News of Note
CRA, changing position, now generally requires LLCs to compute their income under ITA rather than Code rules
Email this ContentCRA has changed its view, and now considers that where a foreign affiliate is a disregarded U.S. LLC with a single-member regarded U.S. corp, its earnings should be computed under Canadian income tax law under Reg. 5907(1) – earnings - s. (a)(iii), rather than under the Code under s. (a)(i), effective for taxation years ending after August 19, 2011. The reason for this change of view is the enactment of Reg. 5907(2.03) requiring an affiliate computing its “earnings” in accordance with Canadian tax law to claim maximum discretionary deductions, so that a concern about abuse has fallen away.
However, if the LLC has two or more members and is required for Code purposes to compute its income from a business to determine the partners’ distributive shares, it must compute its “earnings” under Reg. 5907(1) – earnings - s. (a)(i).
Neal Armstrong. Summary of 20 November 2016 CTF Annual Roundtable, Q.11 under Reg. 5907(1) – earnings - s. (a)(iii).
Beaulieu – Cour du Québec finds that QST on an importation from Ontario did not apply if the imported good previously had been subject to QST
S. 17 of the QSTA, which is the Quebec equivalent of ETA s. 220.05, provides that “very person who brings into Québec corporeal property for consumption or use in Québec by the person” is subject to QST on the value of the property.
Laurin J noted that there would be no QST if the Quebec taxpayer before him had bought a used boat directly from another Quebec consumer (as this would not have qualified as a “taxable supply,”) and thought that it was unfair that the taxpayer should instead be subject to QST on importing a used boat into Quebec even though the Ontario vendor was a consumer who had, in turn, paid QST when he had purchased the boat new in Quebec. Laurin J concluded that the legislature did not intend to create such unfairness, and that s. 17 should be read to mean "taxable supply" for the particular situation in which the property was originally purchased in Quebec.
Neal Armstrong. Summary of Beaulieu c. Agence du revenu du Québec, 2016 QCCQ 12015 under ETA s. 220.05(1).
Loupy’s – Tax Court of Canada confirms that a backdated GST registration has retroactive effect – and that winding-down operations qualified a de-registrant as a “registrant”
When the operator of a restaurant ceased operations due to a termination of its lease, it applied for and was granted a revocation of its GST and QST registrations. The ARQ then assessed it under s. ETA s. 171(3) (and presumably the Quebec equivalent) which (in conjunction with the change-of-use rules) effectively imposes GST on the fair market value of the taxpayer's capital property (here, all the restaurant equipment) where the taxpayer has ceased to be a registrant.
Favreau J found that, notwithstanding the revocation of its revocation, the taxpayer was still a “registrant” – whose definition includes a “person who is required to be registered” - given that it still held equipment which it was seeking to sell (some of which it sold eight months’ later). Thus, it was not subject to the deemed supply under s. 171(3)(b).
More than two years after its revocation of the taxpayer’s registration, the ARQ had restored the taxpayer’s registration with the same effective date as the original registration. Favreau J accepted that this restoration of the registration number was retroactive, so that even if (contrary to be above finding) the taxpayer had ceased to be a registrant, “the registration number was…valid throughout the period at issue.”
Neal Armstrong. Summaries of Restaurant Loupy's Inc. v. The Queen, 2016 CCI 260 under ETA s. 171(3)(b) and s. 240(1).
Fairmont/Jean Coutu – Supreme Court of Canada appears to find that rectification to fix tax problems is limited to fixing badly implemented tax plans rather than fixing bad plans
In reversing Juliar, Brown J indicated in Fairmont that rectification only “allows a court to achieve correspondence between the parties’ agreement and the substance of a legal instrument intended to record that agreement, when there is a discrepancy between the two,” whereas in Juliar, the substance of the agreement was for the exchange of shares for a promissory note rather than shares, so that the purported rectification there was of the agreement itself rather than in the instrument recording the parties’ agreement. (Rectification also was not available on the particular facts before him, involving failure to recognize that a transaction gave rise to a net FX gain for tax purposes.) However, Brown J ignored the dissenting observation of Abella J that “both AES and Riopel involved errors of implementation: the error in AES was a faulty calculation and the error in Riopel was that a complex transaction was conducted in the wrong sequence,” and instead only referred to these cases for the uncontroverted proposition that rectification cannot be used to effect retroactive tax planning.
In the companion Jean Coutu case, Wagner J indicated that a Quebec contract can be rectified to correspond to its objects if they are determined or determinable with sufficient precision He described the AES and Riopel cases somewhat similarly to the above description by Abella J, and noted (likely apropos Riopel) that “modifications to written documents expressing parties’ agreement can include the insertion of transactions” (where consistent with “the contracting parties’ common intention.”) He also stated that there is a “fundamental difference” between a contract (such as in AES) where a party’s contractual obligation “necessary for obtaining the intended tax result - is to issue and deliver a note in an objectively calculable amount equal to the ACB of transferred shares, and a contract [such as that before him] under which there is no [contractual] obligation addressing FAPI.” Accordingly, rectifying to address the overlooked FAPI issue in the Jean Coutu transactions would not accord with the common intention at the time.
Given that both Brown J and Wagner J considered the common law and civil law approaches to rectification as being largely aligned, it would appear that rectification, to substitute share for note consideration, likely would be available on facts similar to Juliar if the common intention at the time were to take back the maximum amount of note consideration, and shares for the balance, and the transaction was not implemented this way only due to a calculation or implementation error. More generally, the correct post-Fairmont/Jean Coutu view may be that a botched execution of a tax plan may be rectified, but not a defective plan.
