News of Note

CRA accords a broad meaning to the concept in s. 84(2) of a distribution occurring "on" the reorganization or discontinuance of a "business"

S. 84(2) deems a Canadian-resident corporation to pay a dividend to the extent that a distribution made by it "on the winding-up, discontinuance or reorganization of its business" exceeds the related reduction, if any, in the paid-up capital of its shares.  In response to a question directed at a "pipeline strategy" (see 2011 STEPs Roundtable, Q. 5 2011-0401861C6), CRA noted that "business" for this purpose includes earning property income from investments, and that the broad meaning of the word "on" could include, for example, the situation where sales proceeds of a business are distributed some time after the sale.

Neal Armstrong.  Summary of  29 May 2012 CTF Prairie Tax Conference, Q. 14 2012-0445341C6 under s. 84(2).

CRA publishes comment on beneficial ownership for Treaty purposes

CRA has published its response at the 2012 IFA Conference respecting when a recipient of interest, royalties etc. is the beneficial owner of those amounts for Treaty purposes.  It states that it "will generally accept that a payment will be for the recipient's use and enjoyment, and that the recipient assumes risk and control over the payment, if the recipient holds a sufficient degree of discretion with respect to the use or application of the payment."  This is similar to an earlier statement (see 2009 IFA Roundtable, Q.1 (No. 2009-0321451C6)).

Neal Armstrong.  Summary of 17 May 2012 IFA Round Table 2012-0444041C6 under Treaties - Art. 11.

CRA accepts that shares of mortgage corporations generally are not taxable Canadian property

CRA considers that the shares of a private corporation holding mostly undefaulted mortgages on Canadian properties do not derive their value more than 50% from the real estate, so that such shares are not taxable Canadian property.

Neal Armstrong.  Summary of 13 September 2012 CICA Compliance Conference, 2012-0453021C6: under s. 248(1) - taxable Canadian property.

Income Tax Severed Letters 16 January 2013

This morning's release of 40 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Newly-released information GST/HST reporting requirements for pension plan employers are not onerous

The Government's loss in the General Motors case caused it to enact s. 172.1, which requires employers to remit imputed GST or HST on their expenditures in administering employee pension plans.  CRA has now released the required information reporting that the employer is required to provide to the pension plan (which is entitled generally to a rebate of 33% of the imputed tax).

Generally, it's not very onerous (and there doesn't appear to be a prescribed form).  Typically, in addition to minor administrative particulars, the employer is only required to specify the aggregate federal and (if applicable) provincial imputed tax for the year - although there's a vague statement to the effect that where there were actual supplies to the pension fund, "the employer must provide sufficient information to enable the pension entity to claim an ITC... ."

Neal Armstrong.  Summary of  Notice No. 280 "Section 172.1 Information Requirements" January 2013 under ETA - s. 172.1(8).

CRA notes that a distributor/marketer separation may deprive them of access to the promotional allowance HST/GST rule

Where a registrant pays or credits an allowance to another registrant (e.g., a retailer) in order to promote sales by the retailer of its product, the allowance generally will be treated for HST/GST purposes equivalently to the payment of a tax-included rebate, that effectively reduces the net remittance obligations of the payor of the allowance and the input tax credits of the retailer.

CRA has indicated that a separation of roles between a distributor (who supplies the property being promoted) and a marketer (who makes the promotional agreements and payments) within a related group will prevent this rule from applying, as it requires that the registrant providing the promotional allowance also have sold the property being promoted.  An agreement that the marketer provide the allowance as agent of the distributor would be necessary.

Scott Armstrong.  Summary of 27 July 2012 Interpretation Case No. 126511 under ETA s. 232.1.

CRA agrees that an obligation to return excess remuneration does not give rise to imputed interest

An employee was obligated to repay excess remuneration previously received. (The payroll service had not been informed that the employee was on unpaid leave.)  CRA indicated that this repayment obligation did not constitute a non-interest-bearing loan to the employee (so that there was no interest imputation under s. 80.4) notwithstanding that it was agreed that the repayment would occur gradually over an extended period of time.

Neal Armstrong.  Summaries of  13 June 2012 Memorandum 2012-0448961I7 F under ss. 8(1)(n) and 80.4(1).

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.