News of Note
UBS AG – UK Supreme Court infers a Parliamentary intention to give relief for restrictive conditions affecting shares' marketability only where those conditions have a commercial purpose
Email this ContentLord Reed found that a scheme to avoid income tax on bankers’ bonuses, which entailed awarding the employees redeemable shares in an offshore company which were subject to a commercially remote risk of forfeiture of all or a significant portion of their value (e.g., in the case of one bank, forfeiture of the shares if the employee was dismissed for misconduct or voluntarily resigned within the next six weeks), did not avoid immediate taxation on the value of the offshore company shares when awarded to them. He applied a variant of the Ramsay principle, which turned on whether “the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
In response to arguments that in the presence of rules governing "restricted shares" which were “extensive and highly detailed…it was impossible to attribute to Parliament an unexpressed intention to exclude schemes of the present kind,” he stated:
[I]t appears from the background to the legislation that the exemption…was designed to address the practical problem which had arisen of valuing a benefit which was, for business or commercial reasons, subject to a restrictive condition involving a contingency. The context was one of real-world transactions having a business or commercial purpose. There is nothing in the background to suggest that Parliament intended that [the exemption] should also apply to transactions having no connection to the real world of business, where a restrictive condition was deliberately contrived with no business or commercial purpose but solely in order to take advantage of the exemption… .
Neal Armstrong. Summaries of UBS AG v Commissioners for HMRC; DB Group Services (UK) Ltd v. Commissioners for HMRC, [2016] UKSC 13 under General Concepts – Tax Avoidance, and General Concepts – Fair Market Value – Shares.
Home Capital is making an issuer bid under a Dutch auction with a specified amount based on the closing market price at the offer expiration
Home Capital is proposing to repurchase approximately 6% of its outstanding common shares under a Dutch auction at a price of between $34.00 and $38.00 per share (or $150 million in aggregate). Most of the proceeds will be subject to deemed dividend treatment, as the paid-up capital per share is around $1.29.
Ss. 191(4) and (5) provide a safe harbour from Part VI.1 tax for repurchase amounts paid up to an amount "specified” in the repurchase agreement not exceeding the fair market value of the shares immediately before the repurchase agreement was entered into. The Offer has a stand-alone statement that “for the purposes of subsection 191(4) of the Tax Act, the ‘specified amount’ in respect of each Share will be an amount equal to the closing trading price for the Shares on the TSX on the [offer] Expiration Date.” This contrasts with the recent TransForce offer, which specified a fixed dollar amount that was in the lower part of the potential range of purchase prices to be determined under the Dutch auction.
Under Code s. 302, a U.S. shareholder whose shares are sold under the offer will be subject to sale rather than distribution treatment if such transaction (a) constitutes a "substantially disproportionate" distribution by Home Capital respecting such U.S. Holder, (b) results in "complete termination" of its equity interest in Home Capital, or (c) is "not essentially equivalent to a dividend."
Neal Armstrong. Summary of Offer of Home Capital under Other – Issuer Bids – Share Offer.
CRA confirms that the status of a location as a “place of amusement” for purposes of the public sector body exemption may be determined on an event-by-event basis
Charges for events by a charity which otherwise might be exempt from GST/HST generally will be taxable if they are characterized as admissions to a “place of amusement” for more than nominal (over $1.00) consideration (and they do not come within an exemption for non-recurring fund-raising). The definition of “place of amusement” includes premises at which various listed types of entertaining events are staged or held, as well as any place, structure or device whose purpose is to provide any type of amusement or recreation.
CRA considers that “regardless of the usual purpose of a place or its day-to-day use, a place may, under the first [branch] become a place of amusement at a particular moment in time due to an activity being staged or held there.” For example, a church that charges admissions to see its unique architecture would not thereby be a place of amusement under the first branch – but would become a place of amusement if a concert (other than a non-recurring fund-raiser) were held there for ticket purchasers.
In CRA's view, a place (e.g., the church) will not be a place of amusement under the second branch if its "ordinary day-to-day purpose" is not to provide amusement or recreation.
Neal Armstrong. Summary of Excise and GST/HST News - No. 98 under ETA s. 123(1) – place of amusement.
CRA considers on-line seminars generally to be a supply of property rather than a service for GST/HST purposes
CRA has developed a list of factors that are generally present when an on-line supply by a school authority is a “service of instructing,” exempted from GST/HST under Sched. V, Pt. III, s. 8, rather than a supply of “intangible personal property,” including that there is systematic instruction, monitoring or supervision provided over an extended period (e.g., weeks or months) with homework, and with assessment of competency upon completion (with the potential to flunk), and with successful completion of one activity being a prerequisite to moving onto the next level.
On the other hand, there generally is a supply of intangible personal property (e.g., admission to a workshop or seminar) where there is little individualized interaction with the participant and with mere attendance (over the activity period of a few hours or a few consecutive days) being sufficient for the participant to receive evidence of successful completion of the activity (whose purpose is merely to provide information to, or to facilitate the exchange of information amongst, participants).
