News of Note
Biles Estate – Federal Court accepts that an alleged settlement agreement had an implied condition that the subject property’s legal ownership be confirmed
Email this ContentPhelan J accepted a CRA submission that an alleged settlement agreement with the taxpayer was subject to an implied condition that the ownership of the property in question be confirmed to be consistent with the proposed reassessment. This was not established. Phelan J stated:
[A]bsent an agreement as to the chain of title not only were the parties not in agreement about the Proposal, but the Proposal could not be legally implemented. A reassessment cannot be made contrary to law.
Neal Armstrong. Summary of Biles Estate v. Canada (National Revenue), 2017 FC 371 under s. 152(4.2).
Samarkand – Court of Appeal of England and Wales indicates uncertainty on whether a partnership exists when its only partners are preliminary partners
Arden LJ followed Eclipse in finding that a film tax shelter partnership was not carrying on a trade given that the film it acquired was immediately leased out for a stream of licensing payments which matched its debt servicing commitments - so that in essence its business was “the payment of a lump sum in return for a series of fixed payments over 15 years.” As a “non-trading partnerships,” the targeted trade loss relief was not achieved.
Respecting a finding made below that the partnership did not exist before the the taxpayers became members, she stated:
Section 1 of the Partnership Act 1890 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". The question which arises is whether that test is satisfied where two or more persons carry on a business in common with a view of profit, not for themselves, but for future new partners who will for all practical purposes replace them.
…[I]n view of its potential wider significance I would be reluctant to express a view upon [this issue] unless it were necessary to do so.
Neal Armstrong. Summaries of Samarkand Film Partnership No. 3 & Ors v Revenue and Customs, [2017] EWCA Civ 77 under s. 96, s. 248(1) - business and s. 96(1)(a).
Chevron Australia – Full Court of Federal Court of Australia finds that a cross-border loan made on arm’s length terms would have benefited from a parent guarantee or other security
The U.S. subsidiary (“CFC”) of an Australian company (“CAHPL”) in the Chevron multinational group borrowed in the U.S. commercial paper market at a borrowing cost of about 1.2% with the benefit of a guarantee from their ultimate U.S. parent, and on-lent U.S.$2.45 billion of such funds under an unsecured Australian-dollar credit facility to CAHPL at about a 9% interest rate. CAHPL deducted such interest in computing its income for Australian purposes, and received tax-free dividends from CFC of most of CFC’s profits (based on the 7.8% spread). The Australian Commissioners initially denied much of CAHPL’s interest deductions under a somewhat primitive Australian domestic pricing rule, and then later issued replacement assessments for three of the tax years based on a subsequent enactment which retroactively established an ability to assess where there was transfer pricing contrary to the Associated Enterprises Article of the relevant Treaty (here, Art. 9 of the Australia-U.S. Convention).
CAHPL’s appeal was dismissed. In his concurring reasons, Allsop CJ stated respecting the assimilated Art. 9 rule:
[W]ere CAHPL seeking to borrow for five years on an unsecured basis with no financial or operational covenants from an independent lender, in order to act rationally and commercially and conformably with the interests of the Chevron group to obtain external funding at the lowest possible cost consistently with any relevant operational considerations, it would do so with Chevron providing a parent company guarantee, if such were available.
In the light of the evidence as to Chevron’s policy concerning external funding and its willingness to provide a guarantee to achieve that end the above is the natural and commercially rational comparative analysis when one removes the controlled conditions operating between CAHPL and CFC and replaces them with the condition of mutual independence.
In the circumstances there would have been a borrowing cost conformable with Chevron’s AA rating, which, on the evidence, would have been significantly below 9%.
Neal Armstrong. Summaries of Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62 under s. 247(2) and Treaties, Art. 9.
