News of Note

Google Ireland - Administrative Court of Paris finds that Google through its contracting arrangements with French advertisers avoided a French PE

Google Ireland engaged Google France on a cost-plus-8% basis to provide marketing and other services to it in connection with earning “per click” revenues from French advertisers, who wanted their names and brief messages to appear with relevant Google search results. Although it appears that Google France was doing essentially all of the French work, all the contracts were signed by Google Ireland electronically, and Google France did not have the authority to enter into contracts in the name of or on behalf of Google Ireland. This was sufficient for the Parisian Administrative Court to conclude that Google Ireland did not have a permanent establishment in France, so that the French Service had to content itself with French income tax only on the 8% mark-up.

Neal Armstrong. Summary of Google Ireland Ltd. v. France (2017), No. 1505113/1-1 (Tribunal Administratif de Paris) under Treaties – Art. 5.

Six further translated technical interpretations are available

Full-text translations of the technical interpretation released last week and of five released between July 23, 2014 and July 16, 2014, are listed and briefly described in the table below.

These (and the other translations covering the last 38 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2017-09-13 21 July 2017 Internal T.I. 2017-0714931I7 F - Retiring allowance - Sick Leave Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance payout of accumulated (non-excess) sick leave credits on termination of employment was a retiring allowance
Income Tax Act - Section 248 - Subsection 248(1) - Death Benefit includes payout on death of accumulated (non-excess) sick leave credits
Income Tax Act - Section 5 - Subsection 5(1) payout on termination of accumulated sick leave credit is employment income to extent otherwise would have been paid at year end
2014-07-23 30 June 2014 External T.I. 2014-0522181E5 F - Legal status of partnership and application of 98(6) Income Tax Act - Section 98 - Subsection 98(6) rollover on dissolution of general partner
2014-07-16 26 June 2014 External T.I. 2014-0523871E5 F - Revenu d'entreprise agricole Income Tax Act - Section 12 - Subsection 12(10.2) government contributions and accrued interest in AgriInvest and Agri-Québec accounts are taxable when withdrawn
Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(p) withdrawals from the AgriStability account are taxable as farm business income
Income Tax Act - Section 248 - Subsection 248(1) - Farming legume germination production as farming
23 June 2014 External T.I. 2014-0528271E5 F - Terrain « adjacent » à la résidence principale Income Tax Act - Section 54 - Principal Residence meaning of immediately contiguous lands
27 June 2014 External T.I. 2014-0527341E5 F - Sociétés publiques aux fins de SPCC Income Tax Act - Section 89 - Subsection 89(1) - Public Corporation Crown corporations not deemed to be public corporations
27 June 2014 External T.I. 2014-0526931E5 F - Vente d'une liste de clients par un employé Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure payment to departing employee for customer list was on capital account
Income Tax Act - Section 6 - Subsection 6(3) - Paragraph 6(3)(e) payment to departing employee for customer list was deemed income under s. 6(3)

Income Tax Severed Letters 20 September 2017

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

SCDA (2005) – Federal Court of Appeal finds that s. 138(11.3) does not generate a basis bump in the 1st year a Canadian insurer carries on business in another country

Webb JA affirmed the interpretation below by Pizzitelli J of s. 138(11.3): there is no deemed disposition under s. 138(11.3) in the first year a Canadian insurer carries on business in another country, so that the taxpayer (Standard Life) did not enjoy a tax-free basis bump of $1.2B.

Neal Armstrong. Summaries of SCDA (2005) Inc. v. Canada, 2017 FCA 177 under s. 138(11.3) and Tax Court Rules, s. 147(3).

CRA rules that on a s. 98(5) wind-up, the ACB of the transferor partner’s interest is bumped by YTD income

A CRA ruling addressed a timing issue respecting the basis adjustments on a s. 98(5) winding-up that occurs where the sole limited partner (LPco) transfers it interest in the LP under s. 85(1) to GP, thereby triggering the dissolution of the LP. It often will be important that the adjusted cost base of the LPco interest in LP on the transfer of that interest to GP be increased by LPco’s share of the LP’s income earned to date.

