News of Note

Bagtech - Tax Court treats a CCPC's fictional non-resident shareholder as bound by USA voting restrictions

In order to avoid arguments that the majority non-resident (or public company) shareholders of a corporation are not a "group of persons," so that they do not control the corporation (see Silicon Graphics), the definition of "Canadian-controlled private corporation" deems their shares to be owned by a single notional non-resident person.  Bédard J. found in the Bagtech case (now published in English translation), that this fictional person should be considered to be party to the (actual) unanimous shareholders agreement for the corporation in question - and that voting right restrictions in this USA should be considered to trench on what otherwise would be the de jure control of that fictional person.  Consequently, the corporation in that case was a CCPC notwithstanding that a majority of its shares were held by non-residents.

Neal Armstrong.  Summary of Price Waterhouse Cooper, Trustee in Bankruptcy of Bioartificial Gel Technologies (Bagtech) v. The Queen, 2012 TCC 120 under s. 125(7).

Birchcliff - Tax Court finds that when CRA has made a GAAR assessment, the Minister's pleadings must disclose the legislative policy that was considered to be abused

Campbell J. found that the object, spirit and purpose of the Act's provisions which the Minister determined, in making a GAAR assessment, had been abused by the taxpayer, was a "material fact" that must be disclosed in the Minister's Reply.  As noted by Steve Suarez:

While it is open to the Crown during the course of the litigation to allege the existence of a different object, spirit or purpose than the one relied on in making the reassessment, that variation in its reasoning will now be transparent and the courts may question the strength of the CRA's arguments in situations in which it has changed the policy it says has been contravened.

Neal Armstrong.  See summary of Birchcliff Energy Ltd. v. The Queen, TCC Docket 2012-1087(IT) G (neutral citation pending) under s. 245(4).

The Quebec recycling charge adds to the fair market value of the related products

Vendors of electronic products in Quebec are now required to include in, or add to, the selling price the amount of an environmental recycling charge (the "écofrais"), which they then pay over to a Quebec agency to cover the costs of subsequent recycling of the products.

CRA considers that the écofrais must be included in the fair market value of such products for purposes of computing an employee benefit when such products are gifted or awarded to an employee.  CRA states that this is so in part because the écofrais "are not required to be presented as an addition to the initial price like for example a sales tax" (don’t ask me to explain).

Neal Armstrong.  Summary of  7 November 2012 T.I. 2012-0466681E5 F under General Concepts - Fair Market Value - Other.

Income Tax Severed Letters 23 January 2013

This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for you viewing.

Marabella - Tax Court finds that invoices issued in the wrong name resulted in lost input tax credit claims

In the course of a construction business, a registrant paid invoices from a subcontractor, which demanded payment to a number of GST-registered corporations that did not in fact provide the services in question.  Instead, these corporations were involved in a false invoicing scheme and none of the GST collected from the registrant was remitted.

Batiot J. found that the registrant was not entitled to ITCs as the suppliers named in the invoices in fact had not supplied it with services - and a good faith mistake in accepting these invoices fell short of establishing a due diligence defence.  The findings in this case would be troubling if they were applied to the situation where one company in a corporate group issues invoices for work that was done by another group company.

Scott Armstrong.  Summary of Les Constructions Marabella Inc. v. The Queen, 2012 TCC 397, under s. 169(4).

GST/HST Headquarters Letters October 2012

This afternoon's release of 21 GST/HST Headquarters Letters is now available for your viewing.

CRA confirms that the Canadian competent authority will only enter into deferral agreements where there is potential double taxation

Some of the treaties contemplate that the Canadian competent authority may agree to the deferral of recognition of gain under a reorganization transaction where there is no recognition of gain to a resident of the other country under the tax laws of that country.  CRA has confirmed that the Canadian competent authority may enter into such a deferral agreement only where gain is deferred under the foreign tax law rather than being exempted - even where the Treaty (e.g., Art. 8, para. 5 of the Canada-Italy Convention) does not specifically stipulate that such a deferral agreement is being entered into "in order to avoid double taxation" (see Art. XIII, para. 8 of the Canada-U.S. Convention).

Neal Armstrong.  Summary of 17 May 2012 IFA Conference 2012-0444161C6 under Treaties - Art. 13.

CRA treats a partnership interest as a single property - but shareholdings are different!

CRA may view the interest of a taxpayer in a partnership as a single property.  For example, the taxpayer may not accomplish anything by purporting to hold both preferred and participating partnership interests with supposedly separate adjusted cost bases.  Consistently with this view, CRA considers that the s. 70(6.2) election, to deem  a "property" of a deceased taxpayer passing to a spouse to be disposed of for its fair market value, cannot be made with respect to a portion of the taxpayer's partnership interest (including, presumably, units of a unitized partnership).

However, each share of a corporation is viewed as a separate property, so that the election can be made with respect to a portion of the deceased taxpayer's shareholdings (except in the unusual situation where he or she held only one share).

Neal Armstrong.  Summary of 12 June 2012 STEP CRA Roundtable, Q. 9 2012-0442921C6 under s. 70(6.2).

American Hotel Income Properties REIT LP achieves flow-through treatment for U.S. properties

The American Hotel Income Properties REIT LP is a Canadian limited partnership which will hold a newly-acquired portfolio of U.S. hotel properties through a subsidiary U.S. private REIT.  This is targeted to achieve flow-through treatment in both jurisdictions.

Neal Armstrong.  Summary of American Hotel Income Properties REIT LP preliminary prospectus under Foreign Asset Income Funds and LPs.

A new trend – Alamos tax disclosure excludes CRICs

Alamos (which has only foreign mining properties) has structured its offer for Aurizon (which on an aggregate basis provides 50% share consideration (Alamos shares) and 50% cash consideration) so as to ensure that the s. 85.1 rollover is not available except for shareholders who receive only Alamos shares.  The tax disclosure states that it does not apply to corporations resident in Canada who are non-resident controlled for purposes of the foreign affiliate dumping rules.

Neal Armstrong.  Summary of Alamos Circular under Unsolicited Bids.