News of Note
CRA indicates that a financial institution’s issuing shares and paying dividends to non-resident shareholders may be a zero-rated supply
Email this ContentCRA indicated that the issuance of shares and the payment of dividends by a financial institution to its non-resident shareholders could potentially qualify as zero-rated supplies, with the implication that GST on related inputs could be creditable. CRA considered that reporting to the shareholders and managing shareholder meetings were not a supply to the shareholders and, instead, represented inputs incurred in the institution’s operations.
Neal Armstrong. Summaries under of 17 December 2015 Interpretation 153009 under ETA, Sched. VI, Part IX, s. 1, ETA s. 123(1), financial service, para. (f), and ETA s. 123(1) – supply.
Double taxation can arise under the FAD rules if a Canadian Buyco delivers shares issued to it by its non-resident parent to the target ((10(f)) corporation’s shareholders
Where a U.S. public corporation uses a Canadian Buyco to acquire the shares of a Canadian target (most of whose assets are foreign affiliates) in consideration for shares that will represent more than 10% of its outstanding shares, there will a technical investment by the Canadian Buyco in a foreign affiliate (its U.S. parent) if the share consideration is first issued by the U.S. parent to Buyco, before Buyco delivers that consideration to the shareholders of the target. Thus, there would be a double deemed dividend under s. 212.3(2): first, for this transitory investment; and second, for the “real” investment of Buyco in the target.
This result can be avoided by using a triangular arrangement pursuant to which the U.S. parent issues the share consideration directly to the target shareholders.
It generally will be advantageous to use a Canadian Buyco rather than make a direct acquisition, where the Canadian target does not have signficant Canadian assets.
Neal Armstrong. Summaries of Ian Crosbie, "Recent Transactions of Interest, Part I," draft 2015 Annual Conference paper under s. 212.3(2) and s. 88(1)(c.3)(i).
Income Tax Severed Letters 31 August 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that services are re tangible personal property for HST place-of-supply purposes if they “serve a particular need…relating to the property”
Although, the HST rules for determining the province in which a service is supplied generally look to the address of the recipient, the place of supply of services in relation to tangible personal property is generally the province where the TPP is situate (unless it moves around, in which case there generally is reference to the province of primary performance). In the course of explaining a heavily redacted ruling, CRA stated:
[W]hether a service is considered to be in relation to TPP depends on whether there is a direct connection between the service and the property, taking into account the objectives of the service and the particular circumstances of each case. With respect to determining the objectives of the service, it must be determined whether the service is designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property. It must then be determined whether the relationship between the purpose or objective of the service and the property is direct rather than merely indirect.
Hope that helps.
Neal Armstrong. Summary of 16 March 2016 Ruling 158766 under New Harmonized Value-Added Tax System Regulations, s. 15.
CRA rules that the supply of a law society membership to a non-resident not practising law in the province was zero-rated
CRA ruled that a supply of some sort of law society membership to a non-resident lawyer who was not registered for GST purposes and did not practise in Canada was a zero-rated supply of intangible personal property. This accords with the consistent CRA view that a supply of membership in an organization is a supply of intangible personal property rather than of a service.
Neal Armstrong. Summary of 8 April 2016 Ruling 158060 under ETA, Sched. VI, Pt. V, s. 10.1.
Guobadia – Tax Court of Canada finds that an inflated charitable receipt is not a “receipt”
The taxpayer was issued charitable receipts for something like 10 times the amounts she actually contributed. Before going on to reject her claim for charitable credits on more conventional grounds (i.e., failure of the receipts to comply with the documentary requirements of Reg. 3501, including stating “the amount of a cash gift”), Smith J found that the charitable receipts also did not qualify as “receipts” on general principles, stating:
[A] receipt is a written document delivered in exchange for the receipt of money, goods or services, reflecting the actual amount of money or the fair market value of the property or services received. It follows that a document, though it bears the title “receipt” …, may not be treated… as such if it does not accurately reflect the money paid or the fair market value of the property or services actually provided in exchange.
Neal Armstrong. Summary of Guobadia v. The Queen, 2016 TCC 182 under Reg. 3501.
Anthony – Federal Court of Canada finds that an inactive corporation incurred expenses on its own account rather than on behalf of its shareholder carrying on the business in question
Approximately eight years after the taxation year in question, the taxpayer made a s. 152(4.2) application to CRA to allow the personal deduction by him of rental expenses that had been incurred under leases of equipment (used in his machinist business) that had been entered into in the name of his corporation (which was inactive except for entering into those leases). Boswell J found that the taxpayer was stuck with this bad form, noting in effect that although there was a lack of tax logic in this arrangement:
Even if the Applicant’s corporation was simply a shell, it was a shell that nevertheless was the party to the lease agreement with CIT and protected the Applicant from personal liability for the rental payments.
