News of Note
CRA considers the assignment of a right to purchase Canadian real estate to be a disposition of taxable Canadian property
Email this ContentCRA considers that a right to acquire a Canadian real estate property (presumably under an agreement of purchase and sale) is an “option” in respect of the property under para. (f) of the taxable Canadian property definition, so that an assignment of such right by a non-resident constitutes a disposition of taxable Canadian property.
It is unclear why CRA considers such a right to be an option in respect of the property rather than (in a common law province) an equitable interest in the property. It would be news to an options trader that a binding obligation to acquire a property was an option.
Neal Armstrong. Summary of 2015-0608211E5 under s. 248(1) - taxable Canadian property - (f).
Edison LLC – Tax Court of Canada finds that a discretionary finder’s fee is not deductible
Two Florida LLCs of two Florida residents effectively had a joint venture to provide bussing services to the Olympic organizing committee for the 2010 Vancouver Olympics. A third LLC (“Edison”) was formed to provide many of the services. Although the documentation purported to make Edison’s key Canadian employee the owner of its shares, this was mere “window dressing” (to make it look like a separate enterprise in the eyes of the organizing committee), so that effectively the beneficial owner of Edison’s shares was one of the two Florida residents (Pouncey).
All of the estimated profits of Edison were made payable to Pouncey’s company pursuant to an agreement which was not prepared until the Olympics were finished. The rationale presented for the full deduction of this amount was that it was for support services provided by Pouncey’s company and for its services in procuring the Olympic contract work for Edison. CRA accepted the deduction of U.S.$400,000 of the fees as relating to support services provided. Pizzitelli J denied the deduction of the U.S.$2.1 million balance on numerous grounds, including that its amount was “discretionary,” stating:
[E]ven if I accept payment can be made for past services, there must at least be some agreement as to the quantum or calculation of such fee or commission in advance in the context of business in order to characterize such payments as such. It is in the very nature of these types of payments that they are calculable on some objective basis and not merely discretionary… .
Neal Armstrong. Summaries of Edison Transportation, LLC v. The Queen, 2016 TCC 80 under s. 18(1)(a) and General Concepts – Window Dressing.
Income Tax Severed Letters 20 April 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that a cross-border notional cash-pooling arrangement engages the B2B loan rules
CRA considers that a notional cash pooling arrangement between a non-resident parent and its various subsidiaries including Canco, and a non-resident bank, as a result of which Canco has an overdraft balance in its pool account, will be caught by the back-to-back loan rules in ss. 18(6)(c)(i) and 212(3.1)(c)(i) (i.e., some pool account deposits of non-resident affiliates of Canco will be considered to be “intermediary debts”). Accordingly, it was not necessary to consider whether the right of the non-resident bank to offset overdraft balances of any pool participants against deposit balances of other pool participants without prior notice engaged the specified right rules in ss. 18(6)(c)(ii) and 212(3.1)(c)(ii).
Neal Armstrong. Summary of 2015 TEI Roundtable, Q.6, 2015-0614241C6 under s. 212(3.1)(c).
CRA confirms that normal-course dividends (as narrowly defined) are not affected by the s. 55(2) amendments
Consistently with oral comments made at the 2015 CTF annual Conference, CRA stated at the November 2015 TEI Roundtable that:
Where a dividend is paid pursuant to a well-established policy of paying regular dividends and the amount of the dividend does not exceed the amount that one would normally expect to receive as a reasonable dividend income return on equity on a comparable listed share issued by a comparable payer corporation in the same industry, the CRA would consider that the purpose of the payment of such dividend is not described in proposed paragraph 55(2.1)(b).
Neal Armstrong. Summary of 2015-0613821C6 under s. 55(2.1)(b).
CRA rules on non-triangular partly-completed loss shift from lossco parent to profitco sub
Lossco 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.