News of Note
Finance confirms that the intention of the s. 15(2.17) rule is to limit the imputation of a shareholder loan to Canco to the amount of Canco’s advance
Email this ContentUSCo and Canco deposit $100 and $50, respectively, into a cross-border third–party notional cash pool structure under which two affiliated non-residents (LuxCo and UKCo) each have a $60 overdraft. Each of Luxco and UKCo, as the intended borrowers, would be considered to have received a loan from Canco of $50, so that there is a deemed shareholder loan of $100 under s. 15(2.17) even though Canco only advanced $50.
Finance indicated that in these circumstances, the intention of the back-to-back shareholder loan rules is to limit the aggregate amount of loans that Canco is deemed to make under those rules, to the amount that Canco has lent to the immediate funder. This is consistent with the general policy of the rules, which is to ensure that the shareholder loan rules are not avoided to the extent that a Canadian corporation provides debt-funding to its shareholders indirectly through one or more intermediaries.
Neal Armstrong. Summary of 26 April 2017 IFA Finance Roundtable, Q.13 under s. 15(2.17).
Finance states that the B2B s. 212(3.6)(a) rule was intended to potentially apply re common share dividends
Canco pays interest on an interest-bearing loan from its parent, Forco 2, which declares and pays dividends on its common shares held by Forco 1. Was there an intent that s. 212(3.6)(a) would not apply given that there is no obligation in the common share terms to declare any dividends?
Finance indicated that the intention was to capture not only preferred dividends, but also common-share dividends on the basis that a dividend declaration on common shares generates an obligation to pay the dividend. However, whether the rule applied would depend on whether the linkage test was met, which would require consideration of relevant factors such as the timing and quantum of the dividend payments.
Neal Armstrong. Summary of 26 April 2017 IFA Finance Roundtable, Q.12 under s. 212(3.6)(a).
Finance blesses a CRA workaround for dealing with an upper-tier blocking deficit respecting an upstream loan
Forco 2 which has exempt surplus of $1,000, is held by Canco through Forco 1, which has an exempt deficit of $100 (and no pre-acquisition surplus). Forco 2 makes three successive loans of $100 directly to Canco. In policy terms, Canco should be entitled to a full s. 90(9) reserve for all three loans but, under the current wording, the exempt deficit effectively blocks each successive loan.
Finance noted that although the general policy is that Canco should be permitted to receive the loans without a deemed dividend to the extent that actual distributions would produce that result, this particular situation was amenable to the work-around described at 2016 Roundtable Q.5 (i.e., Forco 2 lends to Canco via Forco 1). However, if taxpayers nonetheless have a “live issue,” Finance would be interested in hearing from them.
Neal Armstrong. Summary of 26 April 2017 IFA Finance Roundtable, Q.11 under s. 90(9).
Finance is contemplating relief for where upstream loans no longer are synthetic distributions
The general policy intent of the upstream loan rules is to ensure that a synthetic distribution by way of an upstream loan from a foreign affiliate should produce comparable tax results to an actual distribution. Accordingly, Finance is thinking about devising expanded relieving rules to provide a deemed repayment of an upstream loan upon the occurrence of specified triggering events which effectively eliminate the equivalent of a synthetic distribution. An obvious “poster child” triggering event is a cash sale by Canco of a foreign affiliate that had made a (still-outstanding) upstream loan to it. However, Finance would prefer not to introduce relieving triggering events on a piecemeal basis and, instead, would prefer to do a complete analysis of to what extent relief should extend to more complex situations.
In the meantime, taxpayers have available work-arounds to use in situations such as the poster child rather than requesting ad hoc relief. In this regard, Finance referred approvingly to 2013-0491061R3, which it described as a temporary repayment of a loan, in the course of transactions in which the creditor foreign affiliate ceases to be an FA of the taxpayer, being treated as a permanent repayment and not part of a series of loans and repayments.
Neal Armstrong. Summary of 26 April 2017 IFA Finance Roundtable, Q.10 under s. 90(14).
Foote – Tax Court of Canada finds that a senior stock broker realized gains on a small personal portfolio on income account
The co-head of institutional trading at a full-service brokerage, who engaged in active stock trading in his personal account for the last 10 months of 2009 (with an average hold period of about 50 days), was found by Boyle J to have realized his gains on income account, notwithstanding the relatively small size of his portfolio (starting at $650,000) relative to his employment income, and the fact that he significantly underperformed the stock market. In addition to the active trading, Boyle J was significantly influenced by the taxpayer being involved in trading qua employee (i.e., the brokerage would take short-term positions for its own account, and the taxpayer “gleaned relevant market information as part of his daily job”).
Neal Armstrong. Summary of Foote v. The Queen, 2017 TCC 61 under s. 9 – capital gain v. profit – shares.
