News of Note
Development Securities plc - Court of Appeal of England and Wales locates the residence of Jersey subsidiary in the UK given that its directors took instructions from the UK parent on a transaction not in its commercial interests
Email this ContentA U.K. tax avoidance scheme entailed special-purpose Jersey subsidiaries acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that these subsidiaries had their central management and control (“CMC”) and, thus, residence, in Jersey at the moment of the acquisitions. Their directors consisted of the UK-resident secretary of DS Plc and three Jersey residents who also served as directors of numerous other client companies. The board held a three-hour meeting in Jersey to review and approve the transactions, and three briefer meetings to approve the granting and then exercise of the call options, and the replacement of the Jersey directors by UK-management directors (when the time came in the PwC plan for the subsidiaries’ CMC to shift to the UK).
In reversing the Upper Tribunal and reinstating the decision of the First-Tier Tribunal that, at the acquisition times, the CMC of the subsidiaries was exercised in the UK by the parent’s management and not in Jersey, David Richards LJ stated:
The clear conclusion to which the FTT came … was put by the FTT at [422], "the Jersey directors were acting under what they considered was an 'instruction' or 'order' from the parent".
The inevitable conclusion from that finding was … that the decision to enter into the relevant transactions was taken by the parent in the UK, not by the directors in Jersey. They were, of course, concerned to ensure that what they were being instructed to do was lawful. … Likewise, the directors were concerned to ensure that there were no unexpected liabilities for the Jersey companies, such as stamp duty, and to ensure that the documents were in proper order. None of that detracts from the FTT's finding as to who made the decision to enter into the transactions and where that decision was made.
The applicable principle was stated in the concurring reasons of Newey LJ:
A company may be resident in a jurisdiction other than that of its incorporation not only where a constitutional organ exercises management and control elsewhere, but if the functions of the company's constitutional organs are usurped, in the sense that management and control is exercised independently of, or without regard to, its constitutional organs, or if an outsider dictates decisions (as opposed to merely proposing, advising and influencing decisions). [emphasis added]
Neal Armstrong. Summary of R & C Commrs v Development Securities plc & Ors, [2020] EWCA Civ 1705 under s. 2(1).
La Mancha Group – Federal Court of Australia finds that an absorptive merger of a Dutch into a Lux company rendered the Lux survivor as the “taxpayer” for continuing or launching objections
A condition precedent to the merger of a Netherlands private limited company (“LMGI”) into its sister company (“LMA”), which was a Luxembourg private limited liability company (with LMA as the survivor) was that the Federal Court of Australia confirm that LMA as legal successor would be able to exercise all objection or appeal rights in relation to current and pending assessments of LMGI’s taxation years by the Australian Commissioner. Before providing such declaration, Davies J stated, based on the expert law testimony:
Under European law, Luxembourg law and Dutch law, pursuant to the principle of universal succession … all liabilities of LMGI to tax, including under foreign law (that is, the relevant Australian tax acts), will transfer to LMA by operation of law pursuant to the principle of universal succession upon completion of the merger, as will the rights and obligations of LMGI in respect of such tax liabilities … .
After summarizing the relevance of the character of the merger under such foreign law to the Australian common law choice of law rules, she stated:
In consequence, the tax liabilities of LMGI will be assumed by LMA as a result of the merger. Moreover, LMA, as the “taxpayer” under s 175A of the Income Tax Assessment Act 1936 (Cth) … will be entitled to object against assessments which have been issued to LMGI, or which are issued to LMA in its place, and will be “the person” entitled to appeal … in relation to objections from those assessments … . Although those liabilities and obligations (on the one hand) and rights and capacities (on the other) arise under Australian law and are governed by Australian law, Australian law will recognise the operation of Dutch and/or Luxembourg law following the merger as having clothed LMA with the necessary attributes or identity to subject it to those obligations and liabilities and to enable it to exercise those rights and capacities for the purposes of Australia’s tax acts.
Although the parent of the two merging companies was a Luxembourg public limited company, if the parent had been a Canco, the description of the merger suggests that it could have qualified as a foreign merger under ss. 87(8) and (8.2).
