News of Note
Stewart - Tax Court of Canada finds that partners were not necessarily precluded under the s. 152(1.7) “binding” rule from arguing that a partnership determination of loss was statute-barred
Email this ContentCRA issued Notices of Determination to deny losses of a limited partnership (TSI). Both TSI and its partners launched appeals to the Tax Court. However, TSI then filed a Notice of Discontinuance, which resulted in its appeal being deemed by s. 16.2(2) of the Tax Court of Canada Act to have been dismissed. The individual partners continued with their appeals, arguing that the Notices of Determination had been statute-barred.
D’Auray J first indicated that there was potential merit in the individuals’ argument that s. 152(1.7), which provides that a notice of determination is binding on the partners respecting their income, taxes and amounts refundable, did not preclude them from arguing that the Notices of Determination were invalid on procedural grounds. However, that success did not help the individuals, as she agreed with the Crown that their continuing with their appeals was an abuse of process. A previous case had found that generally “dismissal under section 16.2 of the TCC Act carries the same effect as a judgment of dismissal by the Court” – and the action which thus had constructively been decided against them was one in which they could have, but failed to, raise their statute-barring arguments.
Neal Armstrong. Summaries of Stewart v. The Queen, 2018 TCC 75 under s. 152(1.7) and General Concepts – Abuse of Process.
CRA clarifies the computation of the $150 cost per employee safe harbour for employee parties
The T4130 Employers’ Guide states that:
If you provide a free party or other social event to all your employees and the cost is $150 per person or less, we do not consider it to be a taxable benefit.
CRA confirmed that the cost per person for these purposes is computed based on the number of those attending rather than the number invited.
Neal Armstrong. Summary of 9 April 2018 Internal T.I. 2017-0731251I7 F under s. 6(1)(a).
CRA states that hockey tickets purchased by a hockey player recruiter are subject to s. 67.1
Subject to inapplicable exceptions, s. 67.1 deems amounts expended on “entertainment” to be 50% of the expenditures. CRA stated:
Since a hockey game is an athletic event, we are of the view that the amounts paid by a hockey player recruiter for the purchase of tickets to attend hockey games are subject to section 67.1 even if these amounts were paid by a taxpayer in the course of his or her employment.
Neal Armstrong. Summary of 9 April 2018 External T.I. 2017-0714381E5 F under s. 67.1(1).
Takenaka – Federal Court requires CRA to reconsider a penalty imposed for failure to timely file a T1135 by a taxpayer with a nil Part I tax liability
The taxpayer, who had no Part I tax payable for her 2011 and 2012 years, decided in 2014 to file returns for those years in order to make Canada child tax benefit claims. With her returns she also filed the T1135s for those years reporting her co-ownership interest in a Florida property (with the other interest already having been timely reported by her husband). CRA assessed late filing penalties under s. 162(7)(a) respecting the late T1135s – and then, on a second-level review, cancelled the penalty for 2012 but not for 2011. This could be viewed as the taxpayer being penalized for not feeling guilty and, therefore, not using voluntary disclosure proceedings.
Rather than appealing the penalty (see Douglas), she went to the Federal Court. Mosley J sent the file back for a redetermination on the issue of the penalty for 2011, partly on the basis that the CRA delegate had incorrectly considered the 2011 and 2012 income tax returns to be overdue (so that there was little excuse for not also timely filing the related T1135s), whereas in his view she was under no obligation to file such returns.
Neal Armstrong. Summaries of Takenaka v. Canada (Attorney General), 2018 FC 347 under s. 220(3.1) and s. 150(1.1)(b).
CRA states that interest that can increase with commodity price is not participating debt interest until this occurs
A term loan borrowing of Canco (containing a gross-up clause) provided for the payment of regular interest, together with the payment of additional amounts (also calculated as a percentage of the principal outstanding) if a commodity price exceeded a specified level (with the percentage rate for the additional amounts increasing in a stair step manner as the commodity price increased above further specified thresholds). CRA ruled that each payment of regular interest was not participating debt interest as defined in s. 212(3) until such time as the additional amounts became payable as a result of the commodity price condition having been triggered. CRA’s reasoning was that the only interest referenced in this definition was interest that was “paid or payable” – so that the contingent interest could be ignored until it became payable by virtue of the occurrence of the price trigger.
Somewhat oddly, CRA went on to indicate that once this triggering event had occurred, all regular interest paid thereafter would be tainted - even apparently if the commodity price went back down again.
This ruling apparently was all that Canco sought, so that there were no comments on the application of the relevant Treaty.
Neal Armstrong. Summary of 2016 Ruling 2016-0664041R3 under s. 212(3) - participating debt interest.
Income Tax Severed Letters 2 May 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finding, that an interest-free loan from a CFA of Canco to a NR sister of Canco was subject to Part XIII tax, is debatable
In 2015-0622751I7, a foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. As the loan was not exempted under the inter-foreign affiliate exemption in s. 80.4(8), the deemed interest-free benefit imputed under s. 80.4(2) was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, so that Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.