CRA indicates that a mooted RCA providing supplementary pension benefits must be similar to the IPP which it supplements
CRA considers a plan that provides supplementary benefits to an individual pension plan to be a salary deferral arrangement rather than a retirement compensation arrangement if the benefits provided for are unreasonable – which CRA will consider to be the case unless the terms of the supplemental plan are substantially the same as those of the IPP and the supplementary benefits merely provide the employee with a supplement for the benefits that would be provided under the IPP but for the defined benefit limit.
Neal Armstrong. Summary of 14 March 2017 External T.I. 2016-0627311E5 Tr under s. 248(1) – salary deferral arrangement.
CRA indicates that only one Reg. 1101(5b.1) election is required where work on an addition to a non-residential building extends over more than one year
Although the accelerated (declining balance) capital cost allowance of 6% or 10% p.a. is only available for non-residential buildings acquired since March 18, 2007, an election can be made under Reg. 1101(5b.1) to deem an addition to an old building to be a separate new building, thereby accessing the accelerated CCA rate on the addition. CRA considers that if there are two separate additions, an election must be made on each separately and each addition will fall into a separate class – whereas if the work on a single addition extends over more than one year (or there is a subsequent second addition to further extend the first addition), the election can be made at the end of the first year with respect to the work done to date (although this might have no immediate impact under the available-for-use rules) and the subsequent work will fall into the same separate deemed new class without any need to make a second election.
Neal Armstrong. Summary of 13 March 2017 External T.I. 2016-0626641E5 Tr under Reg. 1101(5b.1).
Ike Enterprises – Tax Court of Canada is inclined to consider cereal to be in the cereal aisle
After finding that the exclusions from zero-rating for basic groceries should be narrowly construed, Smith J found that crystallized ginger (which CRA sampled and found to be sweet) was not excluded as candy or confectionaries, and that some granola qualified as a breakfast cereal notwithstanding that it appeared to CRA to be packaged so as to encourage its use as a snack. However, some sticks (made of wheat, rice and spelt) were considered by him to be excluded from zero-rating as sticks or other snack foods, rather than being bread products, given inter alia that they were fried rather than baked.
Compared to earlier jurisprudence, he was less interested in whether or not the products were healthy, and more interested in how they were presented in the marketplace: the ginger and granola were sold in the baking ingredient and cereal areas of the stores; whereas the sticks were presented as a snack food.
Neal Armstrong. Summaries of Ike Enterprises Inc. v. The Queen, 2017 TCC 59 under ETA Sched. VI, Pt. III, s. 1(e). s. 1(f) and s. 1(h).
Ontario introduces a “Non-Resident Speculation Tax”
The Ontario Ministry of Finance has released a summary of its proposed 15% tax on foreign real estate purchasers. The principal announced features are:
- The 15% tax applies effective April 21, 2017 to the value of consideration for the transfer (including a beneficial transfer only) of a residential property in the “Greater Golden Horseshoe” where any of the transferees (e.g., a co-owner) is a foreign entity or taxable trustee.
- In approximate terms, the Greater Golden Horseshoe extends from Simcoe County (e.g., Midland but not Gravenhurst) down to the Niagara Region and Haldimand County on Lake Erie, and from the Waterloo Region to Peterborough and Northumberland Counties.
- A residential property means a real estate property containing up to six family residences (i.e., larger apartment buildings are excluded), and includes residential condo units (irrespective of the number purchased).
- A foreign entity is a “foreign national” or a “foreign corporation.”
- A "foreign national" is an individual who is not a Canadian citizen or permanent resident as defined in the federal Immigration and Refugee Protection Act.
- A “foreign corporation” includes not only corporations incorporated outside Canada but also Canadian-incorporated corporations which are subject to de facto control (as defined for federal income tax purposes) by a foreign entity – and also Canadian-incorporated corporations which are not listed on a Canadian stock exchange and which are “controlled…in part” by a foreign national or other foreign corporation.
- A “taxable trustee” is a Canadian citizen, permanent resident or corporation holding title in trust for foreign entity beneficiaries, or a foreign entity holding title in trust for anyone.
