News of Note
CRA accommodates a pension plan correcting excess borrowing on a going-forward basis through assumption of the debt by a 149(1)(o.2)(ii) sub
Email this ContentThe Directorate considered that a pension plan breached Reg. 8502(i) as the amount of borrowing in respect of certain real estate properties of the Plan exceeded their cost. The Directorate thus considered that this excess borrowing limitation applies on a property-by-property basis. (It did not discuss IA s. 33(3): “singular include[s] the plural.”)
The Plan’s advisor proposed that the Plan transfer all real properties for which there were borrowing issues to a newly-formed s. 149(1)(o.2)(ii) subsidiary, which would assume the related debts, with the Plan being released but providing some guarantees. The Directorate stated that this “appears to be a reasonable solution to resolve past non-compliance.” (This appears to accept that a 149(1)(o.2)(ii) corp. can incur purchase price indebtedness on an internal transfer in excess of historic cost and that Reg. 8502(i) does not prohibit guarantees.)
The Directorate went on to state:
If the Plan is a defined benefit plan, there is perhaps less of a concern about leveraged investing as the income tax rules provide for a self-adjusting mechanism. A higher rate of return than appropriate results in lower employer contributions. However, if the Plan is a money purchase plan, the concern about leveraged investing takes on greater importance as the borrowing would have served in effect to circumvent the RPP contribution limits. In this case, consideration should be given to requiring any excess investment earnings to be withdrawn from the Plan.
Neal Armstrong. Summaries of 10 May 2016 Internal T.I. 2016-0644761I7 under Reg. 8502(i) and s. 149(1)(o.2)(ii).
The subscription by Alignvest (a Cdn SPAC) for a majority interest in Trilogy (a holding LLC for New Zealand and Bolivian Opcos) will result in Alignvest being a dual resident
Alignvest, which is a Canadian TSX-listed special purpose acquisition corporation, is coming up to its 24-month deadline for applying its 2015 IPO proceeds (mostly still held in escrow) to a qualifying acquisition. Although the prospectus for its IPO said that it would target Canadian investments, it is now proposing to subscribe for what will be a 56% interest in a Washington State LLC (Trilogy) assuming that none of the shareholders of Alignvest exercise their redemption right to receive back their IPO subscription price. Essentially the only assets of Trilogy are two subsidiaries in New Zealand and Bolivia running wireless networks.
Given that the existing Trilogy shareholders will continue to hold their units in Trilogy, which will now be exchangeable into common shares of Alignvest (to be renamed Trilogy International Partners Inc. on completion of the reorganization under an Ontario Plan of Arrangement), Alignvest will be treated under the inversion rules in Code s. 7874(b) as converting to a U.S. domestic corporation immediately before the Arrangement under an “F” reorg. The results include that Alignvest will be a dual tax resident subject to U.S. tax on its worldwide taxable income (with issues as to whether the IRS would grant foreign tax credits for the Canadian tax on the same income), and that Canadian shareholders will be subject to U.S. withholding tax on their dividends (for which no Canadian foreign tax credit may be available) – and that, conversely, U.S. shareholders will be subject to Canadian withholding tax on their dividends (for which no U.S. foreign tax credit may be available).
Neal Armstrong. Summary of Alignvest Acquisition Corporation Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Outbound - Subscription.
CRA indicates that post-2015 principal residence dispositions must be reported on a revised Schedule 3
CRA has revised its Folio on the principal residence exemption to state:
Beginning with the 2016 tax year, taxpayers who sell their principal residence are required to report certain basic information with their tax return. Where the property is designated as a principal residence for all the years it was owned, the designation form for individuals (other than trusts) for the 2016 tax year is Schedule 3 of the T1 income tax and benefit return (which is revised for this purpose). The information required includes the address of the property, the date it was acquired and the amount of the proceeds of disposition. This reporting is necessary in order to claim the full principal residence exemption.
Neal Armstrong. Summaries of S1-F3-C2 under s. 54 – principal residence, Reg. 2301, s. 40(2)(b), s. 45(1)(c), s. 13(7)(b), s. 13(7)(e), s. 40(7) and s. 40(4).
Kirkland Lake was merged on a triangular amalgamation with a Newco subsidiary of Newmarket Gold
Kirkland Lake amalgamated with a wholly-owned subsidiary of Newmarket Gold on a triangular amalgamation occurring as part of a CBCA Plan of Arrangement, so that the shares of the Kirkland shareholders were cancelled in consideration for the receipt by them of shares of Newmarket (to be renamed Kirkland Lake Gold Ltd.) Existing Kirkland and Newmarket shareholders held approximately 57% and 43%, respectively of the post-Arrangement Newmarket – i.e., it had elements of a reverse takeover. The stock options of the Kirkland option holders were exchanged on a s. 7(1.4) non-disposition basis for replacement options on Newmarket shares.
