News of Note
CRA rules on a combined pipeline and split-up butterfly
Email this ContentCRA ruled on a combined pipeline and split-up butterfly transaction respecting DC, which invested in marketable securities, and the shares in which passed to the estate with their adjusted cost based having been stepped-up under s. 70(5). DC then transferred its marketable securities to three transferee corporations (TCs) for the three beneficiaries in consideration for “butterfly shares” – but with DC holding onto the notes that it received on the immediate redemption of the butterfly shares for a redacted period of time. After that, DC was wound-up into the TCs, thereby resulting in deemed winding-up dividends and in the notes being extinguished on their being assigned to the TCs.
DC had refundable dividend tax on hand. This sequencing of the two deemed dividends (coupled with the appropriate choice by the TCs of their first year end) avoided Part IV tax circularity issues.
The ruling letter specified that thereafter, the TCs sell their remaining investments and distributed the proceeds on a specified gradual basis.
Neal Armstrong. Summary of 2017 Ruling 2016-0646891R3 under s. 84(2).
Ritchie – Tax Court of Canada finds that an early signing bonus was part of the proceeds of disposition of the subject property
A farmer, who rented his farm to his corporation, received an early “signing bonus” of $255,790 from Enbridge for entering into an agreement with Enbridge by the stipulated deadline under which he granted an easement for a pipeline to Enbridge. The Agreement stipulated that the $255,790 was “an incentive for early signing of the easement agreement” rather than part of the (separately stipulated) compensation for the easement.
Notwithstanding this clause, D’Arcy J found that in substance, the “signing bonus” was part of the taxpayer’s proceeds of disposition for disposing on an interest in land (the granting of the easement) and, thus, gave rise to a capital gain.
This case is helpful to the view that inducements paid to security holders for their agreement to exchange or tender their securities early are part of their proceeds rather than fee or inducement income.
Neal Armstrong. Summary of Ritchie v. The Queen, 2018 TCC 113 under s. 12(1)(x)(viii).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in July 2013, as fully translated by us.
These (and the other full-text translations covering all French-language Interpretations released in the last 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.
CIBC – Tax Court of Canada finds that Visa’s fees to CIBC were subject to GST given inter alia that it was not a “person at risk”
CIBC issued Visa credit cards and utilized a credit card payment system that was operated and managed by Visa Canada. Visa Canada essentially acted as a largely automated go-between between the “issuer,” who provided the funds for a purchase at a merchant by a cardholder, and the “acquirer,” who used such funds to pay the merchant. Visa Canada added $18M in GST or HST to its charges for its services to CIBC in the years in question, and CRA denied CIBC’s s. 261 rebate claim therefor.
Rossiter CJ found that the services of Visa were “quintessentially administrative in nature” so as to be excluded from being a financial service by virtue of s. 4(2)(b) of the Financial Services and Financial Institutions (GST/HST) Regulations. Furthermore, Visa did not qualify as a “person at risk” so as to be excluded from the application of this Regulation: Rossiter CJ accepted a statement by Finance “that the person at risk exception is not meant to apply to risks which have only a remote chance of occurring.”
But for this Regulation, the services supplied by Visa Canada would have qualified as exempt “financial services” under para (l) of the definition (arranging for payment) or para. (i) therof (services relating to an agreement for which credit card vouchers were issued). As in Global Cash Access, the exclusions from financial service that were added in paras. (r.3) to (r.5) of the financial services definition did not have much traction.
Neal Armstrong. Summaries of CIBC v. The Queen, 2018 TCC 109 under ETA s. 123(1) – supply, asset management service, financial service – s. (l), s. (i), s. (r.3), s. (r.4), s. (r.5), Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2)(b), s. 4(3)(c), s. 4(1) – person at risk.
CRA will still demand tax accrual working papers from difficult taxpayers with large unexplained tax reserves
Gordon Parr (Director) indicated that, partly in response to the BP decision, CRA is currently updating its internal communiqué with respect to obtaining information from taxpayers, registrants and third parties. The communiqué will outline that CRA officials can seek the production of tax accrual working papers, provided that the request for such records is relevant to a specific risk issue or item under audit and the CRA official is using a certain level of restraint in seeking this information.
Tax accrual working papers may be sought where there are identified unresolved tax issues and there is a higher risk of non-compliance. Factors that may be considered include the level of non-compliance, large unexplained tax reserves, and potential tax at risk. The taxpayer’s list of uncertain tax positions that relates to tax reserves in the taxpayer’s financial statements is considered to be part of the taxpayer’s books and records and is not a privileged document unless otherwise demonstrated.
