News of Note
G E Financial Investments – First-Tier Tribunal finds that a deemed US resident was not a US treaty resident
Email this ContentA US company (“GEFI Inc.”) and UK company (“GEFI”) in the GE group formed a Delaware LP (“LP”) with GEFI Inc. as the 1% general partner and GEFI as the 99% limited partner. LP acquired five intercompany loans.
The stock of GEFI Inc. and GEFI were stapled, which caused GEFI to be deemed to be resident in the US under the Code, with a view to increasing the US foreign tax credit capacity in the US. GEFI claimed credit for the US income taxes payable by it against its UK income tax liabilities.
HMRC denied the credit. The first issue was whether GEFI was a US resident for purposes of Art. 4 of the UK-US treaty, which relevantly referred to “any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.” Brooks J effectively applied commentary - that the quoted wording requires “effective personal attachment to a territory,” and the effective finding in Crown Forest that full or worldwide taxation is a necessary feature of the connecting criterion but is not sufficient of itself - to find that the mere stapling of the GEFI stock did not give rise to the required connection to the U.S., so that GEFI was not a US treaty resident.
This then left the issue as to whether the US taxes imposed on GEFI were imposable in accordance with the Treaty on the basis of GEFI, through its participation in LP, having a permanent establishment in the US - so that the UK was required to accord a foreign tax credit to GEFI in accordance with Art. 24 of the Treaty (similar to Art. 24 of the Canada-UK Treaty). In finding that the LP did not have a permanent establishment in the US on the basis that it was not carrying on business there under the UK concept of a business (having regard to Art. 3(2)), Brooks J indicated that there was a mere holding of five affiliate loans (albeit, in very large amounts) over the course of approximately six years, which represented “more of a passive, sporadic or isolated activity than a regular and continuous series of activities” – and noted the there was “nothing to suggest that personnel or agents acting on behalf of the LP made or conducted continuous and regular commercial activities in the US.”
Neal Armstrong. Summaries of G E Financial Investments v. The Commissioners for Her Majesty's Revenue & Customs, [2021] UKFTT 0210 (TC) under Treaties – Income Tax Conventions – Art. 4, Art. 5.
Pomeroy Acquireco – Federal Court of Appeal indicates that amendments to pleadings need only assist (and not be prejudicial) to be allowed
The taxpayer opposed a proposed amendment by the Crown (raised before trial) to its pleadings to raise an argument that the subject transaction was a sham and that shares acquired as part of the transaction should have their value discounted to reflect the corporations’ latent tax liabilities. In reversing the decision below and allowing the amendments, Rennie JA disagreed with the trial judge (whom he reversed) that amendments must be “vital” to the case in order to be allowed, stating:
The controlling principle is that an amendment should be allowed at any stage of an action if it assists in determining the real questions in controversy between the parties, provided it would not result in an injustice not compensable in costs and that it would serve the interests of justice. A court should give significant consideration to amendments which further the ability of the trial court to determine the questions in controversy … .
Neal Armstrong. Summary of Canada v. Pomeroy Acquireco Ltd., 2021 FCA 187 under Rule 54.
Castle Building – Federal Court finds that it was not unreasonable of CRA to refuse a late ETA s. 156 election based on a corporation’s failing to file nil returns
A parent corporation (“Castle”) made some of its taxable supplies of building materials to its wholly-owned subsidiary (“CBS”), which on-sold the goods to retailers. There was a s. 171(1) billing election in place between them, so that Castle was responsible for the GST/HST reporting of CBS’s sales - and so that if CBS had bothered to register and file GST/HST returns (which it did not), they would have been nil returns (assuming that a s. 156 election applied to Castle’s sales to CBS – otherwise, Castle was required to charge GST/HST, with CBS effectively being required to claim ITCs).
New rules, effective January 1, 2015, required a fresh s. 156 election to be filed with CRA. Castle and CBS filed their election late. CRA refused to exercise its discretion to accept the late election on the basis of its Guidelines in Policy Statement P-255 which relevantly required that “both corporations must have filed all GST/HST returns as required.”
Walker J found that this refusal was not unreasonable. She noted that although Castle was responsible for reporting and remitting the GST/HST on CBS’s sales, this did not detract from CBS technically being a registrant who in fact was the supplier, so that it technically was still required to file (nil) returns.
Neal Armstrong. Summary of Castle Building Group Ltd. v. Canada (National Revenue), 2021 FC 947 under ETA s. 156(4)(b)(ii).
