News of Note
Our translations of CRA French-language interpretations now go back 6 years
Email this ContentThe table below provides descriptors and links for 3 Interpretations released in January 2013 and December 2012 (including one 2012 APFF Roundtable item), as well as for 10 of the 2018 APFF Roundtable items released by CRA last week - all as fully translated by us. In October, we provided full-text translations of the CRA written answers and summaries of the questions posed at the two 2018 APFF Roundtables, so that what we are now providing is complete in that there also are full-text translations of the questions posed.
The above items are additions to our set of 721 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Deliberately generating a s. 84.1 dividend on a sale of a CCPC can produce lower tax if this planning works
An individual shareholder holding shares of a Canadian controlled private corporation (Opco) with a nominal adjusted cost base and a fair market value of say $10M potentially could use s. 84.1 on a sale of his shares to a third-party for cash in order to generate and receive a capital dividend as well as generating a dividend refund. For example, he could:
- do a drop-down of half of his Opco shares to a wholly-owned Newco on a s. 85(1) rollover basis
- have Newco do a dirty s. 85(1) exchange of its Opco shares with Opco for new Opco shares, thereby realizing a $5M capital gain and additions to its capital dividend account and refundable dividend tax on hand account
- sell in two equal tranches his remaining Opco shares to Newco in consideration for two $2.5M notes, thereby generating, under s. 84.1:
- a $2.5M capital dividend; and
- a $2.5M taxable dividend (generating a dividend refund)
Since he and Newco have high basis in the Opco shares, the sale to the purchaser can now close without further gain being realized.
Issues to be addressed in this planning include:
- It would appear that CRA now accepts that a s. 83(2) election can be made on a s. 84.1 dividend.
- However, CRA might challenge the proposition that a s. 84.1 dividend can generate a dividend refund.
- S. 129(1.2) could apply to deny the dividend refund if one of the main reasons for step 3(b) was to obtain a dividend refund
- Re GAAR, what arguably is the Lipson doctrine, that a specific anti-avoidance provision should not be used to generate a tax benefit, is bothersome (see also Satoma)
Speaking of GAAR, it would appear that continuing a CCPC under foreign corporate law in order to avoid the high corporate rate on investment income is not abusive given inter alia that the scheme of the Act is to make it hard to be a CCPC rather than going in the opposite direction – and furthermore, the Department of Finance turned its mind to extending the refundable tax regime to non-CCPC private corporations in July 2017, but so far has not moved on this.
Neal Armstrong. Summaries of Anthony Strawson and Timothy P. Kirby, “Vendor Planning for Private Corporations: Select Issues,” 2017 Conference Report, (Canadian Tax Foundation), 11:1-28 under s. 110.6(2.1), s. 123.3, s. 84.1(1), s. 83(2), s. 129(1) and s. 129(1.2).
P3 projects raise a range of income tax and GST/HST issues
Observations on P3 projects (e.g., for the construction and operation of hospitals or infrastructure projects) include:
- Interim payments received (before the operational phase commences) from the public sector proponent are typically treated as reducing construction costs under s. 13(7.1) rather than as income receipts.
- However, if the progress payments are treated as capital cost deductions, the potential Reg. 3100(1)(b) benefit can cause Projectco partners to be deemed to be limited partners under s. 96(2.4)(b).
- CRA appears to be willing to apply the two-year rolling-start rule in s. 13(27)(b) on an as-expended basis so that, for example, expenses incurred in Year 1 would satisfy the available-for-use test in Year 3, even if the entire contract is not complete in Year 3; however, the more conservative approach may be to treat the assety as not being available for use until the construction phase is complete - which could give a more favourable result under the tax-shelter analysis.
- A P3 project likely will flunk the mathematical test in the s. 237.1 “tax shelter" definition at financial close given that costs not yet incurred (albeit committed to be incurred) are not taken into account.
- GlaxoSmithKline emphasized the difference between the reasonableness standard in s. 20(l)(c) and the arm’s-length standard in the predecessor of s. 247(2). “These two standards are different, which means that potentially different allowable interest expenses might be permitted as deductions under paragraph 20(1 )(c) or section 67, as compared with transfer pricing.”