Neal Armstrong. Summary of Excise and GST/HST News - No. 98 under ETA Sched. V, Pt. III, s. 8.
CRA expands Folio S3-F6-C1 to state that following a winding-up or amalgamation, assumed debt can be allocated for interest-deduction purposes to eligible assets
CRA has added the following two paragraphs to its Folio on interest deductibility:
1.63.1 ...Where a corporation acquires the shares of another corporation in exchange for an assumption of debt or a note payable to the vendor, the CRA would consider the shares that were initially acquired (and have disappeared) to have been substituted for assets formerly held by the acquired corporation that has been wound-up or amalgamated. These assets would then be tested for an eligible purpose.
1.63.2 In situations such as those in ¶1.63.1 but where the debt represents only partial consideration for the share acquisition, if some assets do not meet the purpose test, the taxpayer may adopt a flexible approach in linking the debt to the eligible assets formerly held by the acquired corporation... . Similarly, if some of those eligible assets are subsequently distributed as a dividend or a return of capital, taxpayers would be entitled to link the debt to any remaining eligible assets... .
This essentially repeats a position released 11 days ago in 2014-0555291I7 (dealing with Buyco acquiring Target partly with borrowed money, amalgamating with Target and then distributing Target assets without reducing the debt) except that it deals with purchase price indebtdness rather than borrowed money.
Neal Armstrong. Summary of S3-F6-C1 under s. 20(1)(c).
CRA rules that on-charges made to an Ontario tire seller’s customers for waste diversion fees imposed on it by Ontario Tire Stewardship are subject to HST
A company (“ACo”) which imports tires into Ontario is required to pay a per-tire “stewardship fee” to Ontario Tire Stewardship (“OTS”) to help cover the costs of the used tire recycling program carried on by OTS. ACo then adds a separately-identified “OTS charge” on its invoices for its tire sales in order to recoup those OTS fees.
In 144133, CRA had ruled that the “fees” charged by OTS were not subject to HST because OTS was not supplying anything to the companies required to pay them. CRA has now ruled that the charges made by ACo to its customers to recoup the OTS fees paid by it are part of the consideration for its sales to them, so that those charges are subject to HST.
This is broadly analogous to HST in effect being imposed on municipal taxes when the tenant pays such taxes, viewed as a form of additional rent (see 156633 and 38588).
Neal Armstrong. Summary of 18 September 2015 Ruling 168521r under ETA s. 123(1) - consideration.
Columbia Sportswear - Karnataka High Court finds that quality assurance work in a purchasing office in India did not give rise to a permanent establishment there
A U.S.-resident outdoor apparel company did not sell or distribute its products in India, but established a liaison office there to purchase, for export, apparel from local manufacturers. The U.S.-India Treaty had the standard exclusion from the definition of “permanent establishment” for
the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise.
The Indian tax authority latched onto the word "solely." However, the Karnataka High Court found that activities of the liaison office in doing more than bare-bones purchasing agent work, such as detailed quality assurance work on the manufacturer's products and acting as a go-between between them and the U.S. head office, did not detract from its coming within this exception.
Neal Armstrong. Summary of Columbia Sportswear Co. v. Director of Income Tax (2015), W.P. No. 39548/2012 (T-IT) under Treaties – Art. 5.
CRA recognizes the concept of intangible real property
CRA reversed 2014-0522241I7 to find that a right to mine for minerals in a mineral resource outside Canada is intangible property rather than tangible property (stating that “real property can include… intangible property”), so that the right constituted “specified foreign property” under para. (a) rather than “tangible property” under para. (b) of the definition of that term in s. 233.3. Use of “intangible property” (e.g., in s. 13(7.5)(c)) or “tangible property” (as contrasted to real property, intangible personal property or tangible personal property) is quite rare in the ITA and ETA, so that this point appears insignificant.
Neal Armstrong. Summary of 2016-0631181I7 under s. 233.3(1) – specified foreign property.
CRA confirms that U.S.-dollar dividends are translated on a cash rather than accrual basis
Even before 2012, CRA's position was that, in the case of regular (cf., deemed) dividends, in order for an eligible dividend designation to be valid, it must stipulate the (dollar) amount of the dividend (2010-0373281C6), and this is even clearer following an amendment, effective for dividends paid after March 28, 2012, to permit designation of part of a dividend as an eligible dividend (see 2013-0512041E5 F).
Citing Banner Pharmacaps, CRA considers that a dividend does not “arise” for s. 261(2) purposes until it is paid (rather than declared) so that its amount, including for eligible dividend designation purposes, is translated using the spot rate on the payment date.
Neal Armstrong. Summary of 20 November 2014-0539951E5 under s. 261(2).
Income Tax Severed Letters 16 March 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.