News of Note
Akanda – Federal Court of Appeal grants an extension to seek reversal of a default judgment notwithstanding the absence of a reasonable explanation for the delay
Email this ContentAfter the taxpayer (Akanda) had missed a lot of deadlines for providing a list of documents and completing discovery examinations, and shortly after its counsel had resigned, its appeals respecting the denial of over $6M and $1.5M in SR&ED and ITC claims, respectively, were dismissed without an appearance by the taxpayer. Akanda then appointed new counsel, who was unsuccessful in a motion for extending the time limit for applying to have this default judgment set aside (the application to set aside having been brought three months’ late).
Webb JA reversed this decision. He noted that Akanda had satisfied three of the usual criteria for such an extension (having a continuing intention to pursue the application to set aside the default judgment, having some merit to its application and there being no demonstrated prejudice to the Crown in the three month delay) but not the fourth criterion (having a reasonable explanation for the delay) – but stated:
Since the findings with respect to three of the four factors favour Akanda and since the amounts involved are significant, the interests of justice support a finding that the application for an extension of time should be granted.
Neal Armstrong. Summary of Akanda Innovation Inc. v. The Queen, 2018 FCA 200 under Tax Court of Canada Rules, s. 140(2).
8 further translations of CRA French-language interpretations are available
The table below provides descriptors and links for two interpretations that were recently released (while we were engaged in translating the 2018 APFF Roundtables) as well as six interpretation released in February and January 2013, all as fully translated by us.
These are additions to our set of 678 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 5 3/4 years of releases by them These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for November.
Brookfield Infrastructure provided an exchangeable LP unit rollover option on its acquisition of Enercare
On October 16, 2018, Brookfield Infrastructure acquired all of the 107M common shares of Enercare Inc. (being all its shares) under a CBCA Plan of Arrangement. The consideration (aggregating C$4.3B) was C$29.00 per share, except that some of the Enercare shareholders elected to instead receive 0.5509 of an Exchangeable LP Unit of a subsidiary LP (“Exchange LP”) of Brookfield Infrastructure Partners L.P. (“BIP”) in exchange for each elected Enercare common share (with a total of 5.7M Exchangeable LP Units being issued). BIP is a Bermuda exempted limited partnership whose units are listed on the TSX and NYSE, and is not a SIFT partnership given that it is not a Canadian resident partnership.
Each Exchangeable LP Unit is exchangeable for one non-voting limited partnership unit of Brookfield Infrastructure Partners L.P. Exchange LP, although a SIFT partnership, is not expected to be subject to significant SIFT tax as it will mostly hold Canadian shares. Those who received Exchangeable LP Units have 75 days from the Arrangement Date to submit the relevant information for making an s. 97(2) election to Exchange LP through the applicable website. Exchange LP may elect to redeem its Exchangeable LP Units after seven years.
Neal Armstrong. Summary of Enercare Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – LP Acquisitions of Corporations – Exchangeable Units.
CRA finds that a government-assisted NPO providing door-to-door transportation services in a rural municipality was supplying GST/HST exempt municipal transit services
A non-profit organization which provided daily pre-booked door-to-door transportation services to members of the rural public within a municipality for fares was ruled to be providing a GST/HST exempt municipal transit services under Sched. V, Pt. VI, s. 1 given inter alia that it received funding from the province and the municipality to support the supply of public passenger transportation services, and all or substantially all of the its supplies were supplies of “public passenger transportation services” (not a defined term) provided within the municipality and its environs. However, its contract or charter service, where it provided a driver and vehicle for events, usually weddings, was taxable.
Neal Armstrong. Summary of 11 July 2018 Ruling 187784 under Sched. V, Pt. VI, s. 1 – municipal transit service.
Satyam – Australian Full Court finds that a Treaty can impose tax
The Indian taxpayer (Satyam) argued unsuccessfully before the Full Federal Court of Australia “that tax treaties are, and can only be, exclusively relieving: that is, they are only ever ‘shields not swords’ and not the grant of a standalone taxing power and independent imposition of taxation.”
The issue arose in the context of the interpretation of Art. 23(1) of the Australia-India Treaty, which provided:
Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.
From a Canadian perspective, the bolded language had the unusual effect of indicating that a technical-services royalty, which Australia was permitted to tax under the Australian royalties article of the Treaty, was deemed to arise in Australia not only for the purposes of the Article of the Treaty dealing with the elimination of double taxation, but also for the purposes of the Australian domestic taxation provisions. Consequently, technical services fees (which were deemed royalties) earned by Satyam, which in the absence of the Treaty would have been considered to not arise in Australia so that they would not have been subject to Australian income tax under the approximate Australian equivalent of ITA s. 115, were now deemed for the purposes of that provision to arise in Australia and to therefore be subject to Australian income tax.
Neal Armstrong. Summary of Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172 under Treaties – Income Tax Conventions – Art. 24.