The latter part of this logic, beginning with the bolded sentence, could be questioned:
[A]rguably, this provision should not be read as deeming Finco to be "a corporation resident in Canada"; it only restates the basic (resident payer) requirement of part XIII after deeming the benefit to be a dividend in order to engage subsection 212(2). If Parliament had intended to apply withholding tax to this clearly extraterritorial situation, it would have deemed Finco to be a person resident in Canada in respect of the benefit conferred on Foreign Sub under subsection 212(13). Absent such explicit provision, basic principles of territoriality dictate that Canada cannot tax the amount (Oceanspan…)
Neal Armstrong. Summary of Michael N. Kandev, “NIB Loan to Non-FA-Related Non-Resident,” Canadian Tax Highlights, Vol.26, No. 4, April 2018, p. 5 under s. 214(3)(a).
6 further full-text translations of CRA interpretations are available
The table below provides descriptors and links for the Technical Interpretation released last week and for 5 of the October 2017 Financial Strategies and Instruments APFF Roundtable questions and answers, as fully translated by us.
These (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for May.
CRA accommodates the equitable division of RDTOH on sequential split-up butterflies of an investments holding company
An investment holding company (DC1) is held directly by A and his brother B (apparently, a non-resident) and by an upper-tier holding company (DC2), whose shares are held by A and B, as well as by their mother (X).
In order to accomplish a split-up of DC1’s assets amongst A, B and X,
- X’s shares are redeemed by DC2, and
- there then is a pro rata butterflying of the assets of DC1 amongst DC2 and newly-formed holding companies for A and B (TC1 and TC2, the latter, a ULC) followed by
- a s. 88(2) wind-up of DC1 into TC1, TC2 and DC2.
Preliminarily to the next set of transactions,
- DC2 pays a s. 84(1) safe income dividend to all the TCs in relation to DC2, including a second ULC (TC3) of B, in amounts sufficient to trigger a full refund of its RDTOH balance.
Next:
- There is a single-wing split-up butterfly of DC2's assets so that a pro rata portion of its two types of property is butterflied to TC1.
- X then steps back into the picture by subscribing for preferred shares of DC2.
- DC2 continues as a ULC and amalgamates with a wholly-owned ULC subsidiary of B to which he had previously transferred a portion of his [common] shares of DC2, and
- B then receives his share of Amalco’s assets first by way of a s.84(1) dividend followed by a PUC distribution, and second by way of having all of his shares redeemed.
In order to create CDA to facilitate the redemption (in Step 1 above) of X’s preferred shares in DC2, DC1 first effects a taxable drop-down of low-ACB marketable securities to a Newco subsidiary, with the resulting CDA being pushed out to DC2 under s.84(1). In addition “redeeming the … preferred shares held by Ms. X crystalizes the additional RDTOH so that it is an asset for the purposes of the butterfly, which allows for a more equitable distribution of assets on the single-wing butterfly of DC2’s assets.”
In order that the safe income dividend in Step 4 generates a full refund of the RDTOH (having regard to a deemed dividend also being paid in Step 5 to only one of the TCs) CRA agrees to there being a taxation year end immediately after Step 4.
Although the published rulings usually redact all numerical information even if it relates only to CRA policies or statutory rules rather than to the taxpayer’s situation, this ruling letter discloses that the Directorate still tolerates only a very small departure (within 1%) for meeting the test for a pro rata distribution of each type of property of the distributing corporations.
Neal Armstrong. Summaries of 2017 Ruling 2016-0674681R3 under s. 55(1) – distribution and s. 55(3.1)(a).
ENMAX – Alberta Court of Appeal finds that interest on a loan from a tax-exempt parent should be at an arm’s length rate reflecting implicit parental credit support
A wholly-owned subsidiary (ENMAX) of the City of Calgary made 10-year subordinated term loans to ENMAX power-distribution subsidiaries at interest rates mostly of 11.5% and 10.3%. Although ENMAX itself was tax exempt, the borrowing subs were required to make “Balancing Pool Payments” equivalent to the income tax that would be payable had they not been tax exempt.
The Court confirmed the Alberta Minister of Finance’s reassessments, made on the basis that the reasonable rates of interest required by s. 20(1)(c)(i) on the above respective loans was 5.42% and 5.26%, and stated:
A parent of a municipal entity is not entitled to gain an advantage over its private competitors by arranging its subsidiaries’ affairs in a way that causes a hypothetical arm’s length loan to appear riskier than it would have been had any reasonable municipal entity actually gone into the market to borrow the funds. Hence the need under the Balancing Pool Payments regime to ensure that the structure of the loan transaction is also objectively reasonable to the extent it would affect a market interest rate.
In also accepting the Minister’s submission that the hypothetical arm’s length loan (in addition to not reflecting the “junk bond” way in which the actual loan had been structured) should reflect implicit credit support by ENMAX (to whom these subs were key assets), the Court stated:
[A]ny third party lender would look at the entire corporate structure and see that ENMAX’s viability could not be separated from that of its subsidiaries. An external lender would therefore assume implicit parental support.
The Court was clear that it was significantly affected by the apparent legislative policy of the Balancing Pool Payments regime of avoiding any tax advantage to municipally-owned power companies, so that it is unclear how relevant this case is to income fund or cross-border loans.
Neal Armstrong. Summaries of Alberta v ENMAX Energy Corporation, 2018 ABCA 147 under s. 20(1)(c)(i), General Concepts – Tax Avoidance, Statutory Interpretation – Hansard, and s. 67.