Neal Armstrong. Summary of La Mancha Group International B.V. v Commissioner of Taxation [2020] FCA 1799 under s. 165(1).
CRA finds that sponsorship of a PSB’s staged production was not subject to GST/HST
ETA s. 135 deem a supply by a public sector body (PSB) of a service, or a licence of copyright, a trade-mark, trade-name or other similar property to a “sponsor” for exclusive use by the sponsor in publicizing the sponsor’s business, to not be a supply – except that this rule is stated not to apply where the consideration for this supply by the PSB to the sponsor is “primarily” for radio, TV, newspaper, or magazine advertising.
CRA dealt with a situation where, in order to ensure the success of an event mounted on a stage, a PSB enlisted the participation of sponsors. The agreements typically provided for consideration payable by that sponsor and for sponsorship rights, which included: acknowledgement as official sponsor of the event, logo visibility on event signage on a website, in newspapers, and in social media; the sponsor’s name being on a stage; a licence to use real property to promote its brand by offering samples; and VIP invitations to attend the event.
CRA found that notwithstanding the newspaper element, “the dominant element is the promotional services that the sponsor acquired” of the permitted character, so that the s. 135 no-supply rule applied.
Neal Armstrong. Summary of 10 August 2020 GST/HST Ruling 210848 under ETA s. 135.
CRA indicates that an arbitration award made in the normal course following a collective bargaining process could qualify for lump-sum averaging
Ss. 110.2 and 120.31 may provide relief to individuals receiving taxable lump-sum payments from their employer relating to services that were performed in prior years. The relief is through calculating the tax liability based on the lower rates applicable had the sums been earned over the course of those years rather than as the lump sum. An employee bargaining unit and the employee, after their collective bargaining process, agreed to resolve the remaining issues by referring them to a three-person binding conciliation board, which awarded salary increases and wage adjustments.
In finding that these could constitute “qualifying amounts” for s. 110.2 purposes, the Directorate stated:
[I]f the particular lump-sum amount is paid to the individual as the result of an arbitration award resulting from a bona fide arbitration process, such a lump-sum amount could be a qualifying amount. This could apply even when the arbitration process is part of a normal collective bargaining process.
Neal Armstrong. Summary of 21 August 2020 Internal T.I. 2019-0834911I7 under s. 110.2(1) – qualifying amount.
CRA indicates that a corporate charity cannot establish RESPs
CRA indicated that an incorporated registered charity could not establish RESPs for needy children given that only an individuals and a “public primary caregiver” (which it was not) can qualify as an “RESP subscriber.”
Neal Armstrong. Summary of 1 September 2020 External T.I. 2019-0832221E5 under s. 146.1(1) – subscriber – (a).
Income Tax Severed Letters 30 December 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on using a Newco as a holding tank for the transfer of losses in order to avoid a direct loss shift transaction with a public company
A published ruling letter concerns a Lossco holding all of the voting common shares of a profitable public company (Opco) that has publicly-traded non-voting shares outstanding. Opco does not wish to engage in loss-shifting transactions that would entail it incurring an interest-bearing loan. Instead, Lossco engages in transactions to shift losses to a newly-incorporated subsidiary (ACo), with Aco then being transferred under s. 85(1) to Opco, and wound-up under s. 88(1.1) into Opco.
Regarding the mechanics of the loss shift, the interest on the loan by Lossco to ACo, as well as the dividends on the corresponding preferred shares held by Aco in a Newco subsidiary of Lossco, are allowed to accumulate until the time of unwinding the structure, at which point Lossco makes a cash capital contribution to Newco to fund the payment of such dividend arrears whose payment, in turn, funds the payment of the interest owing by Aco – but the loss shifting transactions otherwise are unwound on a cashless basis.
This ruling letter is very similar to 2012-0472291R3.
Neal Armstrong. Summary of 2020 Ruling 2019-0835141R3 under s. 111(1)(a).