- The tax does not apply to a purchase made as trustee for a mutual fund trust (including a REIT or “SIFT” trust).
- There also are narrowly-cast exemptions re personal use by foreign nationals within the Ontario Immigrant Nominee Program or refugees – as well as rebate provisions re foreign nationals who subsequently (within four years) become Canadian citizens or permanent residents, who are full-time Ontario students for the following two years or who legally work full-time in Ontario throughout the following year.
- The legislation, when drafted, will contain anti-avoidance provisions whose scope at this point is unclear.
- Although the Teranet system is not yet set up to collect the new tax, in the meantime all transfers registered after April 20 (and all reporting of beneficial conveyances) must contain a statement acknowledging that consideration has been given to the application of the new tax, and the tax must be paid directly to the Ministry of Finance (purportedly even before the legislation is drafted or passed).
There are various uncertainties in the absence of draft legislation or administrative guidance including:
- Would sequencing partnership purchases minimize the tax – for example if a partnership with 100% Canadian partners purchases on Day 1 and on Day 2, a non-resident subscribes for a 1% partnership interest, would this limit the 15% tax to 1% of the property value?
- Are foreign REITs exempted?
- What is meant by the concept of a corporation that is controlled "in part” by a foreign national or corporation? Is this referencing the income tax concept of membership in a control group?
The proposals (which also describe expanded residential rent control measures) state that Ontario will “empower Toronto and potentially other interested municipalities to introduce a tax on vacant homes to encourage owners to sell or rent unoccupied units.”
Neal Armstrong. Summaries of Ontario Ministry of Finance webpage entitled “Non-Resident Speculation Tax” 20 April 2017 and of Ontario Press Release dated 20 April 2017 and entitled “Making Housing More Affordable” under Land Transfer Tax Act, s. 2(1).
CRA may accept a T2062 showing deemed s. 73(4.1) rollover proceeds
The s. 73(4.1) rollover applies to a gift by a German resident of her shares of a family farm corporation to her son. The shares likely are Treaty-protected on the basis that the corporation’s land is used in its farming business. However, if the son fails to give a timely notice of Treaty protection to CRA under s. 116(5.02) or the Treaty exemption is not apparent, CRA considers that s. 116 withholding technically would apply to the accrued gain on the property, so that the German resident would have to claim the rollover in her income tax return to get the tax back. However, CRA then stated:
Administratively however, in situations such as this one, the CRA may accept a T2062 which reported the proceeds of disposition in an amount equal to the adjusted cost base, and such determination would be made on a case-by-case basis.
Neal Armstrong. Summary of 17 February 2017 External T.I. 2015-0602781E5 under s. 116(4).
CRA finds that for thin cap purposes the unconsolidated balance sheet must reflect the same accounting standards applied in the consolidated financials
The Canadian thin cap rules provide that a Canadian corporation’s equity amount includes its retained earnings at the beginning of the year in question “except to the extent that those earning include retained earnings of any other corporation.” A Canadian subsidiary, which prepared its consolidated financial statements in accordance with IFRS, also prepared its unconsolidated financial statements for its tax return purposes using IFRS, but applied IFRS 9 (re fair value accounting) in those statements but not in its consolidated statements. The effect was to boost its equity amount by the increase in the fair market value of its investment in subsidiaries (with that increment estimated to equal their net income for the relevant years).
In rejecting this approach, the Directorate stated:
[C]onsistency between the consolidated financial statements and unconsolidated financial statements… is expected… [in order] to avoid the use of financial statements as a tax planning tool…. [T]he Taxpayer should not be able to adopt IFRS 9 in the unconsolidated financial statements… until the time the Taxpayer adopts the same standard in its consolidated financial statements.
Neal Armstrong. Summary of 23 November 2016 Internal T.I. 2015-0618511I7 under s. 18(5) – equity amount – (a)(i).
Income Tax Severed Letters 19 April 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.