News of Note
Ontario Ministry of Finance proposes to end the transparency of mutual fund trusts and SIFT partnerships for LTT purposes
Email this ContentThe Ontario Ministry of Finance has released (with a comments-due date of August 28, 2017) a proposed modification to the Ontario land transfer tax rules for dispositions of beneficial interests in Ontario real estate by some trusts and LPs and their unitholders.
“Group 1” vehicles will themselves be treated as separate LTT taxpayers and, thus, be required to pay LTT on their beneficial acquisitions – and conversely acquisitions or redemptions of interests in Group 1 vehicles will no longer trigger LTT. Group 1 vehicles are:
- SIFT trusts and partnerships as defined for ITA purposes;
- mutual fund trusts the units in which are eligible for the MFT unit exemption (as described in the current Regulation); and
- pension trusts which are exempt under ITA s. 149(1)(o).
No exemption for REIT mergers is mentioned.
A "Group 2" vehicle is an ITA s. 108 unit trust, or a partnership that has filed (or is required to file) a declaration under the Ontario Limited Partnerships Act (and not the Act for any of the other provinces) - which, in either case, has had over 49 arm's length unitholders or partners. Unitholders or partners of Group 2 vehicles will have the same substantive liability for direct or indirect beneficial transfers as before. Although the Group 2 vehicle itself will continue to be a flow-through for such purposes, it will become an LTT collector and be required to collect and remit LTT calculated at the unitholder or partner level - and will be authorized to collect such amounts from them through withholding from distributions. If it collects an insufficient amount, it will be subject to a penalty of at least the amount it failed to collect. (It is not clear whether this is intended to be effectively a double imposition, so that the Ministry might still go after the unitholders as well.)
No changes are proposed in the treatment of other trusts or partnerships.
At the time of title registration, nominees will be required to disclose the legal names and business registrations numbers of the partnerships or trusts for whom they now hold title.
Neal Armstrong. Summary of Ontario Ministry of Finance Proposal 17-MOF010, posted 14 July 2017 “Facilitating the Payment and Administration of the Land Transfer Tax under Section 3 of the Land Transfer Tax Act” under Ontario Land Transfer Tax Act, s.3(1).
Six further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of the three French technical interpretations released last week, and of the three (APFF) Roundtable item released on December 30 and 23, , 2015 are listed and briefly described in the table below.
These (and the other translations covering the last 31 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Mullings – Tax Court of Canada finds that time spent administering special “medical formula” foods to a child counted as therapy administration and not as dietary control
The taxpayer’s ability to claim the disability tax credit in respect of her young child, who suffered from an inability to digest a common amino acid (“Phe”), turned on whether she was spending at least 14 hours per week on therapy, which was defined in s. 118.3(1.1)(d) to exclude “time spent on dietary…restrictions or regimes.”
Keeping such a child’s bodily levels of Phe within a narrow range (failing which there will be severe brain damage) requires that “medical formula [food] is given in very precise doses four times a day and administering it is no different from administering any other prescription medication.” Since “measuring and controlling Phe intake is properly characterized as administration of the therapy and not as control of X’s diet,” the time so spent counted towards the 14 hours. The taxpayer got the credit.
Neal Armstrong. Summary of Mullings v. The Queen, 2017 TCC 133 under s. 118.3(1.1)(d).
The Canadian pension fund world has become less idyllic with the MLI PPT, and Finance suggestions for extending thin cap and SIFT rules
It is now well-settled that an s. 149(1)(o.2)(iii) investment corporation is not itself required to satisfy the PBSRA rule limiting it investment in a person or affiliated or associated group to less than 10% provided that its parent pension fund does so.
More problematic is the potential introduction of rules to extend the thin capitalization rules to corporations in which tax-exempt entities invest, or to extend the specified investment flow-through rules to partnerships and trusts in which tax-exempt entities invest. In various situations, these rules could also adversely affect taxable investors who are co-investors with s. 149(1)(o.2)(iii) corporations.