Neal Armstrong. Summaries of John Tobin, “Infrastructure and P3 Projects,” 2017 Conference Report (Canadian Tax Foundation), 10:1-31 under ETA, s. 168(3)(c), ITA s. 9 – nature of income, s. 13(27)(b), Reg. 3100(1)(b), s. 96(2.2)(d), s. 237.1(1) – tax shelter – para. (b), s. 248(1) – taxable Canadian property - para. (d). s. 18(7) and s. 20(1)(c).
CRA rules on a butterfly on a gross FMV basis and finishing with an estate freeze
CRA ruled on a butterfly split-up of DC (a Canadian-controlled private corporation holding marketable securities and cash, and also with related-person liabilities) among new holding companies (ACo1, BCo1 and CCo1) for A and her two adult children, B and C. The steps entailed initially packaging DC’s assets into two new subs (BSub and CSub) pursuant to a s. 85(1) drop-down, so that after effecting the butterfly split-up, BCo1 held shares of BSub, CCo1 held shares of CSub and ACo1 held shares both of BSub and CSub.
This was the set-up for ACo to then transfer its shares of BSub and CSub to BCo1 and CCo1, respectively, under s. 85(1) in consideration for preferred shares of the transferees, thereby permitting A’s interest in the DC assets to be frozen for the future benefit of her children.
The spin–off of the DC assets was to be accomplished on a gross FMV basis rather than net FMV basis, i.e., liabilities of DC were not taken into account in determining whether there was a pro rata distribution of each type of property of DC. The butterfly mechanics avoided any Pt IV tax circularity issues.
Neal Armstrong, Summary of 2018 Ruling 2017-0733011R3 under s. 55(1) – distribution.
Jayco – Tax Court of Canada finds that the taxpayer has no remedy in a costs award for LC fees paid to secure its GST/HST obligation until reversed
After its successful appeal of a GST/HST assessment, Jayco sought to include, in the costs recoverable from the Crown, the $1.4 million paid by it to JP Morgan in order to obtain a letter of credit to secure the GST/HST it owed until the assessment was reversed. In rejecting this claim, D’Auray J stated:
In essence, Jayco is submitting that the Minister ought to have exercised her discretion differently and not taken any collection action on the GST/HST assessed. …
This Court does not have jurisdiction to review the Minister’s exercise of that power—that jurisdiction rests with the Federal Court. …
The Rules are clear that disbursements will only be awarded if they are essential to the conduct of the proceedings. … The interest was not paid by Jayco to establish that the Minister’s assessment was incorrect … .
Neal Armstrong. Summary of Jayco, Inc. v. The Queen, 2018 TCC 239 under Tax Court Rules, Rule 147(3)(j).
Apex City – Tax Court of Canada finds that a due diligence defence was not available where the taxpayer incorrectly disagreed with a CRA position
A partnership (Apex) hired a general contractor to construct condos which it then sold. It was required under Reg. 238(2) to file T5018s if its business income was “derived primarily from” construction activities. MacPhee J rejected Apex’s argument that it was not in the business of constructing condos but, rather, “in the business of selling condos after they are constructed,” stating:
To ignore the construction component of the Appellant’s business would be an incorrect interpretation of the phrase “derived primarily from”.
A due diligence defence to s. 162(7) penalties also was not established given that Apex had become aware of CRA’s position that T5018s should be filed but had nonetheless chosen not to file the T5018s because it disagreed with that position. This did not come within the l’École Polytechnique doctrine (2004 FCA 127) that “due diligence excuses either a reasonable error of fact, or the taking of reasonable precautions to comply with the Act.”
Neal Armstrong. Summaries of Apex City Homes Limited Partnership v. The Queen, 2018 TCC 247 under Reg. 238(2) and s. 162(7).
Income Tax Severed Letters 12 December 2018
This morning's release of 27 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Adecco – English Court of Appeal finds that a placement service providing non-employee temps to clients was not paying the temps’ compensation on the clients’ behalf
An employment bureau (Adecco) introduced temporary staff ("temps"), who were not Adecco employees, to clients looking for a temporary worker to undertake an assignment, and if the temps accepted an assignment, Adecco paid them for the work they did for the clients – and collected those amounts plus a mark-up from the clients.
