News of Note
Finance narrowed the potential overreaching in its amendment to s. 212.3(1).
Email this ContentThe recent amendment to s. 212.3(1) expands the scope of the foreign-affiliate dumping rules to include investments in non-resident corporation that are not foreign affiliates of the corporation resident in Canada (the “CRIC”) that makes the investment but are foreign affiliates of a corporation that does not deal at arm’s length the CRIC (the “other Canadian corporation”). As compared to the September 16, 2016 version of the amendment (which arguably could have referred to another non-arm’s length Canadian corporation of which the subject corporation was not an FA), the final version of this amendment:
clarifies that the reference to the "other Canadian corporation" is only relevant where the CRIC made an investment in a subject corporation which is not its FA (or becomes its FA as part of the series of transactions) but is an FA of the non-arm's length corporation (or become the non-arm's length corporation's FA as part of the series of transactions). This clarification appears to largely address the Joint Committee's concerns of the potential overly broad application of the FAD rules.
Neal Armstrong. Summary of Sabrina Wong, "Summary of International Amendments in Bill C-63, Budget Implementation Act, 2017, No. 2", International Tax (Wolters Kluwer CCH), No. 97, December 2017, p. 6 under s. 212.3(1).
CRA finds that the substituted-debt exclusion did not deny s. 18(9.1) deductibility of a redemption premium where the new debt was to new investors
A public company issued Series A Debentures (“SAD”), and subsequently issued Series B Debentures (“SBD”), and redeemed the SAD together with an early redemption premium. Whether it was entitled to deduct the redemption premium under s. 18(9.1) turned on whether (as per s. 18(9.1(a)) it could reasonably be considered to have paid the premium “in respect of the substitution” of the SAB for the SAD. In finding that this was not the case, the Directorate stated:
[S]ince the SAD Investors are a substantially different group of investors than the SBD Investors … it could not reasonably be considered that the SAD Investors were paid the Redemption Premium “in respect of the substitution of the [SAD]” since it was the SBD Investors, and not the SAD Investors, who provided a substitute debt for the SAD.
This upshot appears to be that the “substitution” exclusion in s. 18(9.1)(a) will not apply to an early redemption premium where the replacement debt is issued to a different group of investors.
Neal Armstrong. Summary of 29 May 2017 Internal T.I. 2017-0689161I7 under s. 18(9.1)(a).
Cussens – European Court of Justice describes leases that were entered into in order to trigger a taxable supply at a favourable level of VAT as having “no commercial reality”
Halifax plc v Customs and Excise Commissioners [2006] EUECJ C-255/02, [2006] STC 919, established the European VAT tax avoidance doctrine that:
[I]n the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
…Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. ….[T]he prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.
Some Irish taxpayers, who had constructed holiday homes, leased the homes shortly before sale to a related company, which then leased the homes back to the taxpayers. These leases were then mutually surrendered before the sales, and the taxpayers took the position that the sales were not subject to VAT because there already had been a taxable supply of the homes (under the lease).
The European Court of Justice confirmed that, in applying the second Halifax test, regard was to be had only to the objective of the leases preceding the sales of the homes, rather than of the joint objective of those leases and sales as a whole. In commenting on what might be found to be the purpose of the leases, the Court stated:
…[T]he leases … had no commercial reality and were entered into … with the aim of reducing the VAT liability on the sales of immovable property … which they envisaged carrying out subsequently. As regards the fact that, as the appellants… have contended…, those leases were intended to achieve the sales in the most tax efficient way, that objective cannot be regarded as constituting an aim other than obtaining a tax advantage, as the desired effect was to be achieved specifically by a reduction of the tax liability.
Neal Armstrong. Summary of Cussens & Ors v Brosnan, Case C‑251/16, [2017] BVC 61 (European Court of Justice, 4th Chamber) under ETA s. 274(4).
