News of Note

An individual sold leased land in Quebec to a non-arm’s length corporation of which he was not a shareholder on that basis that he retained the right to all the rents. After finding that the rentals received by the corporation would probably not have the "quality of income” since their receipt was subject to the obligation to pay them over to the individual (see Premium Iron Ores, Wilson, Leonard Pipeline, Canadian Fruit, see also Minet, Wipf, cf. Canpar.) CRA went on to find that s. 56(4) would apply to include the rents in the income of the corporation - and then quoted its statement in IT-440R, para. 10 that:

where the transfer or assignment of the right to an amount that is income does not constitute a deliberate attempt to evade or avoid tax, the amount will be included only in the income of the transferor.

I don’t know about Quebec, but it is not clear that it would be appropriate to apply s. 56(4) in a common law province. It might be considered that the corporation never got any right to the income in the first place, so that there was never a transfer by it of that right back to the individual.

Neal Armstrong. Summaries of 28 October 2016 External T.I. 2016-0654331E5 F under s. 9 – nature of income, s. 18(1)(a) – incurring of expense, s. 56(2) and s. 56(4).

The apparent harshness and breadth of the proposed s. 246.1 rule for converting capital account transactions into deemed dividends to the individual recipient (but not, apparently, to the corporation) is compounded by the unpredictable nature of the concept of “series of transactions” enunciated in Copthorne, which could suggest that a capital dividend paid out of a gain, and the gain-producing transaction, are part of the same series even where the capital dividend was not planned.

The credit to the capital dividend account should not be eliminated but instead only suspended until the capital property leaves the affiliated group.

Neal Armstrong. Summary of Michael N. Kandev, "Proposed Section 246.1", Canadian Tax Highlights, Vol. 25, No. 8, August 2017, p.5 under s. 246.1.

It is unclear how the principal purpose test in Art. 7(1) of the Multilateral Instrument will be applied for Treaties where there already was a PPT (often, more narrowly worded.)

While some countries that have experience applying PPT-type rules might be expected to apply the new PPT in line with their past practice, the breadth of the new PPT would permit for substantially more aggressive approaches by countries inclined to take them.

Option A in MLI Article 13 provides that existing activity exceptions in Treaties would apply only where the activity is of a "preparatory or auxiliary" character, whereas Option B would do the opposite, and would provide that the existing activity exemptions are per se exceptions. Although the OECD had concluded that existing Treaty provisions already provided per se exceptions for locations at which only a single listed activity was conducted, the presence of these Options may cause uncertainty where countries choose neither Option.

If a source country adopts the expanded PE standard in its domestic law but its Treaty partner does not, the source country nonetheless may view a structure that does not rise to the level of a PE under the existing unmodified Treaty, as being subject to the PPT.

Parties are permitted under the MLI Arbitration provisions (Part VI) to craft their own reservations with respect to the scope of cases that will be subject to arbitration. If the other party objects to such "free form" reservations, Part VI will not apply to their Treaty. Of the 26 countries that chose to adopt Part VI, 16 made such "free form" reservations. Many of the reservations involve carving out broad, and often vague, categories of cases, including, for example, all cases involving the application of domestic anti-avoidance rules, or all cases involving serious penalties. Canada is mentioned as an example.

Neal Armstrong. Summaries of Manal Corwin and Jesse Eggert, "Understanding the Operation, Impact, and Practical Implications of the MLI", Tax Management International Journal, Vol. 46, No. 8, 11 August 2017, p. 407 under Multilateral Instrument, Art. 7, 13 and 28.

The availability of the enhanced capital gains exemption to a group of taxpayers depended on the proposition that a newly-formed limited partnership had used, in a Canadian active business, applications to the Saskatchewan government for potash exploitation rights before it transferred such property to a newly-incorporated corporation (“Devonian”), whose shares were sold a number of months later. D’Arcy J found that, in fact, on the same day that the LP acquired the permit rights from the general partner, it had transferred the beneficial ownership of those permit rights to Devonian, so that its fleeting beneficial ownership of those assets did not qualify them as being used in a Canadian active business.

In rejecting the taxpayer’s submission that, until the subsequent completion of the transfer of the permits to Devonian (on their subsequent grant by the government), the taxpayer nonetheless was using the permit applications in a business carried on by it, as required under the s. 110.6(14)(f)(ii) test, D’Arcy J stated that this ignored the so-called “relation-back” theory, and in this regard quoted a judicial statement that “while the trust relationship between vendor and purchaser may be dubious before closing, once the agreement is completed the trust relationship is solidified retroactively.”

Neal Armstrong. Summaries of Gillen v. The Queen, 2017 TCC 163 under s. 110.6(14)(f)(ii), General Concepts – Ownership, General Concepts – Effective Date.