Triangular amalgamations need not be effected under a Plan of Arrangement. They may become more common following the InterOil decision, which implied a rigorous standard in order for a fairness opinion to be accepted for purposes of court approval of a Plan of Arrangement.
Neal Armstrong. Summary of Kirkland Lake and Newmarket Gold Circular under Mergers & Acquisitions – Amalgamations – Triangular Amalgamations.
CRA clarifies how the equity-contribution component of the equity amount of a trust in determined for thin cap purposes
The branch of the calculation of the “equity amount” of a trust for thin cap purposes that relates to equity contributions is ambiguously worded. CRA provided a clarifying example indicating how the average equity contribution is determined:
Using the example of a calendar 2015 taxation year, this means calculating the total contributions for each of the twelve months of 2015 (i.e., the twelve calendar months that end in the year). For each of those months, the total contributions from a specified non-resident beneficiary from the creation of the trust until the end of the calendar month immediately prior to the calendar month in question would be used. Therefore, for January 2015, the total contributions would be calculated from the creation of the trust until the end of December 2014. For February 2015, it would be the contributions from the creation of the trust until the end of January 2015, and so on. The average of the twelve totals would then be calculated.
Neal Armstrong. Summary of 19 August 2016 External T.I. 2015-0585471E5 under s. 18(5) – equity amount – (b).
CRA applies its position on fractional share exchanges under 85.1(1) domestic exchanges to 85.1(5) exchanges
Except for it entailing an exchange of shares of a non-resident corp for (treasury) shares of another non-resident corp, the rollover in s. 85.1(5) is similar to that in s. 85.1(1).
The similarities extend to the CRA treatment of cash consideration. S4-F5-C1 states in the s. 85.1(1) context that cash can also be received – so that the rollover applies only to the exchange of a fraction of each share of the vendor for treasury shares (with the remainder fractions of shares being exchanged for cash on a non-rollover basis) – provided that this is clearly specified in the terms governing the exchange.
This position also extends to s. 85.1(5). However, the foreign merger parties often will be insensitive to Canadian tax considerations, so that the allocation requirement in the Folio will not be satisfied – as appeared to be the case in the example considered by CRA.
Neal Armstrong. Summary of 23 August 2016 External T.I. 2015-0614981E5 under s. 85.1(5).
Investimentos Imobiliários e Turísticos – ECJ finds that mere technical non-compliance with VAT requirements for complete invoices should not prevent input tax claims
A law firm’s invoice paid by a Portuguese registrant, which simply referred to “Fees for legal services rendered until the present date,” did not satisfy the EU Directive respecting the requisite detail to be provided on an invoice. However, the Portuguese registrant then provided the Portuguese authority with other documents (not in invoice form, as technically required) containing the missing particulars. The European Court of Justice found that an input tax deduction should not be denied, stating:
[T]he fundamental principle of the neutrality of VAT requires deduction of input VAT to be allowed if the substantive requirements are satisfied… . It follows that the tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions required by…[the] Directive…if they have available all the information to ascertain whether the substantive conditions for that right are satisfied.
This interpretive approach would be helpful to a Canadian registrant who is claiming an input tax credit where it has good documentary support that nonetheless does not technically comply with the Input Tax Credit Information (GST/HST) Regulations.
Neal Armstrong. Summary of Barlis 06 - Investimentos Imobiliários e Turísticos SA v. Autoridade Tributária e Aduaneira, ECLI:EU:C:2016:690 (Case C-516/14) (European Court of Justice (Fourth Chamber)) under ETA s. 169(4).
Income Tax Severed Letters 4 January 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Our translations of severed letters now go back a year
The table below links to full-text translations of the technical interpretations released last week as well as on January 6, 2016 and December 30, 2015. We thus have now gone back a full year in providing full-text translations of French-language technical interpretations and Roundtable items.
The translations are paywalled in the usual (3 work-weeks per month) manner. You currently are in the “open” week for this month.
CRA accepted that a U.S. resident with only a Canadian services PE was subject only to federal income tax on his income
CRA recently agreed with the position of a U.S.-resident individual who had a services permanent establishment in Canada under the Canada-U.S. Treaty but did not otherwise have a Canadian permanent establishment, that he did not earn income in any province. Accordingly, rather than being subject to provincial tax on his servicing income, he was subject to additional federal tax thereon of only 48% of federal tax.
The same analysis would apply (at least for the common law provinces) to a U.S. corporation which had only a Canadian services PE, so that it would enjoy an additional federal rate of 10% (in effect imposed under s. 124(1)) rather than facing provincial rates running from 12% to 16%.
Neal Armstrong. Summary of Kevyn Nightingale and Amir Pourzakikhani, "A Federal Permanent Establishment, But Not a Provincial One," Tax Topics, Wolters Kluwer, November 3, 2016, No. 2330, p. 1 under s. 120(1).