News of Note
CRA ruling contemplates the operation of the s. 212.3(9)(b)(ii) PUC restoration for upper-tier QSCs on the payment by a U.S. LLP of a “dividend” to lower tier CRIC partners
Email this ContentA U.S. corporation will indirectly subscribe for units in a (presumably U.S.) limited liability partnership (FA1) by subscribing for preferred shares in its two immediate Canadian subsidiaries (Canco1, the general partner of a Canadian LP (“LP1”), and Canco2, the limited partner), with those funds going down through a long stack of Canadian subsidiary LPs (starting with LP1) and corporations as preferred unit and preferred share subscription proceeds, so as to land in FA1. A number of months later, FA1 will pay a distribution proportionately to its partners, who directly comprise (i) a limited partner corporation (Canco9), and (ii) a general partner which is a general partnership (“GP”) - whose partners on a s. 212.3(25) look-through basis are two other indirect Canadian corporate subs in the group (Canco7 and Canco8).
Consistently with the CRA policy on LLPs (see 2016 IFA Roundtable, Q. 1), the CRA ruling letter described FA1 as a (non-resident) subject corporation rather than as a Canadian partnership, and described the distribution as being deemed by s. 90(2) to be a dividend.
S. 212.3(3) provides for the making of an election for a dividend to be deemed to be paid by “the” qualifying substitute corporation which is party to the election. The first CRA ruling was simply that Canco1 and Canco2 (atop the Canadian stack) will each be considered to be a QSC. The letter does not specify how the s. 212.3 effect of the investments made by the three CRICs (namely, the three direct or indirect partners of FA1 – or one CRIC if the partnership interests of Canco7 and Canco8 are nominal) is effectively allocated to the one or both of the QSCs – which may imply that there was flexibility as to how that could be done. But maybe there was no practical significance to this. If all the relevant general partner interests were nominal, there effectively would be only one significant CRIC (Canco9) and only one significant QSC (Canco2).
The second CRA ruling was that the distribution will be considered to be received as a dividend in respect of a class of shares of capital stock of FA1 by Canco7, 8 and 9 for the purposes of s. 212.3(9)(b)(ii) – A(B). This is the same allocation issue in reverse – it appears to be contemplated that the “dividend” received by the three (or one) CRIC can effectively be allocated to restore the cross-border PUC in the QSCs under s. 212.3(9)(b)(ii). The wording of this ruling treats the distribution paid by FA1 to its limited partner (Canco9) and general partners (being effectively Canco7 and Canco8) as the payment of a dividend on a single class of shares to those three shareholders - so that each of Canco 9, 7 and 8 will qualify under s. 212.3(9)(b)(ii) – A(B) as having received a dividend in respect of that single class of shares.
Neal Armstrong. Summaries of 2015 Ruling 2014-0541951R3 under s. 212.3(9)(b)(ii), s. 212.3(3), s. 90(2) and s. 248(1) – corporation.
CRA rules that a US sub servicing the collection of both its own debt portfolios and that of a U.S. sister was a good mothership to the sister
A Canadian corporation has a U.S. business of purchasing and collecting defaulted or other higher risk debts which, for risk management and state licensing reasons, it carries on through multiple U.S. subsidiaries. However, at least in the case of the “FA5 Subsidiaries,” all the work is done by the (apparently numerous) employees of their sister, FA4. CRA ruled that s. 95(2)(a)(i) deemed the income of one of the FA5 Subsidiaries to be active business income (and an addition to its exempt surplus).
This likely does not represent a reversal of 2000-0044387 (see also 9622545), where a U.S. sub, which only carried on the management of the respective real estate development properties of other U.S. subs, was found not to be eligible for s. 95(2)(a)(i) treatment because its management business would have been separate from the development businesses even if it had held the properties directly. Here, FA4 also held distressed debt portfolios of its own, albeit partly through a subsidiary LP – and one of the conditions for the CRA ruling was that LP qualified as a partnership for ITA purposes. Thus, the management and debt collection activities of FA4 may have been regarded by CRA as an integrated business.
Neal Armstrong. Summary of 2015 Ruling 2015-0573141R3 under s. 95(2)(a)(i).
Trez Capital MIC is contemplating an extended liquidation process
Trez, a TSX-listed mortgage investment corporation, is proposing to maximize shareholder value through an “orderly wind-up plan,” under which it will allow its mortgages to mature or sell them before maturity at par. Provided it maintains its ITA status as a MIC throughout this process (as to which there is a risk factor disclosure), it can avoid corporate tax by distributing its net interest income and capital gains as taxable dividends (taxable as interest to the shareholders) or capital gains dividends (1/2 taxable to them).
The tax disclosure divides the process into three phases: initial disposition program; process of being wound-up; and wind-up. It discusses the prospect of receiving a return of the paid-up capital of $10 per share only in relation to the third phase – perhaps reflecting diffidence as to how long a period the “on the winding-up” process referred to in s. 84(2) can extend to.
Neal Armstrong. Summary of Circular of Trez Capital Mortgage Investment Corp. under Spin-offs & Distributions – Liquidations – Corporate liquidations.
The Supreme Court’s finding in Daniels that Métis are Indians does not accord them tax-exempt status under the Indian Act
In finding in Daniels (2016 SCC 12) that non-status Indians and Métis peoples are "Indians" for the purposes of s. 91(24) of the Constitution Act, 1867 does not affect the proposition that such peoples are not members of Indian bands as defined in s. 6 of the Indian Act and, therefore, continue not to benefit from the exemption from taxation accorded by s. 87 of the Indian Act.
