News of Note
Sifto – Tax Court of Canada finds that a taxpayer-accepted agreement with the U.S. competent authority re a VDP-adjusted transfer price binds CRA even if it had not yet audited the taxpayer
Email this ContentCRA accepted a voluntary disclosure by Sifto Canada that it had undercharged on its sales of rock salt to a U.S. affiliate, and reassessed accordingly. Sifto Canada and its U.S. parent then applied to the Canadian and U.S. competent authorities for there to be a correlative downward adjustment in the income of the consolidated U.S. group based on the higher transfer price. The two competent authorities agreed to this, and CRA then entered into a letter agreement with Sifto Canada where it agreed with the adjustment.
Only then did CRA audit Sifto Canada, which resulted in it reassessing Sifto Canada on the basis that the transfer prices should have been even higher. CRA argued that the competent-authority agreement did not represent an agreement on the transfer price and that, in any event, it would be improper for it to implement an agreement which it did not view as according with the ITA.
Owen J rejected these arguments, and found that the above multi-party arrangements had resulted in binding agreements as to the transfer prices, and that such an agreement between the competent authorities in accordance with the Treaty had paramountcy over the ITA provisions.
Neal Armstrong. Summaries of Sifto Canada Corp. v. The Queen, 2017 TCC 37 under Treaties, Art. 9, s. 247(2) and s. 115.1(1).
OPTrust – Ontario Superior Court finds that Ontario LTT applied to contingent deferred purchase price which, in fact, never became payable
The Ontario Land Transfer Tax Act definition of “value of the consideration” includes not only the “the amount expressed in money of any consideration given or to be given for the conveyance” but also “the value expressed in money of any liability assumed or undertaken by the transferee” and of “any benefit of whatsoever kind conferred by the transferee on any person as part of the arrangement relating to the conveyance.”
Purchasers of prospective shopping mall lands paid LTT based not only on the cash amount paid at closing but also on future amounts that would become payable by them upon the vendors achieving specified “milestones” relating to matters such as zoning and prospective leases. The future amounts were expressed to be part of the purchase price and their payment was secured by vendor take-back mortgages with stated principal amounts equal to the maximum future amounts. None of the milestones were achieved, no future payments were made and the purchasers sought refunds of the LTT paid at closing on the future amounts.
In rejecting this claim, Gans J quoted with approval a statement of the Federal Court of Appeal in Daishowa-Marubeni that:
… if the parties to an agreement attribute a value to a future liability, then the Minister is entitled to add this amount to the vendor's proceeds of disposition - whether or not the liability assumed by the purchaser is contingent or absolute.
He also referenced the 2004 Guide of the Ministry of Finance, stating:
…[T]he Appellant could have created a different contractual arrangement and availed itself of [such guidelines] which, arguably, might have resulted in a deferral of the payment of land transfer tax….
Neal Armstrong. Summary of OP Trust v. Ontario, 2016 ONSC 3648 under LTTA, s. 1 - value of the consideration.
S. 111(12) FX losses realized on USD debt on an acquisition of control cannot be carried forward to offset the related s. 40(11) gain realized post-AoC on the debt’s settlement
If a restructuring of USD debt (with an accrued FX loss) of a Canadian debtor entails an acquisition of control ("AoC") of the debtor before the debt is settled for a payment of, say, 20% of the USD amount owing, then an unsheltered capital gain under s. 40(11) very well may arise. In concept, on the debt settlement, s. 40(11) will deem the debtor to realize a capital gain to match the FX capital loss previously realized on the USD debt under s. 111(12) on the AoC (except that this capital gain will be reduced somewhat by the FX loss actually realized on the 20% repayment).
The problem is that the s. 111(12) loss would be extinguished for various purposes on the AoC, and would not be available to be carried forward to offset the s. 40(11) gain. “Finance should consider amending the Act to permit the subsection 111(12) loss to be carried forward after the AoC to offset a later related subsection 40(11) gain.”
A similar problem can arise, for example, on the acquisition of a target owing USD debt, which has appreciated, to an affiliate, and the debt is settled under s. 80.01(3) on an amalgamation occurring, say, a day later.
Neal Armstrong. Summary of Carrie Smit, "Foreign Currency Debts and Acquisitions of Control: Beware the Unexpected Gain," International Tax (Wolters Kluwer CCH), February 2017, No. 9, p. 6 under s. 111(12).
CRA considers that national arts service organizations generally are NPOs rather than charities, and that on-call services are not services
CRA considers that national arts service organizations which register with it do not qualify as charities for GST/HST (or presumably ITA) purposes – although they generally will qualify as non-profit organizations if they are not operated for profit.
A medical facility may pay a doctor set fees for agreeing to be on call for specified periods. CRA has published its view (confirming 8 January 2016 Interpretation 150125) that such fees not only are not for exempt health services, but constitute consideration for supplies by the doctor of intangible personal property. (Agreeing to not engage in conflicting activities is not a service?)
Neal Armstrong. Summaries of Excise and GST/HST News - No. 101 March 2017 under ETA s. 123(1) – charity, Sched. V, Pt. II, s. 5 and Sched. VI, Pt. 1, s. 2(b).
