News of Note
Revised exemption for non-resident employer withholding provides an alternative ephemeral-presence test and eliminates no-PE requirement
Email this ContentThe 2015 Budget introduced an exemption to the Regulation 102 withholding requirement in respect of payments made by "qualifying non-resident employers" to "qualifying non-resident employees." A "qualifying non-resident employees” was a Treaty-exempt non-resident employee who satisfied a test requiring that the employee not be present in Canada for 90 or more days in any 12-month period in which the remuneration was paid. The July 31, 2015 draft legislation now indicates that the ephemeral presence test also will be satisfied if the employee works in Canada for less than 45 days in the calendar year that includes the time of payment. This is an improvement, as many employers may be better able to monitor "work days" than simple presence in Canada.
Another improvement is that the (Treaty-resident) employer no longer is required to not carry on business in Canada through a permanent establishment. However, T4 reporting is still required even where the new withholding exemption is applicable.
Neal Armstrong. Summary of Dov Begun, "Foreign Employers Sending Non-Canadian-Resident Employees to Canada to Work on short-Term Projects May Benefit from Proposed Changes Introduced in the 2015 Federal Budget and Clarified on July 31, 2015," Tax Management International Journal, 2015, p. 634 under s. 153(6) – qualifying non-resident employee.
CRA’s voluntary disclosure practice is to go back only to years for which there is supporting documentation, and no earlier
Although a voluntary disclosure must generally be of information that is at least one year overdue (in order to prevent use of voluntary disclosures to avoid late-filing penalties), where returns for multiple GST reporting periods have not been filed and any one of the returns is more than one year past due, the entire series of returns will be eligible for voluntary disclosure.
Although CRA can go back more than four years where there has been a neglectful misrepresentation etc., “in practice, however, the CRA will (by administrative largesse) only include reporting periods for which supporting documentation is available in the disclosure.”
Neal Armstrong. Summary of Ryan Rabinovitch, Angelo Discepola, "Solving Sales Tax Non-compliance Through the Canadian Voluntary Disclosure Program," Tax Litigation (Federated Press), Vol. XIX, No. 4, 2015, p. 1175 under ETA s. 281.1(1).
The Gold and Silver Notes of Gran Columbia Gold are to be exchanged for PIK notes with PDO and OID issues and with “receipt” by the Noteholders of a “Restructuring Fee”
On December 22, 2015 the shareholders and relevant noteholders of Gran Columbia Gold voted in favour of a B.C. Plan of Arrangement under which the Company’s U.S.$100 million of “Gold Notes” would be exchanged for new notes (the “2020 Debentures”) or (at each Noteholder’s option) common shares of the Company, and its U.S.$78 million of “Silver Notes” (which, like the Gold Notes, are in default) would be exchanged for the 2018 Debentures or (at the noteholder’s option) common shares. The Gold Notes bear cash interest at 10% p.a. and entitle the holder to receive cash on maturity, or earlier exercise of put rights, equal to the greater of their principal and the value of specified numbers of gold ounces, so that there is proportionate participation as the price of gold exceeds U.S.$1400 per ounce. The Silver Notes are somewhat similar. The 2020 Debentures have no gold appreciation feature, are convertible into common shares and bear cash interest at a rate of 6.00% per annum, payable monthly in arrears, unless the Company elects for any month to pay pay-in-kind (PIK) interest (i.e., through the issuance of more debentures) at a rate of 9.00% per annum; and somewhat similarly for the 2018 Debentures.
The amount of Gold Notes which is exchanged for the equivalent principal amount of 2020 Debentures (except to the extent that the Gold Noteholders elect to receive common shares) includes not only their principal and accrued interest but also an increase (styled as an increase to their principal amount and labelled the “Restructuring Fee”) of $2 million. The Canadian advisors think that the Restructuring Fee will be income to the Gold Noteholders, whereas the U.S. advisors think that it instead represents additional proceeds (in the form of additional 2020 Debentures or common shares) to be received for the Gold Notes.
The Debentures "may be" prescribed debt obligations, so that holders might be required to accrue interest at the higher PIK rate under Reg. 7000(2)(c) even if the Company chooses to pay at the lower cash rate. The PIK interest rate option will cause the Debentures to be subject to the U.S. OID rules (requiring inter alia the accrual of original issue discount based on the initial fair market value of the Debentures.)
