News of Note
Milestone Apartments REIT sale of its U.S. portfolio is not subject to FIRPTA withholding and achieves flow-through capital gains treatment for Canadian purposes
Email this ContentMilestone Apartments REIT (a TSX-listed Ontario unit trust) will sell its assets (essentially only the shares of a U.S. LLC indirectly holding its U.S. apartment portfolio) to a Starwood-affiliated purchasing LP. The sale will not be subject to FIRPTA withholding given that Milestone is a U.S. corporation (and U.S. REIT) for Code purposes. In the case of Milestone’s unitholders, their pro rata portion of the capital gain will be distributed to them and their units will be redeemed with the balance of their share of the net proceeds (i.e., US$16.15 per unit, minus the portion distributed as a capital gain).
U.S. investors hold Class B exchangeable units of a subsidiary Delaware LP (MMI LP) of the LLC being sold. MMI LP will be merged into a subsidiary LP of the purchasing LP with MMI LP as the surviving entity and with each exchangeable unit being converted into the right to receive US$16.15 in cash.
Non-U.S. holders owning less than 10% of the Milestone units (actually or constructively) will not be subject to U.S. FIRPTA withholding on the transaction.
The Circular includes interesting commentary on the low cap rates now applicable in the U.S. market (in part, due to private purchasers using 80% leverage.)
Neal Armstrong. Summary of Milestone Apartments REIT Circular under Spin-offs & Distributions – REIT sales proceeds distribution.
Life Choice – Tax Court of Canada finds that there can be no SR&ED without testing
A naturopathic products company (Life Choice) reviewed the literature and consulted other researchers in order to devise three new naturopathic formulations. In finding that this did not qualify as SR&ED, Boyle J stated that “it is the absolute absence of testing of the natural health products by Life Choice after their formulations were hypothesized by Dr. Dahl that is fatal to this appeal.”
Neal Armstrong Summary of Life Choice Ltd. v. The Queen, 2017 TCC 21 under s. 248(1) – scientific research & experimental development.
There is an expressed concern that standard documentation for secured guarantees provided by a CCPC for shareholder bank borrowings can trigger the B2B loan rules
It has been suggested that a secured guarantee by a private corporation of a bank loan to its individual shareholder may cause an income inclusion to the individual under the s. 15(2.17) back-to-back loan rules. In order for the bank not to have a specified right, "the key consideration is that the secured property can be used only to repay the shareholder debt." However:
[M]ost guarantees and related security agreements contain broad language that covers not just the present debt but also any future indebtedness of the individual shareholder. Because of this breadth of coverage, a specified right arises, and with it the tax problem.
In addition:
In certain circumstances, a single security document (given by the corporation to the third party [e.g., bank]) can cover both (1) the individual shareholder's loan from the third party and (2) an existing operating loan given by the third party to the corporation. Because the single security document covers more than just the individual shareholder's loan, a specified right arises.
This is a broader interpretation of "specified right" than has been suggested elsewhere (see Lorito).
Neal Armstrong. Summary of Amanda S.A. Doucette and Britney Wangler, “Normal Borrowing by CCPC Owners Can Create an Income Inclusion,” Canadian Tax Focus, Vol. 7, No. 1, February 2017, p. 1 under s. 15(2.17).
CRA comments on the deductibility of rent paid by a corporation for use of its shareholder’s home
Respecting the situation where a corporation deducts rent or reimbursement amounts paid for use of space in its shareholder’s home, CRA stated:
Generally, we would evaluate reasonableness in relation to the actual costs incurred by the shareholder. We would also expect, at a minimum, that the space is needed to file records, book appointments, take business phone calls and perform other administrative functions, as the case may be, and that there is no other space available to the corporation. …
[N]o mortgage interest or…CCA…should be claimed.
CRA also stated that the rents “would not generally be reported as rental income included on a T776.”
Neal Armstrong. Summaries of May 2016 Alberta CPA Roundtable, Q.15 under s. 15(1) and s. 67.
CRA indicates that s. 13(7)(e) applied to a s. 107(2.1) distribution but not a s. 104(5) deemed disposition
CRA agreed that the ½ step-up rule in s. 13(7)(e) does not apply to a deemed disposition under s. 104(5) given that the trust is not related to itself and does not otherwise not deal at arm’s length with itself.