Neal Armstrong. Summaries of Anthony v. Canada (National Revenue), 2016 FC 955 under General Concepts – Separate Existence, s. 9 – computation of profit and s. 152(4.2).
CRA indicates that it likely is not problematic for an RRSP to make a 4900(1)(j.1) mortgage loan to its annuitant, who on-lends the proceeds interest-free to a wholly-owned corporation
CRA indicated that where an individual who is the annuitant of an RRSP receives an mortgage loan from the RRSP and uses the loan proceeds to make an interest-free loan to a corporation wholly-owned by the individual (the “Corporation”), with the Corporation using the proceeds to pay off a corporate line of credit, the interest on the Mortgage Loan may be deductible to the individual provided that the on-loan to the Corporation “increases the Corporation’s income-earning capacity (i.e., by reducing the Corporation’s interest expense) and the shareholders’ potential future dividend income from the Corporation.”
Assuming that the mortgage loan satisfies the conditions of Reg. 4900(1)(j.1) (e.g., satisfying the conditions for mortgage insurance), the loan likely would be considered to be acquired by the RRSP at fair market value and to have been made on arm’s length terms, so that the RRSP advantage and strip rules would not apply, provided that there was no default.
Neal Armstrong. Summaries of 1 June 2016 T.I. 2015-0601211E5 under s. 20(1)(c), Reg. 4900(1)(j.1), s. 207.01(1) – advantage – para. (d), and s. 207.01(1) – RRSP strip.
ExxonMobil acquisition of InterOil would include a contingent U.S.$1.4B cash payment to the InterOil shareholders which very well would have to be repaid in whole or in part
It is proposed that a newly-incorporated B.C. subsidiary of ExxonMobil will acquire InterOil under a Yukon Plan of Arrangement. InterOil is a Yukon corporation listed on the NYSE but essentially all of whose assets are natural gas assets held in a Papua New Guinea (“PNG”) subsidiary. The consideration for each InterOil share consists of that number of ExxonMobil shares having a fixed value of U.S.$45.00 per share, plus a cash payment of U.S.$26.87 per share (or U.S.$1.37B in total). However the cash “contingent resource payment” (or “CRP”) of U.S.$26.87 per share, which will be held under an escrow arrangement, will have to be repaid in full if an interim resource assessment of a PNG natural gas project of InterOil, which is expected to be completed in the 2nd quarter of 2017, shows a resource of less than 6.2 trillion cubic feet equivalent ("tcfe"), and with the CRP having to be repaid on a pro rata basis if the interim assessment shows a resource of between 6.2 and 10 tcfe.
The Canadian tax disclosure indicates that the full U.S.$26.87 per share CRP consideration (as well as, of course, the share consideration of U.S.$45 per share) will be required to be included in computing a resident InterOil shareholder’s proceeds of disposition for 2016, but (under s. 43) if the repayment obligation is triggered before the filing due-date for the shareholder’s return, the repayment would reduce those proceeds of disposition. If the reduction does not occur until later, it instead will be recognized separately as a capital loss.
The U.S.$1.37B up-front CRP payment will be lent on behalf of the former InterOil shareholders back to ExxonMobil under a loan which will mature after the completion of the interim resource assessment and at an interest rate which will not be determined until such maturity date. The disclosure discusses whether the contingent nature of the interest rate means that there is no interest accrual obligation.
In the previous agreement of InterOil with Oil Search (which was terminated with the payment of a $60M break fee on behalf of InterOil), Oil Search offered a contingent cash payment which was not capped at 10 tcfe, which resulted in significantly different tax issues.
Neal Armstrong. Summary of InterOil Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Hôpital Santa Cabrini – Federal Court of Appeal finds that a hospital which contracted for the services of nurses employed by a personnel-services agency was not receiving an exempt supply of nursing services
Boivin JA affirmed the finding of Archambault J below that a hospital which paid outside personnel-services agencies to receive the services of salaried nurses employed by the agencies was not thereby receiving an exempt supply of nursing services under Sched. V, Pt II, s. 6 given that the nurses were providing their services under the direction and control of the hospital rather than of managers at the agencies – and, in fact, delegation by the hospital of its responsibility for patient care would have been contrary to the Quebec Occupational Health and Safety Act.
This essentially confirms the CRA policy in Excise and GST/HST News - No. 89.
Neal Armstrong. Summary of Hôpital Santa Cabrini v. The Queen, 2016 CAF 207 under ETA, Sched. V, Pt II, s. 6, ITA, s. 180(3), General Concepts - Illegality.