News of Note
Wolf – Tax Court of Canada finds that revenues earned by an individual through an LLC could be included in determining what were his business revenues for services-PE purposes
Email this ContentA U.S. engineer provided services to Bombardier in Canada over a 188-day period (straddling the 2011 and 2012 years). He would have been considered to have a services permanent establishment in Canada under the Canada-U.S. Treaty but for the requirement in Art. V, 9(a) of the Treaty that “more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in [Canada] by that individual.”
The taxpayer derived most of his income through a New York LLC. Although Ouimet J recognized that the LLC was a separate taxpayer for Canadian purposes, he nonetheless found that the U.S.-source revenues received by the taxpayer as an LLC member qualified as active business revenues from the same enterprise as that for the earning of engineering fees from Bombardier. His reasoning appears to be that the LLC’s revenues (from U.S. manufacturing and licensing of a patent generated by the taxpayer) all arose from the same expertise and design work of the taxpayer respecting aircraft fuel lines as were also being exploited in the 2011/12 work for Bombardier – and that the LLC was merely a passive vehicle for divvying up the profits generated from this enterprise engaged in by the taxpayer in conjunction with a third party.
Thus, the taxpayer came close to establishing that he did not have a services PE. However, he lost on an evidentiary point. The figures that he had provided to Ouimet J for the active business revenues generated through the LLC were for calendar 2012, whereas the 50% test was to be applied to the 188 day period straddling the two years. As there was no evidence of what the U.S.-source business revenues were for that precise period, the taxpayer failed to meet the onus on him.
Neal Armstrong. Summary of Wolf v. The Queen, 2018 TCC 84 under Treaties, Art. 5.
CRA confirms that the claiming of a capital gains reserve on a s. 84.1 transfer can result in a s 84.1 deemed dividend on a subsequent transfer
On the non-arm’s length transfer of shares by an individual to a corporation, s. 84.1 prevents the use by the transferor of adjusted cost base in the transferred shares that reflects the previous claiming of the capital gains exemption (“CGE”). However, s. 84.1(2.1) indicates that for purposes of the ACB reduction under s. 84.1(2)(a.1)(ii)) respecting the non-arm’s length transfer, where a capital gains reserve is claimed under s. 40(1)(a)(iii) by the transferor or a non-arm’s length individual and it is possible for the transferor to claim the CGE, the CGE is deemed to have been claimed in the maximum amount irrespective of whether it is in fact claimed and whether in fact there is no intention to claim it.
For example, Father transfers shares of Opco (a small business corporation whose shares are eligible for the CGE) to his children in consideration for a note that is payable over 10 years, claims the capital gains reserve, but does not claim the CGE. The children transfer the Opco shares to a new Holdco in consideration for a note of Holdco, with a view to Opco dividends funding note repayments.
CRA confirmed that this is how s. 84.1(2.1) operates, so that in this example, the children are deemed to receive a dividend on their receipt of the Holdco note. It is irrelevant that the transferor may have CGE room that he wishes to retain for future use - all the available room effectively is deemed to be used.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.17 under s. 84.1(2.1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for five Technical Interpretation released in August and July 2013, as fully translated by us and a further Technical Interpretation released in December 2010 (which we translated somewhat out of sequence given increasing interest in the s. 249(3.1) election.)
These (and the other full-text translations covering all “French” Interpretations released in the last 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
An LLC election to be fiscally regarded does not trigger a disposition
CRA confirmed that an election by a disregarded LLC to be regarded for US tax purposes would not result in a disposition of either the units held in the LLC by its members or of the LLC’s assets for Canadian purposes.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable Q.16 under s. 248(1) – disposition.
CRA indicates that the s. 112(3.2) stop-loss rule does not apply where an estate s.84(3) dividend is indirectly designated to an individual through a spousal trust
The will of the deceased created an estate under which amounts are to be paid to a spousal trust. That trust may, in turn, pay amounts to beneficiaries. The graduated rate estate ("GRE") is deemed to receive a taxable dividend on the redemption of shares. If this taxable dividend is designated to an individual, then the s. 112(3.2)(b) stop-loss rule would not apply. However, if the GRE designates the amount to the spousal trust, which then designates the amount to a beneficiary who is an individual, would s. 112(3.2)(b) apply to reduce the capital loss?
CRA indicated that the exclusion in s. 112(3.32) from the application of s. 112(3.2)(b) should apply where an estate has received an s. 84(3) deemed dividend on a redemption, it designates that dividend, distributes it to the spousal trust, and the spousal trust in turn designates and pays it to the individual beneficiary – so that the taxable dividend does not reduce the loss.
Neal Armstrong. Summariy of 29 May 2018 STEP Roundtable Q.15 under s. 112(3.32).
