News of Note
Italian Supreme Court finds that a holding company without a business was the beneficial owner of dividends from an Italian sub
Email this ContentThe Italian Supreme Court found that a French holding company sandwiched between a U.S. parent and an Italian subsidiary was the beneficial owner of dividends received by it from Italy notwithstanding that it had no business activity – which was inherent in its status as a holding company. What mattered was that its place of effective management was France, including that the main management and administrative decisions occurred there.
Neal Armstrong. Summary of Elio Andrea Palmitessa, "Italian Supreme Court Applies the Beneficial Ownership Clause to Pure Holding Companies," Tax Notes International, April 17, 2017, p. 259 under Treaties – Art. 10.
McKenzie – Tax Court of Canada finds that a foreign retirement arrangement includes an IRA which is a custodial arrangement
Reg. 6803 laconically states that a “foreign retirement arrangement” includes a “plan or arrangement to which subsection 408(a), (b) or (h)” of the IRC applies. In the course of rejecting a succession of spurious arguments that an amount received by a Canadian resident-U.S. citizen from her deceased mother’s IRA was not taxable to her under s. 56(1)(a)(i)(C.1), D’Auray J unpacked those provisions and found that the IRA came within this description notwithstanding that it was a custodial arrangement.
Neal Armstrong. Summary of McKenzie v. The Queen, 2017 TCC 56 under Reg. 6803.
Full-text translations of CRA technical interpretations and Roundtable items now go back two years
Full-text translations of the two French technical interpretations that were released last week and of five of the French technical interpretations released on April 22, 2015 are now available, and are listed and briefly described in the table below. Also listed is a French technical interpretation from 2013 which was translated out of order.
These (and the other translations covering the last two years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Investment Trust Companies – UK Supreme Court indicates that investment funds had valid unjust enrichment claims against suppliers who had charged VAT on exempt supplies
Using 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.