News of Note
Income Tax Severed Letters 7 September 2016
Email this ContentThis morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that an exchange listing does not count until it becomes unconditional
In its new Folio on qualified investments for registered plans such as RRSPs, CRA states:
In a new public issue of securities, the listing of the securities may be delayed for a short period of time pending fulfillment of certain conditions. A security that is approved for listing or that has a conditional approval for listing is not at that time considered to be listed on a designated stock exchange. In order for a security to qualify, the listing must be full and unconditional.
Since it is common for the listing to still be conditional at the time the shares or units in question are first issued, it would be safer to try to rely, if possible, on their qualification as shares or units of a public corporation or mutual fund trust, as applicable (including potentially under the relevant look-back rules).
Other departures or additions from IT-320R3 include:
- Bitcoins are not money.
- “[C]ash on deposit with a broker…is generally not a qualified investment, [but] the CRA will not apply… adverse income tax consequences…if the deposit is left with the broker for no more than a few days.”
- The AIM and Alternext systems are not designated stock exchanges.
- A subsidiary or affiliate of one of the listed rating agencies will be accepted if the “corporate structure and legal relationship make it clear that a listed rating agency recognizes and would stand by the rating given by its subsidiary or affiliate.”
- An undivided interest in a strip coupon qualifies assuming the underlying bond qualifies.
- Gold or silver certificates issued by the Royal Canadian Mint could qualify.
- CRA will accommodate inadvertent and short-term RRSP etc. overdrafts.
- Day trading by an RRSP of qualified investments is acceptable. As for TFSAs, Prochuk "does not stand for the proposition that the trading of securities in a registered plan will not in any circumstance be considered to be carrying on a business by the plan.”
Neal Armstrong. Summaries of S3-F10-C1 under s. 204 - qualified investment - para. (a), s.262 , s.204 - qualified investment (d) , Reg. s. 4900(1)(b), s. 204.4(1), Reg. s. 4900(2), Reg. s. 4900(1)(j), Reg. s. 4900(1)(j.1), s. 204 - qualified investment - (b), Reg. s. 4900(1)(e), s. 207.01(1) -advantage- (b), Reg. s. 4900(1)(u), Reg. s. 4900(1)(v), Reg. 4901(1) specified small business corporation, Reg. s. 5100-eligible corporation, s. 207.04(4), s. 146(10.1), s. 207.01(6), s. 146(4)(a), s. 146(4)(b), s. 146.2(6)
CRA gives an example of where it would waive the 100% advantage tax
One of the conditions for equity of a corporation, partnership or trust to qualify as "excluded property” and, therefore, excluded for the application of the prohibited investment rules, sets limits regarding the “governance of the investment entity.” In its new Folio on the prohibited investment rules, CRA states that this test is not restricted to consideration of the voting rights of the shares:
[T]he phrase governance of the investment entity should be given a wide meaning. For example, where the investment entity is a corporation, the condition might not be satisfied because of the votes that could be cast at either a general meeting of shareholders or at a meeting of the board of directors.
CRA provides an example of a situation where it would give “favourable consideration” to waiving under s. 207.6(2) the 100% advantage tax. The example entails an individual’s TFSA exceeding the 10% threshold in a company as a result of the company redeeming shares of the principal shareholder without the individual finding out about it until a year later, and then the TFSA paying the “advantage” (being the appreciation in the shares while they were a prohibited investment) out to the individual on a taxable basis under s. 207.061 pursuant to a waiver.
Neal Armstrong. Summaries of S3-F10-C2 under s. 207.06(2), s. 207.05(4), s. 207.05(2) and s. 207.01(1) - excluded property – para. (c).
CRA does not permit a s. 261 functional currency different from the GAAP currency, and will consider applying the s. 261(18) avoidance rule to de facto 2nd elections
Comments of CRA in its new Folio on the s. 261 functional currency rules include:
- “Where applicable financial accounting standards require a taxpayer to report its accounts in Canadian dollars, the taxpayer will not have a functional currency simply because it maintains its records and books of account in a qualifying foreign currency.”
- “[Where] a corporation…carr[ies] on two distinct lines of business which have different currencies for financial reporting purposes…the corporation may still make a valid election to determine its Canadian tax results (from all activities) in a particular foreign currency if that currency is the functional currency of its most significant business.”
