News of Note
CRA provides pipeline rulings where the underlying operating business was sold for cash after the death and before the pipeline transactions
Email this ContentA died holding the shares of an Opco and of a portfolio company (Holdco). Following A’s death, the operating business of Opco was sold to a third party for cash, at which point CRA accepted that Opco started carrying on a portfolio business. Opco then engaged in preliminary transactions to push out its capital dividend account and access refundable tax balances by redeeming shares, which generated capital losses that the estate could carry back under s. 164(6). Opco and Holdco then amalgamated to form Opco 2.
CRA ruled on the implementation by the estate of conventional pipeline transactions for Opco 2 (whereby it sells Opco 2 to a Newco formed by it in consideration for a note and, at a subsequent juncture, Opco 2 and Newco amalgamate to form Amalco, and Amalco starts progressively paying off the note).
Neal Armstrong. Summaries of 2020 Ruling 2019-0824211R3 F under s. 84(2) and s. 51(1).
CRA follows its practice of requiring one year to pass before a pipeline note commences to be paid off
CRA ruled on conventional pipeline transactions for a portfolio holding company (Holdco). Unlike most recent rulings it did not redact the period of time between the sale of Holdco to Newco for a note, and the amalgamation of Newco with Holdco (it was stated as “one year” rather than “12 months,” so that there was no naughty number to redact).
Neal Armstrong. Summary of 2020 Ruling 2019-0832601R3 F under s. 84(2).
CRA finds that an NPO should have been charging GST/HST on sales of donated clothing
An NPO operated a store at which it sold used clothing that had been donated to it. Since it was not a registered charity, such sales were not exempted. The NPO had registered the store as a “small supplier division” but there ceased to be an exemption on that ground as a result of the sales exceeding $50,000. Accordingly, the NPO was a registrant (i.e., it was required to be registered for GST/HST purposes) and it thus was responsible for failure to charge GST/HST on the store sales.
Neal Armstrong. Summaries of 3 January 2020 GST/HST Ruling 192645a under ETA Sched. V, Pt. VI, s. 4 and s. 129.1(1).
Special rules (and gaps in the rules) apply where CFAs have debts forgiven or deferred
In determining whether a debt owing by a foreign affiliate is a “commercial debt obligation” for purposes of the debt forgiveness rules, the test is whether any interest paid on the debt would be deductible against foreign accrual property income (FAPI). The forgiven amount cannot be applied to reduce the various tax attributes of the debtor, and will either be applied against any foreign accrual property losses or be carried forward to reduce any future year FAPLs.
2002-0165195 … provides that the "exempt earnings" or "taxable earnings" would not pick up forgiveness of a commercial debt obligation that did not relate to FAPI and that 5907(2)(f) would not be available, thus resulting in such income not being included in the exempt or taxable surplus of the FA debtor. … [T]his position is questionable given Regulation 5907(2)(f) and the definition of "earnings" in Regulation 5907 and may give rise to double taxation.
Assuming that an amount is not recognized as foreign accrual tax (FAT) until it is paid, COVID-related deferrals of tax payments in foreign jurisdictions will generally reduce the Canadian taxpayer’s FAT deduction in computing FAPI by four times the amount so deferred, thus potentially giving rise to Canadian taxes.
Neal Armstrong. Summaries of Marc André Gaudreau Duval and Michael N. Kandev, “Foreign Affiliate Issues in Troubled Times,” International Tax (Wolters Kluwer CCH), No. 112, June 2020, p. 1 under s. 95(2)(g.1), s. 248(27), Reg. 5907(2)(f) and s. 91(4).
Supreme Court grants leave in Alta Energy
Alta Energy rejected what essentially was a Crown position that Treaty-shopping (here, transferring an investment in a Canadian resource company to a Lux holding company followed by a sale, two years later, that was Treaty-exempt) was a GAAR abuse – with Webb JA saying, for instance that there “is no distinction in the Luxembourg Convention between residents with strong economic or commercial ties and those with weak or no commercial or economic ties,” and that “the object, spirit and purpose of the relevant provisions of the Luxembourg Convention is reflected in the words as chosen by Canada and Luxembourg.”
