News of Note
Birchcliff – Federal Court of Appeal finds that a GAAR analysis should look beyond the immediate but transitory effect of transactions for avoiding the loss-streaming rules
Email this ContentA newly-launched public corporation ("Predecessor Birchcliff") accessed the losses of a lossco ("Veracel") in order to shelter the profits from producing oil and gas properties which it was acquiring. Rather than financing the properties directly, private placement investors were told that they could subscribe for subscription receipts of Veracel instead, while being assured that they would get their money back on the closing date if Veracel was not amalgamated with Predecessor Birchcliff. As the investors received a majority voting equity interest in Amalco (“Birchcliff”), the loss streaming rules otherwise engaged by ss. 256(7)(b)(iii)(B) and 111(5)(a) were avoided. The original Veracel shareholders mostly received a modest preferred share interest in Birchcliff, which was redeemed for cash.
Birchcliff got off to a bad start when, at the beginning of his GAAR analysis, Webb JA essentially indicated that, from an abuse-analysis standpoint the actual transactions should be recognized as having “the same effect” and being “equivalent to” the investors having directly received voting majority control of Predecessor Birchcliff on the amalgamation. He then commented:
The logical rationale of the exception in clause 256(7)(b)(iii)(B) is that it would apply to exclude the larger corporation from the deemed acquisition of control rule in the opening part of subparagraph 256(7)(b)(iii), if two corporations amalgamate.
Here, although Veracel was the larger corporation, essentially all its assets were the subscription-receipt cash proceeds – and “There was no scenario under which Veracel would have been allowed to retain the money…”).
He concluded:
[T]he policy underlying clause 256(7)(b)(iii)(B) of the Act would dictate that there was an acquisition of control of Veracel in this situation.
Neal Armstrong. Summary of Birchcliff Energy Ltd. v. Canada, 2019 FCA 151 under s. 245(4).
CRA appears to find that a payout of cash pursuant to an amalgamation agreement does not preclude satisfying s. 87(1)
Two individuals, Mr. A and Mr. B, wholly-own two corporations of equal value (A Inc. and B Inc.), which amalgamate. On the amalgamation, the two individuals, in addition to receiving equal numbers of shares of Amalco, also received an equal amount of cash from Amalco.
CRA explicitly stated that the payout of the cash (pursuant to the Amalgamation Agreement) would comply with s. 87(1)(c) (i.e., the predecessor shareholders received shares of Amalco) and implicitly appeared to accept (consistently with Envision) that this complied with s. 87(1)(a) (all the property of the predecessors became property of Amalco).
CRA went on to explain that the cash busted a rollover at the shareholder level that otherwise would have been available under s. 87(4).
Neal Armstrong. Summaries of 15 September 2017 External T.I. 2017-0696821E5 F under s. 87(1)(a) and s. 87(4).
Income Tax Severed Letters 29 May 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewng.
A CRA ruling contemplates that interest which the issuer can elect not to pay is interest for Part XIII but not s. 20(1)(c) purposes
A public company (ACo) will issue unsecured subordinated Notes, whose terms will be conventional except that:
- ACo may in its discretion elect by notice in writing to cancel the payment of the interest coupons on a going-forward basis, but recognizing that it thereupon loses its right to pay dividends (or the equivalent such as share repurchases) until it recommences interest payments.
- On the occurrence of a specified event (presumably, some sort of financial difficulty), the Notes will be converted into a number of common shares based on a formula-determined conversion ratio (such that the shares' value could be well below that of the converted principal amount).
The Ruling “Additional Information” states:
The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.
CRA then ruled that the Interest amounts paid to an arm’s length Noteholder will not be subject to Part XIII tax under s. 212(1)(b). Thus, CRA accepted that the Interest on the Notes was interest, but perhaps did not consider that the Interest was paid “pursuant to a legal obligation to pay interest” as required under s. 20(1)(c).
Neal Armstrong. Summary of 2018 Ruling 2017-0732001R3 under s. 212(1)(b).
CRA finds that the GST/HST exemption for valuing damages to insured property did not extend to valuing the property’s replacement value
Para. (j.1) of the financial service definition exempts “the service of providing an insurer … with an appraisal of the damage caused to property, or in the case of a loss of property, the value of the property, where the supplier of the appraisal inspects the property, or in the case of a loss of the property, the last-known place where the property was situated before the loss.” CRA ruled that this exemption did not apply where the service provider merely reported on the replacement value of the damaged property rather than of the damage to the property and (respecting the lost property situation), where it did not inspect the last known place where the property was situated before the loss.
Neal Armstrong. Summary of 20 December 2018 Ruling 189221 under ETA s. 123(1) – financial service – para. (j.1).
Ellaway – Tax Court of Canada finds that no moving expense deduction was available for a move to Canada
An Australian resident who moved to Canada to take up residence there was properly denied her moving expenses of $59,188 because she did not satisfy the requirement in the s. 248(1) definition of “eligible relocation” that, before the move, she ordinarily resided at a residence that was in Canada. Owen J also rejected the taxpayer’s submission that IT-178R3 was misleading in this regard and stated that, in any event, “information bulletins do not create estoppels.”
Neal Armstrong. Summaries of Ellaway v. The Queen, 2019 TCC 118 under s. 248(1) - “eligible relocation” – para. (c) and Statutory Interpretation – Interpretation Bulletins.