- Where a Canco which has revoked its functional currency election, avoids the prohibition (under s. 261(3)) against making a second functional currency election by, for example, rolling down all its property to a new Canadian sub which reports its Canadian tax results in U.S. dollars, or if it amalgamates with a sub and Amaclo makes a fresh election, “the CRA would consider issuing a direction under subsection 261(18) that would require either Cansub or [Amalco], as applicable, to report its Canadian tax results in Canadian dollars.”
- The loss denial rule in s. 261(21) applies automatically, i.e., no tax avoidance purpose is necessary.
Neal Armstrong. Summaries of S5-F4-C1 under s. 261(1) – elected functional currency, s. 261(1) – functional currency, s. 261(5)(a), s. 261(7)(h), s. 261(10), s. 261(6), s. 261(6.1), s. 261(12), s. 261(11), s. 261(16), s. 261(18), and s. 261(21).
Intertain will use an exchangeable share structure in connection with interposing a new public U.K. holding company
Intertain, which is an OBCA holding company listed on the TSX, holds most of its assets in non-resident subsidiaries and generates substantially all of its (on-line gaming) revenues in Europe through such subsidiaries. In order to effectively move its residence to the U.K., it has caused the formation of a U.K. plc (“Jackpotjoy”) which (except for those Canadian shareholders who have elected for rollover treatment) will issue its shares to the Intertain shareholders under an OBCA Plan of Arrangement in consideration for transferring all but one of their shares to a grandchild Canadian subsidiary of Jackpotjoy (“ExchangeCo”) and for transferring the remaining common share to Jackpotjoy, for contribution down the chain to ExchangeCo. Those electing for rollover treatment instead will have their Intertain shares exchanged for Class B shares of the amalgamated corporation resulting from the amalgamation of ExchangeCo and Intertain (“AmalCo”), and then exchange those Class B shares under a s. 86 reorg for exchangeable shares.
On the issuance of these exchangeable shares, Jackpotjoy will issue a corresponding number of shares to a Jersey company owned by a charitable trust, with the voting rights on those shares thereafter exercised as directed collectively by the exchangeable shareholders. When an exchangeable shareholder retracts (or AmalCo gives notice of redemption), the immediate parent of AmalCo (“CallCo”) will exercise its overriding call right, so that the exchangeable shareholder will transfer its exchangeable shares to CallCo, CallCo will issue shares to Jackpotjoy and in consideration therefor Jackpotjoy will direct the Jersey company to deliver the relevant number of Jackpotjoy Shares to the former exchangeable shareholder. The exchangeable shares are slated to mature no later than the 5th anniversary of their issuance and, in the meantime, are expected to be listed on the TSX.
All this contains some significant departures from the usual exchangeable share structure. Sirius XM also was different.
Neal Armstrong. Summary of Intertain Circular under Public Transactions – Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Exchangeable Shares.
CRA references the notice clause in a services contract in determining the place-of-supply for HST purposes (and implicitly acknowledges that nutritional consulting’s purpose is maintaining health)
ETA Sch V, Part II, s. 1.2 excludes various supplies of medical care services from the GST/HST exemption if they are not a ““qualifying health care supply”, whose definition includes services whose “purpose” is “maintaining health,” “preventing disease” and “assisting…with [a] disorder.” CRA ruled that the provision by a licensed dietician of “consultant nutrition services” to a registered charity (presumably in connection with a redacted charitable undertaking of assisting needy individuals) qualified for exemption.
Although the provincial place-of-supply rules thus were irrelevant, CRA nonetheless commented that because the the Services Contract named a particular address as being that for notices to be sent to the charity, that determined the place of supply. This is a reminder that, in drafting a services contract, one should be aware in specifying which, among a number of plausible choices, should be the address named in the notice clause.
Neal Armstrong Summaries of 16 February 2016 Ruling 165366 Dietetic Services under ETA Sch V, Part II, s. 1 - Qualifying Health Care Supply and New Harmonized Value-Added Tax System Regulations, s. 13(1).
