News of Note
Income Tax Severed Letters 11 May 2016
Email this ContentThis morning's release of ten severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that installing interior access to the other unit in a duplex occupied by an elderly parent, who shares meals, does not make the whole a principal residence
CRA considers that in order for a duplex to be considered a single housing unit for principal residence purposes, the two units must be “sufficiently integrated so that it is not possible to live normally in the living areas of one of the units without also having access to the other unit in order to use its facilities.” CRA did consider this test to be satisfied where an individual purchases a duplex to support and provide care to an elderly parent, renovates it so that a door now provides interior access between the two units, and with the parent sharing most meals with the child and the child’s family. Thus, on resale, the child could claim the principal residence exemption only on the child’s unit and not the other. However, if the facts were the same except that the elderly parent was the owner, the parent could choose which of the two units to treat as a principal residence.
Neal Armstrong. Summary of 21 January 2016 Ordre des CPA du Québec Roundtable on Personal Taxation, Q. 9, 2016-0625141C6 Tr under s. 54 - principal residence.
Anderson – Tax Court of Canada finds that the principle of deference, in reviewing s. 67 expense deductibility, to presumed taxpayer business acumen does not extend to bone-headed decisions
After stating that “the presumed existence of business acumen should not be treated as absolute, irrefutable or sacrosanct” in the s. 67 context, Smith J allowed many of the $64,000 of expenses incurred in a year by an individual, with a salary of $117,000, in trying to convince successful sales people to sell coffee as his sub-agents in a business venture he was starting up on the side – but Smith J couldn’t countenance the deduction of U.S.$15,000 paid to a prospective salesman, supposedly with a phenomenal sales record, mostly as an enticement to become the taxpayer’s sub-agent and as an advance on his future commissions, stating:
I find that “no reasonable business man would have contracted to pay that amount” (Gabco...), certainly not without a more detailed business agreement.
Neal Armstrong. Summary of Anderson v. The Queen, 2016 TCC 106 under s. 67.
CRA rules that the home of a Canadian employee doing marketing (but no contracting) for a U.S. employer is not a PE
CRA has ruled, respecting an employee performing marketing work out of his Canadian home (which his U.S. employer has no access to and whose expenses are not borne by it) and who has no authority to contract, that the U.S. employer will not thereby be considered to have a permanent establishment in Canada.
Neal Armstrong. Summary of 2014-0550611R3 under Treaties – Art. 5.
Waste Management inversion transaction appears to be proceeding in the face of the recent Treasury debt recharacterization rules
It is proposed that Waste Connections, a NYSE-listed Delaware corporation, will effect a reverse takeover of Progressive Waste Solutions (“Progressive”), a TSX and NYSE-listed OBCA corporation, through a merger of Waste Connections with a Delaware shell sub of Progressive, with Waste Connections as the survivor and with Waste Connections’ shareholders receiving common shares of Progressive so as to end up holding 70% of Progressive. The shares of Progressive will then be consolidated (so that the Waste Connections shareholders have the same number of shares as before) – and Progressive will be renamed Waste Connections by means of amalgamation with a shell Ontario subsidiary with that name.
The obligation to effect the merger is conditional upon Progressive's and Waste Connections' receipt of Code s. 7874 opinions from Weil, Gotshal and Locke Lord, that Code s. 7874 and the Regulations thereunder should not cause Progressive to be treated as a U.S. corporation for Code purposes.
The Circular estimates that the April 4, 2016 U.S. Treasury Department and IRS proposals:
could cause intercompany debt if it were to exceed the currently outstanding debt of Waste Connections to be treated as equity, reducing the amount of deductible interest expense available to the combined company, which could reduce the adjusted free cash flow expected in the first year following the Merger by less than 3%
i.e., maybe not a big deal.
Neal Armstrong. Summary of Progressive Waste Solutions Circular under Other – Continuances/Migrations – Inversions.
CRA rules on a foreign construction company avoiding a PE in Canada through seconding employees to its Canadian sister and coming to Canada for up to 90 days annually in offsite meetings
A ruling describes some sort of large construction project in Canada (or, more precisely, two “Projects”) where many or most of the risks and financial benefits of the Projects apparently will be those of a non-resident company (“ForCo”) (which is a treaty resident of an unnamed country), while at the same time a permanent establishment of ForCo in Canada under the Treaty will be avoided. A Canadian sister company of ForCo (“CanCo”) entered into the Project contracts, but subcontracted to ForCo the work that did not entail direct construction or installation work.
