News of Note
CRA indicates that vacation days of a contract employee in the US can cause his Canadian employer to have a US permanent establishment
Email this ContentArt. V.9(a) of the Canada-US Convention deems a "Canco," which derives more than 50% of its gross active business revenue from services provided by an employee to US businesses during any 12-month period in which that individual is present in the US for more than 183 days, to be deriving those services through a US permanent establishment (so that the resulting profits are not exempt from US income taxation) - or vice versa in the case of a "USCo" providing services to Canadian businesses through an employee who is present in Canada for more that 183 days in a 12-month period.
When asked about the Canco situation, CRA indicated that it considers days that the employee happens to be present in the US for personal reasons, such as vacations, to count for purposes of this 183-day physical presence test.
Neal Armstrong. Summary of 29 August 2012 T.I. 2012-0433791E5 under Treaties - Art. 5.
HST/GST ruling permits gift certificates for services to require the holder to declare the certificate at booking time
CRA has ruled that a gift certificate for services, such as accommodation at a lodge or the use of a golf course, can include a requirement that, in order to book the service, the certificate-holder must declare that a certificate is being used and to state the number on the certificate.
CRA's decision is slightly more liberal than a strict reading of Policy Statement P-202 would allow. The fourth requirement in P-202 is that a gift certificate "does not require the bearer to do anything to redeem the certificate other than to present it as a means of payment or partial payment for the property or services being acquired."
The decision appears to confirm that CRA's current criteria for gift certificates are encapsulated instead in a frequently recurring passage in its recent letters and rulings on s. 181.2 (see the last block quote in our summary of 19 July 2011 Headquarters Letter 127619).
Scott Armstrong. Summary of 24 October 2011, Ruling Case No. 138563 under ETA - s. 181.2.
CRA rules that an IP address is not an "address" for HST purposes
CRA found that an IP address is not an "address" in the New Harmonized Value-added Tax System Regulations. Therefore, online service providers cannot rely on IP addresses to determine at which provincial rate to charge HST. Pursuant to s. 8(c) of the Regulations, such a provider must therefore charge at the highest possible provincial rate, which is the 15% rate in Nova Scotia. (Nova Scotia is currently set to reduce this rate back to 13%.)
Scott Armstrong. Summary of 23 November 2011, Ruling Case No. 131828 under ETA - New Harmonized Value-added Tax System Regulations.
CRA generally permits claiming of input tax credits for GST/HST purposes on costs that relate to a specific proposed asset acquisitions
CRA has indicated that once a company, which has raised capital on a blind pool basis, has identified a commercial enterprise to acquire in an asset purchase, it generally will be entitled to register and claim input tax credits for GST or HST on its related costs thereafter incurred by it - but not before.
Neal Armstrong. Summary of 5 November 2011 Headquarters Letter 135608 under ETA s. 141.1(3)(a).
Twomey - Taxpayer succeeds in self-help rectification before the Tax Court
When the taxpayer and the other individual shareholder discovered that the corporate minutes disclosed that, on the organization of their corporation, only one share, rather than 100 shares, had been issued to them, they passed a corporate resolution to correct this error, so that the minute books now conformed with the corporate financial statements. They did not seek a judicial rectification order.
Pizzitelli J. found that the resolution was binding on the Minister for the purpose of determining when the shares had been issued (which was relevant to the requirement under the capital gains exemption rule that the taxpayer have owned his shares for at least two years before disposing of them), as it "resulted in the records being amended to give effect to the true facts."
The decision suggests that a self-help remedy may be adequate (i.e. rectification may be unnecessary) where the remedy is merely to correct the recording of a transaction that in fact has already occurred. Having said that, the taxpayer would have been better off having his shares increased to 100 shares under a stock split once the error was discovered, as this would have avoided such shares being considered by CRA to be newly-acquired by him.
Scott Armstrong. Summary of Twomey v. The Queen, 2012 TCC 310 under s. 110.6(1) - qualified small business corporation share and General Concepts - Effective Date.