CRA finds that royalties paid by a Canadian company for TV video streams could be bifurcated for Part XIII purposes based on Canadian and non-resident viewership
Canco streams movies and TV shows (the “digital content”) to its Canadian and foreign subscribers (who pay monthly fees) through a TV video stream and a digital content library. Canco pays a royalty to an arm’s length U.K. content provider (“U.K. Content Provider”) that is based on the amount of viewing of the digital content by Canco’s subscribers. Canco either stores its digital content on a server that is located outside of Canada or it is streamed directly by the U.K. Content Provider to Canco’s subscribers.
CRA found that s. 212(5) was still applicable in this streaming context, stating that “a motion picture film that is streamed remains a ‘motion picture film’ and a streamed TV show is a “means of reproduction” of the TV work." It also found that the royalty payments could be bifurcated between a (Part XIII) taxable and non-taxable component, stating that “a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content outside of Canada since Canco’s server is situated outside of Canada and the foreign subscribers are viewing the streamed content outside of Canada.”
Art. 12 of the Canada-U.K Treaty exempted copyright royalties, but there was an exclusion from this exemption for payments in respect of motion pictures or of works on film, videotape or other means of reproduction for use in connection with television broadcasting. CRA rejected an argument that the definition of “broadcasting” in the Interpretation Act had the effect of making this exclusion inapplicable to TV shows. Instead “an ordinary meaning was intended to be given to the words ‘television’ and ‘broadcasting’ and … their meaning, under either domestic or international law, is broad enough to include the digital streaming of television content” – so that the applicable Treaty rate was 10%, not zero.
Neal Armstrong. Summaries of 27 March 2018 External T.I. 2017-0715561E5 under s. 212(5) and Treaties – Income Tax Conventions – Art. 12.
CRA found that the covenant of the assuming debtor to pay accrued interest on a debt assumption was a payment in kind subject to Part XIII tax
As part of the consideration for the drop-down of the assets of a Canadian partnership (whose partners were Canco and its wholly-owned Canadian subsidiary) to a wholly-owned U.S. subsidiary (“Debtor Affiliate”), Debtor Affiliate assumed the loan including accrued interest thereon that had been owing by Partnership to another Partnership subsidiary (“Creditor Affiliate”), and Creditor Affiliate released the Partnership from its obligations under the Loan.
The Rulings Directorate indicated that this transaction likely entailed a novation of the loan, and that Part XIII tax thereby applied under s. 212(1)(b) and s. 212(13.1)(a) at that time on the amount of the accrued interest on the basis that:
[A]t the time of this novation, the Partnership would be considered to have made a payment or credit in kind of the Accrued Interest to the Creditor Affiliate by delivering the Debtor Affiliate’s covenant to make the payments under the Loan agreement to the Creditor Affiliate.
Neal Armstrong. Summary of 13 July 2018 Internal T.I. 2017-0713301I7 under s. 212(1)(b).
CRA reaffirms the requirement for a circular calculation of Pt IV tax and RDTOH
In the context of a group of corporations undertaking a reorganization involving share redemptions between multiple corporations, with one or more of the corporations having an existing RDTOH balance, CRA confirmed that a circular RDTOH, dividend refund and Part IV tax calculation was required, with the result that “the Part IV tax and of the dividend refund of each connected corporation increase proportionally with each calculation.” CRA went on to indicate that this was not especially harsh:
[E]ven though computing a corporation’s Part IV tax and dividend refund by successive circular calculations inflate these amounts and … these calculations are tedious, they are not financially injurious to the connected corporations as the net amount of Part IV tax payable by one corporation (Part IV tax payable minus its dividend refund) will equal the net amount of the dividend refund (dividend refund minus Part IV tax payable) of the other.
Neal Armstrong. Summary of 11 October 2018 External T.I. 2018-0771831E5 under s. 186(1)(b).
CRA rules that a purchaser could acquire Lossco’s business through a sub LP and then acquire Lossco as an empty shell to get its losses under s. 88(1.1)
A foreign-owned Canadian-resident corporation (“Taxpayer”) used a subsidiary LP to acquire the sole business of a “Lossco” that was in CCAA proceedings and then, a number of years later (and perhaps well after the completion of the CCAA restructuring) it purchases the shares of Lossco for nominal consideration and winds up Lossco. Lossco had generated non-capital losses and investment tax credits from its business before the sale of that business by the CCAA monitor to the subsidiary LP of Taxpayer.
CRA ruled that (i) proceeding in this two-step manner, and (ii) the absence of any activity or assets in Lossco for a number of years following its sale of its business and prior to its acquisition by Taxpayer, did not preclude Taxpayer from utilizing Lossco's non-capital losses and ITCs in sheltering income allocated to it by the subsidiary LP and by other subsidiary LPs carrying on similar businesses.
Neal Armstrong. Summaries of 2018 Ruling 2017-0711071R3 under s. 88(1.1)(b) and s. 88(1)(e.3).
Income Tax Severed Letters 31 October 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.