Income Tax Severed Letters 22 September 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Paletta International – Federal Court of Appeal finds that there is no requirement for the Crown to explicitly plead “sham”
Hogan J had found that a tax shelter partnership, which had funded the prints and advertising expenses for films that it had purchased from Twentieth Century Fox, had not incurred such expenses for an income-producing purpose because there was no real prospect that Fox would not exercise its “options” to repurchase the films – and thus no real prospect that the films would generate revenue to the partnership. He stated that “the options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release.”
In concluding that it was not procedurally unfair for Hogan J to make his quoted finding given that the Crown pleadings had “put the appellants on notice that the Minister took the view that it was a certainty that the partnerships would not have any income from the exploitation of the films,” Woods JA stated:
There was no reason for the assumptions to explicitly use the term “sham” or to explicitly state that there was deception. But it is obvious from the relevant assumptions that the Minister did assume that there was deception with respect to the options.
Neal Armstrong. Summaries of Paletta International Corporation v. Canada, 2021 FCA 182 under General Concepts – Sham and s. 9 – capital gain v. profit – real estate.
Le – Court of Quebec finds that domination and abuse of the taxpayer by her aunt precluded a finding of a shareholder benefit
The ARQ assessed the taxpayer (who was a recent immigrant from Vietnam with no knowledge of French or English) under the Quebec equivalent of s. 15 on the basis that a corporation of which she was a 40% shareholder had made unreported sales and a portion of the proceeds had been appropriated to her.
Bourgeois JCQ accepted her testimony that she was dominated by her aunt (who had had her beaten, and precluded her from having opportunities to leave the aunt’s residence), that she had no involvement in the affairs of the corporation and that her aunt had forced her to sign various documents. Before finding that there was no receipt of any taxable benefit, he noted that under the Quebec Civil Code, fear vitiated consent to a contract.
Neal Armstrong. Summary of Le v. Agence du revenu du Québec, 2021 QCCQ 5290 under s. 15(1).
We have published 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in December 2006. Their descriptors and links appear below.
These are additions to our set of 1,724 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 14 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CAE – Tax Court of Canada finds that an unconditionally repayable loan with a 2.5% yield was government assistance
CAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.
Were the amounts government assistance? Ouimet J agreed with CAE that the arrangement was a loan. However, he then interpreted Immunovaccine as establishing that the relevant test was whether the agreement with Industry Canada was an “ordinary commercial agreement.” He found that this test was not satisfied given that the yield on the loan to Industry Canada of 2.5% was a third of the interest that CAE would have borne on an unsecured commercial loan and that the loan lacked normal commercial covenants. As the amounts were government assistance, the amounts received or receivable in each year were excluded from qualifying expenditures for investment tax credit purposes by s. 127(18), the amounts so received were not deductible in computing income by virtue of s. 37(1)(d) and (without duplication) the amounts so receivable were includible in income under s. 12(1)(x).
Neal Armstrong. Summary of CAE Inc. v. The Queen, 2021 CCI 57 under s. 127(9) – government assistance and s. 37(1)(d).
CRA was not unreasonable in not recommending remission where taxpayers realized stock option benefits on stock that became worthless
The taxpayers realized stock option benefits, and then the stock became worthless somewhat later without their having exercised. In finding that it was not unreasonable of the CRA to conclude that no remission of the tax, interest and penalties should be recommended, Southcott J noted the CRA findings that the taxpayers had sufficient home equity to pay the liabilities, and “that the potential for a sudden decline in value after acquiring shares is a known risk” - and then further indicated that “it was within [CRA’s] discretion to be influenced significantly by the public interest in collection of taxes.”
Neal Armstrong. Summary of Anderton v. Canada (Attorney General), 2021 FC 788 under Financial Administration Act, s. 23(2).
CRA indicates that the safe income of common shares acquired on a s. 88(1) wind-up is averaged with that of directly-purchased common shares
A Canadian corporate taxpayer (“Parent”) had held a majority of the common shares of an indirect Canadian subsidiary (“Subsidiary”) for some time through a wholly-owned direct subsidiary (“Holdco”), and recently acquired the balance of the common shares of Subsidiary directly.
CRA ruled that upon a s. 88(1) winding-up of Holdco (so that the two shareholdings were combined in Parent’s hands), the safe income on hand attributable to the historical shareholding would be averaged across all of the common shares held by Parent immediately following the winding-up.
Parent then effects a “dirty s. 85” exchange of its common shares of Subsidiary for new common shares and preferred shares with a cost equaling their redemption amount, and then has a cash dividend paid on the common shares and has the preferred shares redeemed for cash. CRA ruled that the pref redemption would not reduce the safe income on hand attributable to the common shares – noting in its summary that this was because there was no inherent gain on such pref.
Neal Armstrong. Summary of 2020 Ruling 2020-0854091R3 under s. 55(2.1)(c).