Dow Chemical – Tax Court of Canada finds that it has jurisdiction to review whether a CRA denial of a downward s. 247(10) adjustment was “correct in fact and law”
In reassessing the taxpayer under s. 247(2), the Minister did not allow a requested “downward” adjustment under s. 247(10) (to increase the interest expense on a loan from a Swiss affiliate by $3.26 million) because of a limitation period in the Canada-Switzerland Tax Treaty. A Rule 58 question was put to the Tax Court, which was essentially whether it was the Tax Court that had jurisdiction regarding the taxpayer’s challenge to this denial, or whether the only recourse was to the Federal Court for judicial review of the Minister’s decision to disallow.
Monaghan J found that the Tax Court had jurisdiction over the reassessment, including as it related to the denial of the downward adjustment. True, a decision under s. 247(10) is one for the Minister to make and, in that sense, it is a discretionary (although it is non-discretionary in that it must be made.) However, “that decision must be made judicially, i.e., in accordance with proper legal principles.” This situation was similar to the line of cases finding that the Exchequer Court could review whether the Minister’s exercise of a right under the Income War Tax Act to disallow (through a corresponding assessment) expenses that the Minister determined to be unreasonable was “well-founded in fact and law.”
If the Tax Court determines that the Minister’s determination under s. 247(10) was not “correct in fact and law,” the resulting assessment can, for example, be sent back to the Minister for redetermination.
Monaghan J stated:
… The Tax Court will address all challenges to the correctness of the assessment made after the transfer pricing provisions have been applied, including whether the conditions for their application are met, the amount of any adjustments, the liability for penalties and whether the Minister exercised her discretion properly. Once the Tax Court decides to allow an appeal of an assessment on the basis that the Minister did not act properly in exercising her discretion, the powers available to it under section 171 provide it with the relevant remedies.
Neal Armstrong. Summaries of Dow Chemical Canada ULC v. The Queen, 2020 TCC 139 under s. 247(10) and s. 247(11).
CRA states that Hong Kong COVID-prompted cash payments to all permanent residents are not income from a source
Following months’ long protests and the COVID outbreak, the Hong Kong government announced that it would disburse HK$10,000 to each Hong Kong permanent resident aged 18 or above. The Directorate stated:
[T]he amount received from the Hong Kong Government under the Scheme by a Canadian resident individual, will likely not constitute income from a source, and therefore, will not be taxable under the Act.
Neal Armstrong. Summary of 31 August 2020 Internal T.I. 2020-0851071I7 under s. 3(a).
We have translated 4 more CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 3 translations of CRA interpretation released in July and June, 2009. Their descriptors and links appear below.
These are additions to our set of 1,354 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for January.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2020-12-23 | 3 November 2020 External T.I. 2020-0848881E5 F - SSUC/CEWS - rémunération admissible | Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration - Paragraph (c) | eligible remuneration is not reduced where the eligible entity on-charges a portion of its employees' time to an affiliate |
| 2009-07-03 | 25 June 2009 Internal T.I. 2009-0328171I7 F - Pénalité pour omission - 163(1) | Income Tax Act - Section 163 - Subsection 163(1) | s. 163(1) cannot apply where the previous year’s failure was in claiming bogus expenses rather than failing to report revenues |
| 2009-06-26 | 11 May 2009 External T.I. 2008-0276761E5 F - Class 43.1 and 43.2 | Income Tax Regulations - Schedules - Schedule II - Class 43.1 | wood waste fuelled heat production system and ground source heat pump likely could qualify |
| Income Tax Regulations - Regulation 1104 - Subsection 1104(13) - Eligible Waste Fuel | wood pellets are wood waste | ||
| 12 June 2009 Internal T.I. 2008-0294921I7 F - Montant reçu à l'égard d'un surplus actuariel | Income Tax Act - Section 9 - Nature of Income | lump sum paid to asset vendor for actuarial surplus in transferred pension plan was s. 9 income under Ikea expense-adjustment principle | |
| Income Tax Act - Section 248 - Subsection 248(1) - Superannuation or Pension Benefit | transfer of a pension plan assets and liabilities to the asset purchaser with regulatory approval entailed a plan “modification” rendering actuarial surplus compensation taxable |