News of Note
CRA indicates that late-filed ETA s. 156 elections will not be accepted if there was negligence or GST/HST in fact was charged
Email this ContentSince 2014, GST/HST nil consideration elections under ETA s. 156 have been required to be filed with CRA rather than just stuffed in a filing cabinet. CRA has now published a Policy on when it will accept late-filed elections, which in addition to other more mechanical or obvious criteria, specifies that the parties must have consistently treated their inter-group supplies as having been made for nil consideration from the requested effective date onwards, the request for the late filing must “provide a clear explanation as to why the specified members have filed the election… late,” and “the parties to the late-filed election...must not have been negligent or careless in complying with the provisions of section 156.”
This last point is reinforced by an example which concludes with the comment:
The request would generally be accepted where the explanation as to why the election was filed late demonstrates that the parties were not negligent or careless in complying with the election provisions.
Similar criteria apply to a late-filed request for revocation of an election.
Neal Armstrong. Summary of P-155 under ETA s. 156(4)(b)(ii).
The international shipping non-residency exemption may cause a deemed exit tax for foreign shipping companies which had nil income in a prior year
There are some unresolved rules relating to the Canadian international shipping rules:
- The branch exemption found in s. 81(l)(c) only provides that the international shipping income earned by the foreign taxpayer is not included in income – it does not provide that the company is not carrying on business in Canada, thereby potentially resulting in an obligation for a large international shipping company to file hundreds of nil returns.
- It is not clear whether a foreign company can satisfy the revenue tests in s. 250(6)(b) if it happens to have nil revenue in a year, as might occur if its only assets are vessels under construction, or shares in vessel operating companies that do not pay any dividends in the year. If, as a result of this problem, it is considered to be resident in Canada, then in a subsequent year when it earns income qualifying it as a deemed non-resident of Canada under s. 250(6)(b), it will be treated as migrating from Canada, thereby triggering tax on accrued gains.
Neal Armstrong. Summaries of Michael Shields, "Taxation of International Shipping Companies in Canada," International Tax, Wolters Kluwer CCH, No. 88, June 2016, p. 1 under s. 81(1)(c) and s. 250(6)(b).
Failing to repay a grandfathered upstream loan by August 19, 2016 will, at best, require the Canadian corporate recipient to claim perennial reserves against inclusions based on its August 20, 2014 attributes
If an upstream loan that was made before August 20, 2011 is not repaid by the August 19, 2016 deadline for doing so, the Canadian-taxpayer recipient of the loan will be required to include its amount in income on August 20, 2014. If the taxpayer is a Canadian corporation, it will need to determine its surplus and basis attributes as at August 20, 2014, for purposes of any s. 90(9) reserve.
If these attributes as at August 20, 2014 are ultimately used to shelter any actual foreign affiliate dividend or other distribution, or are subsequently earmarked to shelter any other upstream loan, the Canadian corporation will lose its continued entitlement to the subsection 90(9) deduction and may find it necessary to actually repay the grandfathered upstream loan so as to instead claim a terminal deduction under subsection 90(14).
Neal Armstrong. Summaries of Geoffrey S. Turner, "Transitional Tax Treatment of Grandfathered Upstream Loans – Repayment Deadline Approaching," International Tax (Wolters Kluwer CCH), No. 88, June 2016, p. 7 under s. 90(9), s. 90(8)(a) and s. 39(2.1).
Gerbro Holdings – Tax Court of Canada finds that offshore hedge fund investments were chosen in the main for commercial reasons (e.g., manager reputation), so that s. 94.1 did not apply
The investment guidelines governing a privately-held Canadian investment company mandated its holding up to 60% of its funds in hedge funds. Although the hedge funds in which the company invested were in low tax-rate jurisdictions, Lamarre ACJ accepted that tax deferral was not “one of the main reasons” for acquiring these investments and that there instead was an “overarching commercial reason for investing" in these funds, e.g., the reputation of the hedge fund managers – and these offshore funds were selected as being the best choices. Accordingly, those investments were not subject to the offshore investment fund rules in s. 94.1.
Neal Armstrong. Summary of Gerbro Holdings Co. v. The Queen, 2016 TCC 173 under s. 94.1(1).
CRA finds that 25% Part XIII tax applies to interest paid by a transparent ULC (held through a QSSS by an S-Corp) to the S-Corp
Where an S-Corp makes an interest-bearing loan to a Nova Scotia ULC held by it through a qualified Subchapter S subsidiary, the interest paid on the loan will not be eligible for Treaty benefits under the anti-hybrid rule in Art. IV, 7(b): the interest will be disregarded for U.S. purposes, given the fiscally transparent nature of the ULC and QSSS; whereas the interest would be regarded for such purposes if the ULC were not transparent, i.e., the hybrid status of the ULC and QSSS affects the Code treatment of the interest.
This written response is clearer than an oral response given at the 26 May IFA Roundtable, which referred to the S-Corp parent as being “fiscally transparent” and to the “interest…effectively being paid by the U.S Parent (or its members) to itself.” Thus, in contrast to the oral response, which potentially was confusing on this count, the written response is consistent with the longstanding CRA view that S Corps can qualify for Treaty benefits (assuming that, unlike this example, Art. IV, 7(b) does not apply.)
