News of Note
1455257 Ontario Inc. – Federal Court of Appeal finds that a dissolved corporation cannot appeal to the Tax Court
Email this ContentDawson JA and her colleagues have overruled an earlier decision of their Court (495187, a.ka. Sarraf) and found that an Ontario corporation which has been dissolved cannot file a Notice of Appeal.
Under the OBCA, a dissolved corporation cannot initiate legal proceedings, but proceedings can be taken against it. Sarraf considered that a court appeal was a mere continuation of proceedings which had been commenced against the corporation by the Minister’s assessment – but Dawson JA found that Sarraf had failed to consider that the current appeal procedures were quite different from the Income War Tax Act procedures considered in a yet earlier decision.
She noted that although a voluntarily dissolved corporation could not be revived by the Companies Branch, “the dissolved corporation may be revived by a Private Act of the Ontario Legislature.”
Neal Armstrong. Summaries of 1455257 Ontario Inc. v. The Queen, 2016 FCA 100 under OBCA s. 242, ITA s. 169(1), General Concepts – Stare Decisis.
Muir – Federal Court finds that financial hardship references basic living requirements, not university tuition
In rejecting a submission that garnishing $720 per month from a taxpayer with annual income of over $100,000 and children in university produced financial hardship justifying interest relief under s. 220(3.1), Annis J stated:
[I]n many Canadian families, children are expected to finance their own university education as an investment which would be recovered in the future by the benefits of the knowledge and skills acquired by a higher education. … In any event, I agree with the CRA’s interpretation that financial hardship for an individual is financial suffering or lack of what is needed for basic living requirements, such as food, clothing, shelter and reasonable nonessentials.
Neal Armstrong. Summary of Muir v. MNR, 2016 FC 362 under s. 220(3.1).
CRA considers that an aerial drone likely is an aircraft for CCA purposes
CRA considers that an aerial drone likely is a type of (unmanned) “aircraft” so that it would be classified as a Class 9(g) property (25% CCA rate).
Neal Armstrong. Summary of 11 March 2016 T.I. 2016-0633111E5 under Schedule II - Class 9.
Opportunities for the Disabled Foundation – Federal Court of Appeal confirms that charitable registration could be revoked for expending 70% of revenues on fund-raising
CRA estimated that a registered charity expended approximately 70% of its revenues on fund-raising. In confirming that this (along with other substantial grounds) was a sufficient basis for revocation of its registration (as being contrary to the requirement for a charitable organization to devote all of its resources to charitable activities), Ryer JA stated:
[F]undraising itself cannot become a raison d'être for a charity. …[T]he high level of fundraising activities undertaken …can reasonably be regarded as having become an end in itself.
Neal Armstrong. Summaries of Opportunities for the Disabled Foundation v. MNR, 2016 FCA 94 under s. 149.1(1) – charitable organization, s. 168(1)(e) and s. 165(3).
CRA considers it to be objectionable for a s. 55(3)(a) spin-off to result in an increase in the aggregate outside basis
Where an intermediate holding company (Holdco) wishes to have its subsidiary (Opco) spin off a business to another Holdco subsidiary (Newco) in compliance with s. 55(3)(a), this technically can be accomplished by Opco selling that business to Newco for preferred shares, retracting those prefs for a note, and distributing the note to Holdco as redemption proceeds for a portion of the Opco shareholding, before that note is contributed to Newco. This will result in Holdco having full basis for its shareholding in Newco (i.e., a cost equal to the net fair market value of the business transferred to Newco), so that the aggregate ACB of its shareholdings in Opco and Newco increases as a result of the transactions. CRA considers that this increase is contrary to the object of s. 55(2), and “would consider the application of GAAR.”
If butterfly-style mechanics instead are used to spin-off the business to Newco, this is unobjectionable since the resulting ACB of Holdco’s Newco shareholding would be equal to a pro-rata portion of its previous ACB in the Opco shareholding.
Neal Armstrong. Summary of 2015-0604521E5 under s. 55(3)(a).
GWR Global Water Resources, a B.C. company, is proposing to merge under Delaware law into a Delaware corporation
The sole asset of GWR Global Water Resources Corp. (“GWRC”), a TSX-listed small-cap B.C. company, is a 48% equity interest in a Delaware water management company (“GWRI”), with the other 52% held by various private owners. In order to take advantage of a term of bonds previously issued by GWRI, which permits their refinancing if GWRI engages in a public offering, it is proposed that GWRC be merged into GWRI under the Delaware corporate law (but as authorized under a B.C. Plan of Arrangement), with GWRI as the survivor – following which a public offering by GWRI would be completed.
