News of Note
CRA implicitly recognizes that a business investment loss potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity
Two of the three co-owners of a rental building made interest-free loans to a corporation that was the sole tenant of the building and whose shareholder was the third co-owner. The loans subsequently became bad.
CRA treated MacCallum as standing for the proposition that even though their loans were non-interest-bearing and made to a corporation of which they were not direct or indirect shareholders, the business investment loss claimed by them would not be denied under s. 40(2)(g)(ii) if they had made the loans with “the intention of preserving and recovering a considerable source of income for themselves.” However, in finding that this test was not satisfied, so that their BIL claim was denied, CRA stated that the co-owners “always had the option of renting the property to a tenant other than the Corporation and thus continuing to gain or produce rental income from that property,” i.e., assisting the particular tenant was not necessary to preserving their rentals.
In passing, CRA also acknowledged that Rich established that in order for the loss denial under s. 40(2)(g)(ii) not to apply, an income-producing purpose need not be the “the predominant purpose for the loan” and that “a subordinate purpose is sufficient.”
Neal Armstrong. Summary of 16 June 2016 Internal T.I. 2015-0597971I7 Tr under s. 40(2)(g)(ii).
CRA will not accommodate a late filing under s. 216.1
Where a non-resident actor provides acting services in Canada through a related corporation, for instance, a U.S.-resident actor providing such services through an LLC or S corp, the 23% withholding tax under s. 212(5.1) on the gross consideration paid can be avoided if the corporation files a Part I return for the year by its filing due date therefor and elects therein to have s. 216.1 apply. CRA considers that if the non-resident corporation misses this deadline, there is no ability to access s. 216.1, and (based on s. 115(2.1)) the non-resident corporation cannot late-file a “regular” Part I return where the provision of the acting services had resulted in it having a Canadian permanent establishment under the Treaty.
Neal Armstrong. Summaries of 27 July 2016 T.I. 2015-0603271E5 under s. 216.1(1) and Treaties - Art. 16.
Chriss – Federal Court of Appeal finds that a written resignation must be signed and delivered to the corporation to start the two-year s. 227.1(4) period running
The husband of a director had instructed their law firm to prepare a written resignation for her, which they did, but the resignation form was never provided to her. In reversing a finding of Boyle J that this was sufficient to amount to a written resignation that started the two-year limitation period in s. 227.1(4) running, Rennie JA stated:
…In the absence of the communication of a written resignation to the corporation, a resignation is not effective. …
… Reliance on the subjective intention or say-so of a director alone would allow a director to plant the seeds of retroactive resignation, only to rely on it at some later date should a director-linked liability emerge. …[T]he dangers associated with allowing anything less than delivery of an executed and dated written resignation are unacceptable.
Given these strong words, he unsurprisingly went on to find that it was not a sufficient due diligence defence for the director to think that she had resigned.
Neal Armstrong. Summaries of The Queen v. Chriss, 2016 FCA 236 under s. 227.1(4) and s. 227.1(3).
Lightstream Resources is proposing to eliminate $1.2B in debt under a voluntary recapitalization plan giving 95% of the company to the secured noteholders and 2.75% to the unsecured noteholders
Lightstream Resources carries on its business through two partnerships. As at the end of 2015, it had $1.53B in Canadian tax pools available to it. It had approximately Cdn.$1.53B of long-term debt as at June 30, 2016 comprising Secured Notes of U.S.$650M, Unsecured Notes for U.S.$254M and amounts owing under a Revolving Credit Facility. It defaulted on an interest payment owed to the Secured Noteholders in June 2016, and is proposing a "Recapitalization" transaction (mostly occurring under a CBCA Plan of Arrangement) which, in approximate terms, would entail
- a s. 86 exchange by its common shareholders of their shares for new common shares representing approximately 2.25% of the post-Recapitalization issued and outstanding common shares plus three-year out-of-the-money Warrants to acquire three times that number of common shares,
- the exchange by the Unsecured Noteholders of their Notes for common shares representing 2.75% of that total plus three-year Warrants (not as much out-of-the-money) to acquire the equivalent of 5% of the common shares and
- the exchange by the Secured Noteholders for common shares representing 95% of that total (with Apollo and GSO Capital Partners holding about 75%).
These exchanges (net of some additional secured borrowings) would eliminate Cdn.$1.175B of debt and eliminate Cdn.$108 million of annual interest expense.
The transactions are structured so that the forgiveness respecting the Unsecured Notes will occur immediately before an amalgamation of Lightstream with a wholly-owned numbered company, whereas the exchange of the Secured Notes will occur after the amalgamation. The exchange of the old common shares is to be structured as a s. 86 exchange (with the value of the warrants received not expected to give rise to a deemed dividend), the exchange of the Unsecured Notes will occur on a non-rollover basis and the exchange of the Secured Notes is targeted to occur on a s. 51 rollover basis (assuming the Secured Notes can qualify as capital property), so that a conversion right is first to be added to the Secured Notes before the conversion occurs.
There is a backstop plan to accomplish something similar under the CCAA if this Recapitalization plan is not approved.
Neal Armstrong. Summary of Lightstream Circular under Other – Recapitalizations or note exchanges.
