News of Note
Investment Trust Companies – UK Supreme Court indicates that investment funds had valid unjust enrichment claims against suppliers who had charged VAT on exempt supplies
Email this ContentUsing Lord Reed’s simplified facts, the invoice to an investment fund of its manager included VAT of £100 based on a UK VAT provision which was later determined to have improperly treated (contrary to the EU Directive) the manager’s services as taxable rather than exempt. The manager claimed input tax (i.e., an ITC) of £25 in the same mistaken belief that it was making taxable supplies, and remitted £75 to HMRC. Recovery of the £75 from HMRC was now statute-barred.
Lord Reed held that the fund had no common law claim of £75 against HMRC for unjust enrichment given inter alia that the manager’s supposed £75 remittance obligation to HMRC had been independent of its £100 charge to the fund in the sense that the former was triggered by the provision of its services rather than the receipt of the £100 from the fund. However, the fund had a valid £25 claim for unjust enrichment against the manager.
Analogous Canadian facts would arise where the two year deadline for the fund to request a refund from the manager under ETA s. 232 or to make a refund application to CRA under s. 261 had passed, and the manager’s return could not be reopened.
Neal Armstrong. Summary of HMR Commissioners v Investment Trust Companies (in liquidation), [2017] UKSC 29 under General Concepts – Unjust Enrichment.
CRA states that T1135s are prepared without regard to the attribution rules
CRA considers that the attribution rules should be ignored for T1135 purposes so that, for example, an individual who received a spousal gift of the cash used to purchase her share of a specified foreign property would compute whether she was over the $100,000 cost amount threshold and report her share of the income on the form without regard to the application of the attribution rules.
Neal Armstrong. Summary of 24 February 2017 External T.I. 2016-0669081E5 under s. 233.3(1) – reporting entity.
Zara – Tax Court of Canada confirms that 60/40 is “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”. Boyle J found that:
The decisions of this Court applying the near equal requirement have recognized near equality if the time residing with each parent is within the 60:40 range, and has rejected near equality at 65:35.
He then went through a detailed numerical analysis of the evidence to conclude that the father was a bit over that 40% mark, even without giving him some benefit for the children’s hours in school on days when the joint-custody agreement assigned them to their mother.
Neal Armstrong. Summary of Zara v. The Queen, 2017 TCC 45 under s. 122.6 - “shared-custody parent”.
CRA finds that a highly contingent secondary call right of a non-resident on shares of minority residents undercuts for CCPC purposes their USA right to appoint half the board
A mooted Canadian-controlled private corporation (Opco) had its voting common shares held 50-50 by a single non-resident, and by three Canadian residents. CRA accepted (following Bagtech) that a clause in the unanimous shareholder agreement that gave the three residents the right to jointly appoint two of the four directors would have avoided de jure control by the non-resident even if their collective shareholding fell below 50%.
However, CRA found that a contingent right of the non-resident to acquire the shares of a “defaulted shareholder” (e.g., on the discovery of fraud or theft) disqualified Opco as a CCPC (even though this (secondary) call right was exercisable only after failure of the other resident shareholders to exercise their first call right following the default). CRA’s reasoning was that this represented a contingent right to acquire each resident shareholder’s shares, so that the non-resident was deemed by s. 251(5)(b)(i) to be a 100% shareholder. As a deemed sole shareholder, it no longer would be subject to the board representation clause, so that it would have an unfettered right (in this remote scenario) to appoint a majority of the board.
S. 251(5)(b)(ii) refers to a right of a shareholder (here, in the context of an alternative scenario, the non-resident) “to cause” the corporation (Opco) to redeem the shares of another shareholder (i.e., the shares of a defaulted shareholder). Does this mean that s. 251(5)(b)(ii) cannot apply if the USA directly imposes an obligation on Opco to redeem the shares upon the occurrence of default with no discretion of the non-resident shareholder to choose to cause the redemption? CRA considered that s. 251(5)(b)(ii) would apply because the non-resident would have the right to require Opco to redeem the shares if Opco did not fulfill its obligation to do so automatically.
Neal Armstrong. Summaries of 24 March 2017 External T.I. 2016-0662381E5 Tr under s. 251(5)(b)(i) and s. 251(5)(b)(ii).