Harvest Operations – Alberta Court of Appeal states that it cannot use its general equitable jurisdiction to do an end run around the narrow (post-Fairmont) rectification doctrine
Dario J followed the maverick approach to tax rectification of Graymar rather than the more generous Juliar approach. The maverick subsequently was elevated and wrote the majority decision in Fairmont. In now trying to reverse Dario J’s decision, the appellant argued that the Alberta Court of Appeal should exercise its “general equitable jurisdiction to rectify the errors,” citing TCR as an example where this had occurred.
No go. The Court stated:
Without commenting on the merits of the assertion that a superior court has “equitable jurisdiction to relieve persons from the effect of their mistakes”, we fail to see how we can do this without undermining the rectification doctrine and ignoring the precedential value of Fairmont Hotels.
There is no principled basis, in the guise of exercising our equitable jurisdiction, to pump theoretical steroids into the rectification doctrine and give it the strength or force that the Supreme Court of Canada recently and consistently has declined to do.
Neal Armstrong. Summary of Harvest Operations Corp. v. Attorney General of Canada, 2017 ABCA 393 under General Concepts – Rectification.
Geissel – European Court of Justice finds that a letter box address is a valid address for VAT purposes
The European VAT rules require that an invoice provide the “full” name and address of the supplier. The 5th Chamber of the ECJ has held that this requirement can be satisfied by a “letter box” address of a correctly-named supplier, noting that the principal focus of the purchaser, and the tax authority auditing its input tax deduction claim for the VAT charged by the letter box supplier, should be on whether that supplier had a valid VAT registration.
This policy is reflected in the Input Tax Credit Information (GST/HST) Regulations, which do not require disclosure of the supplier’s address. However, a similar issue might arise under the interprovincial place-of-supply rules which, in various contexts, reference “the address in Canada obtained by the supplier.” As with the VAT rule, there is no explicit prohibition against a letter box address.
Neal Armstrong. Summary of Rochus Geissel, as liquidator of RGEX GmbH v Finanzamt Neuss (Neuss Tax Office), C‑374/16, [2017] BVC 58 (European Court of Justice, 5th Chamber) under New Harmonized Value-added Tax System Regulations, Pt I, s. 13(1).
Lavrinenko – Tax Court of Canada finds that 40/60 is not “near equal”
The definition for Canada child benefit purposes of a “shared-custody parent” refers inter alia to a parent residing with the child “on an equal or near equal basis”. In Zara, Boyle J found that a father who was a bit over that 40% mark so qualified. Now in Lavrinenko, Paris J has found that a taxpayer whose access “approached 40%” fell short of the mark, and stated that “even a 60%/40% split would not qualify the Appellant as a shared‑custody parent.”
Neal Armstrong. Summary of Lavrinenko v. The Queen, 2017 TCC 230 under s. 122.6 – shared-custody parent.
Income Tax Severed Letters 3 January 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms the flexibility of the cross-border PUC-restoration rule in s. 212.3(9)(b)(ii)
A majority of the common shares of a Canadian public corporation (Pubco) were held by foreign holdcos (ultimately controlled by Foreign ‘Parent) directly or through “Canholdcos.” Most of Pubco’s assets were investments in foreign affiliates, and the paid-up capital of the various “cross-border classes” of shares (being the Pubco shares held directly by a foreign holdco and the shares held by the foreign holdcos in the Canholdcos) had been previously reduced under s. 212.3(7) as a result of Pubco investing in an offshore Finco which, in turn, financed a large development project of an indirect offshore subsidiary of Pubco (Opco).
Under the ruled-upon transactions, Opco first borrowed U.S. dollars to repay some of the Finco loans (directly and by way of repaying loans from Forco 2). Finco, in turn, inter alia paid dividends on its common shares and “distributions” on its mandatorily redeemable preferred shares to Pubco (the “Finco Distributions”). Pubco, in turn, inter alia lent those funds to a Canadian subsidiary (Canco 1) of one of the foreign holdcos, with Canco 1 subscribing for preferred shares of a Canadian subsidiary (Canco 2) of a second foreign holdcos, with that second Canadian subsidiary effecting a return of capital to its foreign holdco on a class of shares which had not been subject to a s. 212.3(7) grind because this structure was off to the side rather than being “above” Pubco.
