News of Note
CRA indicates that the status of Delaware, NY and Florida LLCs as corporations is not affected by the Quebec residence of a member
Email this ContentA taxpayer’s representative submitted that Delaware, New York and Florida LLCs of which the taxpayer was a member should be treated as partnerships because the taxpayer was a Quebec resident and the attributes of an LLC were similar to those of a partnership under the Civil Code. CRA indicated that it was not convinced that an analysis of the Civil Code provisions pointed to this conclusion, but went on to state:
[I]f it were determined that such a comparative analysis supported the conclusion that a US LLC must be considered as a partnership for the purpose of application of the Act, we suggest that it would not be appropriate to adopt a classification approach to entities and foreign arrangements which could result in a different classification according to the province or territory of the residence (or permanent establishment) of the taxpayer holding an interest in the entity or the arrangement. …
[I]t appears to us, based in particular on the conflict of law rules, that the provincial and territorial laws of property and civil rights in Canada provide for mutual recognition of different types of entities or arrangements established under the respective jurisdictions of the various provinces and territories, thus providing an expanded base for analysis that is uniform across Canada for the purposes of applying the two-step approach.
Although the second sentence may be deliberately woolly so as to avoid outraging the Quebecer fans of bijuralism, it may be effectively saying that, just as Quebec recognizes, as a partnership, an entity of another province (say, Ontario) that satisfies the common law tests for partnerships, it should also recognize, as a corporation, a foreign entity which, in applying the two-step approach to entity classification, would be recognized as a corporation in Ontario.
Neal Armstrong. Summaries of 1 December 2015 Internal T.I. 2015-0588381I7Tr under s. 248(1) - corporation and Interpretation Act, s. 8.1.
CRA considers that a parking space can form part of a condo unit for principal residence exemption purposes
CRA accepts that when a parking space was acquired as part of the purchase of a residential condo unit, the parking space can thereafter form part of the condo unit (viewed as a “housing unit” for principal residence exemption purposes) provided that the parking space facilitates the use of the housing unit (which presumably would always be the case if it is actually used by the condo owner) and it is part of the common or private area for the same building – and this is so even if the parking space as a matter of real property law is separate from the condo unit.
Since the parking space is viewed as part of the single principal residence, CRA apparently considers that using the principal residence designation for the disposition of the parking space does not preclude the use of the principal residence exemption for the same years in question where there has been a subsequent sale of the condo unit.
Neal Armstrong. Summary of 10 June 2016 External T.I. 2015-0590371E5 Tr under s. 54 – principal residence – s. (e).
CRA considers a Quebec regional county municipality to be a municipality
S. 149(1)(d.5) exempts a corporation, commission or association, not less than 90% of the capital of which was held by one or more entities each of which is a municipality in Canada, or a municipal or public body performing a function of government in Canada. The Quebec system of regional county municipalities was introduced beginning in 1979 to replace the historic counties of Quebec.
CRA considers that an RCM is a “municipality” for purposes of s. 149(1)(d.5).
Neal Armstrong. Summaries of 5 January 2016 External T.I. 2015-0568911E5 Tr under s. 149(1)(d.5) and s. 256(5.1).
Anderson – Saskatchewan Court of Appeal finds that transaction documents could not be declared retroactive to the previously-agreed effective date, as this would undercut the Tax Court
When CRA gave notice in 2013 of a proposed audit, the taxpayer’s accounting firm realized that it had failed to instruct the taxpayer’s lawyers to prepare the documents to implement a s. 85 transfer of assets to the taxpayer’s corporation, which the taxpayer had agreed to in a June 6, 2011 meeting with them. On this discovery, the requisite documents were promptly prepared and executed. In confirming a decision of the judge below to refuse to declare that the 2013 documents had retroactive effect to June 6, 2011, Lane JA stated (paras. 29, 34):
The Chambers judge...saw the application for a declaration for what it was – an attempt to obtain equitable relief not available from the Tax Court, which is a superior court of record but not a court of inherent jurisdiction, and to thereby attempt to determine the outcome of an assessment appeal by essentially binding the hands of that Court. …
[He] recognized the specialized nature of the Tax Court and its jurisdiction to decide the ultimate issue concerning the tax implications of the rollover. He correctly declined to effectively pronounce on that issue.
Neal Armstrong. Summary of Anderson v Benson Trithardt Noren LLP, 2016 SKCA 120 under General Concepts – Rectification.
ICM unit offering provides investors choice of flow-through or non-flow through US tax treatment
ICM, which is a newly-formed Alberta unit trust, is making successive offerings of various classes of units (at escalating prices) until the earlier of raising $100 million and the end of 2017. It will invest both directly in a US LP that will be a U.S. private REIT and also indirectly, through a Canadian subsidiary LP of the trust (the "Partnership"). The trust is intended to be a partnership for Code purposes. Most of the underlying real estate properties will be U.S. commercial and residential rental properties held through interests in lower-tier LPs of the U.S. private REIT, but some Canadian rental properties will be held through an interest of the Partnership in a Canadian LP.