Newey LJ essentially found that Adecco was not paying the temps as agent for the clients, so that the full consideration received by it from the clients was subject to VAT rather than just the “commission” earned by it.
It was helpful to Adecco’s case that it could not direct the temps as to how to carry out their assignments, had no effective control over when the assignments ended and did not conduct any appraisals of the temps. However Newey LJ noted that there was no contract between the temps and the clients, the contracts referred to their services being provided "through Adecco," and Adecco charged a single sum for each hour worked rather than breaking out the commission portion.
Neal Armstrong. Summary of Adecco UK Ltd & Ors v Revenue & Customs [2018] EWCA Civ 1794 under s. 123(1) – consideration.
CRA rules that a sideways transfer of property between two MFTs with identical unitholders came within s. 107.4(1)
The units of a REIT were stapled to those of another mutual fund trust (Finance Trust), so that they traded on a stock exchange together and had identical ownership by the same unitholders. Finance Trust held interest-bearing notes of the indirect U.S. commercial real estate subsidiary of the REIT (U.S. Holdco). Finance Trust qualified as a fixed investment trust for Code purposes, so that its unitholders were treated as if they held such notes directly, so as to avoid the U.S. earnings stripping limitations on the level of permitted interest deductions by U.S. Holdco. However, U.S. tax reform eliminated this issue, and the decision was taken to unwind this structure.
Finance Trust will transfer all it notes to the REIT for no consideration, the REIT will purchase all the Finance Trust units for what now is their nominal value and Finance Trust will be terminated through its redemption of its units.
CRA ruled that the disposition of the notes to the REIT will constitute a “qualifying disposition” within the meaning of s. 107.4(1), such that the rules in s. 107.4(3) will apply to the REIT, Finance Trust and their respective unitholders. No reference was made to the safe harbour rule in s. 107.4(2)(a) (whose application was ambiguous), and this ruling letter might be authority for the proposition that (as required by s. 107.4(1)(a)) there was no change in the beneficial ownership of the property (the transferred notes) on general principles notwithstanding that they were held by the unitholders through a sister rather than subsidiary trust.
The same REIT and Finance Trust were issued a s. 107.4(1) ruling in 2017-0720591R3.
Neal Armstrong. Summary of 2018 Ruling 2018-0752811R3 under s. 107.4(1)(a).
Placer Dome – High Court of Australia finds that $6B in goodwill for accounting purposes largely did not exist for tax purposes
Whether the acquisition by Barrick Gold of Placer Dome triggered Western Australia stamp duty of A$55 million on the lands in Western Australia of an Australian subsidiary of Placer Dome turned on whether, on a global consolidated basis, the value of all of Placer Dome's land (defined to include mining tenements and improvements) equalled or exceeded 60% of the value of all its property.
The post-acquisition balance sheet of Placer valued its land assets at $5.694 billion, and recognized goodwill of $6.506 billion, being the excess of the acquisition cost (grossed-up for liabilities) over the fair value of the specifically identified tangible and intangible assets.
In rejecting the proposition that sufficient value could thus be assigned to the goodwill to avoid a conclusion that Placer Dome did not exceed the 60% threshold, the plurality stated:
Murry [(1998) 193 CLR 605] did not broaden the legal concept of goodwill to include sources which did not generate or add value (or earnings) to the business by attracting custom. …
[A]t the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to goodwill. That unexplained gap suggests that the DCF calculations used by Barrick's valuers to value Placer's land, its principal asset, were wrong. … [T]he danger identified by the majority in Murry of attributing a value to goodwill which actually inheres in an asset was readily apparent. …
At the acquisition date, Placer was a land rich company which had no material property comprising legal goodwill. [annoying italics in original]
In most instances, it will be obvious that shares of a private Canadian resource company (or 25% public company bloc) will be taxable Canadian property. This case may be more germane to the question whether a company which for accounting purposes has recognized goodwill in relation to a real estate portfolio (e.g., shopping centres, office towers, retirement homes or hotels) will have significant goodwill for tax purposes. Goodwill is also specifically referenced in ETA s. 167.1.
Neal Armstrong. Summary of Commissioner of State Revenue v Placer Dome Inc, [2018] HCA 59 under Sched. II, Class 14.1 - para. (a).