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Sheldon Intewash - A foundation with a sole trustee (which was "not at arm's length from itself") did not qualify as a public foundation

The Federal Court of Appeal found that, although the definition of "public foundation" in s. 149.1(1) does not explicitly require that a charitable  foundation have multiple trustees (or directors or officers, as the case may be), this is implied by the wording - for example a single trustee cannot satisfy the requirement in the definition of dealing  with the "other" trustees at arm's length (and "[m]oreover, a single trustee is not at arm's length from itself.")

This latter statement skirts a dubious proposition appearing in at least one CRA technical interpretation (see 23 May 1996 T.I. 5-960465) that it is possible for a corporation not to deal at arm's length with itself as a factual matter -  so that on a deemed disposition and reacquisition of property by the corporation (in that interpretation, under s. 149(10) on becoming or ceasing to be Crown-exempt), provisions of the Act which apply to transactions between persons not dealing at arm's length, such as the 1/2 step-up rule in s. 13(7)(e), can apply.  (S. 13(7)(e.1) implies, and common sense suggests, that this CRA interpretation is incorrect.)

Neal Armstrong.  Summaries of Sheldon Intewash and Lynn Factor Charitable Foundation v. The Queen, 2012 FCA 136 under ITA s. 149.1, Interpretation Act s. 33(2), and Statutory Interpretation - Ordinary Meaning.

CRA takes expansive view of when a foreign affiliate in "involved" so as to extend the 4-year limitation period

CRA indicated that where a Canadian parent winds up a Canadian subsidiary and thereby receives that subsidiary's shares of a U.S. subsidiary, the U.S. subsidiary is "involved" in the transaction - so that this winding-up transaction can be reassessed within the extended period in s. 152(4)(b)(iii) (i.e., an extra three years).

CRA cited Shaw-Almex for the proposition that a non-resident affiliate may be "involved" in a transaction to which it is not a party - in that case, the repayment by a Canadian firm of a bank loan owing by a U.S. affiliate to a U.S. bank.  However, such U.S. affiliate also was a signatory to the agreement between the Canadian firm and the U.S. bank for the repayment of the loan, and its (insolvent) business was the matrix of the transaction.  It is far from clear that s. 152(4)(b)(iii) can be applied to the scenario addressed by CRA, in which the non-resident affiliate's "involvement" in the transaction is entirely passive (or, at most, perfunctory, if it approved the conveyance of the shares in its capital).

Scott Armstrong.  Summary of 22 March 2012 Interpretation 2011-0407731E5 under s. 152(4)(b)(iii).

Licensed music incorporated into video is still music

CRA affirmed the principle that the determination of whether a royalty is subject to Part XIII tax is based on the nature of the work being licensed - that is, a musical work is still a musical work even if it is being licensed for the purpose of being integrated into a television ad or other motion picture or video product.

Scott Armstrong.  Summary of 14 December 2011 Memorandum 2011-0424221I7 under s. 212(5).

CRA maintains its broad interpretation of the residual conferral-of-benefit provision (s. 246(1))

CRA has indicated that where a subsidiary (a US limited liability company) confers a benefit on the individual Canadian shareholder of its parent corporation (an Alberta unlimited liability company) by paying the US income tax liability of that individual arising as  a result of both corporations being fiscally transparent for US purposes, the benefit is includable in the individual's income under s. 246(1).  (This is similar to an earlier interpretation: 10 January 2011 Memorandum 2009-034425.) 

The judicial authority cited by CRA (Pub Création) might support this approach only if the parent corporation (the Alberta ULC) had approved the conferral of this benefit, and there is no indication in the statement of facts that this was the case.  CRA, in effect, may presume such approval.  If the transaction occurred after the effective date of draft s. 15(1.4) (October 31, 2011), the benefit also would be included in the income of the Alberta ULC, thereby resulting in double taxation (even if s. 56(2) did not apply).

Neal Armstrong.  Summary of 16 April 2012 T.I. 2011-041149 under s. 246(1) and s. 248(1) - dividend.

CRA finds that the statutory amalgamation rules apply to a Canadian absorptive merger

This concerned a merger under a BC plan of arrangement of a BC corporation (Subco) and its wholly-owned BC sub (Target).  The plan of arrangement (for US tax reasons) provided that Target survived the merger and that Subco ceased to exist - while at the same time (and perhaps with a view to the requirements of s. 87(1)) stating that Target and Subco continued as one corporation.