CRA indicates that a qualifying PHSP could encompass the only two employees of a corporation who are the sole shareholder and spouse
The only two employees of a corporation are its sole shareholder and a related individual (e.g., spouse). The corporation pays all their premiums under a (Blue Cross) private health services plan. CRA stated that there would be no taxable benefit (based on the exclusion in s. 6(1)(a)(i)) if they received the benefits qua employees rather than qua shareholder (or spouse of shareholder), and in this regard quoted its position in S2-F3-C2 that this test “may” be satisfied if “all of the employees are shareholders or individuals related to a shareholder, and the benefit or allowance is comparable (in nature and amount) to benefits and allowances generally offered to non-shareholder employees of similar-sized businesses, who perform similar services and have similar responsibilities.”
If there were a taxable benefit, both the shareholder’s premiums and the spousal premiums would be included in the shareholder’s income under s. 15(1) or 56(2).
Neal Armstrong. Summary of 11 January 2017 External T.I. 2016-0635351E5 under s. 6(1)(a)(i).
CRA treated a distribution to a partnership comprised of named trust beneficiaries (as permitted by the trust deed) as not being made to trust beneficiaries
The CRA position (e.g., in 2014-0538261C6) that if a personal-trust beneficiary is instead issued a promissory note by the personal trust in satisfaction of her capital interest in the trust, the s. 107(2) rollover is unavailable, may not sit well with the proposition that the note issuance entails a transfer of property to the beneficiary.
An apparent position in 2014-0538141C6 that interest, on a hypothec charging a property distributed to a beneficiary, is deductible provided that the assumption of the hypothec “is a condition, of the distribution" should not be applicable in the common law provinces (or at all) given that, at common law, a devisee of real property of an estate takes the property subject to the charge without any requirement that the devisee specifically assume the mortgage, in the absence of any contrary indication in a will.
Where a non-resident personal trust wishes to distribute property (other than taxable Canadian property) to a resident beneficiary, the beneficiary can make a s. 107(2.002) election so that the property does not roll out under s. 107(2) and is instead acquired by the beneficiary at full cost. However, as the beneficiary may therefore realize a gain on the deemed disposition of her capital interest in the trust, it may be more efficient, subject to applicable foreign tax considerations, for the non-resident trust to effect an actual disposition of the property before the distribution.
CRA, in responding to a request for a technical interpretation, declined to confirm that the s. 107(2) rollover was available where property was distributed by a Canadian-resident personal trust to a newly formed partnership, all of whose partners were (non-resident) individual beneficiaries under the trust, unless the deed of settlement of the trust was amended or varied to include the partnership as a named beneficiary. This position appears to be contrary to the meaning of a "beneficiary" in general trust law, which includes any person or partnership that may receive a distribution of property under the trust (whether or not specifically named).
Neal Armstrong. Summaries of Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016 including under s. 107(2), s. 20(1)(c)(ii) and s. 107(2.002).
Parthiban – Tax Court of Canada finds that a UK visitor acquired a new home in Ontario as his primary place of residence
Boyle J rejected a CRA position that a UK citizen had not bought a new home in Markham as the primary place of residence of his family, as required for purposes of the new housing GST/HST rebate, because his status while in Canada when he agreed to buy it was that of a visitor. Since the requisite intention was there (and, in fact, was fulfilled), it was irrelevant that there may have been a significant risk of this intention being defeated by not being allowed to stay by Immigration Canada.
Neal Armstrong. Summary of Parthiban v. The Queen, 2017 TCC 30 under ETA s. 254(2)(b).
CRA states that the usual statute-barring rules apply to whether partnership income or loss can be redetermined
S. 152(1.4) indicates that the Minister may make a determination of the income, loss etc. of a partnership within 3 years of the later of the filing deadline and filing date for the partnership T5013.
3 years may not mean 3 years. CRA considers that because s. 152(1.2) effectively indicates that various of the Division I rules, including the statute-barring rules in s. 152(4), also apply for partnership determination purposes, the 3-year limitation does not apply where the T5013 contained a misrepresentation attributable to neglect etc. The way CRA expressed itself, the CRA determination made beyond the 3 years would not be limited to addressing the misrepresentation, as required by s. 152(4.01), but this may have been inadvertent.
Neal Armstrong. Summary of 29 November 2016 Internal T.I. 2016-0648571I7 under s. 152(1.4).
CRA considers that writing-off a statute-barred debt of an employee triggers a s. 6(15) benefit
CRA considers that whenever a debt owing by an employee is extinguished because of an employer action, s. 6(15) deems the forgiven amount to be an employment benefit. Respecting the situation where an employee debt becomes statute-barred (which presumably is not subject to the deemed settlement under s. 80.01(9) because the debt is not a commercial debt obligation), and the employer then writes it off because it is thus no longer legally collectible, CRA considers this writing-off to be sufficient to trigger s. 6(15). Cf. Diversified Holding: “for a debt to be settled or extinguished…there must be a legally binding termination in form.”
Neal Armstrong. Summary of 12 October 2016 Internal T.I. 2016-0637781I7 under s. 6(15).
Income Tax Severed Letters 8 March 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.