CRA ruled that, by virtue of s. 99(1) deeming the LP fiscal period to have ended two instants of time before the termination of the LP, the ACB of the transferred partnership interest reflected such share of LP’s income. There was a representation that the partnership ceased to exist, and all its property became property of GPco, “upon” the partnership interest transfer. This characterization appears to be correct; and a view that the LP continued to exist until a certificate of dissolution was filed with the local registry would be incorrect.

Neal Armstrong. Summary of 2016 Ruling 2015-0617101R3 under s. 53(1)(e)(i).

Cassan – Tax Court of Canada finds that interest should not be recognized on a portfolio or index-linked note until the return is determinable - and that lack of attention of a lender to creditworthiness established lack of bona fide repayment arrangements under s. 143.2(7)

In December 2009, individual taxpayers participated in a tax shelter that involved making both a leveraged investment and leveraged donation. In the investment component, they used money borrowed from a lender trust (FT) to purchase units in an Ontario LP, which used most of the proceeds to purchase notes of a BVI company (Leeward). The return on the notes was linked to whichever of a stock market index and a notional balanced portfolio performed the better, with Leeward then lending the funds back to FT via a second trust.

Respecting the leveraged donation, they borrowed money from FT at 7.85% p.a. – of which 3.75% p.a. was required to be paid annually in cash (“cash-pay interest”) and the balance was capitalized each year (“capitalized interest”). This borrowed cash was then contributed by them to a registered charity on condition that it invest most of such proceeds in a note of Leeward, that matured in 2028, and bore interest of 4.75%, of which 3.75% was cash-pay interest, and the balance capitalized interest of 1% (which would cause the amount owing under the note to accrete by over 1/3 by 2028). These funds also were mostly circled back to FT. The ability of Leeward to be able to repay this note owing to the charity depended on the small portion of the funds received by it from the individuals (via the LP) under the investment component, that it invested in a fully-indexed note rather than on-lending back to FT via the second trust, appreciating at a rate of 10% p.a. over the close to 20 years until 2028.

Owen J found that the taxpayers’ donation did not qualify as a “gift,” as “Maréchaux and Kossow hold that a transfer of property is not gratuitous if a benefit flows to the transferee as part of an interconnected series of transactions that includes the transfer of property.” The benefit he identified was that the interest rate of 7.85% that was charged to them was less than a reasonable rate of interest, which would have been a minimum of 10% p.a.

This issue was not fixed by the split receipting rules. It is true that having regard only to ss. 248(30)(a), (31) and (a), they could have been entitled to have a gift recognized for the difference between the cash contributed to the charity and the low-interest-rate benefit received from FT. The bigger problem was posed by the combined effect of s 248(32)(b) (deeming the amount of limited-recourse debt to be a benefit), s. 143.2(7)(a) (deeming debt to be limited-recourse if there were no bona fide arrangements for repayment within 10 years) and s. 143.2(12) (deeming there to be no such arrangement if the debtor’s arrangement to repay within 10 years “can reasonably be considered to be part of a series of loans or other indebtedness and repayments that ends more than 10 years after it begins.”) Although the loan from FT to them had a term of 9.3 years, Owen J found that this was insufficient to establish that there were bona fide arrangements for repayment which, in his view, required “that the arrangements reflect what one would reasonably expect arm’s length commercial relations to look like in the circumstances.” This was not the case here as the conduct of the lender (FT) showed relative indifference to the creditworthiness of the taxpayers. Furthermore, respecting s. 143.2(12), it was reasonable to expect the loans to the taxpayers to be renewed on their maturity with the promoter’s assistance.

In finding that Reg. 7000(2)(d) interest accrual did not apply to the index-linked note, Owen J stated:

The assumption underlying paragraph 7000(2)(d) is that [the maximum amount of interest] is capable of determination… .

…In the absence of an actual crystallizing event there is simply no way of knowing the actual amount that the … LP is entitled to be paid under the terms of the Linked Notes… .

In finding that the taxpayers were entitled to an interest deduction on their loans from FT, he noted that the potential for the receipt of interest on the maturity of their share of the Linked Notes held by the LP was sufficient to justify the deduction of interest by them for the 19 preceding years.