Neal Armstrong. Summary of H. Michael Dolson, "Daniels: Tax Changes for Non-Status Aboriginals?", Canadian Tax Highlights, Vol. 24, No. 5, May 2016, p. 4 under Indian Act, s. 87.
Brian Ernewein expresses hope that the IRS rather than CRA can serve a surrogate parent role for US multinationals in 2016
Although the U.S. issued a draft Regulation (REG-109822-15 - see IRS Bulletin: 2016-14) to implement country by country reporting, the likely effective dates will be such that there will be a substantial number of US multinationals in 2016 that will not yet be subject to such reporting requirements. This means that a large U.S. multinational with subsidiaries in, say, 50 different countries, would be subject to a requirement to provide the required OECD-mandated reporting to the local tax authorities for each of the 50 countries – unless the multinational can find a country which will treat its subsidiary in that country as a “surrogate parent” to accept the required filing on behalf of it, the US parent and the other 49 subsidiaries (with the tax administration for that country then being responsible for filing the report with the other countries).
It has been suggested that such U.S. multinationals might choose their Canadian subs as their surrogate parents. However, this would generate a huge workload for CRA for the one year. In this regard, Brian Ernewein stated:
One of the things that has been frequently raised is the possibility of the US itself serving as a surrogate country for the US multinationals for 2016 - if the IRS was prepared to accept those country by country returns, and if other countries are prepared to accept that that works in terms of cutting off the local filing obligation if the US uses itself as a surrogate. There is nothing settled on this but work is being done on this, and I am hopeful (given the desirability of a practical approach) that we will get somewhere on this.
Neal Armstrong. Brian Ernewein on BEPS under “Country-by-Country reporting” - 2016 Annual IFA Conference.
CRA considers that U.S. taxes paid by a Canadian resident individual on business income of LLCs held through a ULC are deductible under s. 20(12) as being in respect of his ULC shares as a source of property income
CRA considered that U.S. taxes paid by a U.S. citizen resident in Canada on income which for U.S. purposes was considered to be earned by him as a “partner” of a Canadian ULC which carried on a U.S. business through LLCs was deductible by him in computing his Canadian income under s. 20(12). CRA reasoned that such U.S. taxes were “in respect of” potential income on his shares of the ULC (being his only source of income from a Canadian perspective, albeit one that was not currently generating income):
There is a logical connection between the income from ULC and the U.S. taxes paid by Taxpayer because if Taxpayer did not own such shares, no U.S. taxes would have been paid [citing Smidth].
Neal Armstrong. Summary of 15 December 2015 Memo 2014-0560371I7 under s. 20(12).
CRS draft legislation contains some departures from FATCA
The OECD model common reporting standard (which is reflected in the Canadian draft legislation released on April 15, 2016 to add Part XIX of the ITA) is heavily influenced by FATCA and the associated Model 1 Intergovernmental Agreement on which the Canada-US Intergovernmental Agreement (Canada-US IGA) is based. However, there are some differences:
First, the CRS applies to reportable persons on the basis of their residence for tax purposes, with no reference to individuals with foreign citizenship, as with FATCA. Second, the Canada-US IGA provided for a de minimis exemption from a review of pre-existing accounts whose balance or value was less than US$50,000. Proposed part XIX does not include such a de minimis exemption for an account held by an individual, but instead provides that varying levels of review apply depending upon the account value.
Neal Armstrong. Summary of Kyle B. Lamothe, "Common Reporting Standard: Draft Legislation", Canadian Tax Highlights, Vol. 24, No. 5, May 2016, p. 6 under s. 273(3).
Income Tax Severed Letters 1 June 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
New Delaware corporate rectification procedure permits various corporate slips to be rectified without a court proceeding, if uncontested
As the Performance Industries and Shafron decisions of the Supreme Court are non-tax, contract cases, the narrower scope given by them to the rescission doctrine - as contrasted to the Juliar line of cases - is justified. The principal concern in such cases is unjust enrichment as between the parties to the instrument. In these contractual cases, “rectification is designed to prevent a written instrument from being used as an engine of fraud or of misconduct equivalent to fraud. The remedy restores the parties to an original oral bargain so that one party cannot rely on the strict terms of a written instrument that contravenes the true arrangement between the parties.” In tax cases, the injustice of mistake-based taxation trumps the policy that underlies the sanctity of contracts. In the successfully contested tax cases, “the Crown, which lacks privity of contract, reaps an undeserved windfall, yet strives to rely on the strict terms of the instrument to justify its enrichment.”
The Delaware corporate law was recently amended to allow various types of corporate slips consisting of defective corporate acts that arise from a failure of authorization, including those found in both public records and private instruments, to be rectified without a court proceeding being required in the first instance. If adopted in Canadian corporate legislation, the process could for example have fixed the mistake in Dale – and since the Crown does not oppose that type of correction, the solution could proceed privately.
Neal Armstrong. Summary of Jeff Oldewening, Rachel A. Gold and Chris Sheridan, "Statutory Ratification", Canadian Tax Journal, (2016) 64:1, 293-325 under General Concepts – Rectification.
CRA considers 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, viz., 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.
In a brief oral response, CRA indicated that s. 93.2(3) is sufficient to permit the rollover under s. 95(2)(c) to be available, notwithstanding the absence of an actual share issuance.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q.10 under s. 93.2(3).