The disclosure states cryptically that for three of the classes of trust units, the holders “will receive returns that are net of U.S. corporate taxes,” while holders of the other three classes “will be subject to U.S. tax.” The U.S. tax disclosure deals in generalities rather than explaining this, but presumably it is contemplated that investors can choose to achieve flow-through treatment for Code purposes given that the Trust is a partnership for Code purposes, but perhaps at the cost of having to file U.S. returns - and perhaps those classes of units which instead are designated to indirectly bear corporate tax will track the US private REIT investment held through the Partnership (which could check the box).
The Trust units will not be listed, but it nonetheless is assumed that it will qualify as a mutual fund trust for ITA purposes. The units are redeemable every quarter end (provided 60 days’ advance notice is given, and with a 30-day delay before receiving the redemption proceeds) at 90% of NAV for the first year, 95% thereof in the 2nd and 3rd year, and 100% thereafter – but with redemptions in any quarter being capped at 10% of the units and with redemption proceeds payable in the discretion of the Trustee in redemption notes (or other assets). The same corporation is the Trust trustee and the GP of the subsidiary Canadian LP.
Neal Armstrong. Summary of ICM Offering Memorandum under Offerings – REIT and LP offerings – Cross-Border Unlisted Trust.
Income Tax Severed Letters 14 September 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Gervais – Tax Court of Canada finds that a basis averaging scheme to transfer half of a capital gain to the taxpayer’s wife was an abusive circumvention of the attribution rules
The taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.
In affirming CRA’s GAAR assessment to add “her” $0.5M capital gain in Mr. Gervais’ return, Jorré J found that this scheme “thwarts the purpose of subsection 74.2(1) and the scheme of the Act by avoiding the attribution of part of the taxable capital gain to Mr. Gervais which would normally have occurred at the time Mrs. Gendron sold the shares,” and also stated:
In the context of the attribution rules, the purpose of the [s. 73] election is to permit a taxpayer to defer or not the realization of a gain, and not to permit a taxpayer to avoid attribution. Here, the election was made in order to circumvent attribution. This is an abuse.
Neal Armstrong Summaries of Gervais v. The Queen, 2016 CCI 180 under s. 245(4), s. 245(3) and s. 245(1) – tax benefit.
Acornwood – UK Upper Tribunal softens a judicial rule that the income-producing purpose test should not track the actual use of the expenditure by the expenditure’s recipient
A UK tax shelter entailed the investors using borrowed money of 80 and their own funds of 20 to fund an LLP, which used 95 of this sum to purchase rights to a future stream of payments from a company (“Shamrock”) whose business it was to exploit IP. Shamrock used the 95 to purchase rights from an artistic production company. However, that company spent only 10 on the production. The balance of 85 went back to Shamrock as the consideration for a share of revenues from the production, with Shamrock using 80 of that sum to purchase a deposit which was used, as to the interest thereon, to fund the required stream of income payment to the LLP (which matched the investors’ interest expense) and, as to the deposit’s principal, to ultimately make a final payment to be applied to fund the repayment of their principal owing.
Nugee J affirmed that the expenditure of the 80 by the LLP was not an expense incurred wholly and exclusively for the purposes of the LLP’s trade, given that only 10 was needed to secure the production, so that that the 80 funded through the LLP members' borrowings “was not in any sense used by Shamrock in fact for exploitation.” He stated:
That last point of course does indeed look at what the recipient does with the money, but in circumstances where this is to the knowledge of, and indeed intended and required by, the payer. …There is no commercial difference between the members paying 15 for Shamrock’s services without having borrowed 80 and without any rights to guaranteed repayment of the 80, and the members paying 95, of which they have borrowed 80 and are guaranteed to be repaid 80.
Neal Armstrong. Summary of Acornwood LLP & Ors v. Revenue and Customs Commissioners, [2016] BTC 517, [2016] UKUT 0361 (Tax and Chancery Chamber) under s. 18(1)(a) - income-producing purpose.
CRA indicates that fees paid by a land developer to a regional municipality to obtain approvals preliminary to receiving GST/HST-exempt permits from the local municipality are not also exempt
Sch V, Pt VI, s. 20(c) exempts the supply of a municipal permit and related processing services from GST/HST. Where a land developer is applying for a final building or service permit of the local municipality, it may first have to obtain the approval of the land development agreement by the regional municipality, for which it is charged separate fees. In rejecting a submission that such additional fees are part of the consideration for a single supply of the ultimate permits, CRA noted that “the provision of property and/or services by two or more suppliers generally indicates that multiple supplies are being made, even if the various supplies are provided together,” and that “many of the fees identified are payment for a separate supply, e.g., approval of a plan amendment or a condominium conversion.”
Neal Armstrong. Summaries of 27 May 2016 Interpretation 130865 under ETA Sch V, Pt VI, s. 20(c), Sch V, Pt VI, s. 21 and s. 189.1.
CRA considers that psychological counselling services provided to an injured athlete including re an upcoming competition generally would qualify for HST/GST exemption
The definition of a qualifying health care supply includes a service supplied for the purpose of assisting in coping with an injury, illness, disorder or disability.” Although CRA generally would consider psychological counselling services for the purpose of confidence building for an athletic competition to not qualify, it would consider that such services supplied “to assist an individual in mentally preparing for an upcoming competition following an injury, illness, disorder or disability sustained by the individual” would qualify.
Neal Armstrong. Summary of 16 March 2016 Interpretation 170748 under ETA Sch V, Pt II, s. 1 - qualifying health care supply.