CRA found that this merger satisfied the requirement in the definition of amalgamation in s. 87(1) that a corporation be "formed" on the merger - and the requirement, for s. 87(11)(b) to apply, that the "new" corporation "acquire" the property of the subsidiary (Target) on the amalgamation.

Neal Armstrong.  Summary of 2012 Ruling 2010-0355941R3 under s. 87(11).

MacDonald - Tax Court suggests that "pipeline" transactions work

MacDonald dealt with a surplus-stripping transaction.  A New Brunswick doctor, who was about to emigrate to the US, sold a cash-rich corporation to his brother-in-law for a promissory note, with his resulting capital gain being sheltered by unrelated capital losses - and with his brother-in-law extracting the corporate funds following a transfer of the corporation to a Newco of the brother-in-law, and then paying off the promissory note.  The doctor was not subject to deemed dividend treatment under s. 84(2) (because he was a creditor rather than a shareholder at the time of the corporate asset extraction) or under the general anti-avoidance rule (given, among other considerations, that it was not contrary to the scheme of the Act to accelerate the recognition of capital gains.)  Also relevant was that, in the absence of this planning, the doctor would have realized the same capital gain on emigration under s. 128.1(4)(b) (although he avoided Part XIII taxes that would have been payable on subsequent extractions of corporate surplus.)

Hershfield J. indicated that the CRA requirement that there be a one-year delay before extracting funds in a (broadly similar) post-mortem pipeline transaction (see, e.g., 2011 STEPs Roundtable, Q. 5 2011-0401861C6), was arbitrary and not justified.

Neal Armstrong.  Summary of MacDonald v. The Queen, 2012 TCC 123 under ss. 84(2), 245(1) and 245(4).

CRA accepts "royalty-free" characterization of trademark licence

Canco proposed an exclusive licence agreement with a qualifying US-resident (Pubco) to manufacture and distribute products of Pubco in Canada.  CRA accepted that Canco's payments to Pubco would be exempted from withholding tax by the Canada-US Income Tax Convention by virtue of being patent/know-how licence payments, other than payments for know-how provided under a "franchise" (a broad term - see Investors Group.)

CRA did not challenge Canco's characterization of its trademark licence from Pubco as being "royalty-free," so that the practical effect of the ruling was that the trademark could be licensed free of withholding tax.

Scott Armstrong.  Summary of Ruling 2011-0416821R3 under Treaties - Article 12.

CRA adopts 2010 OECD Transfer Pricing Guidelines

After noting some of the changes in the 2010 version of the OECD Transfer Pricing Guidelines as contrasted to the 1995 version, CRA  stated that it "endorses the application of the arm's length principle and the 2010 version of the TPG for the administration of the Income Tax Act in transfer pricing matters."

Although it would have been astonishing for CRA to reject the 2010 Guidelines, it nonetheless is useful to have this written confirmation.

Neal Armstrong.  Summary of 2011 TEI Roundtable, Q. 12 2011-0427311C6 under s. 247(2).

Denial of Canadian dollar FX losses realized by subsidiary using a different functional currency

CRA has confirmed  that where a parent with a Canadian dollar functional currency has lent in Canadian dollars to a (Canadian) subsidiary with a different functional currency, a foreign exchange loss realized by the subsidiary on repayment of the loan will be denied.

Presumably the same position would apply if the parent had lent in US dollars to its subsidiary, and it realized an FX loss (in Canadian dollars) on repayment of the loan.

Neal Armstrong.  Summary of 2011 TEI Roundtable, Q. 4 2011-0426981C6 under s. 261(20).

Supreme Court agrees that trusts have the same residency test as corporations

The Supreme Court has found that, as with a corporation, the place of residence of a trust is wherever its "central management and control" (respecting important decisions) is exercised, which is not necessarily the jurisdiction of residence of the trustee(s).

The Court also has confirmed British case law that if a shareholder exercises the central management and control of a corporation from another jurisdiction than where the board of directors meets, the corporation is resident in that other jurisdiction.

Scott Armstrong.  Summary of Fundy Settlement v. Canada, 2012 SCC 14, under ITA s. 2.