News of Note
Johnson - Federal Court of Appeal decision might (or might not) require taxpayers to waive privilege in connection with a statute-barring defence
The taxpayer's gains from investing with the perpetrator of a ponzi scheme were not statute-barred because she had failed to check the story of the rogue - that he was making tax-paid capital distributions out of a trust to her - with an independent advisor. This finding is problematic if it is interpreted as indicating that (notwithstanding that in this context, the onus is on the Crown rather than the taxpayer) there somehow is an onus on a taxpayer to testify that he or she in fact had received legal advice on the otherwise statute-barred transactions that have purportedly been assessed by CRA. There is a judicial doctrine that once a taxpayer advances a defence that legal advice was received on a point in issue, all solicitor-client privilege respecting that communication, and perhaps surrounding communications, with or from that advisor is lost. See, for example, Bentley v. Stone, Verney v. Great-West Life, Toronto-Dominion Bank v. Leigh Instruments, and Softsim Technologies.
Surrey City Centre Mall - Tax Court decision suggests that intercompany debt reductions following a settlement can give rise to double GST taxation
A settlement payment received by the grandparent company of a project company as a result of the termination of contracts for the construction of a B.C university facility otherwise likely would have been subject to GST under s. 182 of the Excise Tax Act both in its hands (in light of the impairment of its indirect investment in the project company and its various direct contractual rights and obligations under the project agreements) and to the project company (given that its debt to its parent was written down following the settlement - so that under s. 182 it had enjoyed a debt reduction "as a consequence" of the settlement). In fact, there was no GST payable on the settlement payment as the only relevant assessment was of the project company, and the deemed supply made by it enjoyed the Crown immunity of the province (notwithstanding that the province did not provide the usual certification of Crown immunity).
This case illustrates that care should be taken if any intercompany or other debts are settled in connection with a contractual settlement.
The taxpayer, who was a family lawyer, was assessed penalties of $546,747 under s. 163.2(5) (i.e., before taking into account any parallel Ontario assessment), calculated as 50% of the purported federal tax savings of all 134 participants in a charitable donation scheme in relation to which she, in her capacity of president of the charity, issued false receipts. Bédard J. found that this sanction was essentially criminal in nature given its potential materiality and unlimited amount (it incresed with the number of taxpayers involved and their tax savings), as well as likely collateral damage to her professional reputation, so that it was invalid as not having been imposed pursuant to proper criminal proceedings (e.g., with a requirement for proof beyond a reasonable doubt).
If correct, this finding has the likely effect of eviscerating s. 162.5, given the significantly higher burden on the Crown in successfully applying a criminal provision. It is not clear what other income tax or HST/GST penalty provisions this reasoning might apply to (other than, of course, the "twin" Excise Tax Act provision (s. 285.1)).
Meranex Energy Trust is proposing a structure for investing in a U.S. oil and gas business that essentially is identical to that used in Argent Energy Trust and other more recent offerings: it will use a corporate structure, i.e., investing in a Canadian holding corporation which will hold a US Opco, as well as investing in notes of the US Opco. This contrasts to the earlier Eagle Trust offering, which used a hybrid structure (i.e., holding units and interest-bearing notes of a Canadian sub trust that is a corporation for US tax purpose which, in turn, holds a Delaware LP that is disregarded for US tax purposes).
Accordingly, issuers may now be starting to vote in favour of this corporate structure for this type of cross-border business. However, note that the new kid on the block is the Crius offering, which uses a similar corporate structure to Meranex, except that the Canadian mutual fund trust elects to be a partnership for U.S. purposes and contributes the cross-border debt to a subsidiary sub trust - perhaps in order to maximize potential U.S. interest deductions.
Neal Armstrong. See summary of Meranex Energy Trust preliminary prospectus under Foreign Asset Income Funds and LPs.
