News of Note
Alta Energy may inform the Canadian interpretation of the MLI
Email this ContentIn Alta Energy, Hogan J found that the reference in the preamble to the Canada-Luxembourg Treaty to the prevention or reduction of double taxation was too vague to be indicative of the rationale of the specific Treaty Articles relied upon by the taxpayer – and also found in a GAAR context that Treaty-shopping was not contrary to the object and spirit of the Treaty. This approach might inform a consideration of the minimum standards in the MLI that specifically condemn double non-taxation and treaty shopping and provide a principal purpose general anti-abuse test (“PPT”).
[I]n the absence of either a rule that changes the liable-to-tax test to a subject-to-tax test or a limitation-on-benefits clause, it could still be argued that the clear wording of a treaty would be too powerful an evidence of a treaty’s object and purpose to be overridden by a vague preamble or a subjective PPT.
Neal Armstrong. Summary of Michael N. Kandev, “Taxpayer Wins Treaty Shopping Challenge in Alta Energy Luxembourg,” Tax Management International Journal, 14 September 2018, p. 572 under Treaties – MLI – Art. 6.
CRA confirms that a non-statute-barred partner can be assessed directly where the s. 152(1.4) partnership loss determination period is exceeded
CRA confirmed (consistently with comments in 2078970 Ontario) that if it has not made a partnership loss determination within the three-year limitation period under s. 152(1.4), it has the option of assessing the partners directly where their returns are not yet statute-barred.
Neal Armstrong. Summary of 17 April 2018 Internal T.I. 2017-0734751I7 under s. 152(1.4).
Cameco – Tax Court of Canada finds that having Swiss/Lux subsidiaries enter into long-term purchase contracts at a somewhat fixed price with third parties and the taxpayer did not engage s. 247(2)
Cameco Canada formed a Swiss subsidiary (“CESA/CEL,” - more precisely, a two-employee Swiss branch of a Luxembourg subsidiary ("CESA"), that was succeeded a few years later by a Swiss subsidiary ("CEL")), that entered into long-term contracts (guaranteed by Cameco Canada) for the purchase of Russian-sourced uranium from a third party (e.g., "Tenex"). CESA/CEL also purchased uranium from the Cameco Canada under long-term base-escalated supply contracts (the “BPCs”), and then sold that uranium to Cameco US (who had marketed the uranium) at 98% of the sales price obtained by Cameco US. When the price of uranium subsequently increased significantly, CESA/CEL made substantial profits from the resale of the uranium under both types of contract given that its purchase prices only partially escalated with increasing uranium market prices. Owen J essentially found that both sets of contracts had terms that reflected the depressed uranium market at the time they were concluded and renewed, and that s. 247(2) did not authorize CRA to deem most of the profit to have instead accrued to Cameco Canada through applying s. 247(2) to effectively transfer the benefit of the advantageous Tenex purchase contract to Cameco Canada, or to deem Cameco Canada to have received a higher selling price under the BPCs.
His comments included:
- The concept of a “series” under s. 247(2) should be interpreted narrowly in order to not make it impossible to engage in the comparative analysis contemplated under that section and the OECD Guidelines.
- Ss. 247(2)(b) and (d) essentially dealt with “commercially irrational” transactions, which was not the case here.
- The decision of Cameco Canada to offshore the contracts to CESA/CEL was consistent with “the purpose of the foreign affiliate regime … to allow Canadian multinationals to compete in international markets through foreign subsidiaries without attracting Canadian income tax.”
- “The Appellant’s and CESA/CEL’s strategic decision to enter into the BPCs when they did may have been based on the subjective views of those parties as to the price of uranium, but that fact has no bearing on whether the terms and conditions agreed to in the Long-term Contracts are arm’s length terms and conditions.”
- S. 247(2)(a) permitted the taxpayer to fall "within an arm’s length range of prices" rather than requiring the taxpayer to hit a pinpoint price.
Neal Armstrong. Summaries of Cameco Corporation v. The Queen, 2018 TCC 195 under s. 247(2) and General Concepts - Sham.
CRA indicates that the Reg. 5903(5)(b) continuity rules does not permit a foreign affiliate parent to carry back FAPI losses generated by a wound-up foreign affiliate
Perhaps as a result of changes to the Iceland-U.S. Treaty, an Iceland “Sameignarfelag” (viewed by CRA as a partnership), which had been serving as a Finco to foreign affiliates in a Canadian multinational group was wound up into its non-resident partners (NR1 and NR2, wholly-owned by Canco2). The interaffiliate loans had been giving rise to active business income to NR1 and NR2 under s. 95(2)(a)(ii)(B) and, thus, were excluded property. Even if the time of disposition by NR1 and NR2 of their partnership interests on the partnership wind-up were viewed as the time of the final partnership distribution rather than the subsequent time of formal dissolution of the partnership, by that time the partnership had disposed of its loans, so that the partnership interests at that time no longer qualified as excluded property. (In this regard, CRA referred only to paras. (b), (d) and (e) of the excluded property definition, and ignored para. (c), which references property (including presumably a partnership interest) substantially all of the income from which is active business income including deemed s. 95(2)(a)(ii) active business income – but CRA likely would have come to the same conclusion if it had also examined para. (c) given that the s. 95(2)(a)(ii) source of income had disappeared by the disposition time.)