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 9, 2016-0642131C6 under Treaties – Art. 4.
Centerra Gold to acquire Thompson Creek solely for Centerra shares
Centerra Gold is proposing to acquire all of the shares of Thompson Creek under a B.C. Plan of Arrangement in consideration solely for Centerra shares, with the acquired shares contributed immediately to a new holding subsidiary of Centerra. As there is no nominal cash or other non-share consideration, the Thompson Creek shareholders are not required to file an election form in order to receive rollover treatment - so that Centerra will have lower basis in the acquired shares. The U.S. tax disclosure indicates that the exchange is expected to be a “B” reorg (which requires that the sole consideration be shares).
The exchange ratio (resulting in the Thompson Creek shareholders holding only 8% of Centerra) reflects that Thompson Creek has U.S.$673 million of deferred revenue obligations under a gold stream arrangement for its B.C. mine, as well as U.S.$823 million of long-term debt. Centerra has renegotiated the gold stream arrangement to reduce the gold delivery obligation and create a copper delivery obligation.
Neal Armstrong. Summary of Thompson Creek Circular under Mergers & Acquisitions – Mergers – Share-for-Share.
CRA confirms that the s. 95(2)(c) rollover can apply on a dropdown of shares made to an LLC as a contribution of capital rather than for “share” consideration
FA1 transfers all of its shares of FA2 to another non-resident subsidiary of FA1, which is a non-share corporation (“FA3”), as a capital contribution, i.e. no new member interests are issued by FA3. S. 93.2(3)(a) deems FA3 to have issued shares to FA1 in respect of the transfer if the fair market value of a class of its shares (i.e., the FMV of its membership interest) is increased as a result of the transfer.
CRA noted that, as a technical matter, s. 93.2(3)(a) does not appear to go quite far enough so as to permit the particulars of the rollover formula in s. 95(2)(c) to be filled in. However, CRA went on to find that despite these “textual challenges,” the s. 95(2)(c) rollover would be available provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 10, 2016-0642101C6 under s. 93.2(3).
CRA states that it sees no substantive differences between LLCs, and LLPs and LLLPs
In its oral comments at the 26 May 2016 IFA Roundtable, CRA indicated it had finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, but indicated that it was prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018.
In its written response published yesterday, CRA referred to the entities’ “separate legal personality” and “the extensive limitation of liability afforded to all of their members,” and also stated:
[I]t has become widely accepted that U.S….LLCs…are properly viewed as corporations for the purposes of the Act, notwithstanding…Anson… . We see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware.
24 other states provide for LLLPs or LLPs. CRA stated:
We suspect that much of this reasoning may be applicable in respect of entities of other states of the U.S. and perhaps other foreign jurisdictions… .
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 1, 2016-0642051C6 under s. 96.
CRA is thinking about providing administrative relief on computing late-filed PLOI election penalties on a debit-by-debit basis
Where a corporation resident in Canada wishes to make PLOI elections respecting intercompany balances resulting from hundreds of intercompany sales, CRA considers that “each intercompany transaction resulting in a receivable… should be treated as a unique amount of indebtedness,” so that the $100 per month late filing penalty must be calculated separately with respect to each such receivable. However, “the possibility of providing administrative relief in this regard is currently under review,” e.g., “aggregat[ing] certain amounts receivable… on an annual, quarterly, or monthly basis.”
Neal Armstrong. Summaries of 26 May 2016 IFA Roundtable, Q. 11, 2016-0642031C6 under 15(2.13) and s. 212(13).
Pacific Rubiales restructuring will leave 0.006%, and at least 29.3%, of the company to the existing shareholders and plan sponsor, respectively
The debt of Pacific Exploration (formerly, Pacific Rubiales), which filed for protection under the CCAA in April, 2016, consists of U.S.$4.1B of notes, U.S.$1.3B of loans and U.S.$0.50B of DIP financing, of which U.S.$0.24B was advanced by Catalyst. Under the proposed CCAA Plan, the notes and loans will be exchanged for approximately 58.2% of the Corporation’s fully diluted shares, the Catalyst DIP financing will be exchanged for 29.3% of the fully diluted shares – and the DIP providers will hold warrants (with a nominal exercise price) to acquire 12.5% of the fully diluted shares. In addition, those who acted to support the recapitalization before a specified time will receive, in aggregate, an extra 2.5% of the fully diluted common shares (the “Early Consent” shares- which effectively come out of the shares otherwise receivable by those slower to act). The holders of the notes and loans also will have the option to cash in some of their common shares, to be funded out of additional cash subscriptions by Catalyst and some others. Existing common shareholders will hold 0.006% of the post-Plan shares.
The U.S. tax disclosure indicates a risk of the Early Consent shares being treated as a taxable consent fee, whereas the Canadian disclosure is clear that they are part of the exchange consideration.
The U.S. tax disclosure discusses the risk that U.S. holders would receive rollover treatment – on the basis that their debt holdings are “securities,” or that the Plan would be considered to be a recapitalization. There are no Canadian risk disclosures.
Neal Armstrong. Summary of Pacific Exploration Circular under Other – Recapitalizations or note exchanges.