Although s. 253.1 when read in conjunction with Consolidated Mogul provides substantial comfort that borrowing at the level of an investee LP is not problematic for the s. 149(1)(o.2)(iii) corporation, even greater comfort is afforded if a unit trust is interposed in between.
Pension plan investments in real estate are not generally made through an s. 149(1)(o.2)(iii) investment corporation but rather through an s. 149(1)(o.2)(ii) real estate corporation. Some of the strictures which otherwise would bind such a corporation may be avoided by leasing the corporation’s real estate to a lessee which carries on the activities in question.
The new principal purpose test in the MLI is potentially problematic for Canadian pension funds who are co-investing in Europe through an intermediate holding vehicle such as a Luxco.
Neal Armstrong. Summaries of Jack Silverson and Bill Corcoran, "Issues Affecting Investments by Canadian Pension Plans in Private Equity, Infrastructure and Real Estate in Canada, the USA and Europe," 2016 CTF Annual Conference draft paper under s. 149(1)(o.2)(iii), s. 149(1)(o.2)(ii) and MLI, Art. 7.
Pietrovito – Tax Court of Canada refuses to permit a taxpayer to correct a clear error in appealing only one of the two taxation years in dispute
Due to a clerical error by a liaison between the taxpayer and his counsel, counsel was only instructed to prepare a Notice of Appeal for Year 1 and not Year 2, notwithstanding that it was the obvious intention of the taxpayer to appeal both. Lafleur J declined to extend the Wells case to permit the taxpayer, following the discovery of this error, to amend his Notice of Appeal to extend the appeal to cover Year 2.
She also found that as the one year extension period under s. 167(5)(a) had long since passed, she could not waive the one-year period and rejected an argument that “on the basis of Hickerty, [2007 TCC 482] that where an appellant has taken positive actions to appeal and where that appellant reasonably believes that the appeal has been validly filed, the one‑year grace period had stopped running.”
Neal Armstrong. Summaries of Pietrovito v. The Queen, 2017 TCC 119 under s. 169(1) and s. 167(5)(a).
Club Intrawest – Federal Court of Appeal splits a service in relation to a cross-border vacation home portfolio into two geographic components
Under the usual approach to applying the GST single-supply doctrine, a Canadian-resident non-share corporation, most of whose members had time share points which entitled them to book stays at Canadian, U.S. and Mexican resort condos beneficially owned by the corporation, would have been found to be receiving its annual fees from them as consideration for a single supply of a service, namely, funding the operating costs of the time share program. This gave rise to a conundrum, as ss. 142(1)(d) and 142(2)(d) respectively deem a supply of a service in relation to real property inside Canada or outside Canada to be made in Canada or outside Canada – so that a single supply here, which would have related to both, would have been deemed to be made both inside and outside Canada.
Dawson JA resolved this dilemma by finding that in this unusual context of services in relation to a cross-border real estate portfolio, there were two supplies, so that the services in relation to the Canadian and foreign real estate were taxable and non-taxable, respectively:
I see no reason in principle that precludes splitting up the supply so that the supply is treated as two supplies in order to recognize that ultimately the services are inherently distinct in one important respect: the services relating to the operation of the vacation homes located in Canada are services in relation to real property situated in Canada and hence are a taxable supply – the services relating to the operation of the Intrawest vacation homes situated outside of Canada are services related to real property situated outside of Canada and hence are a non-taxable supply.
Neal Armstrong. Summaries of Club Intrawest v. Canada, 2017 FCA 151 under ETA s. 142(1)(d) and General Concepts – Agency.
CRA finds that an artists’ union must issue T4A slips to incorporated artists respecting benefits received from the union
2013-0507171I7 F indicated that where a producer paid fees under a contract of service with the corporation of an incorporated performing artist and also was obligated to pay dues directly to the artists’ union (the UDA) in addition to some UDA dues that it was required to deduct from the fees paid to the artist’s corporation and remit, the producer was required to issue two T4As for the respective amounts to the artist’s corporation (so that the full fee amounts including dues deducted at source were included in its business income) and to the artist (so that the additional dues were included in his or her employment income from the corporation qua employer).
