News of Note
CRA considers that no accrued FX loss on a loan owing by a target to a sub is realized on an AOC where there is a same-day amalgamation and no time-stamping
Email this ContentCRA considers that where a Canadian target is indebted to a subsidiary under a U.S.-dollar loan with an accrued foreign exchange loss and it is amalgamated with the sub on the date of its acquisition then, assuming that the amalgamation is not time-stamped and no s. 256(9) election is made, that FX loss will disappear rather than being recognized under s. 111(12). The reasoning:
- Both the amalgamation and the acquisition of control are considered to occur at the same time (say, 12:01 am).
- The intercompany debt is deemed under s. 80.01(3) to be settled for its historic cost amount two moments before that time (say, 11:58 pm), so that no loss or gain is realized on the deemed settlement.
- FX losses under s. 111(12) are triggered only one moment before the acquisition of control (say, at 11:59 pm), and at that time the FX loss has already vanished.
Neal Armstrong. Summary of 2 August 2016 External T.I. 2014-0544941E5 Tr under s. 111(12).
The revised stub period accrual rules still provide unduly narrow safe harbours
The stub period accrual rules originally were motivated by situations as simple as that where foreign accrual property income of a controlled foreign affiliate of a Canadian taxpayer accrues during the first portion of the year, but the CFA then becomes a subsidiary of someone else before year end, so that none of that FAPI is required to be picked up by the taxpayer. Several observations (among many) of Angelo on the revised stub period accrual rules in draft ss. 91 (1.1) to (1.5) (which inter alia can operate to trigger a stub taxation year in a CFA where there has been a change (e.g., a decrease, as in the above example) to a relevant taxpayer’s surplus entitlement percentage (SEP) respecting that CFA):
- There is an exception to this rule in s. 91(1.1)(b)(i), where the decrease to the taxpayer's SEP in the particular CFA is matched by an increase to the SEP in the particular CFA of one or more taxpayers, each of which is a taxable Canadian corporation that does not deal at arm's length with the taxpayer immediately after the particular time. Two points:
First, the decrease and increase(s) must be in respect of the same particular CFA. Thus, if there is some sort of reorganization involving two particular CFAs and the taxpayer's SEP in one of them decreases but the taxpayer's (or a non-arm's length taxable Canadian corporation's) SEP in the other one increases, that does not fit within this exception even if the total amount of attributable FAPI remains unchanged. Moreover, this exception would apply only where the increased SEP lands in a non-arm's length taxable Canadian corporation - and thus would not apply where the other non-arm's length taxpayer is an individual or a trust or even a partnership, notwithstanding that the SEP decrease is to be "determined as if the taxpayer were a corporation resident in Canada."
- The deemed (s. 91(1.2)) year end respecting, e.g., a particular CFA of the Canadian taxpayer, applies also respecting each resident corporation not dealing at arm's length with the taxpayer (and each partnership where the particular taxpayer or a non-arm's length corporation resident in Canada is, directly or indirectly, through one or more partnerships, a member thereof.)
- Ss. 91(1.4) and (1.5) provide in specified circumstances for an election to be made for there to be a deemed CFA stub year under s. 91(1.2). Two examples in the Explanatory Notes illustrate where this is desirable. However, it is unclear why these measures are elective, since it is difficult to see any circumstance where this result would not be desirable from the perspective of the particular taxpayer in the situations where the elections are available.
Neal Armstrong. Summaries of Angelo Nikolakakis, "Guess Who's Back? The Revised Stub Period Rule for FAPI," International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 8 under s. 91(1.1), s. 91(1.2). s. 91(1.4) and s. 91(1.5).
CRA’s policy for free use by all employees of recreational facilities includes free ski passes for ski resort employees
CRA indicated that its general administrative policy, that there is no taxable benefit “where employees generally are permitted to use their employer's recreational facilities free of charge,” extended to a ski resort operator giving free season’s ski (and snowboarding) passes to all its employees (although there would be a taxable benefit to the extent that members of an employee's family were included). Furthermore, the CRA policy respecting the non-recognition of the first $500 of non-cash gifts made to an employee each year could apply if the employees were given the passes as a “Christmas gift” and “it is shown that the Season Pass is offered to the employee as a gift and not as compensation.”
Neal Armstrong. Summary of 24 June 2016 External T.I. 2015-0571471E5 Tr under s. 6(1)(a).
Cheema – Tax Court of Canada confirms that a bare trustee is transparent for tax purposes
The availability of the new housing GST/HST rebate to the taxpayer under ETA s.254(2) turned on him (or his spouse) being the only person who was “liable” under the purchase agreement. CRA denied the rebate on the basis that a friend of the taxpayer had acquired an undivided 1% interest in the property (as a result of requirements of the mortgagee), even though, on the date of closing, the friend executed a declaration of bare trust in favour of the taxpayer and his wife.
In finding that the requirements for the rebate were satisfied, Smith J stated:
The notion of a bare trust as an agency relationship…is well known and well established…. For tax purposes, a bare trust is considered a non-entity in the sense that a beneficiary as principal, is considered to deal directly with property through the trustee as agent or nominee.
Neal Armstrong. Summary of Cheema v. The Queen, 2016 TCC 251 under ETA, s. 254(2)(b).