Quebec’s GRIP is federally based even though it has more restrictive SBD rules
Where a Canadian-controlled private corporation qualifies for the federal small business deduction but not the more restrictive Quebec SBD, the combined (corporate and individual) tax rate on distributed earnings will be 56.42% as contrasted to 56.02% for a Quebec corporation that does not “enjoy” even the federal SBD. This result arises because its earnings are not added to its general rate income pool, whose definition is integrated with the federal rather than Quebec rules, and dividends paid by it thus will also not be eligible dividends for Quebec purposes.
Neal Armstrong. Summary of Hiren Shah and Manu Kakka, "Coming to Grips with Quebec's Lack of GRIP," Tax for the Owner-Manager, Vol. 17, No. 2, April 2017, p.6 under s. 89(14).
S. 69(11) can apply to non-rollover transactions
The shareholders of X Co, which is engaged in an equipment leasing business, would like to sell their shares for $4 million, but potential purchasers are only interested in an asset purchase. The X Co shareholders instead sell their shares for $4.5 million to an arm’s length Lossco, which winds up X Co and sells the equipment to an arm’s length purchaser (Buyco) for $5 million.
Since the sale of the X Co shares is likely for an amount in excess of their fair market value, s. 69(11) should not apply to that sale. However:
If Buyco was a real estate developer and the property owned by X Co was real estate that was capital property to it but inventory to Buyco, subsection 69(11) could be an issue. The shares of X Co would be worth the full $5 million to Buyco, because Buyco could step up the cost of X Co's underlying land to the $5 million purchase price of the shares of X Co….This being the case, the shareholders of X Co, in order to effect the share sale to Lossco, will have accepted less from Lossco ($4.5 million) than they could expect Buyco to pay ($5 million).
Neal Armstrong. Summary of Perry Truster, "Loss Trading and Subsection 69(11)," Tax for the Owner-Manager, Vol. 17, No. 2, April 2017, p.4 under s. 69(11).
A year-end income allocation by a non-resident partnership to an immigrant included offshore capital gains realized pre-immigration
Where a member of a non-resident partnership becomes a Canadian resident in a year, s. 96(8) prevents the recognition for ITA purposes of losses realized by the partnership from dispositions occurring in that year but prior to the immigration. There is no symmetrical application for capital gains realized from a disposition in the year of a property (e.g., U.S. real estate) occurring prior to the immigration, so that the new resident must include his or her share of that gain in computing income for that year.
Neal Armstrong. Summary of 17 January 2017 Internal T.I. 2016-0647161I7 under s. 114.
CRA treats amounts paid by a Canadian sub, to reimburse its U.S. parent for dilution under SARs that could be settled in cash at the issuer’s option, as deductible
A Canadian subsidiary (Canco) of a U.S. parent (USco) was charged by USco for the “costs” to it in issuing stock to Canco employees under various incentive plans at a discount, and Canco took the position that s. 7(3)(b) did not prohibit the deduction by it of those “reimbursement” payments. The Directorate accepted this position respecting Stock Appreciation Rights (SARs) provided to the Canco employees given that the choice to satisfy them in cash or shares was in the discretion of the USco compensation committee. However, it considered that s. 7(3)(b) applied to a performance share plan (where the number of shares to be received by the employee was contingent on assessed performance over a three year period), as well as to a number of other plans where the USco obligation to issue shares was less contingent.
Neal Armstrong. Summary of 29 July 2016 Internal T.I. 2015-0600941I7 under s. 7(3)(b).
CRA indicates that a non-resident director who attends all Canadian board meetings by phone or internet is not subject to source withholding
CRA considers that attendance of a non-resident individual outside Canada at Canadian board meetings through the internet or telephone does not constitute the performance of services in Canada, so that under Reg. 104(2), no withholding would be required. However, Reg. 200(1) nonetheless would require reporting of the remuneration on T4 slips (unless, per RC4120, the remuneration paid in the year was under $500.)
Neal Armstrong. Summary of 9 March 2017 External T.I. 2016-0677351E5 under Reg. 104(2) and Reg. 200(1).
Income Tax Severed Letters 12 April 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.