However, various ForCo employees are key to the Projects, including the construction work, which in theory will be carried on only by CanCo. Their involvement will be handled in two ways. Some of ForCo’s employees will be “seconded” to the ForCo, so that they will be treated as CanCo employees, notwithstanding that they will stay on the ForCo payroll. Second, in the case of ForCo employees whose role does not require them to attend the construction sites, they will come to the CanCo offices (outside the construction sites) for meetings, which are stipulated to “never exceed an aggregate of 90 days over any 12 month period.”
CRA ruled that there will be no Reg. 105 withholding on the payroll reimbursement payments made by CanCo to ForCo and that the described activities (i.e., subcontracting to ForCo, secondments and meetings) will not by themselves result in a ForCo PE under the Treaty. The CRA approach to secondments is more favourable than in some Indian cases (e.g., Centrica, Bamford).
A dilemma faced by ForCo was that in order for CRA to accept that the payroll reimbursements were not fees for services rendered by ForCo in Canada, CRA required that there be no mark up (see also 2013-0474431E5 respecting a similar seconding issue under s. 95(2)(b)(ii)), whereas no mark up would look odd from a transfer pricing perspective. CRA did not comment directly on this, but received a rep that all “transfer prices for transactions between CanCo and ForCo will be determined in accordance with the arm’s length principle.”
Neal Armstrong. Summary of 2014-0542411R3 under Treaties – Art.5 and ITA s. 247(2).
Non Corp Holdings – Ontario Superior Court of Justice rectifies the date of a capital dividend declaration to eliminate Part III tax
CCPCs generally can pay out ½ of capital gains as a capital dividend immediately after realization, whereas additions to the capital dividend account from sales of eligible capital property do not occur until the year end. The most common mistake giving rise to rectification orders is to pay a capital dividend immediately after receipt of proceeds of goodwill, rather than waiting until the beginning of the following year.
Following the sale of a business giving rise to a “capital gain” (likely, goodwill proceeds), the dividend of the targeted capital dividend amount was paid on the first day of the following year, but the resolution declaring the dividend was dated the last day of the current year. CRA required that this error be rectified (by changing the resolution date by one day) in order to reverse the Part III tax.
In granting this rectification order (which was not opposed by CRA), Dunphy J stated that (in contrast to his Birch Hill decision, where the denied rectification “would have materially re-ordered the transaction in ways that nobody had considered at the relevant time”), here:
There was a specific intention to allocate specific proceeds of a specific transaction to a specific tax account – the capital dividend account – to achieve a specific tax goal. A very minor mistake, in human terms at least, was made.
Neal Armstrong. Summaries of Non Corp Holdings Corp. v. A.G., 2016 ONSC 2737 under General Concepts – Rectification and s. 89(1) – capital dividend account – para. (c.1).
CRA finds that corporate PUC and capital surplus flowed through on a cross-border continuance
A non-resident corporation governed by a non-resident jurisdiction’s corporate law had issued share capital based only on the “nominal value” (perhaps better translated as “par value”) of its common shares, but with a share premium account from share issuances. It became resident in Canada through a change in its central management and control, and then continued under a provincial companies statute, with the issued share capital account and share premium account being relabelled as stated capital and contributed surplus, respectively, on the continuance. It then passed a resolution converting the newly-styled capital surplus account into further stated capital – and got a ruling that this did not generate a s. 84(1) deemed dividend.
This ruling letter is supportive of a view that paid-up capital (and capital surplus), however precisely labelled under the applicable corporate statute, maintain their status on various types of corporate migrations, such as a continuance, or perhaps a conversion of a C-Corp to an LLC (with the right drafting of the LLC agreement), notwithstanding that the treatment (and labelling) of the capital and surplus amounts under each statute will often differ to some extent.
Neal Armstrong. Summary of 2015-0584151R3 under s. 84(1).
Ferlaino – Tax Court of Canada requires the exercise price of employee stock options to be translated at the exercise-date spot rate
The former Director of Taxes at a large Canadian corporation argued unsuccessfully before Smith J that the computation of his s. 7(1)(a) benefits on exercising options on the shares of the listed U.S. parent should depart from the norm by translating his exercise price using the much higher exchange rate at the time of option grant, rather than the rate (of around par) at the time of exercise.
Neal Armstrong. Summaries of Ferlaino v. The Queen, 2016 TCC 105 under s. 7(1)(a) and s. 110(1.5)(a).
Income Tax Severed Letters 4 May 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.