News of Note
Keybrand Foods – Federal Court of Appeal finds that a transaction with a financially subordinate company was a non-arm’s length transaction
Email this ContentThe taxpayer (“Keybrand”) and its wholly-owning parent (“BWS”) were guarantors of loans made to a start-up company (“Vidabode”) by GE Capital. In order to fund the discharge of the GE Capital loans following a Vidabode default, Keybrand subscribed $19.5 million for Vidabode common shares (of which $14.3 million was funded with a bank borrowing), thereby resulting in Keybrand holding about 39% of the common shares of Vidabode in addition to the 41% already held at that point by BWS. A receiver was retained two weeks later by BWS in its capacity of a secured creditor of Vidabode, and on May 6, 2011, Vidabode filed for bankruptcy.
Webb JA confirmed that Keybrand did not generate an allowable business investment loss on its subsequent disposition (under s. 50(1)(b)(iii)) of its shares of Vidabode, on the basis that the share subscription transaction was one between persons not dealing at arm’s length – so that s. 69(1)(a) deemed the cost of those shares to Keybrand to be their nil fair market value.
Webb JA made note of the “directing mind” test applied in the Robson Leather case (whose facts revealed “a striking similarity,” as in both cases there was “substantial debt” owing by a company with poor prospects to the relevant family.) He then stated:
Given the degree of financial dependence of Vidabode on BWS and Keybrand and the lack of any negotiation with respect to the terms and conditions (including the price) related to the share subscription, it is more likely than not that Keybrand controlled both sides of the transaction related to the issue of shares by Vidabode to Keybrand.
Webb JA also confirmed that the interest on the bank loan to fund the shares subscription was non-deductible, given that the factual findings of the Tax Court supported its conclusion “that Keybrand did not have a reasonable expectation of income in acquiring the shares of Vidabode and hence did not borrow the money for the purpose of earning income from property.”
Neal Armstrong. Summaries of Keybrand Foods Inc. v. Canada, 2020 FCA 201 under s. 251(1)(c), s. 20(1)(c)(i) and General Concepts - Purpose/Intention.
ACN 154 - Federal Court of Australia, Full Court finds that gold refining included refining gold that was already at the precious metal level of purity
ETA Sched. VI, Pt. V, s. 6.3 zero-rates “a supply made to a non-resident person that is not registered [for GST/HST purposes] of … a service of refining a metal to produce a precious metal.”
An Australian GST provision effectively zero-rated a supply of “precious metal” (relevantly defined as gold, in an investment form, of at least 99.5% fineness) if it was the “first supply of that precious metal after its refining by … the supplier”. The Australian Commissioner argued that an Australian company did not qualify as refining gold “scrap” purchased by it (which was generally of at least 99.99% fineness, but nevertheless was scrap gold because it was not in investment form) because its mooted refining was of gold that thus already exceeded the statutory threshold of 99.95% fineness.
In rejecting this submission, the Full Court stated:
The ordinary meaning of the word “refining” … and the statutory context suggest that the word “refining” in s 38-385 is referring to a process by which metal is brought to a finer state or form. It may be accepted that, as the Commissioner submits, this is concerned with increasing the metallic fineness of the metal. But this does not require that the process be directed towards increasing the metallic fineness of the metal above the requisite standard of fineness (99.5% in the case of gold). …
[E]ven if …the primary objective of these processes was to provide quality assurance (rather than to increase the metallic purity), the processes nevertheless constituted “refining” in the sense outlined above.
Neal Armstrong. Summaries of ACN 154 520 199 Pty Ltd (in liquidation) v Commissioner of Taxation [2020] FCAFC 190 under ETA Sched. VI, Pt. V, s. 6.3 and s. 123(1) – precious metal.
