News of Note
Under a restructuring of a Canadian corporate borrower's US$ debt, it may suffer from its forgiven amount exceeding its economic gain
Email this ContentIf a Canadian corporate debtor, which borrowed US$100 at par, restructures its debt, at a time that the US dollar is now worth Cdn.$1.50, by settling that debt for a payment of US$20, it will realize an economic gain of Cdn.$70 (Cdn.$100 - Cdn.$30). That gain for tax purposes will consist of a forgiven amount of Cdn.$80 (as per s. 80(2)(k)) and a s. 39(2) FX loss of $10.
[I]f the debtor has non-capital or capital loss carryforwards, undepreciated capital cost, cumulative eligible capital, resource pools, or adjusted cost base in certain capital property, those attributes must be used before the forgiven amount can be applied against the current year foreign exchange loss. Accordingly, planning to utilize or move other more valuable tax attributes prior to the debt forgiveness should be considered.
Neal Armstrong. Summary of Carrie Smit, "Debt Restructuring and the Falling Canadian Dollar," International Tax (Wolters Kluwer CCH), February 2016, No. 86, p. 5 under s. 80(2)(k).
Turner – Tax Court of Canada indicates that interest carrying charges increased the ACB of a share investment
After finding that a retired professional engineer could not recognize, as a non-capital loss to be carried forward, his losses, including from interest expense, on plowing most of his money into an investment in a public corporation that then went bankrupt, Masse DJ went on to indicate that the individual's interest carrying charges increased the adjusted costs base of his share investment, thereby increasing his capital loss. This view, in fact, was advanced by the Justice lawyer, so that Masse DJ did not review whether it was consistent with Stirling.
Neal Armstrong. Summaries of Turner v. The Queen, 2016 TCC 77 under s. 18(1)(b) – capital loss v. loss and s. 54 – adjusted cost base.
Lebouthillier announces major boost to tax practitioners’ dispute resolution practices
CRA will invest $444 million (over what time period, the Minister did not say) to expand the auditing and litigation of suspected tax evasion and aggressive tax avoidance, resulting in a 12-times increase in the number of “schemes” being examined, and an increase in the number of examinations of high-risk taxpayers from 600 to 3000 per year - as well as the hiring of an additional 100 auditors to investigate “high-risk” multinationals. “To make sure these investments deliver results, the CRA will embed legal counsel within investigation teams, so that cases can be quickly brought to court.”
Neal Armstrong. Summary of 11 April 2016 CRA Press Release “Government of Canada cracks down on tax evasion” under s. 152(1).
CRA rules on donation of pubco shares to a private foundation followed by immediate buy-back
A privately-held Canadian corporate group is using its shareholdings in a public company to maximize the benefit from a corporate contribution to a charitable foundation established by the spouse of one of their individual shareholders. One of companies in the group is donating its shares to the foundation (claiming the s. 38(a.1) exemption), with the Foundation then immediately selling those shares to another group company for cash. Some related transactions occur in order to utilize the benefit of the s. 110.1 deduction for charitable donations.
At the completion of the reorganization, a newly-formed Amalco is being wound-up into its parent, Newco. At the time of the winding-up, Amalco holds Newco preference shares. CRA ruled that the cancellation of these shares on the wind-up will not give rise to a deemed dividend under s. 84(3) (see also 2012-0450821I7 F).
Neal Armstrong. Summaries of 2014-0532201R3 under s. 38(a.1) and s. 84(3).
CRA provides an opinion that the new s. 55(2) rules do not apply to a loss-shifting transaction
Profitco is wholly-owned by Lossco, which is wholly owned by Parent. Rather than engaging in a triangular loss shifting transaction (see, e.g, 2012-0437881R3) Profitco will simply borrow from Profitco (at an interest rate reflecting the loan’s subordinated status) and subscribe for non-voting cumulative redeemable retractable preferred shares of Lossco. Parent will agree, in a support agreement with Lossco, to make capital contributions to fund Lossco’s payment of the dividends, which will occur on the unwinding of the transactions.
Consistently with the policy announced at the 2015 annual CTF conference, CRA provided an opinion that, after giving effect the July 31, 2015 draft amendments, s. 55(2) will not apply to this dividend.
Neal Armstrong. Summary of 2015 Ruling 2015-0604071R3 under s. 111(1)(a).
Whether an individual is a de facto director or merely a manager partly engages the question, what are the core functions of directors
The question whether an individual is a de facto director and, thus, has potential liability under ITA s. 227.1 and similar provisions in other statutes turns, in part, on whether the individual is doing the things that generally directors do. However, this is also a comparative exercise, as a director may have more success in avoiding liability if there is someone else who is playing a more key role and, conversely, it is very difficult for a sole director and shareholder to cease to be a director.