CRA notes issues on the GST/HST boundary line between qualified acupuncturist supplies and taxable supplies
The supply by a “practitioner” of acupuncture services was exempted effective February 12, 2014. One complication is that the profession is not provincially regulated in smaller provinces (Manitoba, Saskatchewan, Prince Edward Island, Nova Scotia and New Brunswick). CRA helpfully suggests that those with acupuncture practices in those provinces “contact the regulatory body in any of the regulated provinces to determine if their qualifications are equivalent to those necessary to be licensed or otherwise certified in that province,” so as to determine if they qualify as “practitioners.”
Mixed supply issues may also arise. CRA provides an impractical example of a dual-qualified professional who meticulously invoices for 40 minutes of acupuncture and 20 minutes of massage therapy, and states that it would assume that there were separate supplies of massage therapy (which is not exempted) and of acupuncture. A sale of herbal goods would also not be assimilated to the acupuncture supply (and would not be zero-rated as a grocery supply).
Neal Armstrong. Summaries of GST/HST Technical Information Bulletin B-110 “Application of the GST/HST to the Practice of Acupuncture” April 2017 under ETA, Schedule. V, Pt, II, s. 7, s. 1 – practitioner, Sched. VI. Pt. III, s. 1.
CRA indicates that the transfer of an oil and gas lease was not eligible for the s. 167 GST election
CRA indicated that the transfer of an interest in an individual “lease” of oil and gas property which may be operating under a joint venture agreement likely would not constitute a supply of part of a business for ETA s. 167 purposes given that this would not be associated with the transfer of any other assets and it might represent only one of the assets in a field held by the vendor.
Neal Armstrong. Summary of 3 February 2017 Interpretation 158436 under ETA s. 167(1).
CRA indicates that decommissioning work is of the type covered by the construction PE Article
A Canadian-resident company, which agreed to decommission various offshore oil or gas platforms, arranges for a non-resident affiliate to perform subcontract work at the same Canadian location in two separate four-month work periods (each covered by a separate subcontract) occurring in two successive years, and separated by a work stint of the non-resident for a separate non-resident customer.
CRA first confirmed that demolition and other decommissioning work comes within the scope of the standard OECD-based “construction PE” article (Art. 5(3)). Turning to the 12-month test therein, CRA indicated that the two work segments might very well be considered as a single unit, in which case the non-resident would be considered to have a Canadian permanent establishment if the work on the first segment commenced more than 12 months before the completion of the second segment.
Neal Armstrong Summary of 16 January 2017 External T.I. 2016-0655701E5 under Treaties – Art. 5.
CRA rejects the recognition of a loss on a s. 261 conversion to the U.S. dollar
Canco had all along been preparing its financial statements is U.S. dollars and then validly elected to adopt the USD as its functional currency effective the beginning of its 2015 taxation year. It proposed to recognize a loss for ITA purposes equal to the difference between (i) its USD retained earnings (“R/E”) balance in its 2014 USD balance sheet (used for financial statement purposes) and (ii) its “R/E for Canadian income tax purposes” resulting from converting its December 31, 2014 R/E into USD under s. 261(7)(h) using the December 31, 2014 relevant spot rate. (There, that was easy to say!)
CRA identified a fundamental flaw: s. 261 does not recognize gains or losses on the conversion, and the conversion only affects the computation of subsequently realized (or otherwise recognized) amounts. In any event, Canco’s year-end retained earnings are not an amount “that is relevant in determining the Canadian tax results” and, therefore, are not to be converted under s. 261(7)(h). For instance, the retained earnings that is referenced for thin cap purposes is the retained earnings in the opening balance sheet contained in the financial statements used for accounting purposes.
Neal Armstrong. Summary of 2 March 2017 External T.I. 2016-0633981E5 under s. 261(7)(h).
Consistent use of Bloomberg, Thomson Reuters or OANDA FX spot rates generally is acceptable to CRA
What exchange rate will CRA permit a taxpayer to use as the “relevant spot rate” as an alternative to the Bank of Canada daily exchange rate? CRA indicated that the rates quoted by Bloomberg L.P., Thomson Reuters Corporation and OANDA Corporation would be “generally acceptable” as satisfying its criteria of being widely available on an ongoing basis, verifiable, and market-recognized. If such rates are used for ITA purposes, they must be used consistently from year to year and also used in the taxpayer’s financial statements – and be “used in accordance with well-accepted business practice” (which might mean something more than simply recording and storing them properly).
There is no mention of being allowed to average the exchange rates – and there is also no explicit discussion of how to select rates if the Bloomberg machine is providing continuous quotes throughout the day (although the “consistently” and “well-accepted business practice” references would have some bearing.)
CRA also states that:
The Bank of Canada rate will still be required in respect of a taxpayer transitioning into or out of income tax reporting in its elected functional currency in accordance with subsections 261(7) or 261(12)….
Neal Armstrong. Summary of 27 April 2017 Internal T.I. 2017-0684831I7 under s. 261(1) – relevant spot rate.