News of Note
CRA rules on non-triangular partly-completed loss shift from lossco parent to profitco sub
Email this ContentLossco wished to transfer its non-capital losses to its wholly-owned subsidiary, Profitco. Rather than engaging in the conventional form of triangular loss-shifting transactions, Profitco used the proceeds of an interest-bearing loan from Lossco to subscribe for preferred shares of a newly-formed subsidiary, which lent the proceeds in a non-interest-bearing loan back to Lossco. These transactions already had occurred. CRA ruled inter alia respecting the interest deduction to Profitco and the non-application of s. 12(1)(x) to the capital contributions made by Lossco to Newco to fund the pref dividend payments, and opined that s. 55(2) as it is to be amended by the July 31, 2015 draft legislation did not apply.
The unwind also is elegant: Newco delivers the non-interest-bearing loan to Profitco as the redemption proceeds for the preferred shares, and the two loans are set-off.
Neal Armstrong. Summary of 2015-0582101R3 under s. 111(1)(a).
CRA states that Canadian domestic sourcing rules apply in determining whether a Canadian corporate donor to a U.S. charity has US-source income for Treaty purposes
A gift made by a Canadian-resident corporation to a U.S. resident charity that also would qualify as a Canadian registered charity if it were resident in Canada is deemed by Art. XXI, para.7 of the Canada-U.S. Treaty to be a “gift to a registered charity” for purposes of the Act, subject to an assumption that the corporation’s income only includes its income arising in the U.S. considers that the Canadian domestic sourcing rules should be used in determining whether income has a U.S. source for these purposes so that, for example, the policy in Folio S5-F2-C1, paras. 1.62 to 1.65 would apply in determining whether a capital gain had a U.S. source.
The 75% income limitation (re income from U.S. sources) and the five year carryover rule in s. 110.1(1)(a) also apply for these purposes.
Neal Armstrong. Summary of 2015 TEI Roundtable, Q.7, 2015-0614251C6 under Treaties, Art. 21.
Income Tax Severed Letters 13 April 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Under a restructuring of a Canadian corporate borrower's US$ debt, it may suffer from its forgiven amount exceeding its economic gain
If 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).