News of Note

The taxpayer argued that he was not subject to the application of the Australian general anti-avoidance rule given that he had relied on two legal opinions. The taxpayer’s counsel had voluntarily provided a précis to the Commissioner of one of two legal opinions in some considerable detail.

Bromwich J found that this amounted to waiver of legal professional privilege over the letters.

A similar dilemma was avoided in Inwest, where it was sufficient, in helping to establish that the taxpayer’s filing position did not reflect carelessness, to indicate that it had consulted with counsel, without the specific advice received being put in evidence – so that there was no waiver of solicitor-client privilege.

Neal Armstrong. Summary of Hart v Commissioner of Taxation (No 3) [2017] FCA 571 under s. 232(1) – solicitor-client privilege.

S. 17(8)(a)(i)(A) provides an exception to the imputed interest rule under s. 17(1) for outbound low-interest loans where the loan was used by a controlled foreign affiliate for the purpose of earning income from an active business, as defined. In a change of position, CRA has now indicated that it is willing to apply the (Trans-Prairie “fill the hole”) indirect use test described in the interest-deduction Folio in this context as well, so that such a loan used to fund a return of capital or accumulated profits that had funded an active business would fit the exception.

Neal Armstrong. Summary of 15 May 2017 External T.I. 2016-0676701E5 under s. 17(8)(a)(i)(A).

CRA considered that business losses incurred by lower-tier partnerships (the PSLPs) were deemed to be limited partnership losses of an upper-tier LP (MLP) – which meant that they were effectively trapped in MLP given that s. 111 (and, thus, the ability to deduct limited partnership losses under s. 111(1)(e)) was only available to a taxpayer and not to a partnership such as MLP. Webb JA rejected this interpretation and considered that the PSLP business losses were also business losses rather than limited partnership losses in the hands of MLP, so that such losses could be allocated to the MLP partners in the same manner as if they had been generated in a single-tier LP. In the course of a detailed discussion, he stated:

Since the computation of income for a partnership that is a member of another partnership will cause problems when that top-tier partnership attempts to allocate its income on a source basis to its partners, in my view, Parliament did not intend for a partnership that is a member of another partnership to compute income. Rather, Parliament intended for the sources of income (or loss) to be kept separate and retain their identity as income (or loss) from a particular source as they are allocated from one partnership to another partnership and then to the partners of that second partnership (and so on as the case may be). [emphasis added]

Since MLP was not supposed to compute its income, does this mean that the adjusted cost base of its units do not reflect the income or loss earned by it (but still reflect the distributions made by it out of those earnings) – or in the post-Green world, is the ACB of interests in an upper-tier partnership now an irrelevancy since the partnership is transparent?

Webb JA also stated that the Crown’s concern, “that the at-risk rules could be avoided entirely if the top-tier partnership (MLP) were a general partnership,” was outweighed by other considerations.

Neal Armstrong. Summary of The Queen v. Green, 2016 FCA 107 under s. 96(2.1) and s. 102(2).

Full-text translations of the three French technical interpretations that were released last week along with a further technical interpretation obtained directly from the correspondent, and of two technical interpretations released on February 11, 2015 and February 4, 2015, are listed and briefly described in the table below.

These (and the other translations covering the last 28 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for June.