News of Note

CRA considers that the central management and control test also applies to estate residence

The Fundy Settlement case found that the residence of inter vivos trusts was determined by the situs of their central management and control rather than by the country of residence of their trustees.  Not surprisingly, CRA considers that the central management and control test also determines the residence of an estate.

CRA also considers that, under the draft s. 94(3) rules, a testator cannot be a "resident contributor" to an estate (because he's dead).  Furthermore, non-resident trusts, which are deemed by those rules to be resident in Canada for various purposes, continue to be non-resident for purposes of the s. 116 certificate rules, so that clearance certificates are required for a distribution of taxable Canadian property to Canadian beneficiaries.

Neal Armstrong.  Summaries of 4 January 2013 T.I. 2012-0448681E5 under ss. 2(1), 116(1) and 94(3).

CRA finds that a switch to computing earnings for surplus purposes under Canadian principles does not result in doubling-up deductions

Suppose that a foreign affiliate ceases to be required to compute its income under local taxation laws so that it becomes required to start computing its earnings for surplus purposes under Canadian principles (under Reg. 5907(1) - "earnings" - (a)(iii)).  Would this mean, for example, that an asset which already had been fully depreciated under the local income tax laws under the old system would now have to be depreciated a second time under Canadian principles?  Although there is some ambiguity in draft Reg. 5907(2.03) on the point, CRA apparently considers that in this situation, no such catch-up deductions would be required.

Neal Armstrong.  Summary of 22 January 2013 T.I. 2012-0460121E5 under Reg. 5907(2.03).

CRA rules that an investment in MRPS was a share investment potentially triggering the CRIC rules

The Luxembourg tax authorities consider mandatorily redeemable preferred shares (i.e., shares which must be redeemed before the 10th anniversary of their issuance) of a Luxembourg s.à r.l. to be debt for Luxembourg purposes, so that dividends paid on the shares are treated as deductible interest.  CRA has ruled that MRPS will be treated as shares, although the MRPS in question were non-dividend bearing (perhaps because dividend-bearing MRPS would engage the foreign tax credit generator rules (see draft s. 91(4.7) or because of term preferred share issues  - there also was a s. 258(3) ruling).

The MRPS were issued to a Canadian public company which was partly owned, and controlled, by a non-resident public company, with the proceeds used to fund an off-shore project (perhaps a mine).  CRA indicated that the foreign affiliate dumping rules would apply to the investment if the Canadian public company could not satisfy the onerous requirements of s. 212.3(16) (so that the paid-up capital of the Canadian public company's shares would be reduced by the amount of the investment, or it would be deemed to pay a dividend to its parent).

Neal Armstrong.  Summaries of 2012 Ruling 2012-0452291R3 under ss. 212.3(2) and 248(1) - share.

Income Tax Severed Letters 20 February 2013

This morning's release of 27 letters from the Income Tax Rulings Directorate is now available for your viewing.

GF Partnership – Tax Court finds that a developer “ought to have known” that a clause, purporting to make it an agent for home purchasers in incurring development levies free of GST, was defective

A housing developer implemented advice from a tax consultant (a CA) that it could avoid charging GST on the portion of the home sales prices that represented a recovery of municipal development levies, by sticking a clause (drafted by him) in the sales agreements stating that the development levies had been (or would be) paid by the developer on behalf of the purchasers.  Woods J. found that this clause was defectively drafted, so that the development levy on-charges were taxable.  However, even a well drafted clause might not have done the trick given that the development levies often were paid in advance of the sales agreements, and the concept of incurring levies on behalf of an unascertainable principal is metaphysical at best.

The effect of the increased sales consideration was to reduce the related new housing rebate on some of the sales.  Woods J. found that this gave rise to a liability of the developer under s. 254(6) on the basis that it "ought to have known" that the CA’s legal drafting was defective.

Neal Armstrong.  Summaries of GF Partnership v. The Queen, 2013 TCC 53 under ETA ss. 153(1), 154(1), 254(6) and 296(2).

Uranium One employee stock options are to be surrendered under a privatization plan of arrangement for a deferred payment of their Black-Scholes value

An indirect Netherlands subsidiary of a Russian state company (Rosatom) is proposing to acquire the public’s 48% minority block of Uranium One shares for cash consideration of $1.3 billion under a CBCA plan of arrangement.  Structuring the transaction this way rather than using a Canadian buyco and an amalgamation squeeze-out avoids an application of the foreign affiliate dumping rules, similarly to the Nordgold transaction.