CRA has now amended this TI to indicate that the second T4A (relating to the employee benefit arising out of the dues paid to the UDA) was required to be issued by the UDA rather than the producer. CRA stated:
With respect to the contributions paid by the UDA for the benefit of the artist, subject to the exceptions in subparagraph 6(1)(a)(i)…, the artist must include in the employment income earned from the [artist’s] Corporation the value of the benefits accruing from such contributions. In addition, the UDA…must issue a T4A slip to the artist including the sums paid as vacation pay.
Neal Armstrong. Summary of 21 November 2016 Internal T.I. 2016-0675761I7 Tr under Reg. 200(1).
CRA considered that s. 55(2) did not apply to dividends paid only for asset protection and QSBC-status purposes, and that safe income was allocated between 2 classes of participating shares pro rata to their dividend entitlements
Two unrelated individuals hold a portion of their equal investments in Opco in the form of equal direct common shareholdings and the balance through an equally owned Holdco, which holds Class X shares of Opco that are entitled to receive a proportion of the earnings of Opco and are redeemable for an amount equal to that proportionate amount of such undistributed earnings plus their nominal issuance price.
CRA was guardedly amenable to the proposition that dividends paid on the Class X shares could be considered to be paid only for purposes of asset protection and eliminating excess liquidity that could prejudice this status of the common shares as qualified small business corporation shares.
If it were necessary to rely on the safe income safe harbour, CRA applied the Robertson rule that “income will be attributable to a particular class of shares in the same ratio in which each class would be entitled if all earnings of the corporation, but not share capital, were to be distributed,” so that the safe income earned or realized annually following the issuance of the Class X Shares could be proportionately allocated based on the number of shares of each class. If safe income was lower than the earnings, the Class X shares would bear a pro rata portion of the deficiency (even if the share terms purported to limit the distribution and redemption entitlement of the Class X shares to X% of the safe income).
Neal Armstrong. Summaries of 6 April 2017 External T.I. 2016-0658841E5 Tr under s. 55(2.1)(b) and s. 55(2.1)(c).
CRA finds that payment of family-law debt out of a TFSA to the surviving spouse could occur as a survivor payment
The definition of “survivor payment” in s. 207.01(1) - exempt contribution – para. (b) references a payment to the survivor directly or indirectly out of the former TFSA as a consequence of the deceased’s death. The exempt contribution can be contributed by the survivor to his or her own TFSA.
CRA considered that this requirement can be satisfied where the TFSA property is used for the payment of family-law debt of the deceased (e.g., obligations for support or under a separation agreement) to the surviving spouse, given the effect of the 248(23.1)(a) deeming rule.
CRA also indicated, similarly to 2016-0679751E5 F, that in light inter alia of s. 248(8)(a), a payment could be considered to be made to a surviving spouse directly or indirectly out of the former TFSA as a consequence of the deceased’s death where an executor in his discretion chooses to satisfy a legacy of specific property (in this case, of the residue of the estate, which included the family residence) by retaining the proceeds from the sale of the residence and instead paying an equivalent amount out of TFSA property.
Neal Armstrong. Summary of 6 June 2017 External T.I. 2015-0617331E5 Tr under s. 207.01(1) - exempt contribution – para. (b).
Woessner - Tax Court of Canada orders the removal of taxpayer’s counsel since a law partner of the firm likely would be called as a witness
Campbell J granted the Crown’s motion to remove the Shea Nerland firm as counsel of record on the taxpayer’s appeal of the denial of his losses from a software “investment” since it appeared likely that a current Shea Nerland partner and a former associate at the firm would be called as witnesses by the Crown and/or the taxpayer’s counsel. She stated:
The degree to which Shea Nerland appears to be immersed in the promotion and management of the alleged tax shelter scheme and the likely importance of the testimony of Mr. Nerland and Mr. Mamdani, necessitate an order for the removal of Appellant counsel and the law firm in order to maintain the reputation of the administration of the judicial system and to avoid the appearance of impropriety to the public.
Neal Armstrong. Summary of Woessner v. The Queen, 2017 TCC 124 under Tax Court of Canada Rules (General Procedure), s. 31(2).