CRA ruled that the Finco Distributions were receipts of property described in s. (B) of variable A of the s. 212.3(9)(b)(ii) formula, i.e., they restored the cross-border PUC held in Pubco and in the relevant Canholdcos on the basis that Pubco had received equivalent property as dividends on the shares of the subject corporation (Finco). Thus, it did not matter that:
- The Finco Distributions were sourced from a borrowing beneath the subject corporation rather than being a distribution of sales proceeds or profits;
- Insofar as the Canholdcos were concerned, the Finco Distributions received by Pubco were not distributed up to them but, instead, were distributed in a “sideways” manner; and
- The s. 212.3(9) bump to the PUC of the cross-border classes (in Pubco and the Canholdcos) was banked rather than utilized. (This may have occurred because the transactions under consideration were completed before the rulings were ultimately given.)
That was the easy part. Pubco had previously elected under s. 261(3) for the U.S. dollar to be its elected functional currency. CRA indicated that the PUC of the cross-border classes for both Pubco and the Canholdcos should be computed at the same time in U.S. dollars (on the basis that the entries to the PUC accounts for the cross-border classes held in the Canholdcos were relevant to the Canadian tax results of Pubco) and also in Canadian dollars (see also 2016-0642111C6). CRA then ruled that the full restoration of the cross-border PUC was dependent on the total amount of the Finco Distributions being no less than the previous net grinds to the PUC of the cross-border classes of shares computed both in Canadian and U.S. dollars.
Neal Armstrong. Summaries of 2016 Ruling 2016-0629011R3 under s. 212.3(9)(b)(ii) – A(b) and s. 212.3(18)(c)(v).
Deloitte v. Livent – Supreme Court of Canada finds that auditor negligence in providing comfort to investors in a public company did not result in liability
Deloitte was found to have negligently provided a comfort letter in October 1997, which assisted Livent in raising money from new investors, and to have also negligently provided an unqualified audit opinion in April 1998 respecting Livent’s 1997 financial statements. Gascon and Brown JJ, speaking for a bare majority of the Supreme Court, found that Deloitte was not liable to the receiver for Livent for the negligent comfort letter, because it helped accomplish Livent’s purpose of raising money, stating:
Deloitte never undertook, in preparing the Comfort Letter, to assist Livent’s shareholders in overseeing management; it cannot therefore be held liable for failing to take reasonable care to assist such oversight. … Consequently, the increase in Livent’s liquidation deficit which arose from its reliance on the Press Release and Comfort Letter was not a reasonably foreseeable injury.
However, they went on to find that Deloitte was liable for the increase in Livent’s liquidation deficit which followed the completion of the negligent statutory audit, stating that the very purpose of a statutory audit was to “to allow shareholders to collectively 'supervise management’,” so that the consequences of failure to permit the shareholders to see the losses that were being racked up by management resulted in Deloitte responsibility for those losses.
The minority thought that Deloitte should not be liable on either basis.
This decision might assist those who have provided negligent tax disclosure in offering documents.
Neal Armstrong. Summary of Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 under General Concepts – Negligence.
CRA indicates that the free provision a home electric charging station for an employment-required vehicle may be non-taxable
A free charging station is provided at an employee’s home for a car used in performing employment duties. CRA considers that “in many cases the employer would likely be the primary beneficiary, provided that ownership of the charging station is not transferred to the employee, and that its cost (including installation) is reasonable in the circumstances,” such that the provision of the station would not be a taxable benefit. As the charging station draws on the employee’s electricity, the employee effectively bears a portion of the operating costs. In this regard, CRA stated that “if an employer reimburses an employee for reasonable employment-related electricity costs paid by the employee, the reimbursement will not generally give rise to a taxable benefit.”
Neal Armstrong. Summaries of 14 September 2017 CPA Alberta Roundtable, Q.17, 2017-0703881C6 under s. 6(1)(a), s. 6(1)(k) and s. 8(1)(h.1).