CRA reconfirms that receipt of a capital distribution on a share can result in a loss of interest deductions
Comments of CRA in IT-533, para. 31, indicate that where a taxpayer borrows at a negative spread (e.g., borrowing to acquire preferred shares with a dividend rate lower than the interest rate), the interest generally will be deductible in full. However, CRA has also indicated that where there is a paid-up capital distribution on shares acquired with borrowed money, there will be a proportionate loss of the interest deduction to the extent that the capital distribution is used for personal purposes. See 1993 A.P.F.F. Round Table, Q.3.
Both propositions have recently been confirmed. The second proposition is somewhat questionable where the quantum of the capital distribution is not sufficient to significantly impair the income-producing potential of the shares in question.
An individual who managed a partnership for a fixed fee "through" a corporation of which he was the sole officer and shareholder would have been an officer of the partnership but for the interposition of his corporation - so that the corporation was found to be carrying on a personal services business (with a resulting loss of the small business deduction).
Before reaching this conclusion, Bédard J. noted that the same individual could not have been viewed as an employee (as contrasted to the holder of an office) of the partnership as (at both common law and Civil Law) it was "well established that a partner cannot be an employee in his own partnership." This legal proposition is in part the basis for a CRA position that fixed partnership draws paid to a "salaried" partner cannot give rise to a deductible loss to the other non-salaried partners. See Income Tax Technical News, No. 30.
This case also may indicate that in some circumstances, "fees" paid to an individual partner-manager of a partnership are exempt from GST/HST under s. 272.1 of the Excise Tax Act.
Crius Energy Trust, which will be a listed Canadian mutual fund trust, proposes to elect for US purposes to be a partnership. It will indirectly invest in an LLC (carrying on an energy distribution business in the U.S.) which will be a partnership for US purposes but a US corporate subsidiary for Canadian purposes. The US anti-inversion rules are expected not to apply as it will initially acquire only a 1/3 interest in the LLC.
Neal Armstrong. Summary of Crius Energy Trust preliminary prospectus under Foreign Asset Income Funds and LPs.
When CRA withdrew its position allowing joint ventures to compute income as if they had a separate fiscal period, it also indicated that it would allow transitional relief by allowing the deferred income to be brought into income over a period of up to five years (similar to the rule in s. 34.2).
CRA has indicated that this administrative transitional relief also will apply to the the full amount of the deferral of 22 months' worth of income that was deferred as a result of a two-tier joint venture (e.g., the corporate taxpayer is a member of a joint venture with a fiscal period ending one month later which, in turn, is the member of a second joint venture with a fiscal period ending yet a further one month later).
Neal Armstrong. Summary of 28 August 2012 T.I. 2012-0454811E5 under s. 249.1(1).
Slate U.S. Opportunity (No. 2) Realty Trust is structured as a cross-border mutual fund without an initial listing
The Slate U.S. Opportunity (No. 2) Realty Trust proposes to invest in US real estate through an Ontario "holding company" LP and a Delaware "grandchild" subsidiary LP, both of which will elect to be corporations for US purposes. The offered units do not appear to be intended to be listed - but the offering contemplates a listing of the units (or an exchange of the units) by September 30, 2018 or an asset sale by them. In order that the Trust can in the meantime qualify as an open-end unit trust for Canadian tax purposes, there is a technical retraction right, but one which likely is not commercially meaningful.
Neal Armstrong. Summary of preliminary prospectus for Slate U.S. Opportunity (No. 2) Realty Trust offering under Foreign Asset Income Funds and LPs.
Section 182 provides that where a supplier under an agreement for a taxable supply receives an amount as a result of a breach or termination of the agreement, this payment is deemed to be inclusive of GST/HST, and the payor generally is entitled to an input tax credit for the included GST/HST.
In a ruling dealing with a damages payment received by a company which was not paid the remaining instalments on equipment it was constructing, CRA stated that section 182 did not apply because the supplier did not receive that payment as a consequence of the breach or termination of the agreement - so that the payor of the damages was not entitled to an input tax credit for GST. On the facts described, this finding seems to be incorrect. Perhaps there was a lack of understanding of basic contract law principles on the part of CRA, or perhaps there was something redacted from the ruling that would justify this conclusion.
Neal Armstrong. Summary of 8 March 2012 Ruling 137942 under ETA s. 182(1).