News of Note
Full-text translations of severed letters extend back to July 2015
Email this ContentFull-text translations of five further technical interpretations released in French on August 5, 2015, as well as a French technical interpretation released on July 29, 2015 are now available - and are listed and briefly described in the table below.
These (and the other translations covering the last 19 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for March.
Farm Credit Canada – Tax Court of Canada finds that “loan corporation” for GST/HST purposes has a broader meaning than its provincial regulatory meaning
A listed financial institution, whose definition includes a “person whose principal business is the lending of money,” will usually also be a selected listed financial institution (SLFI) if it has a cross-Canada business. Different types of SLFIs are subject to different attribution rules for determining the blended HST rate of tax to which they are ultimately subject. One of these SLFI categories is for “a trust and loan corporation, a trust corporation or a loan corporation.” Quite oddly, “loan corporation” is not defined.
Farm Credit Canada (a federal Crown corporation providing financing assistance to farmers) argued that it was not a “loan corporation” because the quoted phrase above had a well understood meaning given that the provincial legislation regulating trust and loan corporations defined a “loan corporation” as a corporation that was incorporated for the purpose of borrowing money from the public (which Farm Credit Canada did not do) and then lending or investing such money.
D’Arcy J found that a loan corporation simply refers to a corporation whose principal business is the making of loans (notwithstanding that the Regulation did not use this phrase appearing in the listed financial institution definition), stating:
There are no provisions in the GST Act that state that a listed financial institution whose principal business is the lending of money is only a “loan corporation” for the purposes of the Attribution Regulations if it accepts deposits from the public. In my view, if Parliament had intended such a result it would have added that specific condition to the legislation. …
Neal Armstrong. Summary of Farm Credit Canada v. The Queen, 2017 TCC 29 under Selected Listed Financial Institution Attribution Method (GST/HST) Regulations, s. 26(1).
Full-text federal tax decisions going back to the late 90s have been added
We are beginning to add the full-text judicial decisions to our database, starting with Tax Court decisions (back to 1999), and tax-related decisions of the Federal Court of Appeal (1997) and Trial Division (1996) and the Supreme Court of Canada (1877, subject to no income tax back then). This will permit you to use our search engine in searching content in the last two decades of cases. Two basic pointers:
- Searches for section numbers will include more detailed versions of the indicated item. For example entering
245(4) 20(1)(c)
in the search box will show cases (and other content types, before you choose to narrow them down using the menu at the left), that also contain both 245(4) and 20(1)(c)(i) or (ii).
- Search results will be narrowed if you use quotations (resulting in only that exact word or phrase being searched). For example searching “surplus stripping” rather than surplus stripping reduces the cases hit from 30 to 15.
Decisions are added to our site within 37 minutes of their being published at the court sites (our computer slumbers not, nor sleeps).
CRA provides detailed guidance on the CbCR rules
On Thursday, CRA released its guide on the Country-by-Country Reporting (CbCR) legislation (s. 233.8) and related return-completion guidelines. CRA comments include:
- The BEPS Action 13 Final Report should be a “useful” source in interpreting s. 233.8.
- “CRA intends to provide a reasonable degree of flexibility for MNE groups filing a CbC report in Canada in respect of their initial reporting fiscal year, where guidance or interpretation on certain issues may not have been available….”
- Some accommodations are being made for ultimate parent entities (UPEs) which are resident in jurisdictions which have been somewhat slow in implementing their legal CbCR framework.
- The s. 233.8 definition of “excluded MNE group” (i.e., excluded from CbCR reporting obligations) references consolidated annual group revenue of €750M, whereas some other jurisdictions reference the local currency equivalent of this. Provided that such jurisdiction “has implemented a reporting threshold that is a near equivalent of €750 million in its domestic currency as it was at January 2015, an MNE group that complies with this local threshold will not be subject to the secondary reporting mechanism in Canada.”
- Also, use of an average annual exchange rate is permitted in translating revenues for purposes of applying the €750M threshold.
- A Canadian entity completing the report can fill in the amounts using its functional currency, if it has made a functional currency election.
- Respecting the reporting of “Revenues-Related party” (i.e., “revenues arising from transactions between entities not dealing at arm’s length”), “the financial results of all intercompany transactions within the same jurisdiction must be aggregated and not consolidated” (which is easy to say).
- Where there has been a takeover or reorg during the fiscal year resulting in a new UPE (including perhaps one in the same jurisdiction), the old UPE reports results up to that time, and the new UPE for the balance of the fiscal year (also easy to say).
- Investment funds should follow their accounting treatment in determining whether investees are part of their consolidated group, so that unless the investees are consolidated (as contrasted presumably with equity accounting), they can be ignored.
- As the CbCR is supposed to be used only for risk assessment, “CRA will not use CbCR information, by itself, to make reassessments to the income of a taxpayer.”
Neal Armstrong. Summaries of RC4651 “Guidance on Country-By-Country Reporting in Canada” 2 March 2017 under s. 233.8(3), s. 233.8(1) - excluded MNE group, s. 241(1) and s. 247(2).
A TCPL sub trust is proposing to issue 60-year automatically convertible notes which will qualify as equity for rating-agency purposes
An Ontario units trust controlled by TransCanada PipeLines Limited, which has already issued U.S.$1.95B in notes, is proposing to issue a further U.S.$1.2B, with the proceeds to be on-lent under unsecured subordinated notes to TCPL at roughly a 25 b.p. spread. The targeted result is that this debt will qualify for Basket ''C'' equity treatment by Moody's, and for Intermediate Equity Credit treatment by S&P. Somewhat equity-like features include the term of around 60 years, automatic conversion into preferred shares (with the same redemption amount) on specified insolvency events and the right of TCPL to satisfy interest payments in preferred shares.
