News of Note
Upstream surplus reserve rules do not adequately address blocking deficits
Email this ContentIn the most recent comment (in 2007) of CRA on partnerships governed by the Delaware Revised Uniform Partnership Act, it indicated that it still considers their proper characterization to be an open question, so that effectively taxpayers have since been faced with a "don’t ask, don’t tell" situation.
As for Florida and Delaware LLPs and LLLPs, an examination of the governing law of, for example, a Florida LLLP indicates that it “is formed, exists, and is dissolved by a virtue of the contractual arrangements between two or more persons instead of being a legal person formed and dissolved only by state action,” so that CRA does not appear to have been compelled to conclude that it is a corporation.
The s. 90(9) reserve permitting a Canco to utilize available surplus to shelter an upstream loan to it does not adequately address blocking deficits. For example, if FA Opco with exempt surplus of $300 and held by FA Holdco with an exempt deficit of $100, makes two successive loans of $100 to Canco (Holdco’s parent), no reserve would be available to Canco because, each time, the $100 deemed exempt surplus dividend received by Holdco would merely eliminate its exempt deficit – notwithstanding that the consolidated surplus equals the loan amounts.
Neal Armstrong. Summaries of Michael N. Kandev and Sandra Slaats, "Recent Developments in the Foreign Affiliate Area," 2015 Annual CTF Conference paper under s. 248(1) - corporation, s. 96, and s. 90(9).
Koskocan – Tax Court of Canada finds that an individual signing most of a company’s cheques was not a de facto director (for director liability purposes)
A taxpayer sold all his shares of a company to his son, resigned as director, but continued to sign most of the cheques due to bank requirements. In rejecting the position of the ARQ that the taxpayer was a de facto director, so that he was liable for unremitted corporate GST under ETA s. 323, Archambault J noted that signing cheques was an officer rather than director core function - so that it could not be said that the taxpayer was usurping the function of the two (legal) directors - and that ETA s. 323 reflected an apparent legislative choice to limit its application to directors.
Neal Armstrong. Summary of Koskocan v. The Queen, 2016 CCI 277 under ETA s. 323(1).
[Revised] Further translations of French severed letters are available
The table below links to full-text translations of 9 of the APFF Roundtable questions and answers that were released last Wednesday as well as of the French internal technical interpretation which was released the previous week. They are paywalled in the usual (3 work-weeks per month) manner. The current week is “open.”
Income Tax Severed Letters 7 December 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
GST/HST Notice on the new closely-related test may imply that special voting rights accorded by a subsidiary’s articles or in a USA may cause it to not be closely-related
The revised ETA closely-related person test requires that 90% or more of shareholder votes in respect of all corporate matters must be held and controlled by the tested person, with the exception inter alia of special voting matters provided by statute, or where a statute provides a special class vote. For an example of the first exception, CRA refers to the special voting right accorded by s. 183(3) of the CBCA to minority shareholders to approve an amalgamation. As an example of the second, it refers to the special class vote accorded by s. 176(1) of the CBCA to approve major amendments to the articles of incorporation.
The perceived need for these exceptions may imply that special voting rights accorded otherwise than by statute, e.g., in the articles or a unanimous shareholders’ agreement, could cause a shareholder to not be closely related for GST/HST purposes.
Neal Armstrong. Summary of GST/HST Notice No. 303 - Changes to the Closely-related Test under ETA, s. 128(1.1)(a)(i).
KPMG – Federal Court of Canada finds that s. 231.2(3) overrides the CPA duty of maintaining client confidentiality
KPMG LLP sought to quash an order that authorized CRA to impose a requirement on it pursuant to s. 231.2(3) to disclose confidential information respecting unnamed clients who had participated in the KPMG “Offshore Company Structure” – on the grounds that the CPA Code of Professional Conduct prohibited disclosure of confidential client information. In dismissing the motion, Crampton CJ stated that “the language of s. 231.2(3)… is clear and overrides the general confidentiality rule imposed by Rule 208 of the Code.”
Neal Armstrong. Summary of Canada (National Revenue) v. KPMG LLP, 2016 FC 1322 under s. 231.2(3).
The new back-to-back royalty rules may require a Canadian taxpayer to determine an arm’s length licensor’s structure and whether it was tax motivated
A key departure in the proposed back-to-back loan rules from the existing rules is that funding provided by an ultimate funder who is entitled to a lower withholding tax rate than the intermediary is incorporated into the calculation of the amount of deemed interest under the rule, thereby potentially reducing the deemed interest paid to other ultimate funders who are subject to higher withholding tax rates. This is illustrated by an example in the article below.
The new back-to-back royalty rules can apply where one or more "ultimate licensors" indirectly lease or license property to a Canadian taxpayer by way of a chain of "relevant royalty arrangements" involving one or more intermediaries. Similarly to the back-to-back loan rules, there is a connection test which considers causal connections between incoming royalty arrangements received by an intermediary and outgoing royalty arrangements provided by the intermediary. When the licensor under an incoming royalty arrangement deals at arm's length with the taxpayer, the connection test will be satisfied only if one of the main purposes of this arrangement is to reduce or avoid withholding tax, or to avoid the back-to-back royalty rules.
This additional condition was added in the October proposals and, according to the Explanatory Notes, is intended to prevent the rules from applying to ordinary, arm's length commercial transactions that are structured without any main tax purposes. However, it may be difficult to rely on this condition in practice because a Canadian taxpayer is not likely to have sufficient information to determine an arm's length licensor's tax motivations.
Neal Armstrong. Summaries of PWC, “Bill C-29 significantly expands back-to-back rules,” Tax Insights PWC International Tax Services, Issue 2016-53, 16 November 2016 under s. 212(3.4), s. 212(3.92)(b)(ii) and s. 212(3.91).
Robinson – Cour du Québec finds that an individual who went to work full-time in Alberta remained resident in Quebec
A Quebecer who obtained employment in Alberta and stayed at employer-provided lodges at the various Alberta work sites was found to still be residing in Quebec. Her remaining significant ties to Quebec included having a son who went to school there and stayed with her mother in Quebec leased premises which the taxpayer helped fund, as well as her returning to Quebec for several weeks each summer and each winter to see him.
Neal Armstrong. Summary of Robinson v. Agence du Revenu du Québec, 2016 QCCQ 11066 under s. 2(1).
CRA considers that the repeal of the s. 55(2) exemption, for dividends for which the Part IV tax is refunded on on-payment to an individual shareholder, busts integration
A dividend is received by Holdco from an Opco, which under the new s. 55(2) rules is no longer exempted from s. 55(2) even though the Part IV tax to which it was subjected is refunded on on-payment as a dividend to the individual shareholder.
CRA considers that the high rate of resulting combined tax cannot be alleviated by treating such s. 55(2) application as permitting an election to treat the applicable portion of the individual shareholder’s dividend as a capital dividend. Instead, such capital gain only generates capital dividend account for use for future dividends.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.4 under s. 89(1) – capital dividend account – (a).
CRA considers that the bearing of RRSP or TFSA fees by the annuitant or holder typically will be subject to the 100% advantage tax, effective 2018
CRA considers that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically will be considered to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount). However, to give the investment industry time to make the required system changes, CRA will defer applying this new position until January 1, 2018. Investment management fees that are reasonably attributable to periods ending before 2018, and are paid by the annuitant or holder will have no adverse tax consequences.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.5 under s. 207.01(1) – advantage - (b)(i).