CRA indicates that a non-resident trust can be retroactively (going back 5 years) deemed to have been resident in Canada if a non-resident contributor immigrates
A non-resident trust has resident beneficiaries with a current potential entitlement to receive income or capital and its contributor had made a contribution to the trust less than 60 months before becoming resident.
CRA indicated that in light inter alia of the lookback rule in s. 94(10), the trust is deemed to be resident for the five taxation years before the taxation year in which the individual became resident in Canada. Thus, the trust will be subject to interest and late-filing penalties for failure to have filed T3 returns (reporting its income for those years) and (where applicable) T1135 or T1134 returns for those years.
Neal Armstrong. Summaries of 29 May 2018 STEP Roundtable Q.14 under s. 94(3)(a) and s. 94(10).
Almadhoun – FCA finds that the TCC, after finding against the taxpayer, improperly directed CRA to “seriously” consider interest relief and tax remission
The Tax Court had held that the taxpayer was not entitled to the Canada child tax benefit during the years in question, but referred the matter back to the Minister so that “taxpayer relief in the form of a waiver of any applicable interest and penalties under the Act and also a remission of taxes pursuant to the Financial Administration Act” may be “seriously consider[ed].”
In striking this referral part of the judgment, De Montigny JA stated:
It is only when the Tax Court allows an appeal that it can refer the assessment back to the Minister for reconsideration and reassessment.
Nor is it for the Tax Court to interfere with the discretion of the Minister, if only by suggesting that the Minister “may” seriously consider taxpayer relief in the form of a waiver of any applicable interest and penalty under the Act, and a remission of taxes … .
Neal Armstrong. Summaries of Almadhoun v. Canada, 2018 FCA 112 under s. 122.6 – “eligible individual” - (e), s. 171(1)(b)(iii), Charter s. 15(1) and Statutory Interpretation - ordinary meaning.
Freitas – Federal Court of Appeal finds that a statute-barred reassessment was valid for the purpose of being objected to and vacated on substantive grounds
The taxpayer, a retired Deloitte partner, was assessed by CRA in 2009 to impose a CPP contribution obligation on an amount of income that was distributed to him under ITA s. 96(1.1). CRA denied the taxpayer’s request four years later for a refund of this amount on the grounds that this request had not been made within the required three-year period – and in the resulting 2014 reassessment it in fact denied some deductions/credits that had been initially allowed in its 2009 assessment.
A threshold issue was whether the 2014 reassessment had been made pursuant to ITA s. 152(4.2) (also applicable for CPP purposes), which deals with a reassessment made “for the purpose of determining … the amount of any refund.” Characterization as a s. 152(4.2) reassessment would have meant that ITA s. 165(1.2) would have invalidated the taxpayer’s objection to it. Webb JA stated that “a reassessment that increases a person’s tax liability is not one that was made for the purpose of determining a refund but instead would be made for the purpose of determining that person’s liability.”
In response to a further Crown argument that the 2014 reassessment was statute-barred, Webb JA noted that the reassessment was deemed by s. 152(8) to be valid subject to being vacated. Accordingly it could be objected to on substantive grounds (in addition to being vacated on the grounds that a reassessment outside the normal reassessment period cannot increase the taxpayer’s liability in the absence of misrepresentation.)
The reassessment was vacated on substantive grounds since a s. 96(1.1) distribution did not satisfy the applicable requirement in s. 14 of the CPP Act that it be “his income for the year from all businesses … carried on by him” (he instead was retired).
Neal Armstrong. Summary of Freitas v. Canada, 2018 FCA 110 under s. 152(4.2), s. 152(8) and Canada Pension Plan Act, s. 14.
CRA indicates that U.S.-dividend income attributed under s. 75(2) does not generate FTCs for the related withholding tax
CRA noted that the attribution of foreign source income (e.g., U.S. dividend income) of a trust (e.g., an alter ego trust) to the settlor under s. 75(2) does not entail the attribution of the non-business taxes (i.e., withholding taxes) thereon so that the settlor cannot claim a foreign tax credit. However, the trust itself may be able to claim a s. 20(11) or (12) deduction in calculating the income that is attributed to the settlor.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.13 under s. 126(1).
International Hi Tech – ITCs were lost because they had been claimed by the wrong group entity
A corporation (“Garmeco”) had made timely claims for input tax credits for GST on legal invoices (based on alleged advice of a CRA official that it was the right person to make the claims), but was found by the Tax Court of Canada not to be entitled to them. A subsidiary of Garmeco (“IHI”) then claimed the ITCs on the basis that the Tax Court judgment had found that it was the right party to make the claims.
Russell J has now found that IHI also was precluded from claiming the ITCs because it had made the claims beyond the four-year period set out in s. 225(4)(b) – so that the fact that its parent had made the claims on a timely basis did not count for anything.
Neal Armstrong. Summary of International Hi Tech Industries Inc. v. The Queen, 2018 TCC 531 under s. 225(4)(b) and General Concepts -Estoppel.