The Trust notes and Sub notes of TCPL nonetheless clearly are debt for ITA purposes; but the U.S. tax disclosure states that there is no certainty that the IRS or a court will agree with TCPL’s position that they are debt. TCPL has the right to cause the Trust notes to be redeemed in the event that a “Tax Event” occurs, which in approximate terms refers to an opinion of independent counsel that any change in tax law (including its official administrative interpretation) would limit an interest deduction for U.S. tax purposes so as to result in the Trust or TCPL/TCC being subject to significant additional taxes or the interest being subject to significant withholding.
Neal Armstrong. Summary of Short Form Supplemented PREP Prospectus of TransCanada Trust under Offerings – Trust Notes.
Ontario LLP partners are limited partners subject to the negative ACB rule
2006 amendments to Ontario’s Partnership Act changed the liability protection for partners of LLPs from partial-shield protection (protection only from the negligence of another partner or an employee) to full-shield protection (generally protection against all but the partner’s own professional negligence or misconduct). This change had the effect of rendering partners of such LLPs as a “limited partners” under the s. 40(3.14) definition thereof, so that they are now subject to the s. 40(3.1) negative ACB rule. However, as members of a professional partnership, they benefit from the rule in s. 40(3.11)(B)(c), which allows current-year income to be included in their partnership interest ACB calculated for the year.
Neal Armstrong. Summary of Lorenzo Bonanno and Guy Buckley, "Limited Liability Partnerships," Canadian Tax Highlights, Vol. 25, No. 2, February 2017, p. 7 under s. 40(3.14).
Ozerdinc Family Trust v Gowling – Ontario Superior Court of Justice finds that the test of causation of damages from professional negligence is a “but for” test
It was acknowledged that a tax lawyer had fallen below the relevant standard of care in failing to advise clients that a new family trust which replaced an old family trust would, by virtue of s. 104(5.8), have a deemed disposition of its assets only four years later - which, in fact, occurred (see Grimes). The law firm argued that it should not be treated as the proximate cause of the loss, as the clients’ accounting firm should have been keeping track of the deemed disposition date.
Labrosse J applied Clements v. Clements, 2012 SCC 32 (“the test for showing causation is the ‘but for’ test… in other words that the injury would not have occurred without the Defendant’s negligence”) in finding that causation had been made out. The question of the degree of any negligence of the accounting firm only went to any liability of them for contribution and indemnity once an award of damages was made against the defendants in this action (the tax lawyer and his firm).
Neal Armstrong. Summary of Ozerdinc Family Trust v Gowling, 2017 ONSC 6 under General Concepts – Negligence.
CRA requirement for disregarded LLCs to now compute their surplus under the ITA engenders complications
At the annual 2016 CTF annual conference, CRA announced that, retroactive to all FA taxation years ending after August 19, 2011, a disregarded US LLC must apply ITA rules to its surplus computations rather than using the local tax law (under the Code) – and that if this entails a switch from using US tax law, CRA would treat deductions claimed under the Code as if they had been claimed under the ITA. Issues raised by this change include:
- In the situation where the Act provides a larger deduction than the Code for the previous year, does the shortfall leads to a retroactive downward adjustment to earnings computed on ITA principles given that Reg. 5907(2.03)(b) deems maximum deductions to have been claimed in prior taxation years?
- The requirement to shift to Canadian tax law retroactive to 2011 could mean that once the surplus has been recomputed, it will now be retroactively considered that dividends were paid in excess of available exempt surplus.
- Using Canadian tax law may trigger early recognition of income or gain for surplus purposes but without corresponding US tax; and subsequent US tax may be paid by a different FA and now be ignored in computing the first FA's surplus.
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Earnings of Disregarded US LLC," Canadian Tax Highlights, Vol. 25, No. 2, February 2017, p. 5 under Reg. 5907(1) – earnings – (a)(iii).
CRA notes that a s. 7(8) deferred gain is triggered on a s. 73 rollover
A stock option benefit which was deferred under s. 7(8) on a stock option exercise before March 4, 2010 will be triggered on a disposition of the shares, even if this is as a rollover under s. 73(1.01)(b) of the shares to the taxpayer’s ex-spouse on a matrimonial settlement. The triggered s. 7 gain will add to the ACB of the rolled-over shares.
Neal Armstrong. Summary of 27 September 2016 Internal T.I. 2015-0572901I7 under s. 73(1.01)(b).
BC Trust – B.C. Supreme Court applies Fairmont to decline rectification relief
The trustees of Trust 1 determined not to distribute its 2012 trust income to Trust 2 (its sole beneficiary) based on CRA having designated the two trusts as one under s. 104(2). After the dispute was resolved by CRA agreeing to reverse the designation, the trustees were unsuccessful in obtaining a rectification order to declare that there could be a retroactive declaration by them of a 2012 income distribution. Weatherill J stated that “Fairmont Hotel…made clear that rectification is limited to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement.” He also declined to exercise the court’s inherent jurisdiction in this regard.
Rather oddly, he concluded with the statement:
[T]here is nothing prohibiting the Trustees from executing a trust minute in respect of the petitioner’s 2012 income allocation. A court order is not necessary. If the petitioner decides to do so, it will be up to the CRA to decide whether or not to give that allocation retroactive effect.
Neal Armstrong. Summary of BC Trust v. Canada (Attorney General), 2017 BCSC 209 under General Concepts – Rectification.