Employee stock options are being surrendered under the plan of arrangement for the immediate payment of any in-the-money value they have (based on the cash purchase price for the shares) plus a payment on December 31, 2013 (i.e., well beyond the effective date of the rest of the plan of arrangement) of the excess of their Black-Scholes value over any such in-the-money value.

Neal Armstrong.  Summary of Circular of Uranium One Inc. under Cross-Border Acquisitions – Inbound – Other.

Lockyer (Pawson Estate) - UK Upper Tribunal finds that an active business of renting out a vacation property was an investment business, as the services elements were not predominant

The UK Upper Tribunal has found that the renting out of a vacation property to a succession of vacationers for a weekend or week at a time constituted a business of holding investments rather than a non-investment business - notwithstanding that the property was actively managed and various ancillary services were provided.  The British statutory distinction is similar to that in ss. 95(1) and 125(7) between an investment business (subject to an exclusion for more than five full-time employees), and a business (such as an assisted living facility or health spa) where the level of services is much higher - so that this decision may be relevant in the Canadian context.

Neal Armstrong.  Summary of R&C Commrs v. Lockyer & Anor (for Pawson Estate), [2013] UKUT 050 (Tax and Chancery Chamber) under s. 95(1) - investment business.

Anson - English Court of Appeal finds that an entity (here, an LLC) generally will not be fiscally transparent if its members have no proprietary interest in its assets

The English Court of Appeal has found that a U.S. LLC is not fiscally transparent, so that a distribution of its profits to a UK resident represented a source of income which was distinct from the profits when they were earned by the LLC in the first instance.  Accordingly, there was no double taxation of the same income when the US taxed the individual's share of the profits of the LLC (which was fiscally transparent for US purposes), and the UK taxed the distribution of those profits: hence, no relief from double taxation under the UK-US Convention.

Although the finding that an LLC is fiscally opaque is not startling from a Canadian perspective (see 25 October 1994 T.I. 941750, and see also TD Securities), the Court's approach may have some bearing in sorting out whether other foreign entities are partnerships (or trusts), or corporations, from a Canadian perspective.  Lady Justice Arden emphasized the question as to whether the members of the entity have any proprietary right to its assets; and, on the other hand, she indicated that a separate legal personality for the entity in question (e.g., a Scottish partnership) would not necessarily mean that it was not fiscally transparent.

Neal Armstrong.  Summary of HMRC v. Anson, [2013] EWCA Civ 63 under Treaties - Art. 24.  See also Memec and Sommerer.

CRA imputes full basis to employee stock options passing to an estate

Although stock options generally are not capital property (see 2001-009124), as their disposition gives rise to employment income rather than capital gains, CRA accepts that unexercised employee stock options which pass to an estate are capital property to the estate.  This creates an issue as there is no provision like s. 70(5)(b) that specifically deems the options (viewed as not qualifying to the deceased individual as capital property) as having been acquired by the estate at a cost equal to their fair market value on death.

No problem!  CRA generally will apply s. 69(1)(c) to deem the estate to have acquired the options at their fair market value.

However, the deceased employee, who will receive deemed employment income on death equal to the same amount, will not be entitled to a 1/2 deduction (under s. 110(1)(d)) - assuming that no election was made under s. 110(1.1).

Neal Armstrong.  Summaries of 21 December 2012 Memorandum 2009-0327221I7 under ss. 110(1)(d) and 69(1)(c).

Spannier - Tax Court clarifies when an employee may deduct an accommodation allowance for a remote work location

Graham J. found that the mischief addressed by s. 6(6) is that taxation on an accommodation allowance "would leave the taxpayer worse off for having traveled for work as they would have to pay for their temporary accommodations with after tax dollars."  Accordingly, it was irrelevant that the taxpayer spent 20 out of every 28 days at her temporary accommodations, given that it was clear that she preserved her other home for her use throughout her employment.

Scott Armstrong.  Summary of Spannier v. The Queen, 2013 DTC 1062 [at 332], 2013 TCC 40, under s. 6(6).