S. 128.2(2) appears to effectively deem such a merger to be the same thing as a continuance to Delaware (triggering asset dispositions under s. 128.1(4)(b) and potential emigration tax under s. 219.1), immediately followed by a s. 87(8.2) absorptive foreign merger of GWRC into GWRI. On the basis that GWRC will not became resident in the U.S. to avoid the emigration tax or Part XIII tax, the applicable rate of emigration tax is reduced under s. 219.3 from 25% to 5%. On the numbers, no significant Canadian tax is anticipated to be triggered. Canadian shareholders are expected to be eligible for rollover treatment given that the merger is believed to qualify as a s. 87(8) foreign merger.
GWRC will be treated for Code purposes as (i) transferring all of its assets and liabilities to GWRI, in exchange for common shares of GWRI, and (ii) distributing those GWRI shares to its shareholders. Although the GWRI shares are FIRPTA assets, this is not anticipated to trigger significant tax. In addition, GWRI is anticipated to have no significant "all earnings and profits amount," so that with the appropriate elections, Code s. 367(b) gain by U.S. shareholders should be avoided.
Neal Armstrong. Summary of Circular for merger of GWR Global Water Resources Corp. under Public Transactions – Other – Continuances/Migrations – Outbound – Outbound mergers.
Income Tax Severed Letters 30 March 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Korfage – Tax Court of Canada notes that CRA has the discretion to use an average annual exchange rate in translating monthly U.S.-dollar amounts received
A Canadian-resident recipient of pension payments from a U.S. pension plan was entitled under Art. XVIII, para. 1 of the Treaty to deduct from his Canadian income the amount of the pension payments which he would have been entitled to exclude from his U.S. taxable income were he a U.S. resident. He was unsuccessful before Lamarre ACJ with an argument that his deduction from his 2010 pension income should use the higher Cdn/U.S. exchange rate applicable when his pension entitlement was crystallized on his retirement in 2000, rather than the 2010 FX rates. She found that the exempt amount arose each month under Code s. 72(b)(1) (based on a straight-line amortization of the U.S.-dollar cost of his pension investment) when the pension payments were received by him, so that those were the stipulated translation times under ITA s. 261(2).
In fact, CRA used the average exchange rate for 2010 for all the 2010 pension amounts, as to which she noted that “the Minister has discretion in the application of an appropriate exchange rate.”
Neal Armstrong. Summary of Korfage v. The Queen, 2016 TCC 69 under s. 261(2).
It might be “market” for tax loss reps in acquisitions of losscos to have a term of 6 or 7 years
Anecdotal evidence and limited publicly available materials suggest that arm’s-length purchasers of losscos are paying from $0.03 to $0.10 per dollar of non-capital losses, so that they are heavily discounting the anticipated post-acquisition value of the losses.
Given that statute-barring does not commence to run until a loss is utilized (so that a tax-balance rep open for the normal reassessment period is effectively open-ended), “it is not unusual for the parties to agree to an explicit survival period in respect of representations relating to tax loss balances; a survey of the limited public disclosure available indicates a range of 6-7 years from closing of the acquisition.”
Neal Armstrong. Summary of Anu Nijhawan, "When is 'Loss Trading' Permissible: A Purposive Analysis of Subsection 111(5)," draft 2015 CTF Annual Conference paper under s. 11(5)(a).
CRA may reduce interest income to the recipient when it denies interest deductions on related person loans
In numerous CRA challenges to interest rates on loans between sister companies, parents and subsidiaries, and in cross border hybrid debt structures, Gosselin and Lynch “have seen significant reductions to interest rates claimed to nominal amounts and in some cases zero.” However, although in theory, the interest income to the creditor could remain fully taxable even following such reduction in the interest deduction, in some files they “have seen CRA apply a policy… to reduce interest income of the recipient entity” by analogy to a two-sided adjustment policy for management fees (see, e.g., 2012-0440071E5).
Neal Armstrong. Summary of Marie-Eve Gosselin and Paul Lynch, "A Review of Interest Deductibility Since Ludco," draft 2015 CTF Annual Conference paper under s. 20(1)(c).