In situations where the individual has not performed any of the definitive or major acts that only a director could perform but has instead been involved in the corporation's administration or operations, what seems to matter is the extent of the lesser acts that cumulatively may signal the existence of a de facto directorship.
Neal Armstrong. Summary of Brian M. Studniberg, "Identifying the De Facto Director," Canadian Tax Journal, (2015) 63:4, 1073-95 under s. 227.1(1).
CRA automatically assigns a corporate income tax account to non-residents who voluntarily register for GST purposes
Where a non-resident which is not carrying on business in Canada (and, therefore, is not subject to any Canadian income tax liability under Part I) voluntarily registers for GST purposes, CRA will automatically assign a corporate tax account irrespective of the non-resident's wishes. In order to be de-registered for income tax purposes, the non-resident must confirm that it has no obligation to file a corporate income tax return, and then close the corporate income tax account by phone or by sending in the right form (an RC 145).
Neal Armstrong. Summary of 2015 CBA Roundtable, Q.26 under ETA s. 240(3)(a).
It may be advantageous for a CCPC to structure so that it earns foreign source income as FAPI
It generally will be advantageous for a Canadian-controlled private corporation to earn ordinary passive income, such as a royalty, as foreign accrual property income through a controlled foreign affiliate in a jurisdiction that imposes tax at around a 25% rate, rather than directly. A 25% foreign rate is sufficient to generate a full foreign accrual tax deduction and is lower than the rate of tax paid by the CCPC on aggregate investment income.
On the other hand, it generally will be disadvantageous to have a CFA of the CCPC realize and distribute a capital gain. The reason is that the non-taxable portion of the gain (when distributed as a dividend out of exempt surplus) merely generates an addition to the CCPC’s general rate income pool rather than to its capital dividend account. There generally is a better result if the CCPC holdco for the CFA instead sells the CFA shares, as this will generate an addition to its CDA. However, a s. 93 election may be made instead if the sales proceeds are to be reinvested rather than distributed to Canadian individual shareholders.
A further alternative, where the CCPC holding the CFA is, in turn, held by another CCPC, is for the top CCPC to sell its shares of the CCPC holding the CFA. Here, similar considerations (deferral v. absolute reduction in total tax) govern the choice between accessing safe income or sticking with capital gains treatment.
Neal Armstrong. Summaries of Paul Dhesi and Korinna Fehrmann, "Integration Across Borders," Canadian Tax Journal, (2015) 63:4, 1049-72 under s. 91(4), s. 95(2)(b), s. 93(1), s. 55(2)(d), Reg. 5907(2.1).
Zone3 - Federal Court finds that a failure to give adequate reasons for the rejection of a film tax credit claim required that the claim be reconsidered
Martineau J has ordered the Canadian Audio-Visual Certification Office (“CAVCO”) to reconsider a decision to reject a leading Quebec TV producer’s application for certification of a TV series. The essential problem was that CAVCO’s advance notice of a negative determination - on the basis that the production was “in respect of a game…or contest” and, therefore, ineligible for the Canadian film or video production tax credit under Reg. 1106(1), “excluded production,” (b)(iii) – did not address the taxpayer’s position that the shows’ question-and-answer format merely served as a pretext or vehicle for effectively presenting the informational content, and did not disclose that, in fact, the application had been rejected through the mechanical application of a “decision tree” that the taxpayer did not find out about until later.
Martineau J applied the general principle that:
When the reviewing court is not in a position to determine if the decision on that point or argument falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and the law, the decision will usually be found to be unreasonable, unless the reviewing court can itself reasonably find that the outcome of the proceedings would not have changed even if the point or argument has been dealt with by the tribunal one way or the other.
This principle also potentially applies to discretionary decisions of CRA which cannot be challenged through appeal of an assessment.
Neal Armstrong. Summary of Zone3-XXXVI Inc. v. A.G. (Canada), 2016 FC 75 under Reg. 1106(1) “excluded production” – (b)(iii).
CRA will be cautious about providing the police with evidence of taxpayer criminal conduct
ITA s. 241(9.5) and ETA s. 295(5.04) authorize CRA officials to provide taxpayer information to the police that they have reasonable grounds to be believe affords evidence of serious criminal activity. Last year, CRA indicated that:
… [N]o information will be released to the police or other law enforcement agencies without the approval of the Assistant Commissioner of the Compliance Programs Branch.
… Since enactment in June 2014, the CRA has not exercised its authority under the new legislation.
Neal Armstrong. Summary of 2015 CBA Roundtable, Q. 1 under s. 241(9.5).