News of Note

CRA publishes look-through/gross-asset approach to characterization of shares of companies holding Canadian real property

CRA has finally released its Round Table response at the 2011 CTF annual conference at which it confirmed that debts could no longer be allocated to specific properties for purposes of determining whether shares are deemed real property for Treaty purposes, and describing the proportionate recharacterization of a portion of shares of a subsidiary as being Canadian real property (based on its relative asset holdings) for purposes of the taxable Canadian property definition.

Neal Armstrong.  Summaries of  28 November 2011 CTF Round Table, Q. 2, 2011-0425901C6 under Treaties - Art. 13 and ITA - s. 248(1) - taxable Canadian property.

CRA confirms acceptance of Singleton-style mechanical tracing approach

CRA has confirmed that the interest-tracing approach relied upon in Lipson would have "worked" but for the application of GAAR to the transactions on the basis that there was an abuse of the income attribution rules.

Neal Armstrong.  Summary of 27 February 2013 T.I. 2013-0477601E5 under s. 20(1)(c).

Income Tax Severed Letters 24 April 2013

This morning's release of 39 letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA considers conference attendance fees to be for IPP rather than services supplies for HST purposes

CRA has indicated that where members of a national organization are charged separate fees for a conference to be held at a Canadian location, that fee will be characterized for purposes of the HST place-of-supply rules as being consideration for a supply of intangible personal property, so that the location of the conference will govern the place of supply.

If CRA had instead considered that the fee was for a service, a potential complication would have arisen: if the individual attended the conference, the place-of-personal-performance rule (in s. 17) might govern; whereas if the individual was to be a "no show" (which might not be known, if at all, until after the fee was charged), the recipient's business address rule (in s. 13(1)) might govern.

Neal Armstrong.  Summaries of 17 January 2013 Ruling Case No. 130479 under New Harmonized Value-Added Tax System Regulations, ss. 6(1) and 8.

Public company debt for debt-and-equity exchange is structured to reduce s. 80 hit

CRA has ruled on the restructuring under a plan of arrangement of debt of a public company (Aco) in financial difficulty.  In order that common shares issued to the debtholders will have a greater value (thereby reducing the s. 80 hit), those shares will be issued to them by a new corporation (New Aco) to which Aco, in turn, will issue notes and preferred shares.  The existing equity of Aco will then be redeemed for further New Aco shares, so that New Aco will be the "top" group company.

The steps are sequenced so that capital losses arising on a change-of-control write-down (under s. 111(4)(d)) can be applied to absorb the forgiven amount arising to Aco – and there also is a debt tuck-under and winding up transaction similar to 2012 Ruling 2011-0426051R3 summarized below.

Neal Armstrong.  Summary of 2012 Ruling 2012-0452821R3 under s. 80(1) – forgiven amount.

CRA rules on the avoidance of s. 80 on extinguishing intercompany debt of an insolvent company

CRA has ruled on a technique for avoiding the debt forgiveness rules on the conversion into preferred shares of intercompany debt owing by an under-water company (Opco).

The affiliated creditors transfer their Opco debt (with principal of $100 and a value of $1) to a Newco subsidiary of Opco (Subco) in exchange for pref of Subco having a value of $1.  As the debt so acquired by Subco is deemed by ss. 40(2)(e.1) and 53(1)(f.11) to have an adjusted cost base of $100, that debt can then be extinguished, on winding-up Subco into Opco, without the debt forgiveness rules applying (per the s. 80.01(4) rule).

Neal Armstrong.  Summary of 2012 Ruling 2011-0426051R3 under s. 80.01(4).

Immunovaccine - Tax Court finds that government loans made on non-commercial terms are "government assistance"

Under a federal program for fostering Maritimes development, the taxpayer received interest-free advances which were repayable only out of a percentage of future revenues.

Lamarre J. found that the advances were "government assistance" which reduced the taxpayer's SR&ED credits.  Although they were not subsidies or forgivable loans, they were "any other form of assistance," which she interpreted as including funds advanced on terms that a private investor would never consider.

Scott Armstrong.  Summary of Immunovaccine Technologies Inc. v. The Queen, 2013 TCC 103, under s. 127(9) - government assistance.

CRA focuses for GST/HST real estate purposes on the beneficial owner

Where real estate is acquired by a bare trustee, the GST/HST consequences of the acquisition attach to the beneficial purchaser.

Consistently with this position, CRA has indicated that application for the new residential rental property rebate should be filed by the beneficial purchaser.  Going somewhat further afield, CRA also is continuing to maintain its position that a bare trustee is not eligible to be the operator under a joint venture even where the routine administration and cash management is done in its name - notwithstanding the widespread use of bare trustee operators.

Neal Armstrong.  Summary of 12 February 2013 Interpretation File 145624 under ETA s. 256.2(3) and  of 21 January 2013 Interpretation Case No. 146302 under ETA s. 273(1).

CRA disagrees with TD Securities

CRA, in addition to applying  Art. IV(6) of the Canada-U.S. Treaty (added by the 5th Protocol) on the basis that an LLC is only entitled to claim Treaty benefits (e.g., reduced Canadian withholding or branch tax) if the amount in question is considered to be derived by a U.S. resident who qualifies under the limitation-of-benefits Article, also "is not in agreement with the decision in TD Securities," so that it presumably will challenge any pre-Protocol benefits claimed by an LLC.

Neal Armstrong.  Summary of 25 September 2012 B.C. CTF Round Table, Q. 10, 2012-0457591C6 under Treaties - Art. 4.

CRA confirms that it considers the date of disposition of shares to be the settlement date

Notwithstanding the cancellation of IT-133, CRA still considers shares to be disposed of on the settlement date as determined by the rules of the applicable stock exchange, which may be two or three days after the trade date.

Scott Armstrong.  Summary of 6 May 2012 TEI Conference, Q. 5, 2012-0468931C6 under s. 248(1) - disposition.