News of Note
Hall – Tax Court of Canada confirms that the assessment of Part I tax returns does not engage the running of statute-barring for taxes under other Parts
Email this ContentD’Auray J confirmed that a T1-OVP form is technically a return made under a separate part of the Act (Part X.1), so that the assessment of timely filings of regular Part I returns of the taxpayer did not commence the running of the normal reassessment period respecting his required reporting of excess-RRSP contribution tax. Accordingly, the Minister was entitled to assess the tax in 2015 going back to the 2008 year.
After referring to the discretion of the Minister to waive the tax under s. 204.1(4) (or, failing that, to waive interest thereon under s. 220(3.1)), D’Auray J recommended “that the Minister exercise her discretion for the taxation years in issue.”
Neal Armstrong. Summaries of Hall v. The Queen, 2016 TCC 221 under s. 152(4) and s. 204.1(4).
On the Agrium/PotashCorp merger, all shareholders would move to a new holdco and s. 85.1 treatment for non-electing shareholders would be busted through a 3-party exchange
In a proposed “merger of equals,” resident taxable shareholders of Agrium and PotashCorp who had validly elected for rollover treatment would transfer their shares under s. 85.1 to a Newco (“New Parent” – whose initial nominal capital would be owned on a 50-50 basis by Agrium and PotashCorp) in exchange for common shares of New Parent. The other shareholders would transfer their Agrium and PotashCorp shares to two new subsidiaries of New Parent (“Agrium AcquisitionCo” and “PotashCorp AcquisitionCo”) in exchange for the delivery to them of New Parent shares (with the two AcquisitionCos simultaneously issuing shares to New Parent as payment for the New Parent share consideration). As a result, the former Agrium and PotashCorp shareholders would hold 48% and 52%, respectively, of New Parent.
All the Agrium and PotashCorp shares acquired by New Parent under the s. 85.1 exchange would be dropped down into Agrium AcquisitionCo and PotashCorp AcquisitionCo, also as part of the above CBCA Arrangement. It is intended that Agrium AcquisitionCo will be amalgamated with Agrium, and PotashCorp AcquisitionCo with PotashCorp.
Neal Armstrong. Summary of Joint Agrium/PotashCorp Circular under Mergers & Acquisitions – Mergers – New Holdco.
CRA carries forward many of its published policies on M&P profits
The determination of a corporation’s Canadian manufacturing and processing profits still is relevant for various provincial corporate income tax purposes. CRA’s new Folio on manufacturing and processing does not contain much that is new, carries forward many of the policies from IT-145R (e.g., various flexible approaches to determining the cost of capital or labour in ways that avoid double-counting) and drops some of the more detailed guidance in IT-145R, especially detailed industry-by-industry comments on the delineation of qualified and non-qualified activities.
Neal Armstrong. Summaries of Folio S4-F15-C1 Manufacturing and Processing under s. 125.1(3) – Canadian manufacturing and processing profits, s. 125.1(3) – manufacturing and processing, Reg. 5200, Reg. 5202- Cost of Labour, Rental Cost, Cost of Capital, Qualified Activities, Sched II, Class 29.
CRA provides expanded comments on business investment loss issues in its new Folio
The new Folio on business investment losses covers more ground than IT-484R2, including:
- Guidelines on when CRA may accept a request to revoke a s. 50(1) election, e.g., where the taxpayer was not aware of the loss being denied under s. 40(2)(g)(ii) (i.e., no carte blanche).
- There is an extensive example illustrating the adverse application of s. 50(1.1) to a non-arm’s length person who started carrying on business in a corporation acquired by her from the taxpayer who had claimed an insolvency loss re the corporation.
- In a somewhat grudging acknowledgement of the case law, CRA states that “while there is no legal requirement that in all cases a taxpayer must exhaust all legal means of collecting on a debt before determining that during the year it had become a bad debt, such a determination will generally fall short if it is evident that collection on the debt is reasonably possible but no proactive steps were taken to collect on it,” and that “the existence of a non-arm’s-length relationship between the creditor and the debtor ... will not prevent the creditor from establishing that a debt has become a bad debt.” (However, CRA still considers that all of a debt must be bad to be written off under s. 50.)
- Before summarizing some of the s. 40(2)(g)(ii) jurisprudence, CRA states that
The burden of demonstrating a sufficient connection between the taxpayer’s loan to (or the taxpayer’s guarantee of the debts of) the debtor and the potential for income will be much higher in situations where the taxpayer is not a direct shareholder of the debtor.
- CRA provides an extended example illustrating the s. 39(9) rule (re the previous claiming of the capital gains exemption).
Neal Armstrong. Summaries of S4-F8-C1 ”Business Investment Losses” under s. 50(1), s. 248(1) – small business corporation, s. 50(1.1), s. 50(1)(a), s. 40(2)(g)(ii), s. 39(9) and s. 164(6).
Zone3 – Federal Court of Appeal declines to require CAVCO to consider extending favourable certification guidelines to the taxpayer’s TV production
In the Federal Court below, Martineau J had 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, questionnaire 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 vehicle for effectively presenting the show’s informational (historical) 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.
In reversing nullifying Martineau J's order (so that the CAVCO rejection stood), Montigny JA stated that “the exclusion of a game, questionnaire or contest is sufficiently broad to encompass the Production in this case, irrespective of the relative importance to be accorded to the quiz-questionnaire aspect compared to that of its historic and informative content,” and (respecting the alleged procedural unfairness in the use of the decision tree) “its application normally has the effect of favouring the producers as it limits the scope of the exclusion under the Regulation” and “the treatment accorded to other productions does not create legitimate expectations for the respondent.”