CRA denies a deduction for the employer’s source deduction payment for s. 7 RSU benefits where that payment is funded by reducing the RSU shares issued
An employee who otherwise would be entitled to receive, say, 30 shares of the employer’s parent (ParentCo) as a result of restricted share units (“RSUs”) vesting, instead is only issued 18 shares to reflect that the employer (EmployerCo) will make a cash payment to the Receiver General on behalf of the employee on account of the required income tax withholding on the taxable benefit under s. 7(1) arising in the year of issuance.
In finding that s. 7(3)(b) prohibited EmployerCo from claiming a deduction for this payment in computing its income, CRA stated:
[A] portion of the rights of the employee under the RSU Plan is considered to have been disposed of by the employee in exchange for EmployerCo paying the required income tax withholdings arising from the issuance of shares of ParentCo under the RSU Plan. Consequently, the employee is deemed to have received a benefit under paragraph 7(1)(b) equal to the amount of income tax remitted by EmployerCo on behalf of the employee.
Since the benefit … arises from the issuance of shares, paragraph 7(3)(b) precludes a deduction by EmployerCo in respect of that benefit.
This analysis seems to implicitly treat the 30 shares that were agreed to be issued as having been issued for s. 7(3)(b) purposes even though, in fact, only 18 are issued.
Neal Armstrong. Summary of 28 September 2020 External T.I. 2020-0840681E5 under s. 7(3)(b).
CRA confirms that a long-term project election under s. 13(29) need only be filed once
Where a major construction project (other than of a rental building) is expected to extend beyond three years, the adverse impact of the available-for -use rules on potential capital cost allowance claims in the third and subsequent years often can be ameliorated by making a s. 13(29) election. The wording of the election form (which likely will be amended in this regard) seems to suggest that the election must be made annually, starting generally with the third year.
CRA has clarified that this is incorrect – the election need only be made once (generally with the return for the project’s third taxation year).
Neal Armstrong. Summary of 1 October 2020 Internal T.I. 2019-0821651I7 under s. 13(29).
Income Tax Severed Letters 18 November 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
PCI Géomatics – Quebec Court of Appeal finds that a loan that was not repayable if the borrower’s revenues consistently declined was a forgivable loan
A company (PCI) engaged in R&D activities for the development of software for satellites, received a non-interest-bearing loan from Industry Canada that was repayable by it (on a formula basis) over the following 15 years: in equal annual instalments if its revenues were stable; in amounts up to 1.65 times the advances received if its revenues increased consistently and significantly over the 15-year repayment period – but not at all if its revenues decreased steadily throughout the 15-year repayment period.
Hogue, J.C.A. found that, in light of this last feature, the loan was a “forgivable loan” and, thus, “government assistance” (under a Quebec definition similar to that in ITA s. 127(9)) so that its amount reduced R&D tax credits of PCI for Quebec purposes. In distinguishing McLarty, she stated that here, by way of contrast:
[T]he Agreement does not have the effect of [merely] limiting the remedies available to the government in the event of a PCI default. Rather, it provides that PCI’s obligation to repay will only arise if its revenue is maintained or increases, which is a future and uncertain event. This condition goes to the very nature of the debt.
Neal Armstrong. Summary of Agence du revenu du Québec v. PCI Géomatics Entreprises Inc., 2020 QCCA 1342 under s. 127(9) – government assistance.
CRA indicates that amounts received out of a UK FURBS are taxable except to the extent there can be a lump sum rolled into an RRSP or RPP
A UK resident is a member of a “funded unapproved retirement benefit scheme” (“FURBS”), which is a UK trust to which the taxpayer’s employer had contributed and the benefits from which are attributable to services rendered by the taxpayer while resident in the UK and before the time of retirement. CRA indicated that, if the individual became a Canadian resident, amounts paid out of the plan would be taxable under s. 56(1)(a)(i) if the plan was a foreign pension plan, and if it was any other form of EBP, such amounts would be taxable under s. 6(1)(g).
If an amount received out of the UK retirement plan was a lump sum amount taxable under s. 56(1)(a)(i), a deduction could be accorded under s. 60(j) regarding a transfer to an RRSP or a registered pension plan. No Treaty exemption (nor the s. 56(1)(a)(i)(C.1) exemption for IRAs and kin) would be available.
