News of Note
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
Email this ContentThe 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).
CRA considers that farm quota units often are identical properties for determining their cost as Class 14.1 assets
CRA considers that since “in most cases, units of a particular type of farm quota are indistinguishable from one another,” the units (viewed as Class 14.1 properties) likely would constitute identical property whose cost is averaged under general principles or under s. 47 – including where their cost is determined under the transitional rule in draft s. 13(38)(b)(ii) based on the pre-2017 eligible capital expenditure made for their acquisition.
Neal Armstrong. 27 September 2016 External T.I. 2016-0660861E5 under s. 13(38)(b)(ii).
Blank – Australian High Court briefly affirms a finding that phantom units were not taxable when they vested
What essentially was a deferred compensation plan granted phantom units to an individual, who started off as an employee of Glencore International AG (“GI”) and later became employed by an Australian subsidiary, to participate in the cumulative profits of GI, although it was somewhat dressed up to look like he was investing in shares of the ultimate Swiss parent (Glencore Holding AG). The Australian High Court found that the U.S.$160 million to which he was entitled on his retirement was ordinary income rather than a capital gain when received.
Most of the case was devoted to the income v. capital receipt distinction. However, the “when received” aspect of this case briefly affirmed an interesting finding in the Full Federal Court below, which appeared to implicitly find that the phantom units were not income when they vested, but only when they were paid out. This is consistent with the proposition that phantom units are not constructively received when they vest but no exercise occurs (cf. Bianchini).
The High Court did not address the rejection by the Full Court of an argument that a pro rata portion of the U.S.$160 million was exempt based on the fact that for roughly his first eight years of service after the grant of a predecessor version of the units, the taxpayer had been a non-resident employed outside Australia (with the Full Court finding that the U.S.$160 million “was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made.”)
Neal Armstrong. Summaries of Blank v Commissioner of Taxation [2016] HCA 42 under s. 6(1)(a) and of Blank v. Commissioner of Taxation, [2015] FCAFC 154, aff’d [2016] HCA 42 under s. 6(1)(a) and s. 115(1)(a)(i).
Chrysler Coop - Cour du Québec finds that a marketing-promotion corporation qualified as a not-for-profit
Lareau J followed BBM in finding that a corporation, which was funded by member Chrysler dealerships to help promote their vehicle sales, qualified as a not-for-profit under the Quebec equivalent of s. 149(1)(l). Although in the years in question, it had a profit, its more general mode of operation was to operate on a cost recovery basis (based on the member funding), and it was irrelevant that its activities were promoting the profitability of its members through increased sales. What mattered was that it was not being operated with a view to its own profit and that no profit could be distributed to its members.
Neal Armstrong. Summary of Coop publicitaire des concessionnaires Chrysler Jeep Dodge du Québec c. Agence du revenu du Québec, 2016 QCCQ 11252 under s. 149(1)(l).
Tax Interpretations is scraping the CRA website 6 times daily
We are now scraping the CRA website six times daily. Consequently, this content is included in our search engine results. (To enhance search results, certain irrelevant content, such as CRA-auditor expense reports, is excluded.) In addition, it will be easier to see where you are within the (copied) CRA site (including fully expanded breadcrumb trails).
The continual scraping also will soon let us start highlighting key changes in the CRA site including, perhaps most importantly, changes to topic web pages. The scraped site is included within the regular paywall.
Finance official indicates that the U.S. was informed in the FATCA negotiations of Canada’s view that estate planning trusts are excluded
A Finance official indicated that, in the course of the negotiations of the IGA with the U.S., the US tax authorities were informed of the Canadian government’s position that personal trusts used for estate planning purposes and not seeking to raise external capital are excluded from the FATCA reporting requirements for Canadian financial institutions. Finance considers that the Canadian legislation in this regard is compatible with the "financial institution" definition in the IGA.
Neal Armstrong. 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.10.