CRA states that a deduction to Canco for repayment of an upstream loan made by its FA to a non-resident sister does not depend on FA continuing as a creditor affiliate
Where a non-resident subsidiary (FA) of Canco has made a loan to a non-resident subsidiary (SisterCo) of Canco’s non-resident parent (Foreign Parent), CRA considers that it is irrelevant that FA has ceased to be a creditor affiliate of SisterCo two years later, as a result of the sale by Canco of FA to Foreign Parent - so that s. 90(6) could still apply to include the loan’s amount in Canco’ income. However, by somewhat the same token, s. 90(14) also “is not dependent on FA being a ‘creditor affiliate’ at the time of repayment,” so that “when the loan is finally repaid a deduction will be available to Canco in the taxation year of repayment, provided the repayment is not made as part of a series of loans or other transactions and repayments.”
Neal Armstrong. Summary of 4 August 2016 Internal T.I. 2016-0645521I7 under s. 90(14).
Bywater – High Court of Australia finds that the place of directors’ meetings is given little weight in determining corporate residence if they are not the true decision makers
The High Court of Australia has found that various non-Australian companies, which made money trading on the Australian stock exchange, were resident in Australia, on the basis of having their central management and control there, notwithstanding that all the board meetings were held outside Australia and the directors were mostly residents of Switzerland. The key point was that they did not exercise any independent judgment with respect to any decisions to be taken by the companies, so that all such decisions essentially were made by the Australian-resident individual, who was the companies’ ultimate beneficial owner, from his office in Sydney. The Court stated:
Ordinarily…it will be found that a company is resident where the meetings of its board are conducted. But… it does not follow that the result should be the same where a board of directors abrogates its decision-making power in favour of an outsider and operates as a puppet or cypher, effectively doing no more than noting and implementing decisions made by the outsider as if they were in truth decisions of the board.
In addition to various Australian and British decisions, the Court referred to Fundy Settlement with approval, and also referenced Hertz, where the U.S. Supreme Court:
held that, in determining whether a corporation is a "citizen" for federal jurisdictional purposes, the statutory criterion of "principal place of business" is …"best read as referring to the place where [the] corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's 'nerve center' … and not simply an office where the corporation holds its board meetings… .”
Neal Armstrong. Summary of Bywater Investments Ltd. v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 under s. 2(1).
Athabasca University – Tax Court of Canada finds that a University’s purpose in acquiring books for its students was their education rather than the (free) “sale” of the books to them
Athabasca University, which provided online courses to its students and delivered printed books to them without any additional charge, was entitled to a GST rebate on its purchases of the books provided that it could be considered, as required by ETA s. 259.1(2) to have acquired the Books “otherwise than for the purpose of supply by way of sale.” Lyons J applied the single supply doctrine to find that, as the University was making a single supply of education (a service) to its students, it should be considered to have acquired the books for this “ultimate” purpose rather than for the purpose of merely transferring their ownership to the students. (This latter point may have been adverting to the fact that “sale” is defined for ETA purposes to “include any transfer of the ownership of the property” - so that, technically, a sale might include a gift – but her focus instead was on there being no “supply” of the books.)
Although Finance’s Explanatory Notes indicated that the rebate was not intended to be available where the books were acquired “for the purpose of resale or to give away permanently,” this proposition was not reflected in the wording of s. 259.1(2).
Neal Armstrong. Summary of Athabasca University v. The Queen, 2016 TCC 252 under ETA, s. 259.1(2).
CRA considers that a share of the revenues of a mortgage broker paid to a franchisor generally will be subject to GST/HST
Although the activities of a mortgage broker generally qualify as an GST/HST exempt “arranging for” financial service, CRA considers that where the mortgage broker is a franchisee, the payment of a portion of those exempt revenues to the franchisor generally will be subject to GST/HST. CRA apparently considers that such payments (viewed by it as “franchise fees”) likely are consideration for the supply by the franchisor of “intangible personal property,” namely, “the right to operate a franchise which includes the right to use the name of the franchisor as an advertising tool and any systems made available by the franchisor to facilitate the operation of the franchise.”
CRA also considers that fees charged by car dealers or travel agents to an insurer for helping their customers sign up for insurance (e.g., customer disability insurance) are taxable.
Neal Armstrong. Summaries of Excise and GST/HST News, No. 100, November 2016 under ETA, s. 123(1) – financial service – para. (l), para. (t).
Income Tax Severed Letters 16 November 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on the payment of a substantial capital dividend by a s. 149(1)(l) incorporated golf club
Shares for an incorporated club (likely a golfing club) had outstanding shares held by its members which were entitled to receive dividends, subject to a restriction in its letters patent prohibiting the payment of any income as determined under s. 149(2) (i.e., income other than taxable capital gains). The club sold its land and building, leased back a portion of the property from the purchaser and paid a capital dividend to its shareholders.
CRA ruled that the excess of the capital gain realized over the taxable capital gain was added to the club’s capital dividend account, notwithstanding that the portion of the taxable capital gain was exempt under s. 149(5)(e)(ii) (as being from property used directly in providing dining, recreational or sporting facilities) and that this capital dividend did not cause the club to cease to be exempt under s. 149(1)(l).
Neal Armstrong. Summary of 2016 Ruling 2015-0593841R3 under s. 149(1)(l).