News of Note
CRA indicates that s. 39(1.1) mostly only applies to those euros and U.S. dollars in your wallet
Email this ContentS. 39(1.1) applies if, because of any FX fluctuation, an individual has made a gain or loss on capital account from the disposition of a foreign currency. CRA does not consider that s. 39(1.1) could apply to a sum of money in foreign currency held on deposit by an individual at a financial institution, and would instead regard this as a debt of that institution owing to the individual. Accordingly, the usual rules (e.g., ss. 39(1) and 70)) would apply if that debt were disposed of on capital account.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 39(1.1).
Income Tax Severed Letters 18 October 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Plains Midstream – Tax Court of Canada finds that s. 16(1) operates symmetrically (no creditor interest – no debtor interest deduction)
To over-simplify somewhat, Amoco agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was effectively non-interest-bearing (or more precisely, only bore interest to the extent of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. Amoco treated the $207.5M difference between these two amounts as simple interest (no compound interest), which it deducted over the term of the loan on a straight-line basis. Someone then figured out that this worked out to a 29% p.a. interest rate on the $17.5M, and at trial it reduced its claim to a 6% rate. Its position was that under s. 16(1), regard should be had to the economic substance of the situation, which was that it received $17.5 million as the present value of $225 million.
One of the key points for Hogan J was that the Japanese creditor (APCJ ) was not entitled to any interest on the assumed loan. In denying any interest deduction, he stated:
The language used in subsection 16(1) of the ITA stating that the payment is “deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable” reflects Parliament’s intention that both parties receive symmetrical treatment. …
[N]o part of the amount that is due by the Appellant can reasonably be regarded as interest that is payable to APCJ under the terms and conditions of the … loan. …
[I]t is unthinkable that Parliament would have intended the asymmetrical treatment proposed by the Appellant as this would open the door to transactions in which one party receives a tax benefit and the other party receives a non-taxable payment, resulting in a one-sided tax expenditure. Explicit language would have been expected in this regard, as is the case with subsection 12(9) of the ITA and section 16.1 of the ITA.
Amoco assumed the loan as part of intricate arrangements for its acquisition of Dome Petroleum for $5.2B under a Plan of Arrangement. Hogan J stated obiter that the $207.5M difference might instead be an addition to the cost to Amoco of its Dome Petroleum shares.
Neal Armstrong. Summary of Plains Midstream Canada ULC v. The Queen, 2017 TCC 207 under s. 16(1) and s. 54 – adjusted cost base.
CRA states that MacDonald is “irreconcilable” with George Weston
We have prepared brief summaries of the questions posed at the 6 October 2017 APFF Financial Strategies and Instruments Roundtable, and are providing translations of the CRA preliminary written answers and of the Finance answers, as the cae may be, on a piecemeal basis. We will also provide complete translations of the questions posed to CRA when they are officially released, towards or about year end. (We have also completed translating the answers at the (regular) 6 October 2017 APFF Roundtable.)
Turning to Q.16, in commenting on MacDonald, CRA stated:
The approach taken by the TCC in this case respecting, inter alia, the linkage principle appears to be irreconcilable with previous jurisprudence, including George Weston … .
Nevertheless, the CRA is currently considering whether to change its approach pending the Federal Court of Appeal decision in James S. A. MacDonald.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.16 under s. 9 - capital vs. profit – futures/forwards/hedges.
CRA releases final versions of the 2017 STEP Roundtable
The final versions of the 13 June 2017 STEP Roundtable questions and answers were released last week by the Income Tax Rulings Directorate. Although we provided posts and summaries in June of the items with interpretive content, we are providing the Table below of all the items for convenience of reference.
The proposed ETA s. 272.1(8) is not a general partner distribution recharacterization rule
The draft ETA s. 272.1(8) rule merely deems fair market value consideration to have been paid to the general partner of an investment limited partnership for its management and administration services, without regard to the partnership distributions (such as on a “carry”) that in fact are paid.
