News of Note
CRA finds that a non-solicitation agreement was assimilated to a non-compete for purposes of the s. 56.4(7) exemption
Email this ContentWhere s. 56.4(7) applies to an arm’s length share sale, it prevents s. 68 from applying to deem a portion of those proceeds to be paid for a non-compete covenant as described in the preamble to s. 56.4(7)(b). When presented with an agreement for the sale of the shares of a private company under which various shareholders were required to agree to a non-compete covenant (“NCC”) and a non-solicitation covenant (“NSC”), the Directorate found that “essentially, the terms of the NCC and NSC … reflect the conditions that one might normally expect to see in a typical non-competition agreement,” so that they “could be treated as a single RC [restrictive covenant] that is in respect of a non-compete covenant.” As the other conditions of s. 56.4(7) also were met, s. 68 did not apply.
The Directorate also indicated that it previously had considered that the similar description of a non-compete in s. 56.4(3)(c)(ii) would encompass an “undertaking not to solicit the clients of the corporation that is sold, but … [not] with respect to the value of an undertaking not to solicit the employees to change employment” and also a non-competition agreement that includes “both a non-competition and a confidentiality clause.”
Neal Armstrong. Summaries of 22 August 2017 Internal T.I. 2017-0688301I7 under s. 56.4(7)(b) and s. 56.4(3)(c)(ii).
CRA confirms that the required s. 7 employer withholding does not apply to s. 7(1.1) stock option benefits
S. 153(1.01) generally ensures that an amount deemed to be received as a benefit under s. 7(1)(a) is subject to the withholding and remittance requirements of s. 153(1) as if it were a bonus. CRA has confirmed that by virtue of an exception to this rule in s. 153(1.01)(b), this withholding requirement does not apply where an arm’s length employee who has exercised options to acquire shares of a Canadian-controlled private corporation, later disposes of the shares and the recognition of the s. 7(1)(a) benefit is correspondingly deferred under s. 7(1.1).
Neal Armstrong. Summary of 3 January 2018 Internal T.I. 2017-0709811I7 under s. 153(1.01)(b).
CRA applies the proportionate value approach to determining whether shares of a foreign holding company are derived more than 50% from Canadian immovable property for Treaty purposes
A Netherlands corporation (BVCo) holds 1/3 of its assets as shares of an Australian subsidiary (“AusCo”), whose Australian real estate assets represent 5/6 of the consolidated assets, but also with high liabilities, and holds 2/3 of its assets as shares of a Canadian subsidiary (“TCPCo”) whose Canadian real estate assets represent 1/6 of the consolidated assets, but with low leverage. In determining whether the shares of BVCo are taxable Canadian property, CRA would first apply the “gross asset value method” to determine that 100% and 0% of the gross assets of TCPCo and AusCo, respectively, are taxable Canadian property (“TCP”). Next, it would apply the “proportionate value approach” to multiply such percentages by the FMV of the shares of TCPCo and AusCo to conclude that 2/3 of the FMV of the BVCo shares was derived from TCP, so that the BVCo shares were themselves TCP.
CRA concluded that the same methodology should also be applied in determining that more than 50% of the value of the shares of BVCo held by a UK company were derived from Canadian immovable property, so that those shares would not be exempted in the UK company’s hands under the Canada-UK Treaty.
Neal Armstrong. Summary of 22 September 2017 External T.I. 2016-0668041E5 under s. 248(1) – taxable Canadian property – (d) and Treaties – Articles – Art. 13.
Income Tax Severed Letters 24 January 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Matthew Boadi Professional Corp. – Federal Court finds that CRA failed to consider whether late T1135s were filed “voluntarily” for earlier years notwithstanding subsequent years being under review
A taxpayer had a history of filing its T2 returns late and had been subject to various CRA demands to file them. It then became aware that it should have been filing T1135s respecting some foreign real estate, and it filed late T1125s in March 2015 for its 2005 to 2013 taxation years in reliance on the voluntary disclosure program. CRA denied VDP relief on the basis that this disclosure was not voluntary, i.e., the related T2 returns were subject to CRA “enforcement action” for having been filed late.
Gascon J found that this approach was reasonable respecting the T1135s for 2011 to 2013 given that the related T2 returns had finally been filed at that point, but had not yet been assessed. He stated that “the enforcement action taken by the CRA [i.e., assessing these T2 returns] would likely have uncovered its obligation to file T1135 returns” for those years. However, he was unwilling to make the same inference with respect to the earlier years, and there was no evidence that CRA had thought adequately about the proposition that it was perhaps unlikely that in assessing the later returns it would not have focussed on the absence of T1135s for the earlier years – and, in fact, the CRA officer appeared to not realize that those earlier years had already been assessed or, at any rate, was indifferent to that fact.
Accordingly, the matter was referred back to a different CRA delegate for reconsideration.
Neal Armstrong. Summary of Matthew Boadi Professional Corporation v. Canada (Attorney General), 2018 FC 53 under s. 220(3.1).
