News of Note
Income Tax Severed Letters 21 September 2016
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that employee meal reimbursements other than in connection with travel are not taxable benefits if made principally to enhance employee efficiency
In response to an inquiry on the taxability of the reimbursement of meal expenses to employees, CRA indicated that although normally it only accepts that meal reimbursements are not taxable benefits where made in connection with travel outside the metropolitan area of the employer’s establishment, “where the principal objective of the reimbursement of meal expenses is to ensure that the employee's duties are undertaken in a more efficient manner during the course of a work shift, then the employer could be the one who principally benefits,” in which case there is no taxable benefit.
Neal Armstrong. Summary of 10 June 2016 External T.I. 2015-0587131E5 Tr under s. 6(1)(a).
Oxford Properties – Tax Court of Canada finds no abuse in bumping LPs to which the target transferred buildings pre-closing and then selling the bumped LP interests to tax exempts after 3 years
When Oxford Properties was sold to an OMERS subsidiary, the purchaser first negotiated that Oxford would drop various properties down into LPs on a s. 97(2) rollover basis, with those partnership interests subsequently being bumped under s. 88(1)(d). After the acquisition, those bumped costs were then pushed down onto the cost of interests in property-specific LPs (which had been formed following the acquisition), by winding-up the upper-tier LPs under s. 98(3) and using the s. 98(3)(c) bump. After the three-year s. 69(11) period, some of the property-specific LPs were then sold to tax exempts.
In rejecting CRA’s application of GAAR, D’Arcy J stated inter alia:
Parliament…made the positive decision to limit the application of subsection 69(11) to transfers to tax-exempt entities that occur within the three-year period. In my view, it is reasonable to conclude that Parliament was of the view that transfers after this three year-year period did not abuse subsection 97(2).
As to the alleged abuse of the s. 88(1)(d) bump, its design insofar as a partnership interest bump was concerned did not, at the time, reflect an ability to look through to the underlying (depreciable) nature of the assets of the partnership.
Neal Armstrong. Summary of Oxford Properties Group Inc. v. The Queen, 2016 TCC 204 under s. 245(4).
Proposed Vail Resorts acquisition of Whistler includes exchangeable share consideration (likely bearing dividends) and an exchange-rate adjusted cash component
Vail Resorts is proposing to acquire Whistler Blackcomb under a BC Plan of Arrangement for a combination of shares and cash, paid by a B.C. subsidiary of Vail Resorts (Exchangeco). Resident Whistler shareholders who so elect will receive the share consideration in the form of exchangeable shares of Exchangeco under a largely conventional exchangeable share structure, with those shares being listed on the TSX and having a sunset date seven years out. The cash component of the consideration is nominally in Canadian dollars, except that it is based on an exchange rate of 0.7765 so that, for example, if the exchange rate is less than this six days before the Arrangement implementation date, the Whistler shareholders will receive a correspondingly lower amount.
The Vail shares currently have a dividend yield of around 2%. The U.S. tax disclosure points out that if (contrary to expectation) the exchangeable shares were issued after 2016, any dividends paid on them would be subject to U.S. withholding tax under Code s. 871(m).
Neal Armstrong. Summary of Whistler Blackcomb Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Exchangeable Share Acquisitions.
CRA indicates that the status of Delaware, NY and Florida LLCs as corporations is not affected by the Quebec residence of a member
A 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.