CRA reconfirms that the s. 69 rule does not apply to the amount of deemed dividends
CRA has confirmed an earlier position (see 2004 APFF Roundtable Q.15 No. 2004-008682 and 31 December 2004 Memorandum 2004-0091781I7) that where shares of a corporation are purchased for cancellation in a non-arm's length transaction for a purchase price that is less than their fair market value, s. 69 will not apply to increase the deemed dividend to the shareholder (in this case, a Canadian-controlled private corporation). S. 69 instead will apply to increase the capital gain, if any, arising on the purchase for cancellation transaction by the excess of that fair market value over the purchase price.
In this case, the effect of this position appears to be that the shareholder could not utilize additional safe income on hand that would have been available to shelter a larger deemed dividend.
Neal Armstrong. Summary of 3 July 2012 Memorandum 2012-0450821I7 F under s. 84(3).
Timbercreek offers LP unit for a joint investment by Canadian and US investors in US apartment buildings
Under a blind pool offering to Canadian investors in a new Canadian LP, that Canadian LP will make a joint investment with a Delaware LP which is simultaneously funded by US private-placement investors. Their joint investment will be in a subsidiary Delaware LP which will acquire US apartment buildings.
In order to shield the Canadians from US reporting requirements, a "blocker" Ontario general partnership (Holding GP) will be interposed between their LP and the operating Delaware LP. Holding GP will elect to be a corporation for US purposes, but will be a flow-thorough entity for most Canadian purpose. Most distributions from the operating LP to Holding GP, including gains from property sales, will be subject to 35% US withholding tax. This high rate may not be problematic in the case of top-marginal-rate Canadian investors, as Timbercreek expects property gains to be on income account for Canadian purposes - the Fund only has a projected term of about four years, and will renovate and "reposition" the acquired properties.
Neal Armstrong. Summary of Timbercreek U.S. Multi-Residential offering under Foreign asset income funds, REITs and LP offerings.
CRA acknowledges that options on Canadian real estate company shares are exempt under the Canada-US Convention
The capital gains exemption in the Canada-US Income Tax Convention for qualifying US residents does not apply to alienations of shares of Canadian real estate (or resource) companies. The Canada Revenue Agency has acknowledged that this exclusion does not apply to capital gains from alienations of options on such shares - nor are there any rumblings of the general anti-avoidance rule potentially applying where a US resident relies on this exemption (e.g., the US resident structures its investment in a Canadian real estate company as a long-term option on the company's shares with a low strike price).
Neal Armstrong. Summary of 22 June 2012 T.I. 2011-0416521E5 under Treaties - Art. 13.
CRA indicates that GAAR applies to an avoidance of the debt forgiveness rules
In the same ruling referred to below, CRA indicated that the general anti-avoidance rule applied where a purchase by "ProfitCo" of the equity of "LossCo" from an arm's length vendor was structured so as to avoid the application of the debt forgiveness rules to some subordinated debt owing by LossCo to an affiliate of the vendor. Before the sale, ProfitCo lent money to the vendor who invested that money in shares of LossCo, which then paid off the the sub debt. The loan by ProfitCo to the vendor was then repaid by way of set-off against the purchase price for the vendor's shares of LossCo. The effect of the transactions was that the vendor group received the sale proceeds mostly in the form of repayament of the sub debt (so that there was no debt forgiveness) rather than as equity sale proceeds.
CRA stated that these "transactions are essentially the same as transactions that the GAAR committee previously determined resulted in an abuse of section 80."
Neal Armstrong. Summary of 2011 Ruling 2011-0392171R3 under s. 245(4).
CRA finds that two deposit-taking businesses satisfied the similar business test in the loss-streaming rule
CRA ruled that a deposit-taking business of a financial institution that was acquired by and amalgamated with another financial institution would satisfy the similar business test in the loss-streaming rule in s. 111(5)(a), so that its non-capital losses could be utilized. This ruling likely turns on the proposition that the profitable Amalco financial "services" business would entail the "rendering of similar services" to those for the acquired business.
Neal Armstrong. Summary of 2011 Ruling 2011-0392171R3 under s. 111(5)(a).