News of Note

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The gains were held to be on income account given that this investment was handled consistently with the LPs’ modus operandi, which was to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit,” and were derived from an Australian source given inter alia that RCF personnel were active board members. Before finding that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium were not exempted under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 (as expanded in Australian domestic legislation) for dispositions of (deemed) real property situated in Australia, Pagone J found that such gains were from “entreprises of” the U.S. limited partners, stating that this expression encompassed “a passive investment activity.”

The appeals of RCF IV and RCF V (regarded effectively as appeals of their component U.S. partners) nonetheless were allowed on the basis that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations.

The same approach might also be applicable to determining whether shares of a Canadian mining company are “taxable Canadian property” (whose definition, unlike the Australian TARP definition and the definition of “Canadian property mutual fund investment” in Part XII.2 of the ITA) uses “derived from” rather than “attributable to” language.

Neal Armstrong. Summaries of Resource Capital Fund IV LP v Commissioner of Taxation [2018] FCA 41 under Treaties – Income Tax Conventions – Art. 3, Art. 13, s. 248(1) – taxable Canadian property – (d), s. 115(1)(a)(ii), s. 9 – capital gain. v. profit – shares, General Concepts – stare decisis, s. 152(1).

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.

CRA then noted that this tax liability of Finco could attach under s. 160(1) to dividends that flowed up the chain to Canco. There also was potential liability of the directors of Finco under s. 227.1 (so that in establishing a due diligence defence, they might have to explain how they could have missed such palpably obvious points of Canadian tax law.)

No mention of Oceanspan or principles of territoriality. CRA doubtless was focused on the fact that value was leaving the Canco silo, but note that under its technical analysis, CRA was purporting to impose s. 215(1) liability on a foreign person (Finco) in respect of a deemed benefit that was conferred by it on another non-resident (Foreign Sub).

Neal Armstrong. Summaries of 16 August 2017 Internal T.I. 2015-0622751I7 under s. 15(2.9), s. 160(1) and s. 227.1(1).

The above post on 2017-0713051E5 notes that CRA has a solution (through filing an amended business-limit assignment) when at the time required for the first CCPC to file the assignment it does not yet know what is the maximum permitted assignment amount because the year end for the second (assignee) CCPC has not yet been determined. A similar issue has not yet been addressed by CRA, namely, that the income of the second CCPC might subsequently be reduced due to an assessment (e.g., because CRA applied s. 67 to deny the deductibility to the first CCPC of fees charged to it by the second CCPC – see 2012-0440071E5). This income reduction would retroactively reduce the allowed BL assignment amount, which might invalidate the assignment,

At some point, CRA presumably will be asked whether in this situation as well, an amended assignment can be filed.

Neal Armstrong. Summary of Dino Infanti, "Assignment of Small Business Limit Creates Filing Headaches," Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 18, No. 1, January 2018, p 3 under s. 125(3.2).

The taxpayer's accountant inexplicably failed to include a T4 for $47,770 in the taxpayer’s return. In confirming that CRA’s decision to deny penalty relief was reasonable, Campbell J indicated that CRA had appropriately focused on the taxpayer’s “responsibility to exercise care to ensure that all income was reported, and to supply evidence that he was prevented from doing so.” It thus is generally incumbent on the taxpayer to review the return (see also Chiasson).

Neal Armstrong. Summary of Morrison v. Canada (Attorney General), 2018 FC 141 under s. 220(3.1).