Neal Armstrong. Summary of 11 September 2020 External T.I. 2019-0824281E5 under s. 56(1)(a)(i).
Richard A. Bureau Barrister & Solicitor Inc. – Tax Court of Canada leans in favour of giving a registrant its day in court
In granting an extension for an incorporated lawyer to appeal HST assessments to the Tax Court, Russell J accepted the testimony of the lawyer that his strategy was to see if anticipated income tax reassessments (both of his professional corporation and him personally) might assist the corporation’s HST position in its HST appeal. Russell J further stated:
I consider it just and equitable to permit an entity its day in court absent a clear rationale for declining to do so. As well … procedural gaffes are not so egregious as to require or demand denial of this application.
The tests in ETA s. 305(5)(b) for granting an extension are similar to ITA s. 166.2(5)(b) except that there is a further test in ETA s. 305(5)(b)(iv) that “there are reasonable grounds for appealing from the assessment.” Russell J stated in this regard that “there is a semblance of logic to … [the corporation’s] position, sufficient to constitute reasonable grounds.”
Neal Armstrong. Summary of Richard A. Bureau Barrister & Solicitor Incorporated v. The Queen, 2020 TCC 119 under ETA s. 305(5)(b).
We have translated 6 more CRA Interpretations
We have published 6 further translations of CRA interpretation released in November, 2009. Their descriptors and links appear below.
These are additions to our set of 1,321 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Custeau – Quebec Court of Appeal finds that Copthorne does not require the s. 248(10) “in contemplation of” test to be applied on a backwards-looking basis
When a family small business corporation (the “Corporation”) was in financial difficulty, two Quebec regional development funds agreed in 1997 and 1998 (with an objective of saving jobs) to inject equity capital in the Corporation on terms largely dictated by them. As a result of paid-up capital averaging that occurred in the 1998 transactions, the PUC of the common shares of the taxpayers (two brothers) was boosted by a significant amount. In 2003 and 2004, they engaged in capital gains crystallization transactions, which resulted in them holding their shares through respective Holdcos whose shares had a stepped-up ACB and a PUC that reflected the PUC that had effectively been transferred to them. The funds’ common shares of the Corporation were repurchased in 2005 (the Corporation had done quite well), and the taxpayers had their Holdcos distribute most of their PUC in cash during 2006.
The ARQ considered this to be abusive surplus-stripping, and applied the Quebec general anti-avoidance rule to treat most of the paid-up capital distributions as taxable dividends. Dortélus JCQ had found that the utilization by the taxpayers of their stepped-up PUC in 2006 was not part of the same series of transactions as the 1998 PUC-averaging transactions, stating that in order to analyze the nexus between the 1998 and 2006 transactions “it is necessary to place oneself in 1998, at the time of the first transaction and not to apply a backwards-looking analysis.” The ARQ submitted that this approach had erred by not recognizing that Copthorne had found that the assimilation to a series of transactions - of related transactions completed “in contemplation” of the series - included backwards-looking contemplation (i.e., the 2006 transactions were effected “in contemplation” of the previous PUC step-up in 1998.)
In rejecting this submission, Schrager JCA found that, consistently with Copthorne, the question of whether the “in contemplation of” test as to a series should be applied prospectively or retrospectively, depended “on the circumstances of the case.” In the circumstances of this case, including that “none of the players in 1998 could have foreseen that the business would generate sufficient cash six or eight years later to allow the shares to be redeemed,” Dortélus JCQ had not erred by applying the “in contemplation of” test looking forward from 1998 rather than backwards from 2006. It followed that the 1998 PUC-averaging transactions and the use of that PUC in 2006 were not avoidance transactions for GAAR purposes.
Neal Armstrong. Summary of Agence du revenu du Québec v. Custeau, 2020 QCCA 1496 under s. 248(10).