Neal Armstrong. Summaries of Cassan v. The Queen, 2017 TCC 174 under s. 118.1(1) – total charitable gifts, s. 143.2(7)(a), s. 143.2(12), Reg. 7000(2)(d), s. 20(1)(c)(i) and Statutory Interpretation – Realization Principle.

CRA finds that a payout of (non-excess) sick leave credits on termination was a retiring allowance

On termination of employment, the employee would be paid the value of his or her accumulated sick leave credits. CRA considered that this payment would be a retiring allowance (and thereby presumably excluded from CPP contribution requirements) except for the amount paid in excess of the equivalent of 20 days, which generally would be considered to be employment income given that this excess, in the absence of the termination, would have been paid out to the employee at the end of the year.

Neal Armstrong. Summaries of 21 July 2017 Internal T.I. 2017-0714931I7 F under s. 248(1) – retiring allowance and s. 248(1) – death benefit.

CRA confirms that s. 38(a.1) prevails over s. 69(4)

CRA confirmed that the s. 38(a.1) rule prevails over s. 69(4), as well as s. 69(1)(b)(ii), so that where a corporation transfers shares of a public corporation for no consideration to its sole shareholder, which is a private foundation, s. 38(a.1) will deem there to be no gain to the corporation if the transfer qualifies as a gift.

Neal Armstrong. Summary of 31 May 2017 External T.I. 2016-0642621E5 under s. 38(a.1).

Chiang – Tax Court of Canada finds that a “reasonable error of fact” (e.g., confusion as to how to claim a deduction) established a due diligence defence to penalties

The taxpayer (Chiang) overcontributed to his RRSP (thereby incurring Part X.1 tax) because he “genuinely and reasonably believed” that he had deducted his contributions for two years in his returns for those years (but, in fact, did not enter the amounts in the deduction line) and that for a third year he had unused RRSP deduction room (which he did not). In finding that Chiang was not subject to penalties under s. 162(1) for not filing Part X.1 tax returns, Sommerfeldt J found that because

Mr. Chiang reasonably believed in, and was operating under, a mistaken set of facts that, if true, would have resulted in there not having been a cumulative excess amount…his failure to file tax returns (Form T1-OVP) for 2004 to 2013 resulted from a reasonable error of fact, so as to be excused by the due diligence defence.

Neal Armstrong. Summary of Chiang v. The Queen, 2017 TCC 165 under s. 162(1).

OneREIT asset sale and merger into SmartREIT entails an allocation of recapture of depreciation to its existing unitholders

OneREIT is proposing to sell a substantial portion of its rental assets (held through subsidiary LPs) in a taxable sale to a third party (Strathallen) and then, as part of the same Plan of Arrangement, to be merged into SmartREIT (which is an Alberta unit trust and REIT) under s. 132.2. Those OneREIT unitholders who elect to receive cash for their units, will have their units redeemed immediately after the closing of the Strathallen sale, with all the recapture of depreciation of around $0.15 per unit (as well as capital gains) from that sale being allocated to them. Those electing to receive their consideration as SmartREIT units, will have this result effected through the usual s. 132.2 mechanics. The projected value of the SmartREIT units to be received is estimated to be somewhat lower than for the cash alternative ($4.20 v. $4.275 per unit).

All the properties of OneREIT are held through subsidiary LPs. Applications are being made to CRA for approval of a stub fiscal period in order that the LPs can allocate their capital gains and recapture from the Strathallen sale, and other income to date, to OneREIT for allocation, in turn, to its current unitholders. Unitholders can avoid this allocation by selling on the TSX. Since the cash part of the transaction is structured as a redemption, non-residents will be subject to Part XIII.2 and XIII withholding on the full proceeds if they elect to receive cash.

There are no corporate steps in the Ontario Plan of Arrangement other than an amalgamation of, and $10 unit subscription by, the corporate trustee for the general partner of a subsidiary LP.

Neal Armstrong. Summary of OneREIT Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – REIT Mergers.

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