The Supreme Court will be hearing the Crown’s appeal.
Neal Armstrong. Summary of Canada v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 43, leave granted 6 August 2020 under s. 245(4).
Samsung Heavy Industries – Supreme Court of India finds that a Mumbai liaison office for a domestic construction project was not a PE
Samsung, a resident of South Korea, was a member of a consortium for fabricating and installing offshore drilling plaforms at an oil development off the west coast of India of an India oil company (“ONGC”). The Supreme Court of India found that a two-person liaison office in Mumbai (which was unfortunately called the “project office”) did not constitute a permanent establishment of Samsung.
Art. 5 of the Treaty with South Korea (the “DTAA”) provided inter alia that the term PE “means a fixed place of business through which the business of an enterprise is wholly or partly carried on,” and went on to provide (in Art. 4(e)) that the term was deemed not to include “the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research or any other activity, if it has a preparatory or auxiliary character in the trade or business of the enterprise.”
Nariman J stated:
[T[he Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also… the Mumbai Project Office … would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.
Neal Armstrong. Summary of DIT vs. Samsung Heavy Industries Co Ltd (Supreme Court) CIVIL APPEAL NO. 12183 of 2016 under Treaties – Income Tax Conventions – Art. 5.
Income Tax Severed Letters 5 August 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Chevalier – Court of Quebec finds that the subdivision of a residential land into around 30 serviced building lots by the purchaser-developer did not scupper capital gains treatment
An individual who had held property for her personal residential use, was approached by a housing developer, who agreed to purchase her land on the basis that it would acquire around 30 fully-serviced building lots, with it doing all the work to make this subdivision and addition of the services happen. Lewis JCQ found (in reliance inter alia on Latulippe) that the taxpayer’s gain was on capital account given her lack of involvement in the development work.
Neal Armstrong. Summary of Chevalier v. Agence du revenu du Québec, 2020 QCCQ 2220 under s. 9 – capital gain v. profit – real estate.
Wachal – Tax Court of Canada finds that non-granular pleading of the Minister failed to shift the onus to the taxpayer
The taxpayer’s eligibility for Canada child tax benefit for his son turned primarily on whether he qualified as the “eligible individual” for that child. The Crown pleaded that in the periods in question, the taxpayer “was not the parent primarily responsible for the care and upbringing of [the child],” i.e., it simply quoted from the relevant portion of the statutory definition of “eligible individual,” and did not refer to how any of the eight factors listed in Reg. 6302 for determining such primary responsibility applied, with the exception of a brief reference to a divorce judgment.
Russell J considered this pleading to be deficient, and found that, given that there was not much of a burden on the taxpayer regarding his “eligible individual” status, somewhat fluffy and poorly substantiated testimony of the taxpayer was sufficient to establish that the taxpayer so qualified for various periods in issue (other than those as to which the taxpayer had effectively conceded.)
Neal Armstrong. Summaries of Wachal v. The Queen, 2020 TCC 78 under s. 122.6 - eligible individual – (b)(ii) and s. 122.62(1).
Spouses might be able to access the lower prescribed rate for s. 74.5(2) by simply refinancing their interspousal loan
Where spouses have avoided the application of the income attribution rules through a demand loan made at the prescribed rate from one spouse to the other in reliance on s. 74.5(2), they may now wish to take advantage of the reduction in the prescribed rate from 2% to 1%.
An approach which is simpler and less costly than a sale of the income-producing asset in question and the new loan being made once the sale proceeds have repaid the original loan, is for the one spouse to make a loan at the 1% prescribed rate to the other spouse, with the other spouse using such proceeds to repay the original loan. However, according to an old Interpretation (9336625) the new loan in this latter scenario would not be used for an income-producing purpose, but rather for the purpose of extinguishing the original loan, so that the new loan would not be described by the s. 74.5(2) safe harbour. However, it is suggested that this position does not reference s. 20(3), and may be incorrect.
Neal Armstrong. Summary of Michael Goldberg and Vincent Didkovsky, “Refinancing Prescribed-Rate Loans Used for Income Splitting,” Canadian Tax Focus, Vol. 10, No. 3, August 2020, p.2 under s. 74.5(2).