News of Note
Licensed music incorporated into video is still music
Email this ContentCRA affirmed the principle that the determination of whether a royalty is subject to Part XIII tax is based on the nature of the work being licensed - that is, a musical work is still a musical work even if it is being licensed for the purpose of being integrated into a television ad or other motion picture or video product.
Scott Armstrong. Summary of 14 December 2011 Memorandum 2011-0424221I7 under s. 212(5).
CRA maintains its broad interpretation of the residual conferral-of-benefit provision (s. 246(1))
CRA has indicated that where a subsidiary (a US limited liability company) confers a benefit on the individual Canadian shareholder of its parent corporation (an Alberta unlimited liability company) by paying the US income tax liability of that individual arising as a result of both corporations being fiscally transparent for US purposes, the benefit is includable in the individual's income under s. 246(1). (This is similar to an earlier interpretation: 10 January 2011 Memorandum 2009-034425.)
The judicial authority cited by CRA (Pub Création) might support this approach only if the parent corporation (the Alberta ULC) had approved the conferral of this benefit, and there is no indication in the statement of facts that this was the case. CRA, in effect, may presume such approval. If the transaction occurred after the effective date of draft s. 15(1.4) (October 31, 2011), the benefit also would be included in the income of the Alberta ULC, thereby resulting in double taxation (even if s. 56(2) did not apply).
Neal Armstrong. Summary of 16 April 2012 T.I. 2011-041149 under s. 246(1) and s. 248(1) - dividend.
CRA finds that the statutory amalgamation rules apply to a Canadian absorptive merger
This concerned a merger under a BC plan of arrangement of a BC corporation (Subco) and its wholly-owned BC sub (Target). The plan of arrangement (for US tax reasons) provided that Target survived the merger and that Subco ceased to exist - while at the same time (and perhaps with a view to the requirements of s. 87(1)) stating that Target and Subco continued as one corporation.
CRA found that this merger satisfied the requirement in the definition of amalgamation in s. 87(1) that a corporation be "formed" on the merger - and the requirement, for s. 87(11)(b) to apply, that the "new" corporation "acquire" the property of the subsidiary (Target) on the amalgamation.
Neal Armstrong. Summary of 2012 Ruling 2010-0355941R3 under s. 87(11).
MacDonald - Tax Court suggests that "pipeline" transactions work
MacDonald dealt with a surplus-stripping transaction. A New Brunswick doctor, who was about to emigrate to the US, sold a cash-rich corporation to his brother-in-law for a promissory note, with his resulting capital gain being sheltered by unrelated capital losses - and with his brother-in-law extracting the corporate funds following a transfer of the corporation to a Newco of the brother-in-law, and then paying off the promissory note. The doctor was not subject to deemed dividend treatment under s. 84(2) (because he was a creditor rather than a shareholder at the time of the corporate asset extraction) or under the general anti-avoidance rule (given, among other considerations, that it was not contrary to the scheme of the Act to accelerate the recognition of capital gains.) Also relevant was that, in the absence of this planning, the doctor would have realized the same capital gain on emigration under s. 128.1(4)(b) (although he avoided Part XIII taxes that would have been payable on subsequent extractions of corporate surplus.)
Hershfield J. indicated that the CRA requirement that there be a one-year delay before extracting funds in a (broadly similar) post-mortem pipeline transaction (see, e.g., 2011 STEPs Roundtable, Q. 5 2011-0401861C6), was arbitrary and not justified.
Neal Armstrong. Summary of MacDonald v. The Queen, 2012 TCC 123 under ss. 84(2), 245(1) and 245(4).
CRA accepts "royalty-free" characterization of trademark licence
Canco proposed an exclusive licence agreement with a qualifying US-resident (Pubco) to manufacture and distribute products of Pubco in Canada. CRA accepted that Canco's payments to Pubco would be exempted from withholding tax by the Canada-US Income Tax Convention by virtue of being patent/know-how licence payments, other than payments for know-how provided under a "franchise" (a broad term - see Investors Group.)
CRA did not challenge Canco's characterization of its trademark licence from Pubco as being "royalty-free," so that the practical effect of the ruling was that the trademark could be licensed free of withholding tax.
Scott Armstrong. Summary of Ruling 2011-0416821R3 under Treaties - Article 12.
CRA adopts 2010 OECD Transfer Pricing Guidelines
After noting some of the changes in the 2010 version of the OECD Transfer Pricing Guidelines as contrasted to the 1995 version, CRA stated that it "endorses the application of the arm's length principle and the 2010 version of the TPG for the administration of the Income Tax Act in transfer pricing matters."
Although it would have been astonishing for CRA to reject the 2010 Guidelines, it nonetheless is useful to have this written confirmation.
Neal Armstrong. Summary of 2011 TEI Roundtable, Q. 12 2011-0427311C6 under s. 247(2).
Denial of Canadian dollar FX losses realized by subsidiary using a different functional currency
CRA has confirmed that where a parent with a Canadian dollar functional currency has lent in Canadian dollars to a (Canadian) subsidiary with a different functional currency, a foreign exchange loss realized by the subsidiary on repayment of the loan will be denied.
Presumably the same position would apply if the parent had lent in US dollars to its subsidiary, and it realized an FX loss (in Canadian dollars) on repayment of the loan.
Neal Armstrong. Summary of 2011 TEI Roundtable, Q. 4 2011-0426981C6 under s. 261(20).
Supreme Court agrees that trusts have the same residency test as corporations
The Supreme Court has found that, as with a corporation, the place of residence of a trust is wherever its "central management and control" (respecting important decisions) is exercised, which is not necessarily the jurisdiction of residence of the trustee(s).
The Court also has confirmed British case law that if a shareholder exercises the central management and control of a corporation from another jurisdiction than where the board of directors meets, the corporation is resident in that other jurisdiction.
Scott Armstrong. Summary of Fundy Settlement v. Canada, 2012 SCC 14, under ITA s. 2.
CRA maintains global grasping of employee source deductions
CRA has confirmed that a US (or other non-resident) employer is required to withhold and remit Canadian source deductions from the remuneration paid by it to its Canadian-resident employees, even if it does not carry on business in Canada directly or indirectly, the employees work only in the US and their remuneration is subject to full US source deductions.
Although the literal scope of the Regulations in question is consistent with this position (clarifying an earlier position), it appears to be oblivious to a principle of statutory interpretation (see Territorial Limits) that generally an implication should be read into a taxing provision that it does not apply to a taxpayer (in this case, a US corporation) which has no connection to the jurisdiction imposing the tax (or, in this case, a source deduction obligation.)
Neal Armstrong. A summary of Memorandum 2012-0436311I7 appears under Regulation 102.
BC Supreme Court gives taxpayers a second shot at rectifying a deficient trust deed
The BC Supreme Court granted a rectification order to cleanse a trust deed of deficiencies that had caused CRA to assess on the basis that s. 75(2) applied to attribute a substantial capital gain realized by the trust to the settlor (the father). However, on receiving this rectification order, CRA confirmed its reassessments on the basis that it had discovered further deficiencies in the trust deed that caused s. 75(2) to continue to apply! The solution? The taxpayers went back to Court (in a contested motion) to get a further rectification order to correct the further alleged deficiencies. Dorgan J reasoned that as tax planning (i.e., multiplying the capital gains exemption) was a major purpose of the trust from its inception, rectification relief gave effect the the parties' specific intentions.
Neal Armstrong. Summary of McPeake v. Canada, 2012 BCSC 132, under Rectification.