CRA finds that a fee for an agreement to be available to supply services was a supply of property for HST/GST purposes
CRA found that a stipend paid by a hospital to a medical specialist for agreeing to stay close to the hospital so as to be available on an on-call basis was taxable consideration for the supply of property to the hospital rather than for a supply of an exempt medical service, stating:
[T]he hospital acquired a right to call upon the physician to attend the hospital during a given time period…[which] has a distinct utility to the hospital and as such…the right is a discrete supply that is separate from any health care services that may be rendered by the physician to patients of the hospital.
Neal Armstrong. Summary of 8 January 2016 Interpretation 150125 under ETA, Sch V, Part II, s. 5.
Oldcastle Building Products – Tax Court of Canada finds that compensation to a corporation's research head based on a percentage of its net sales of new products was not a “bonus” for SR&ED ITC purposes
Reg. 2900(9) provides that salary and wages for SR&ED investment tax credit purposes excludes “bonuses” and “remuneration based on profits.” The taxpayer agreed to pay the head of its SR&ED program (who was not a major shareholder or other “specified employee”) a base salary plus a “bonus” (which Archambault J preferred to refer to more neutrally as “variable pay”) equal to a percentage of the net sales of new or modified products. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which his variable pay exceeded $1 million, as occurred in the years in issue.
Archambault J found that the variable pay was not a “bonus” given inter alia that the taxpayer had no discretion as to how much it paid, and also that it was not “based on profits” given that the only expenses deducted in arriving as net sales were freight and insurance. As to a Crown argument that the variable pay did not qualify as a s. 37 expense because the compensation amount referenced “the sales of products respecting which the R&D activities had been performed in prior years” Archambault J stated that “CRA is confusing the nature of the amount paid with the method of its calculation,” and that “the amounts paid did not constitute remuneration for the sale of Oldcastle products because the work of Mr. Castonguay was not the sale of products but, rather, development at the Research Centre of new products.”
Neal Armstrong. Summaries of Oldcastle Building Products Canada Inc. v. The Queen, 2016 CCI 183 under Reg. 2900(9)(c), Reg. 2900(9)(d) and s. 37(8)(a)(ii)(B).
Canadian investors in an LLP viewed as a U.S. corporation generally should not be entitled to U.S. Treaty benefits on U.S. source income of the LLP
The conversion of an LLP or LLLP to a limited or general partnership (which CRA is requiring to occur before 2018 in order for it to be accepted as having been a partnership all along) “should be accorded non-recognition treatment” under the Code.
If a LLP or LLLP (viewed by CRA as a U.S. corporation) were subject to Canadian corporate tax by virtue of being considered to have a Canadian permanent establishment, the U.S. should permit the U.S. partners foreign tax credits for the tax to the same extent as if the LLP/LLLP were regarded as a partnership in Canada.
The Canadian tax treatment to Canadian investors in a U.S. LLP/LLLP would be affected to a significant extent by whether it constituted a foreign affiliate or controlled foreign affiliate to them.
From the U.S. tax standpoint, Canadian partners of the LLP/LLLP should not generally have access to Treaty benefits for income (e.g., U.S.-source dividends) earned through the LLP/LLLP. An open question is whether Article IV(7)(a) blocks the application of X(6) and results in a Code 30% branch profits tax.
Neal Armstrong. Summary of Nathan Boidman, Peter Glicklich and Michael Kandev, "Canada's New Approach to U.S. LLPs and LLLPs," Tax Management International Journal, 2016, p.479 under s. 248(1) – corporation.
CRA considers that medical evaluations for insurers are no longer GST-exempt including where report writing in the U.S. is separately charged
CRA considers that independent medical evaluations (IMEs) supplied by non-employee doctors to insurance companies or lawyers before March 21, 2013 were exempt health supplies. Effective after that date, s. 1.2 of Part II of Sched. V was added to exclude supplies whose purpose was not patient care or treatment, so that in CRA’s view, this amendment generally rendered IMEs taxable. Where the doctor is a U.S. resident (and HST registrant) performing the exams in Ontario and preparing his report in his U.S. home office, CRA will consider there to be a single supply of an IME so that all his fee will be taxable because it was performed, in part, in Canada (and this is so even if there is a separate charge for the report preparation).
Neal Armstrong. Summaries of 8 January 2016 Interpretation 150125 under ETA Sch V, Part II, s. 1.2 and s. 1 – qualifying health care service, ETA. 142(1)(g), New Harmonized Value-Added Tax System Regulations, s. 13(1).