Although the exchange under the Plan of Arrangement of Gold or Silver Notes for shares occurs at the noteholder’s election, s. 51 non-recognition treatment is not considered to apply, and the note-for-debenture exchanges are considered to also occur on a taxable basis (no s. 51.1). In the U.S., it is not clear that the exchanges would qualify as recapitalizations as contrasted to taxable exchanges given inter alia that the Debentures have relatively short-term maturities and, therefore, may not qualify as “securities.”
Neal Armstrong. Summary of Gran Columbia Gold Circular under Other - Recapitalizations.
Income Tax Severed Letters 6 January 2016
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A US enterprise arguably can acquire a Canadian services PE by providing services only to related Canadian enterprises
The US Joint Committee on Taxation stated that the services PE concept in the Canada-U.S. Treaty “only applies to services provided by the enterprise to third parties and not to services provided to that enterprise (i.e. inter-company services)." In 2009-0319441C6, CRA rejected the proposition that this means that there can be no services PE where services are only rendered between related parties. The CRA position might correct on the basis that the Joint Committee report was merely indicating “that services provided to the nonresident enterprise by its affiliates do not result in a PE to the enterprise to whom the services are provided,” as contrasted to excluding services provided by a non-resident enterprise to related parties.
Neal Armstrong. Summary of Abraham Leitner and Peter Glicklich, "Uncertainty Remains Under the Services PE Provision in the U.S.-Canada Income Tax Treaty," Tax Management International Journal, 2015, p. 784 under Treaties – Art. 5.
Emotion Picture Studios – Tax Court of Canada finds that “research” to figure out how to maximize Google search rankings was not SR&ED
C Miller J found that “experiments” engaged in to figure out how to improve Google search rankings for websites were not SR&ED, stating:
I fail to see how it is a scientific advancement to figure this out. It strikes me more of solving an equation someone has already solved, rather than coming up with a new proof.
Neal Armstrong. Summary of Emotion Picture Studios Inc. v. The Queen, 2015 TCC 323, under s. 248(1) - scientific research & experimental development.
CRA may characterize investment management services provided to a pension plan as supplied to the employer, and on-supplied to the plan
A service which in reality is provided by A to C may be viewed by CRA as a double supply made by A to B, and by B to C, if it is B who retained the services of A. For example, where an employer retains an investment manager for the company pension plan, and the pension plan pays the manager directly, CRA considers there to be a double supply of a service from the manager to the employer, and by the employer to the plan, so that the employer generally may claim an ITC for the HST payable to the manager, and is required to collect a corresponding HST amount from the plan. (This is broadly consistent with Caithkin, respecting a double supply of foster care services.)
Neal Armstrong. Summary of B-032 “Expenses Related to Pension Plans” 17 November 2015 under ETA s. 123(1) - recipient.
The Honeywell cash purchase price for COM DEV is reduced by capital gains tax realized by COM DEV on spinning out a subsidiary (exactEarth)
It is proposed that COM DEV spin-off its 73% interest in a subsidiary (exactEarth) under a s. 86 reorg and that its common shares then be acquired by an indirect Canadian sub of Honeywell International for an initial cash payment of $5.125 per common share plus a second “Contingent Payment Amount” approximately two weeks following the closing date of up to $0.125 per Common Share (based on whether the exactEarth shares have appreciated over a pegged figure in post-closing trading on the TSX.)
The rationale for the contingent payment is that Honeywell is only willing to pay the last $10 million of the purchase price for the COM DEV shares if the fair market value of the exactEarth Shares distributed by COM DEV on the s. 86 reorg (as evidenced by their trading prices on the TSX for the first five trading days after the Arrangement) does not exceed $7.15 per share (which is already a premium over the $6.50 per share at which COM DEV and the minority exactEarth shareholder will have subscribed for exactEarth shares shortly before the Arrangement.) To the extent that the market values exactEarth higher than this, the second cash payment by Honeywell to the former COM DEV shareholders will be reduced by the capital gains tax payable by COM DEV on that appreciation (at an assumed rate of 13%).
Neal Armstrong. Summary of COM DEV Circular unde Mergers & Acquisitions – Cross-Border Acquisitions – Inbound - Canadian Buyco.
Blank – Australian Full Court finds that phantom units were not taxable when they vested
In 1994, a non-resident executive was granted units which entitled him, on retirement, to receive payments calculated by reference to the consolidated profits of Glencore International AG, a Swiss corporation. He retired at the end of 2006, and became entitled to receive U.S.$160 million in instalments commencing in July 2007. He and Glencore then agreed (pursuant to an agreement which was not executed until January 2008) that the first four instalments would be paid by Glencore to the Swiss taxing authority (the FTA) in satisfaction of Swiss withholding tax on the U.S.$160 million. This remittance occurred in 2008.