The correspondent also suggested that s. 13(7)(e) does not apply on a s. 107(2.1) distribution of property: although s. 107(2.1)(a) and (b) respectively deem the trust to have disposed of the property and the beneficiary to have acquired it, s. 107(2.1) does not deem the beneficiary to have acquired the property from the trust. CRA considered this argument to be precious given that the preamble to s. 107(2.1) stipulates as a precondition to its application that there be a disposition of property by the trust to the beneficiary.
Finally, CRA indicated that the assumption by the beneficiary of debt of a personal trust owing to a bank would not preclude s. 107(2) applying to the distribution provided that such assumption did not result in the trust ceasing to be a personal trust (having regard to the question, not discussed by CRA, of whether such assumption constituted consideration for the acquisition of a beneficial interest in the trust).
Neal Armstrong. Summaries of 19 January 2017 External T.I. 2015-0576751E5 Tr under s. 13(7)(e) and s. 107(2).
CRA describes what a s. 115(5) remittance letter should disclose
There is no prescribed form for the purchaser’s making of a s. 116(5) or (5.3) remittance where the non-resident vendor has failed to file a T2062. The remittance letter should state:
- the purchaser’s full name and address
- the non-resident vendor’s name
- the non-resident vendor’s address (if available)
- a description of the property (as much detail as possible)
- the date of the acquisition
- a copy of the purchase agreement and/or other documents, such as the Statement of Adjustments, to support the purchase price.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Q.14 under s. 116(5).
Income Tax Severed Letters 8 February 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Barrick Gold – Tax Court of Canada finds that gains from closing out gold hedges on the sale of a mine were included in mining production profits
The definition of “gross resource profits” included income from “the production and processing in Canada of…ore.” Barrick Gold had entered into forward contracts to lock in the price of anticipated gold production at its Doyon Mine but then, shortly before completing a sale of the Mine to Cambior, closed out its forwards at a gain. Paris J found that the forwards had a sufficient connection with Barrick’s Doyon mining operation, given that they were entered into in the course of that business to hedge against price fluctuations respecting the production, for the hedging gains to be income from that production.
Although the resource allowance that was at stake in this case has since disappeared, this case is consistent with the proposition that the character of a gain from settling a contract usually is determined based on the relevant intention and circumstances surrounding the entering into of the contract rather than those prevailing at the time of realization of the gain. (Among other bold arguments, the Crown had submitted that “the Forward Contracts ceased to be hedges prior to their closeout because as of [the date of the letter of intent for the sale to Cambior] the Appellant no longer anticipated any future gold production from the Doyon Mine.”)
Neal Armstrong. Summaries of Barrick Gold Corp. v. The Queen, 2017 TCC 18 under Reg. 1204(1)(b)(ii) and General Concepts – Accounting Principles.
CRA states that it applies the same (exceptional circumstances) policy to relief of penalties for culpable conduct as for gross negligence
Guindon noted that the Minister’s factum suggested that the taxpayer relief provisions of s. 220(3.1) could be available to an individual assessed with a civil penalty. Before indicating that the position in IC07-1, paras. 37-38 respecting relief from gross negligence penalties being available only in exceptional circumstances would also apply to culpable conduct penalties (which were at issue in Guindon), CRA stated:
CRA policies and procedures have not changed in light of the Guindon SCC decision. The taxpayer relief provisions of subsection 220(3.1) could be available to an individual assessed a civil penalty…including a third-party penalty.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Q.13 under s. 220(3.1).
CRA confirms that taxpayers paying U.S. taxes through a Canadian trust or partnership are relieved from documenting support for their FTC claim (if T3 or T5013 issued)
At the 2016 STEP Roundtable, Q.9 (and later, at the 2016 annual CTF Conference, Q.12), CRA indicated that it had ceased exempting claims for U.S. foreign tax credits from the approach, which it already had been applying to FTC claims for other jurisdictions, of requiring a copy of the foreign tax return as well as a copy of the foreign notice of assessment (or other equivalent document) from the foreign tax authority – but that, in response to feedback on this change, it had begun to accept proof of payment to (or refund from) the foreign tax authority, rather than insisting on something like a notice of assessment.
As it turns out, CRA was also asked about this a month earlier at the May 2016 Alberta CPA Roundtable and, in addition to the other points, also stated that “Canadian information slips [e.g., T3s or T5013s] continue to be acceptable supporting documents for the FTC.”
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Q.10 under s. 126(1).