Paypal - Federal Court grants an authorization for CRA to demand transaction summaries for the PayPal business account users
Gascon J granted an authorization for CRA to issue a requirement under ITA s. 231.2 and ETA s. 289 on Paypal Canada to disclose the names and addresses (etc.) of corporations and individuals holding a business account with PayPal that had used PayPal's online payment platform in the course of their commercial activities during the period from January 2014 to date, and to provide the total number and value of payments received and made for those years. He stated that "the expectation of privacy with respect to business records … is very low" and that "the information sought … is required in the context of verification activities undertaken … to determine whether the Unnamed Persons have filed their required tax returns."
Neal Armstrong. Summary of MNR v. Paypal Canada Co., Docket T-564-17 (FCTD), 10 November 2017 under s. 232.2(3).
LLPs and LLLPs have various partnership attributes
CRA’s position, that Delaware and Florida LLPs and LLLPs are corporations, is being questioned.
Their partnership attributes include that they are created and dissolved by contract (rather than statute), the partners (unlike shareholders) have mutual agency and can only assign their economic interest (as contrasted to full partner status) and they owe each other and the partnership a duty of loyalty. As for their separate legal personality (like corporations, but also like Scottish partnerships), s. 35 of the Interpretation Act provides that the word "corporation" "does not include a partnership that is considered to be separate legal entity under provincial law."
There is a strong argument that the IA definition applies for greater certainty to ensure that LLLPs and LLPs are not treated as corporations. Further, the phrase "a partnership which is considered to be a separate legal entity under provincial law" does not necessarily limit the application of the IA definition to partnerships governed by provincial law.
Although the Delaware and Florida statutes provide “full shield” protection, limited liability nonetheless is less absolute than for corporations. For example, if a general partner of an LLLP is culpable of tortious conduct toward third parties in the execution of its duties as the manager of the LLLP's business, it is not protected by the LLLP shield. Furthermore, the failure to make filings may result in the loss of limited liability, whereas corporate limited liability is intrinsic to a corporation.
Neal Armstrong. Summaries of Angelo Discepola and Robert Nearing, "A Reply to the CRA's Classification of Florida and Delaware LLLPs and LLPs as Corporations," 2016 Conference Report (Canadian Tax Foundation), 24:1-39 under s. 96 and s. 248(1) – corporation.
There is additional significance respecting the effective dates of dividends for 2017
For 2017, there may be additional significance as to whether a dividend was paid in that year or 2018 given that 2017 was the last year that dividends could be "sprinkled" freely to adult family members, and given that the U.S. "Transitional Tax" on most accumulated earnings and profits may cause Americans to wish dividends to be considered to have been paid to them in 2017 by their Canadian companies in order to generate Canadian tax to offset the Transitional Tax.
CRA recognizes that a transaction may be "papered" after the fact, but backdating is improper where it is tantamount to a retroactive characterization or alteration of reality.
The authors recommend:
an express CRA policy permitting the crystallization of compensation and dividends in an owner-managed business to occur, for example, up to 60 days after fiscal year end (to match the due date for T5 slip filing). This administrative concession would codify the CRA's existing practice.
They also note that a formulaic approach to drafting resolutions before year end respecting the determination of the salary/loan repayment/dividend mix may be legally effective.
Neal Armstrong. Summary of Kevyn Nightingale and John Sorensen, "Backdating of Dividends," Tax Topics (Wolters Kluwer), No. 2392, January 11, 2018, p. 1 under General Concepts – Effective Date.
Translations of CRA technical interpretations/Roundtables now go back 4 years
The table below provides descriptors and links for the French technical interpretation released last week and six technical interpretations released in January of 2014, as fully translated by us.
These (and the other full-text translations covering the last 4 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Engelberg – Court of Quebec finds that an agreement to transfer a to-be-constructed condo unit to a shareholder did not generate a shareholder benefit until the year of transfer
A corporation, which had not yet started work on a condominium project on lands that it owned, agreed to sell a project condominium unit to its individual shareholder (Engelberg) at a price that was less than the current fair market value of such a unit. Financing was confirmed, and construction commenced later that year, construction was completed a year later (in 2007) and the transfer occurred in 2008 at the agreed price.
Lareau J rejected Engelberg’s argument that the ARQ should have assessed him for a taxable shareholder benefit in 2006 or 2007 (both now statute-barred) rather than for his 2008 taxation year. Lareau J distinguished Boulet on the grounds that that case involved an already-existing property rather than a “future” property.
This does not explain why he did not consider the shareholder benefit to arise in 2007, when the condo unit was completed. However, he noted that the amount of the hypothec that was assumed by Engelberg in 2008 was different than the amount contemplated in the 2006 agreement and that this was “a change to the conditions of sale which could have an effect on the quantification of the benefit which was conferred on the shareholder.” This case implicitly seems to consider that recognition of income should be deferred until it can be accurately quantified (cf. West Kootenay).
Given this emphasis on precise benefit quantification, it is somewhat ironic that Lareau J also indicated that the ARQ was clearly in error to have assessed the 2008 shareholder benefit based on the 2006 rather than the somewhat higher 2008 value of the unit - but, as he could not increase the ARQ assessment under appeal, this did not matter.
Neal Armstrong. Summary of Engelberg v. Agence du revenu du Québec, 2017 QCCQ 14819 under s. 15(1).