The relevant Australian tax law provided that, in the case of a reward for personal service, the income “derived” by the taxpayer is the “amount…actually received in the year in question” (Brent, 125 CLR 418, at para. 13), and a deeming provision specified that “you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct."
The Full Court of the Australian Federal Court held that although two of the four instalments were due to him in 2007, they were not income to him until 2008 when they were paid on his behalf to the FTA. This is consistent with the proposition that phantom units are not constructively received when they vest but no exercise occurs (cf. Bianchini).
The taxpayer also unsuccessfully argued that a pro rata portion of the U.S.$160 million was exempt based on the fact that for roughly his first eight years of service after the grant of the units, he had been a non-resident employed outside Australia, and came to Australia to work for an Australian sub (and became an Australian resident) only in 2002. The Court stated:
[T]he Amount was incapable of apportionment as between earnings from foreign service, on the one hand, and earnings not from foreign service on the other because the agreed method of calculating that Amount did not allow for that distinction to be made. The Amount was incapable of being calculated on a per diem basis… .
If analogous facts arose in applying s. 115(1)(a)(i) to a lump sum paid to a non-resident who had worked both inside and outside Canada where apportionment on a rational basis was impossible, would one conclude that the amount was 100% exempt or 100% taxable?
Neal Armstrong. Summaries of Blank v. Commissioner of Taxation, [2015] FCAFC 154 under s. 6(1)(a) and s. 115(1)(a)(i).
Proposed Sprott Physical Gold Trust acquisition of Central Goldtrust under s. 132.2 merger uses bonus units and supplants Central GoldTrust proposal to convert to ETF
In May, Sprott made an offer that would have entailed an acquisition by Sprott Physical Gold Trust of all the units of Central GoldTrust, with the GoldTrust unitholders being provided a choice between a taxable exchange of their units for Sprott units, or participating in a s. 132.2 rollover merger. GoldTrust essentially is a closed-end fund, although its units provide what in economic substance is a somewhat illusory retraction right to qualify it as an open-end trust for Canadian tax purposes (so that its units traded at a significant discount to NAV before the Sprott offer.) The trustees of GoldTrust resisted this offer, and early this month issued a Circular in which they proposed that GoldTrust be converted into an ETF whose unit terms would provide that unitholders whose units’ value at least equalled that of a (London good delivery) gold bar could redeem their units for gold bullion plus top-up cash (and with all unitholders having a right to redeem units for cash at a 5% discount to NAV, so that the trust would be a unit trust under s. 108(2)(a)). In the meantime, a non-discounted cash redemption right would also be added to the units to be available until the ETF conversion occurred.
The Canadian tax disclosure stated that GoldTrust would report any gains realized on its gold bullion, as a result of honouring redemption demands, as capital gains, and indicated uncertainty as to whether, if CRA at a subsequent juncture assessed on the basis that such gains were realized on income account, the additional trust income could be pushed out to the resident unitholders (and that there would be Part XIII tax exposure where the redeemed units instead were those of non-residents). The U.S. tax disclosure was non-commital as to whether the various proposed amendments should be treated as a non-taxable amendment of the terms of the Units or as a deemed exchange of the existing Units for new amended Units qualifying as a tax-free recapitalization and/or as a tax-free stock exchange for Code purposes – and had extensive disclosure relating to GoldTrust’s status as a PFIC.
On Christmas eve, GoldTrust issued a further Circular indicating that, as a result of proxies given to Sprott under its bid, Sprott had replaced essentially all the GotdTrust trustees and requisitioned a GoldTrust unitholders meeting to approve the merger with the Sprott Physical Gold Trust (which Sprott now has the votes to get approved as a result of getting those proxies). The merger would essentially occur the same as before except for an interesting twist (that arose during the bidding process) that Sprott would initially contribute some "bonus consideration" Sprott Physical Gold Trust units to GoldTrust, which then would be immediately distributed to the GoldTrust unitholders.
Neal Armstrong. Summary of Sprott Physical Gold Trust offer for Central Goldtrust units under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers, summary of Central Goldtrust Circular for ETF Conversion under Other – Conversions – Closed-End To Open-Ended Funds and summary of Central Goldtrust Circular for merger with Sprott Physical Gold Trust under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers.