News of Note
Municipality of Woerden – European Court of Justice finds that a sale of a building at 10% of cost to an intermediary for 90% non-taxable use entitled the vendor to full input tax credits
Email this ContentIf a Dutch municipality had provided two buildings constructed by it to the mostly VAT-exempt building users (e.g., schools) directly, it would have been entitled to a credit for only 10% of its construction-related VAT costs (being the percentage of use by a taxable sports facility). Instead, after a newly-formed non-profit foundation was interposed between it and the users, it sold the buildings to the foundation at 10% of its cost and reported VAT on that below-FMV selling price.
This worked, so that the municipality received 100% credit for its VAT costs. President Biltgen stated:
[I]f the supply price is lower than the cost price, the [input tax] deduction cannot be limited in proportion to the difference between the supply price and the cost price, even if the supply price is considerably lower than the cost price, unless it is purely symbolic. … The fact that that purchaser allows parts of the building…to be used without charge is of no importance… .
B.C. Sky Train is similar.
Neal Armstrong. Summary of Municipality of Woerden v. Secretary of State for Finance, Netherlands, C:2016:466 (ECJ (10th)) under ETA s. 141.01(1.1).
Mariano – Tax Court of Canada makes the promoter of a leveraged donation scheme jointly and severally liable with the unsuccessful test-case taxpayers (whose appeals it had controlled) for the Crown’s costs
After finding that the leveraged donation transactions in Mariano were a sham, Pizzitelli J dealt with the disposition of the Crown’s Bill of Costs for $491,137. Although there had been 27,000 participants in the scheme, there were only seven appellants before him, who argued that they should not be responsible for costs that were incurred on a scale reflecting larger amounts at stake than the credits taken by them personally.
Although he dismissed all their arguments respecting scaling back the bill, Pizzitelli J ultimately was sympathetic. Even though this went beyond the literal wording of the Tax Court Rules, he found that the promoter of the scheme (who had controlled the litigation from its start) should also be liable for the costs, on a joint and several basis with the appellants as a group (with the appellants bearing any costs which the Crown might seek to collect from them amongst themselves on a pro rata basis in accordance with the size of the credits claimed by them respectively). It would not be surprising if the Crown now presents 100% of the bill to the promoter.
Summary of Mariano v. The Queen, 2016 TCC 161 under Tax Court Rules, Rule 147(1).
Trustpower - Supreme Court of New Zealand finds that expenditures contributing to an expansion project but made before a decision to proceed were on capital account
The highest New Zealand court found that approximately NZ$18M of expenditures incurred by a New Zealand power company in getting “resource consents” (re land and water use and discharge permits) for four potential power generation projects were capital expenditures, notwithstanding that, at trial, no decision had yet been made to proceed with the projects (nor had they been abandoned).
Young J stated:
The expenditure on obtaining resource consents… was directly related to specific projects that would be on capital account if they came to fruition. The projects could not proceed without resource consents. Obtaining the consents thus represented tangible progress towards their completion. …
Expenditure which is not directed towards a specific project or which is so preliminary as not to be directed towards the advancement of such a project is likely to be seen as being on revenue account.
Bowater was accepted as authority for the latter proposition, but not for the broader (incorrect in his view) proposition that “expenditure on a capital project which does not result in the acquisition of a capital asset is deductible.”
Neal Armstrong. Summary of Trustpower Limited v. Commissioner of Inland Revenue, [2016] NZSC 91 under s. 18(1)(b) – capital expenditure v. expense – improvements v. running expense.
Income Tax Severed Letters 3 August 2016
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Friday’s draft legislation fixes gaps in the ECP transitional rules
Lorne Richter pointed out two problems with the 2016 Budget rules for the transition from eligible capital property to Class 14.1 depreciable property. The transitional rule in draft s. 13(37)(d) generally permits a corporation that has disposed of ECP in calendar 2016 but during a taxation that ends in 2017 to elect to have a s. 14(1)(b) inclusion rather than realizing a taxable capital gain.
The first problem now fixed in the draft legislation which was released on Friday is that there will now be a CDA addition (in the case of a CCPC) for an income inclusion under s. 13(37)(d).
The second problem was that the election was not available if the taxpayer no longer is carrying on the business on January 1, 2017 (so that the election would not be available for goodwill proceeds received on a 2016 sale in the straddling year). This also has been addressed in the draft legislation by dropping a requirement that the business be carried on on January 1, 2017 (although there still is a requirement that the "taxpayer has incurred an eligible capital expenditure in respect of [the] business before January 2017," which could be problematic for goodwill which has not been purchased).
Lorne Richter, "ECP Transitional Rules and 2016 Asset Sales," Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 12 under s. 13(37)(d).
Exercise of employee stock options before a s. 86 spin-off transaction may entail reliance on a comfort letter
Where, prior to implementation of a spin-out, employees exercise their options to acquire common shares of the pre-spin corporation, which are then exchanged under a s. 86 reorg for new common shares and special shares (to be exchanged under the Plan of Arrangement for Spinco shares), under current law the common shares acquired on exercise would not qualify as prescribed shares (due to their imminent cancellation) – although a November 29, 2012 comfort letter issued to Ian Gamble re the Telus transaction recommends fixing this problem. A potential advantage to effecting the spin-out as a s. 84(2) PUC distribution is that an exception accommodating such distributions is already built into Reg. 6204(1)(b).
Neal Armstrong. Summary of John McClure and Brian Kearl, "Stock Options in Spinout Transactions," Canadian Tax Highlights, Vol. 24, No. 7, July 2016, p. 7 under Reg. 6204(1)(b).
CRA confirms that a spousal trust can have a final distribution date 36 months after testator’s death
When asked, CRA confirmed that a trust can qualify as a spousal trust for purposes of s. 70(6) even if the spousal trust provided for under the testator’s will specifies a final distribution date which is 36 months (or fewer) after the date of death. The questioner may have been confused by the stipulation in s. 70(6)(b) that the estate property must vest indefeasibly in the spouse or spousal trust within 36 months of death (subject to CRA extension).
Neal Armstrong. Summary of 20 April 2016 T.I. 2015-0601141E5 under s. 70(6)(b).
CRA provides background on its recent positions on the new s. 55(2) rules
Comments of Yves Moreno and Annie Mailhot-Gamelin (both with the Income Tax Rulings Directorate) on the proposed s. 55(2) rules included:
- The integration principle is key to CRA’s thinking about safe income and s. 55(2) (so that the role of s. 55(2) is “is to ensure that corporate tax is paid, but that at the same time that there is no duplication of corporate taxes”) and, conversely, “the concept of safe income is one of the pillars of integration.”
- The changes to s. 55(2) were meant to address the type of planning raised by D & D Livestock, where ACB is created (without being caught by existing s. 55(2) because there was no gain on the shares in question). In particular, new s. 55(2) “now would address circumstances where the purpose of the dividend is to either reduce the value of a share…or to increase the cost of the property in the hands of the dividend recipient…” (with both elements being present in the D&D-style planning).
- For the new rules to apply, there is no requirement that a sale occur as part of the same series of transactions. In this regard, the policy is similar to the boot rules, where excess boot will produce an immediate gain even if there is no plan to use the additional basis.
- CRA previously provided comfort (in 2015-0613821C6) on the non-application of s. 55(2.1)(b) to dividends paid as part of a corporation’s standard practice of paying regular quarterly or annual dividends. CRA has now indicated that the rationale is that “it is doubtful that the dividend would significantly reduce the fair market value or the gain on shares,” and that, in any event, “it is difficult to imagine that one of the purposes of the dividends would be to achieve that.” CRA rejected calling this position a “safe harbour,” stating that “the analysis of every dividend will involve its own set of facts and circumstances.” Similarly, there can be no automatic exemptions for other common dividend transactions such as funding general current expenses of a parent or settling intragroup debt resulting from cash pooling arrangements.
- CRA considers it to be appropriate from a policy perspective for safe income to be correspondingly lower where incentive deductions have lowered a corporation’s income for ITA purposes.
- CRA cannot confirm in the context of a butterfly that the pro-rata requirement in s. 55(1) is met where the shares issued are discretionary, and might ask that the terms of those shares be changed in order to be able to issue a favourable ruling under s. 55(3)(b).
Neal Armstrong. 8 June 2016 CTF Technical Seminar: Update on s. 55(2).
Not ignoring subsidiary debt for all TCP purposes can affect the TCP status of shares in a Canadian parent
A closely-held Canadian parent, whose shares are being tested as to whether they are taxable Canadian property (“TCP”), holds both debt and shares of a Canadian subsidiary. Assuming that, in this situation, “CRA’s approach…ignores the intercompany debt as an asset for the parent and as a liability for the subsidiary, but continues to recognize it in the calculation of the fair market value of the subsidiary’s equity,” then “this approach may…produce cases where an equity/debt capital structure of a subsidiary would result in the parent’s equity constituting TCP, where a 100% equity structure would otherwise not, and vice versa.”
Neal Armstrong. Summary of Jared A. Mackey, "Canada Revenue Agency Views on Taxable Canadian Property Determinations Involving Subsidiaries," Tax Topics (Wolters Kluwer), No. 2315, July 21, 2016 p. 1 under s. 248(1) – taxable Canadian property – para. (d).
CRA treats a Dutch co-op as a corporation
CRA briefly concluded (after the obligatory nod to its two-step approach to foreign entity classification) that a Dutch Co-op was a corporation for purposes of the Act. (See also 2010-0373801R3.)
Neal Armstrong. Summary of 21 June 2016 Memo 2015-0581151I7 under s. 248(1) – corporation.