Neal Armstrong. Summaries of Canada (A. G.) v. Fairmont Hotels Inc., 2016 SCC 56 under General Concepts – Rectification and Statutory Interpretation – Interpretation Act, s. 8.1; summaries of Jean Coutu Group (PJC) Inc. v. Canada (A.G.), 2016 SCC 55 under General Concepts – Rectification and Statutory Interpretation – Interpretation Act, s. 8.1.
CRA confirms that an emigrating trust can elect to defer payment of the exit tax
Ss. 220(4.5)-(4.54) permit an “individual” to elect, on giving security acceptable to CRA, to defer payment of the emigration tax under s. 128.1(1)(b). Consistently with the ss. 104(2) and 248(1) extension of this quoted concept to trusts, CRA confirmed that these provisions apply to a trust which has ceased to be resident in Canada (as to which it referenced the Fundy Settlement test of central management and control), and did not intimate that any different security requirements would apply than for a “regular” emigrating individual.
Neal Armstrong. Summaries of 18 October 2016 External T.I. 2015-0608051E5 Tr under s. 220(4.5) and s. 2(1).
Durocher – Federal Court of Appeal suggests obiter that it is proper for the Tax Court to pass on the alleged nullity of a contract in the context of passing on the correctness of an assessment
A financial institution, which was controlled by a non-resident, acquired an option to subscribe at a future date for the majority of the equity of a holding company for an Opco which, if actually exercised by it, would have violated a prohibition in the Act respecting financial services (Quebec) against it acquiring greater than a 20% stake in the company. Noël CJ affirmed the finding of Rip J below that a mere option did not violate such Act. The effect of finding the option to be valid is that the Opco did not qualify as a Canadian-controlled private corporation, so that capital gains deductions claimed at a higher level in the structure were properly denied.
Before so concluding, he stated obiter, respecting a Crown argument that it would have been beyond the competence of the Tax Court to (instead) declare that the options were invalid under Quebec law:
[T]he role of the TCC, when confronted with an argument based on nullity in the context of an appeal under the ITA, cannot be assimilated to that of a Superior Court which has the power to “declare” a contract to be a nullity for all purposes pursuant to section 33, 35 and 142 of the Code of Civil Procedure… (see in comparison Markou v. The Queen, 2016 TCC 137, paras. 7-21 where the TCC was confronted with a similar problem in the context of litigation arising in a common law province… .)
Neal Armstrong. Summaries of Durocher v. The Queen, 2016 CAF 299 under s. 251(5)(b) and Statutory Interpretation - Interpretation Act, s. 8.1.
InterOil – B.C. Court of Appeal invalidates a Plan of Arrangement which had received strong shareholder support
The Yukon Court of Appeal (composed of members of the B.C. Court of Appeal) found that the Plan of Arrangement for the Exxon acquisition of InterOil should not be approved given that Exxon and InterOil did not in its view counter the testimony of Peter Dey that the process undertaken by the InterOil board did not meet current governance best practices and of a oil and gas expert that the consideration was inadequate. The judge below had placed too much significance on the approval of the combination by over 80% of the InterOil shareholders.
The relevance of this to a tax practitioner is that, in some circumstances, the securities lawyers on the team may be more reluctant to undertake a business combination by way of plan of arrangement.
Neal Armstrong. Summary of InterOil Corp. v. Mulacek, 2016 YKCA 14 under OBCA, s. 182(5)(f).
Upstream surplus reserve rules do not adequately address blocking deficits
In the most recent comment (in 2007) of CRA on partnerships governed by the Delaware Revised Uniform Partnership Act, it indicated that it still considers their proper characterization to be an open question, so that effectively taxpayers have since been faced with a "don’t ask, don’t tell" situation.
As for Florida and Delaware LLPs and LLLPs, an examination of the governing law of, for example, a Florida LLLP indicates that it “is formed, exists, and is dissolved by a virtue of the contractual arrangements between two or more persons instead of being a legal person formed and dissolved only by state action,” so that CRA does not appear to have been compelled to conclude that it is a corporation.
The s. 90(9) reserve permitting a Canco to utilize available surplus to shelter an upstream loan to it does not adequately address blocking deficits. For example, if FA Opco with exempt surplus of $300 and held by FA Holdco with an exempt deficit of $100, makes two successive loans of $100 to Canco (Holdco’s parent), no reserve would be available to Canco because, each time, the $100 deemed exempt surplus dividend received by Holdco would merely eliminate its exempt deficit – notwithstanding that the consolidated surplus equals the loan amounts.
Neal Armstrong. Summaries of Michael N. Kandev and Sandra Slaats, "Recent Developments in the Foreign Affiliate Area," 2015 Annual CTF Conference paper under s. 248(1) - corporation, s. 96, and s. 90(9).
Koskocan – Tax Court of Canada finds that an individual signing most of a company’s cheques was not a de facto director (for director liability purposes)
A taxpayer sold all his shares of a company to his son, resigned as director, but continued to sign most of the cheques due to bank requirements. In rejecting the position of the ARQ that the taxpayer was a de facto director, so that he was liable for unremitted corporate GST under ETA s. 323, Archambault J noted that signing cheques was an officer rather than director core function - so that it could not be said that the taxpayer was usurping the function of the two (legal) directors - and that ETA s. 323 reflected an apparent legislative choice to limit its application to directors.
Neal Armstrong. Summary of Koskocan v. The Queen, 2016 CCI 277 under ETA s. 323(1).
[Revised] Further translations of French severed letters are available
The table below links to full-text translations of 9 of the APFF Roundtable questions and answers that were released last Wednesday as well as of the French internal technical interpretation which was released the previous week. They are paywalled in the usual (3 work-weeks per month) manner. The current week is “open.”