CRA rules that a note whose repayment obligation is 100% linked to a commodity does not bear participating debt interest
ACo will issue senior unsecured notes for 100% of their principal amount and bearing an annual coupon of a stipulated percentage of the principal. On maturity, the amount paid (the “Final Redemption Amount “) will equal the product of the principal amount, and an index reflecting the price performance of the specified underlying commodity between a date shortly before the issue date, and a date shortly before the maturity. The Final Redemption Amount will be payable in cash unless a Noteholder timely elects for physical settlement. A calculated early redemption amount is payable on default or certain other events. ACo will likely hedge its exposure under the notes through options.
CRA ruled that s. 212(1)(b)(ii) (which imposes withholding tax on participating debt interest) will not apply to any payments of the interest coupons or to any payments on maturity or earlier redemption. The rationale stated in the CRA headnote is that:
The commodity is not sufficiently linked to the profitability of the issuer’s business.
No interest deductibility ruling was requested, but CRA presumably accepted that the notes were debt.
Neal Armstrong. Summary of 2018 Ruling 2018-0766771R3 under s. 212(3) – participating debt interest.
Renaud – Federal Court of Appeal affirms that a benevolent law practice for indigent clients thereby had a “personal aspect," justifying use of REOP test to deny losses
A Quebec lawyer who worked full-time as a federal government employee also worked 5 to 15 hours a week providing legal services to clients of modest means. Of the four years in issue, practice revenues ranged between $850 (or 5% of claimed expenses) and $3,850 (37% of claimed expenses). Jorré J below observed that the taxpayer’s part-time law practice verged on charitable volunteerism – and, more generally, found that since such practice had a personal aspect, the question as to whether her practice was a business could (consistently with Stewart) be tested through determining whether it had a reasonable expectation of profit, as to which there was none. Her claimed losses were non-deductible.
In affirming the decision below, Nadon JA stated that “there is no doubt that the law practice of the appellant … certainly qualifies as having a personal aspect."
Neal Armstrong. Summary of Renaud v. Canada, 2019 CAF 154 under s. 3(a) – reasonable expectation of profit.
MEO – European Court of Justice finds that an early termination fee was consideration for the contracted service
Subscribers to the services of a Portuguese telecommunications company (“MEO”) agreed to pay for a minimum subscription period - and when they discontinued service before the end of that guaranteed period they were required under the terms of their contracts to pay a lump sum equal to their monthly subscription fee multiplied by the number of remaining months in the guaranteed period. The ECJ found that this lump sum was taxable “consideration” received by MEO for its services on ordinary principles for VAT purposes, stating:
[I]t must be held that the consideration for the amount paid by the customer to MEO is constituted by the customer’s right to benefit from the fulfilment, by MEO, of the obligations under the services contract, even if the customer does not wish to avail himself or cannot avail himself of that right for a reason attributable to him.
In Canada, the distinction between consideration received by the supplier of services pursuant to the services contract, and compensation received by it for termination of the contract, is relevant because the latter amount is deemed by ETA s. 182 to be inclusive of GST/HST.
Neal Armstrong. Summary of MEO — Serviços de Comunicações e Multimédia SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2018:942 (ECJ (5th Chamber)) under ETA s. 123(1) – consideration.
6 more translated CRA interpretations are available
We have published translations of a CRA interpretation released last week, an interpretation released in July 2012 (which a few months ago we missed translating in its proper sequence) and a further 4 CRA interpretations released in February, 2012. Their descriptors and links appear below.
These are additions to our set of 867 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for June.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2019-05-22 | 26 May 2016 External T.I. 2014-0527251E5 F - Interest Deductibility | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) | interest was deductible on a note indirectly issued to satisfy a dividend |
| 2012-07-27 | 3 July 2012 External T.I. 2012-0448651E5 F - Allocation of Safe Income | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | apportionment of safe income amongst three classes of discretionary common shares took into account the entitlement of the first class under the USA to a preferential dividend |
| 2012-02-17 | 8 February 2012 Internal T.I. 2011-0431581I7 F - Sous-alinéa 6(1)a)(vi) proposé | General Concepts - Effective Date | taxpayers can file based on proposed legislation and wait until announcement that it will not be implemented |
| Income Tax Act - Section 220 - Subsection 220(3.1) | no penalties if taxpayer promptly refiles after announcement that favourable amendment will not proceed | ||
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(vi) | “studies” are at all levels and bursaries and tuition reimbursements potentially are included | ||
| 2012-02-10 | 27 January 2012 Internal T.I. 2011-0428831I7 F - Crédit d'impôt pour frais médicaux | Income Tax Act - Section 118.2 - Subsection 118.2(3) - Paragraph 118.2(3)(b) | taxpayer could claim credit for years where he was no longer entitled to claim repaid Quebec drug benefit against private plan due to being out of time |
| Income Tax Act - Section 152 - Subsection 152(4.2) | application under s. 152(4.2) for drug claim deductions that later emerged | ||
| 12 January 2012 External T.I. 2011-0421791E5 F - Usufruit de terres boisées acquises avant 1987 | Income Tax Act - Section 248 - Subsection 248(3) - Paragraph 248(3)(a) | gift of bare ownership resulted in deemed disposition to deemed s. 248(3)(a) personal trust | |
| Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) | property acquired before 18 June 1987 will qualify if s. 110.6(1.3)(c) (i) or (ii) satisfied | ||
| 27 January 2012 External T.I. 2011-0421551E5 F - Pompiers volontaires | Income Tax Act - Section 3 | modest amounts received by volunteers are not taxable | |
| Income Tax Act - Section 118.06 - Subsection 118.06(1) | “volunteer” firefighters are not true volunteers |