While CRA officials may, in certain circumstances, request the list of what the taxpayer has determined to be its uncertain tax positions, in considering the structures and transactions outlined, CRA officials should perform their own research and analysis in forming the basis of any potential reassessment. Provided that all of the relevant facts of the transactions are included in their uncertain tax positions, exclusions of the advisors’ analysis of the legal and tax effects of the transactions may be considered.
Neal Armstrong. 24 May 2018 CTF Seminar - Preventing, Navigating, and Resolving Tax Disputes under “Managing Tax Risk, The Ins and Outs of Reporting and Compliance” (Gordon Parr).
CRA has adopted mandatory referrals from auditors to Headquarters
Comments made by Assistant Commissioner Ted Gallivan included:
- CRA’s tightening of the voluntary disclosure program was in part responsive to concerns expressed by elected officials and other stakeholders who would have preferred to scrap the program entirely.
- CRA is making more referrals to Criminal Investigations.
- CRA is less likely to go back quite a number of taxation years for taxpayers who are generally compliant and cooperative during the audit process.
- With the help of its additional funding, CRA has substantially increased its ability to detect non-compliance, and is bringing lawyers into its investigations program to give it insights from the beginning.
- CRA has decided to adopt mandatory referrals from auditors to Headquarters, so that audit teams no longer have the discretion to refer to Headquarters for help or advice: there were too many files where Headquarters was brought in too late in the process.
- The audit teams can have litigation advice on request. However, this will not stop the entire audit report from being available to taxpayers.
- In more significant matters, proposal letters now often reflect input from Justice and Finance.
- CRA is revising its procedures on when it will request and use information under s. 231. CRA is committed to being systemic and consistent, and to explain why it needs information.
Neal Armstrong. 24 May 2018 CTF Seminar - Preventing, Navigating, and Resolving Tax Disputes under “Challenges of an Evolving Tax Landscape” (Ted Gallivan).
CRA indicates that financial institutions cannot provide T3s etc. to their clients in electronic form without written or electronic consent of the clients
Given the wording of Reg. 209(3), CRA does not consider that financial institutions can provide their clients with electronic copies of information slips (e.g., T3s) on a secure website without the written or electronic consent of the clients, even where the T3s etc. have also been provided in written form (subject to a limited exception permitting the provision of T4s in electronic form).
Neal Armstrong. Summary of 21 March 2018 Internal T.I. 2017-0730761I7 under Reg. 209(3).
CRA finds that a cross-border cash pool entailed a series of loans and repayments
Canco (along with other members of the group) was part of a “physical” cash pooling arrangement with a non-resident affiliate (Finco) under which funds were automatically transferred to and from Finco by way of daily cash sweeps, with interest being computed on the resulting balances owing either way. Due to fluctuations in Canco’s position, it was both a net lender and a net borrower for various periods during the taxation years in question. The only question posed was whether the daily cash sweeps were to be considered to be a series of loans or other transactions and repayments. After noting the restrictive interpretations accorded to this phrase in Attis, Uphill and Meeuse, CRA nonetheless concluded:
[T]he Cash Pooling Arrangement appears to be structured in a manner that results in automatic daily cash sweeps which produce a “rolling forward” of the inter-company loans from Canco to Finco. If that is the case, we believe that a respectable argument could be made that the automatic daily cash sweeps constitute a series of loans or other transactions and repayments and as such, the exception under subsection 15(2.6) should not apply as it would otherwise result in a perpetual deferral of the inclusion under subsection 15(2).
Neal Armstrong. Summary of 27 February 2018 Internal T.I. 2017-0682631I7 under s. 15(2.6).
Davis – Tax Court of Canada finds that an individual who was well advanced in his steps to return to Canada had a “habitual abode” in the U.S.
An engineer who, after having been employed in the U.S. for 10 years in what turned out to be his final job, started preparing to return to Canada after being laid off at the end of 2012. In addition to his home in Massachusetts, he had a rural home in Nova Scotia, which he visited frequently from the time of its 2009 purchase and where he would see his “platonic” girlfriend. Family was in Alberta.
Given Bocock J’s finding that the taxpayer was a dual resident of Canada, the question as to whether the taxpayer was taxable in Canada on his receipt of the proceeds out of his 401(k) plan on May 6, 2013 turned on which country he was resident in on that day under the tie-breaker rule in Art. IV(2) of the Canada-U.S. Treaty. This question could not be resolved by the centre of vital interest, so that Bocock J turned to the taxpayer’s “habitual abode” on May 6, 2013 and stated:
Mr. Davis’ residency in Canada before May 9, 2013 was preparatory to disengaging from the U.S. and permanently ceasing to be a resident after May 9, 2013. Before May 9, 2013, Mr. Davis … habitually lived in the U.S.
Neal Armstrong. Summary of Davis v. The Queen, 2018 TCC 110 under Treaties – Income Tax Conventions - Art. 4.
Income Tax Severed Letters 20 June 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.