Neal Armstrong. Summary of A.G. (Canada) v. Zone3-XXXVI Inc., 2016 CAF 242 under Reg. 1106(1) “excluded production” – (b)(iii).
CRA indicates that loan advances to a limited partner may give rise to negative ACB gains
Rather than making current distributions of its cash flow to a limited partner, those sums are lent by the LP to the limited partner – then at the beginning of the following year the LP effects a distribution of the applicable share of the previous year’s profits to the limited partner by issuing a demand note to the limited partner and pays that note by way of set-off against the loans owing by the limited partner. Does this approach avoid negative ACB gains under s. 40(3.1)?
CRA referred to the “general principle of civil law to the effect that a person cannot make a contract with itself,” so as to suggest that a partnership loan to a partner may not be valid. (See also s. 12 of the Limited Partnerships Act (Ontario) which overrides a potential common law concern (see e.g., Rye), by specifying that “a limited partner may loan money to and transact other business with the limited partnership,” but does not specifically validate a loan going the other way.) CRA went on to state:
Should it not be possible for a limited partnership to make loans to the limited partner…the amounts styled as loans…would be treated by the CRA as amounts received in lieu of or in full or partial payment of the distribution of the taxpayer’s share of the limited partnership profits under subparagraph 53(2)(c)(v).
CRA also stated:
[T]he Courts…have given a very wide scope to the terms "on account of" and "in lieu of"…which are also used in subparagraph 53(2)(c)(v).
Neal Armstrong. Summaries of 27 June 2016 External T.I. 2016-0637341E5 Tr under s. 53(2)(c)(v) and s. 40(3.13).
CRA considers advances to employees to be currently taxable
CRA considers that an advance to an employee is current s. 5 income to him or her even if the advance is required to be repaid if the future services are not performed. This goes further than Merchant.
Neal Armstrong. Summaries of 26 April 2016 Internal T.I. 2015-062357 under s. 5(1) and s. 8(1)(n).
The significance of making a Reg. 5907(2.1) election has increased with the assimilation of goodwill to depreciable property
Reg. 5907(2.1) allows a taxpayer to elect to use accounting rather than tax depreciation for its depreciable or foreign resource properties in computing a foreign affiliate's earnings from an active business. With the proposed assimilation of goodwill and other eligible capital property to the world of depreciable property, the potential benefit (or detriment) from making this non-revocable election has increased.
Because goodwill is amortized for US tax purposes on a straightline basis over 15 years but is generally carried at historical cost for the purposes of financial statements, the benefit of following accounting rules rather than tax rules may be significant if there has been no impairment. At the same time, the opposite could be true if a significant impairment was recognized for accounting purposes in a subsequent year before the purchased goodwill was the subject of an equivalent amount of amortization for tax purposes.
Neal Armstrong. Summary of Albert Baker and David Bunn, "FAs and the Repeal of the ECP Regime", Canadian Tax Highlights, Vol. 24, No. 9, September 2016, p. 4 under Reg. 5907(2.1).
407 ETR – Tax Court of Canada finds that Ontario government charges to the 407 Highway operator for OPP patrol services were for an HST-exempt supply of a “municipal service”
D’Arcy J noted that since “policing services are one of the core services provided by a municipality,” and since the HST exemption in Sched. V, Pt. VI, s. 21 on its face contemplates that an exempt “municipal service” can be supplied by a non-municipal government, it followed that charges of the Ontario government to the private operator of the 407 Highway for OPP patrol services were exempted as a “municipal service,” as they “were of the same nature as services typically provided by municipalities.”
Neal Armstrong. Summary of 407 ETR Concession Co. Ltd. v. The Queen, 2016 TCC 213 under ETA Sched. V, Pt. VI, s. 21.
Dell – Supreme Court of Spain finds that the local premises of a commissionaire were a fixed place of business of the non-resident principal
In civil law, a commissionaire is an entity that sells in its own name for the account of another. Accordingly, the commissionaire is not a dependent agent for Treaty purposes as it does not habitually exercise “authority to conclude contracts in the name of the [non-]resident.”
The Supreme Court of Spain did not agree with this proposition, finding that in order for the local entity to be a dependent agent there need only be a "functional link" between the customers of the commissionaire and the non-resident principal, so that actual legal authority is unnecessary.
More fundamentally, the Supreme Court held that the premises of the local commissionaire (Dell España SA) constituted a fixed place of business, and thus a PE, of the non-resident (Dell Products Ltd., an Irish company) before even turning to the dependent agent paragraph.
The Court referred to the OECD Commentary statement that premises can be at the disposal of a non-resident even if the non-resident does not hold a formal legal right to use those premises, and then stated “disposal also includes…activity on account of the company.” There was no requirement for the non-resident to have any of its own personnel located on the Spanish premises, as the "fixed place" could be found solely due to activities performed by employees of Dell España SA - so that the business activities performed by Dell España SA should be regarded for treaty purposes as the business of the non-resident carried on in Spain at the Dell España SA premises.
Neal Armstrong. Summary of Gary D. Sprague, "Observations on Treaty Interpretation – Spanish Supreme Court Addresses Commissionaires," Tax Management International Journal, 2016, p 55 under Treaties - Article 5.