That said, the new amendments, in conjunction with the existing rules, will likely lead to increased scrutiny of the activities of investment limited partnerships and may provide additional scope for … CRA … to assert on audit that partnership distributions (or portions thereof) should be characterized as taxable fees for services, as well as for disputes regarding the fair market value for such services.
Neal Armstrong. Summary of Allan Gelkopf, Robert Kreklewich and Zvi Halpern-Shavim, "Finance Canada Seeks Comments on New Tax Proposals Regarding Investment Limited Partnership Rules", Canadian Current Tax, Vol. 28, No.1, October 2017 p. 4 under ETA s. 272.1(8).
CRA applies the "holder-by-holder" method to treat contingent s. 251(5)(b) rights as being exercised re all the other shareholders
X, the sole shareholder of a CCPC, sells 25% of his shares to Acquireco, whose shareholders (also executives) are his son (as to 30%) and 10 unrelated individuals (each with 7%). The Acquireco shareholders’ agreement provides that, on any voluntary departure, the remaining shareholders have a proportionate right to acquire the departing employee’s shares.
In finding that X’s son would be deemed to control Acquireco by virtue of s. 251(5)(b)(i), so that s. 84.1 would apply to X’s sale to Acquireco, CRA stated:
As a general rule, the CRA will apply this presumption [in s. 251(5)(b)(i)] by taking into account the rights of Mr. X's son in respect of all other shareholders ("holder-by-holder" method). Accordingly, Mr. X's son would have rights to all of the shares because he would have rights to the shares of each of the shareholders if each of them became a shareholder affected by an event provided for in the agreement.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.17 under s. 251(5)(b)(i).
CRA states that a legally non-severable farm that is used both in farming and as a residence is one property for purposes of the s. 110.6 principal-use tests
A husband and wife equally own a partnership which for some time has been holding land which as to 80% was used in the farming business and as to 20% was used for their residence (with the residence not being legally severable). CRA indicated that because under the Quebec Civil Code “an owner of an immovable (for example, a piece of land) is the owner by accession to all structures and works located on the immovable,” the land was to be treated as one indivisible property for purposes of determining under the “interest in a family farm or fishing partnership” definition whether the land was used principally (over 50%) in a Canadian farming business. (The common law is the same.)
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.16 under s. 110.6(1) - “interest in a family farm or fishing partnership" - s. (a)(i).
CRA agrees that appreciated goodwill is now eligible for the s. 111(4)(e) step-up
The assets of a corporation sold to a third party include valuable goodwill with a nil cost. Since goodwill relating to a business is now a Class 14.1 depreciable property, the corporation can step-up the goodwill in accordance with s. 111(4)(e).
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.15 under s. 111(4)(e).
Univar – Federal Court of Appeal finds that using old s. 212.1(4) to extract surplus from a non-resident target’s Canadian sub was not abusive
A non-resident's acquisition of the shares of a Netherlands public company (Univar NV) indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using the pre-2016 version of s. 212.1(4). This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian ULC, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.
Webb JA noted that the purpose of s. 212.1 “was not to prevent the removal from Canada, by an arm’s length purchaser of a Canadian corporation, of any surplus that such Canadian corporation had accumulated prior to the acquisition of control” since a non-resident could use a Canadian Buyco with full outside basis and paid-up capital to acquire an arm’s-length Canadian target and then extract the target’s surplus. Accordingly, the above transactions were not an abuse of s. 212.1:
The shares of Univar NV were acquired in an arm’s length transaction and, at the time that such shares were acquired, the avoidance transaction was contemplated. Therefore, the avoidance transaction would be part of the series of transactions by which control of Univar Canada was indirectly acquired in an arm’s length transaction. Whether the surplus of the Canadian corporation is removed by completing the alternative transactions described … above or by completing the transactions that were done in this case, the same surplus is removed from Canada.
Neal Armstrong. Summary of Univar Holdco Canada ULC v. Canada, 2017 FCA 207 under s. 212.1(4) and s. 245(4).