Since the partnership interests were not excluded property at the time of their disposition on the winding-up, their ACB was to be computed in Canadian dollars under Reg. 5908(10), i.e., essentially it became irrelevant that for most of its life, the Icelandic partnership held excluded property for which the calculating currency of its partners was to be used. This, in turn, meant that NR1 and NR2 realized a capital loss for FAPI purposes on the partnership wind-up. (The wind-up apparently occurred in pre-FACL days.)
The principal former partner was NR1. Canco2 transferred NR1 to the non-resident subsidiary (NR3) of its Canadian sister (Canco1 – which, like Canco2, was wholly-owned by the Canadian parent of this multinational group). NR1 was then wound-up into NR3.
CRA accepted that under Reg. 5903(5)(b), which deems the parent foreign affiliate on a designated liquidation and dissolution under s. 95(2)(e) to be the same corporation as and a continuation of the dissolved foreign affiliate for specified purposes, NR1 would be able for FAPI purposes to carry forward the loss of NR1, but that NR3 was precluded from carrying back that loss to prior taxation years.
Neal Armstrong. Summaries of 27 March 2018 Internal T.I. 2015-0592551I7 under s. 95(1) – excluded property, Reg. 5908(10), Reg. 5903(5)(b), s. 96 and s. 98(2).
Income Tax Severed Letters 26 September 2018
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CBS – Tax Court of Canada finds that CRA could repudiate a settlement based on factual inaccuracy only where that agreed fact had “no bearing to reality”
The Justice Department entered into a settlement agreement with the taxpayer in which it agreed to permit the taxpayer to carryforward an agreed portion of a $23.4M non-capital loss – and then promptly sought to repudiate the agreement on the basis that CRA had discovered that the non-capital loss in question did not exist, so that implementing the settlement would be contrary to law, which Galway and CIBC said was bad.
Lyons J quoted University Hill (“the Court will only interfere if the agreed‑upon facts clearly have no bearing to reality”) and then found that here “the agreed fact in the Minutes - that the $24,366,301 is available - is grounded in objective reality.” Accordingly, CRA was bound by the settlement agreement.
Neal Armstrong. Summary of CBS Canada Holdings Co. v. The Queen, 2018 TCC 188 under s. 169(3).
CRA acknowledges that it has discretion to waive its requirement for a vendor GST/HST registration number that is valid on the supply due date
CRA considers that in order for a supplier invoice to be a good invoice for input tax credit purposes of the recipient, the quoted registration number must be valid on the due date (or, in some circumstances, payment date) for the supply - except that CRA acknowledges that it has the discretion under ETA s. 169(5) to waive non-compliance by invoices where it is satisfied that there is or will be sufficient information evidencing the particulars of the supply and the tax payable.
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.15 under Input Tax Credit Information (GST/HST) Regulations, s. 3(b)(i).
CRA continues to apply Miedzi narrowly
CRA indicated that, notwithstanding Miedzi, it would not accord input tax credits to a parent, whose sole activity was ownership of Opco shares, for GST/HST on document preparation services supplied to its board, and on expenses related to discussions regarding the replacement of board members (i.e., a proxy fight?). This answer was provided before the release of draft ETA s. 186(1)(c), which generally would accord ITCs respecting most overhead expenses of a parent substantially all of whose property is shares or debts of an “operating corporation.”
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.14 under s. 186(1).
CRA effectively indicates that a builder who failed to self-assess GST on the construction of a rental complex may be better off lying in the grass
A non-registered corporation did not self-assess under ETA s. 191(3) on completing the construction of a triplex nor did it claim input tax credits. If it simply lay in the grass and did nothing until CRA discovered this situation on audit, s. 296(2.1), by virtue of requiring CRA, at the time of reassessing the corporation for undeclared GST, to retroactively allow any available but unclaimed rebates, would protect the corporation against any charges for interest (or late-filed return penalty under s. 280.1),) provided that the rebate claims for unclaimed ITCs and the s. 256.2 new rental residential property rebate put it in a net refund position. Would the answer change if the corporation did not wait for any audit and sent to CRA, in the same envelope, an s. 191(3) self-assessment filing and documentary support showing the availability of the offsetting rebate claims?
CRA indicated that this would be treated as the equivalent of a late-filed return and late rebate claims, rather than engaging the s. 296(2.1) netting rule, so that interest and penalties would apply. The correct procedure for accessing penalty and interest relief was to follow and comply with the voluntary disclosure program rules.
Thus, CRA effectively indicated that the corporation very well might be better off lying in the grass (and the extreme brevity of its response showed understandable discomfort with this point).
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Tax Roundtable, Q.12 under ETA s. 296(2.1).
Borealis Geopower – Tax Court of Canada found that a taxpayer had “physically” received unearned government assistance
Although all the conditions for the receipt of government assistance had not yet been (and never were) satisfied, Campbell J found that the taxpayer had “physically acquired” the funds in question through depositing a cheque to a trust account of its own formation and thereafter disbursed the funds out of the account to fund its project without any practical hindrance by the government foundation in question (which appeared to have waived the condition referred to above). Accordingly, she found that the taxpayer had in fact “received” the assistance in question at that time for purpose of a grind to its SR&ED expenditures under s. 37(1)(d).
Neal Armstrong. Summary of Borealis Geopower Inc. v. The Queen, 2018 TCC 189 under s. 37(1)(d).