News of Note

CRA finds that a U.S. LLC’s intra-group lending business can qualify its C-Corp. member, under the Treaty active trade or business test, for the 0% Treaty-reduced rate on an LLC loan to a Canadian affiliate

Article XXIX-A, para. 3 of the Canada- U.S. Treaty indicates that a U.S. resident which is not a qualifying person nonetheless will be eligible for Treaty benefits with respect to income derived from Canada in connection with a substantial business (other than, in the case of a non-financial institution, a business of making or managing investments) actively conducted in the U.S., including such income derived by it "through" another U.S. resident.

CRA considers that a U.S. "C-Corp" that is the sole member of a U.S. LLC which acts as a group Finco will satisfy this test, so that interest paid by a Canadian affiliate on a loan from Finco is eligible for the 0% withholding rate under the Treaty, notwithstanding that the C-Corp is carrying on the business which so qualifies it for this Treaty benefit "through" the LLC.  Among other things, this appears to confirm that a money-lending business is not a business of making investments, and that the LLC look-through provision (in Art. IV, para. 6) dovetails nicely with this active trade or business test in Article XXIX-A.

Neal Armstrong.  Summary of  2012 Ruling 2012-0458361R3 under Treaties - Art. 4 and Treaties - Art. 29A.

First Quantum structures its share and cash bid for Inmet to ensure no rollover treatment – but will eat any Panamanian tax

First Quantum is making an unsolicited offer to purchase all the shares of Inmet for approximately $2.5B in cash and 115M First Quantum shares.  However, the offer is structured so that those tendering only for First Quantum shares will not get rollover treatment (the offeror in fact is a First Quantum subsidiary which is acquiring shares from First Quantum, a B.C. company, and delivering them to tendering Inmet shareholders).

First Quantum will top up the consideration paid by it for any Panamanian withholding tax that is required to be remitted.

Neal Armstrong.  Summary of First Quantum Offer for Inmet under Unsolicited Bids.

GST/HST Headquarters Letters September 2012

This morning's release of 10 GST/HST Headquarters Letters is now available for your viewing.

CRA finds that treaty-exempt mark-to-market gains or losses on shares are not qualifying income or losses for foreign tax credit purposes

CRA found that a Canadian insurance company would not have been able to claim foreign tax credits for U.S. withholding tax on dividends paid on its portfolio investments in shares of U.S. companies in the absence of the Canada-U.S. Treaty, as the dividends were from a Canadian source (its Canadian insurance business).  CRA went on to indicate that the company was entitled to foreign tax credits by virtue of Article XXIV of the Treaty, which deemed both the dividends and the company's mark-to-market gains or losses on the shares to be income from a Canadian source.

CRA went on to find that in applying the formula to calculate the foreign tax credit, the (income account) mark-to-market gains or losses on the shares were to be ignored as they were deemed to be a separate source of (Treaty-exempt) income under s. 126(6)(c).  Accordingly, only the dividends on the shares were "qualifying income" for purposes of the formula.  This helped the insurance company in this case, as it had mark-to-market losses for the year in question.

Neal Armstrong.  Summary of  5 November 2012 Memorandum 2012-0462151I7 under s. 126(6)(c).

CRA considers penalties under the U.S. Bank Secrecy Act not to be tax penalties

Although FBAR forms and penalties are administered through the IRS, CRA considers FBAR penalties not to be in respect of US taxes owing - a position based mainly on the FBAR penalties being imposed under the U.S. Bank Secrecy Act.  Therefore, CRA does not consider itself obligated to collect such penalties under Article XXVI-A of the Canada-U.S. Tax Convention.  This reasoning probably applies to other penalties that are not imposed under the Internal Revenue Code.

Scott Armstrong.  Summary of 25 July 2012 T.I. 2011-0427221E5 under Treaties - Article 26A.

Income Tax Severed Letters 9 January 2013

This morning's release of 35 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Shulkov - Tax Court of Canada accepts valuation of shares using 5-day VWAP

After surviving a 17-day trial focused on whether s. 160 applied to the transfer of substantial blocks of shares of penny stock by an executive of the company in question to his common law wife, D'Arcy J. accepted the valuation of the transferred shares in the Crown's valuation report - which valued the shares at each transfer time at their 5-day VWAP, and applied a discount ranging from 1.3% to 3.6% to reflect that it would take up to 44 days to sell-off each transferred block.

Neal Armstrong.  Summary of Shulkov v. The Queen, 2012 TCC 247 under General Concepts - Fair Market Value - Shares.

CRA ruling appears to accept that partnership loss or income can be allocated disproportionately to the capital accounts

In order to be allocated a portion of the losses of a partially-owned subsidiary, the subsidiary will roll its business into a newly-formed subsidiary LP for Class A units, and the majority shareholder then will fund the LP's need for additional capital by subscribing directly for Class B units with the same per-unit income entitlement.  Although the ruling letter is ambiguously drafted on the point, CRA appears to have accepted that loss (or income) will be allocated between the Class A and B unitholders in proportion to their respective number of units, even though capital distributions (i.e., in excess of income) can be made disproportionately on the Class A and B units.

Neal Armstrong.  Summary of 2012 Ruling 2011-0421261R3 under s. 103(1).

CRA treats management fees paid by a non-profit organization as disguised profit distributions

CRA found that a non-profit organization, which had made a significant investment in a taxable corporation and which paid substantial management fees to its non-profit sole member corporation, was almost certainly ineligible for the s. 149(1)(l) exemption.  The management fees, which were well in excess of any management costs of the sole member, were treated effectively as profit distributions for the benefit of the member - and it was irrelevant that the member itself was an NPO.

CRA's conclusion is consistent with other recent positions it has taken pursuant to its "NPO project," which are based inter alia on CRA's position that Woodward's establishes that "if the objectives of the organization cannot be achieved without the making of a profit, then the organization must be organized and operated for the purpose of profit."

Scott Armstrong.  Summary of 21 November 2012 Memorandum 2012-055501I7 under s. 149(1)(l).

Income Tax Severed Letters 2 January 2013

This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.