Joint Committee releases its submissions on the B2B and s. 152(9) rules
In addition to reiterating its recommendations from its July 25, 2016 submission on the back-to-back (B2B) rules (now reflected in the July 29 draft legislation), the Joint Committee has now provided various examples of technical glitches which already have emerged respecting the duplicative application of s. 15(2), a failure of s. 212(3.6)(a) to properly distinguish shares of a relevant funder that are intended to be captured by the character substitution rule from those which are not (and also problems with the somewhat similar language of s. 212(3.92)(a)), problems with the interaction with the s. 216 rules (which could simply be addressed by exempting rental payments which are subject to s. 216 treatment) and problems for some types of cross-border securitization arrangements.
The Joint Committee has also separately submitted that the s. 152(9) draft legislation should not extend to, in effect, permitting new assessments beyond the normal reassessment period (where the waiver and misrepresentations exceptions do not apply).
Income Tax Severed Letters 28 September 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Full text translations of income tax severed letters now available
We have prepared full-text translations of all French technical interpretations and Roundtable questions and answers that have been released by CRA since 27 April 2016.
The original French text can be accessed by clicking on the "Text of Severed Letter" icon at the top of the translated letter. The translations are paywalled in the usual (4-days per week) manner. From here, we will continue going back in time with our translations as well as keeping up with current French severed letters (other than most rulings).
The table below links to the recent translations and the summaries thereof (as well as these items being searchable and retrievable in the usual manner).
Proposed BEPS changes will place greater pressure on what it means for a dependent agent to “habitually” exercise its role
The BEPS final action plan contemplates that the permanent establishment definition will be changed so as to no longer require the dependent agent to conclude contracts in the principal's name: it will be sufficient that the dependent agent habitually plays the principal role leading to the routine conclusion of contracts without material modification by the enterprise — that is, the principal. Given that dependent agents will likely play that role, the existence of a PE will often largely depend on whether the “habitually” requirement is met. Some observations on the “habitually” requirement:
- “a mere transient presence in a country is less likely to give rise to a PE than is a presence amounting to almost six months.”
- “An activity that is exercised recurrently is generally considered habitual, even if its duration does not exceed six months…[e.g.] a dependent agent who spends every Thursday in another country negotiating contracts that are binding on his employer”.
- The German Federal Tax Court found that regularly recurring trips to Germany (of roughly 12 per year) by the dependent agent (a Portuguese director) aggregating less than 60 days in total for each of four successive years fell below the “habitually” threshold.
- Whether the business is temporary in nature (e.g., a seasonal business) lowers the threshold - as does the situation where the dependent agent is the exclusive outlet for the non-resident’s product (e.g., where a wine producer sells all of its output at a particular festival through the local agent).
Neal Armstrong. Summary of Christian Ehlermann and Marla Castelon, "When Does a Dependent Agent Act Habitually?," Tax Notes International, 26 September 26 2016, p. 1141 under Treaties – Art. 5.
Tech Mahindra – Australian Full Federal Court finds that the exception in the Australia-India Treaty for “effectively connected” royalties was not intended to exempt royalties not attributable to the source country PE from source country withholding
The Indian-resident taxpayer performed technical services for its Australian customers from its offices in India, the fees for which were deemed to be royalties under the Australia-India Treaty - as well as earning fees through an Australian permanent establishment. Art. 12(4) of the Royalty Article of the Australia-India Treaty (similarly to a provision in the Canada-India Treaty) provided that the provisions of Arts. 12(1) and (2) (permitting India and Australia to tax royalties) “shall not apply” if the Indian resident entitled to the royalties carries on business through an Australian PE “and the… services in respect of which the royalties are paid… are effectively connected with such permanent establishment” – in which case “the provisions of Article 7 … shall apply.”
The Indian taxpayer argued that the royalties received by it in India (which were accepted by Australia as not being attributed under Art. 7 to the Australian PE) nonetheless were “effectively connected” to that PE in the sense that the work in India advanced the common goal with the Australian PE of servicing the Australian customers. The taxpayer then argued that the quoted statement - that Art. 12(2) “shall not apply” - meant that Australia was precluded from imposing withholding tax on these royalties.
In rejecting this argument, the Court stated:
[T]he evident purpose of Art 12(4) is to relieve the source State from the limitation on taxing rights imposed under Art 12 by taxing such royalties under Art 7, not to disentitle the source State from any taxing rights where otherwise Art 7 would not give such taxing rights.
In any event, “’effectively connected with’ should be understood to mean having a real or actual connection with the activities carried on through the permanent establishment,” which was not the case here.
Neal Armstrong. Summary of Tech Mahindra Limited v Commissioner of Taxation, [2016] FCAFC 130 under Treaties – Art. 12.
ARTV Inc. - Cour du Québec finds that a shareholder’s right to put its shares did not give the other shareholder a s. 251(5)(b)(i) “right” to acquire those shares
ARTV would have been associated with its largest shareholder (Radio Canada) under the Quebec equivalent of s. 251(5)(b)(i) if the obligation of Radio Canada to acquire the ARTV shares of another shareholder (ARTE France) in the event ARTE France exercised a put right constituted a contingent “right” to acquire those shares for s. 251(5)(b)(i) purposes. In rejecting this proposition (so that ARTV and Radio Canada were not associated), Cameron JCQ stated:
Before the exercise by ARTE France of its option, which depended on its will, Radio Canada had no right and, notwithstanding the irrevocability of its obligation to purchase, no expectation of purchasing, given the absence of control or influence over ARTE France.
Neal Armstrong. Summaries of ARTV Inc. v. Agence du revenu du Québec, 2016 QCCQ 8757 (Cour du Québec) under s. 251(5)(b) and Interpretation Act, s. 8.1.