News of Note
CRA is negative on using a stock dividend of nominal value discretionary shares to shift value to an affiliated company
Email this ContentAn individual) holding Class A common shares of Opco with substantial safe income on hand (“SIOH”) and an undisclosed ACB, receives a stock dividend of Class B discretionary voting shares, which are voting, participating, bear discretionary dividends and are redeemable by Opco for $1 – and then transfers the Class B share to a new Holdco under s. 85(1). Opco then pays a $1M dividend to Holdco.
CRA noted that no safe income travelled with the Class B share’s transfer to Holdco and stated that “if all other conditions were satisfied, subsection 55(2) would apply in respect of the dividend of $1 million.”
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 15 under s. 55(2.1)(c).
CRA comments on the application of safe income on hand to dividends paid on estate freeze prefs
Opco declares and pays a dividend (at the fixed 8% rate specified in the share terms) on estate freeze preferred shares held by Holdco with a nominal ACB and which had “inherited” safe income on hand from the common shares for which they had been exchanged of $700,000. CRA noted that the SIOH that contributed to the hypothetical capital gain on these prefs could be greater or less than $700,000 due to the effect of previous dividends or post-freeze earnings and stated that the dividend would reduce any post-SIOH attributable to the prefs before it ate into whatever was the balance remaining of the $700,000 of SIOH.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 16 under s. 55(2.1)(c).
CRA indicates that FX gains or losses on pre-transition debts are not affected by an s. 111(4)(e) election made following an acquisition of control
Where a taxpayer with an elected functional currency (e.g., the USD) has an accrued FX loss on a debt obligation owing in another foreign currency (e.g., the euro), an s. 111(4)(e) election made following an acquisition of control of the taxpayer will not affect the FX gain which would be realized under s. 261(10) re a pre-transition debt, so that it is only changes in the euro/USD exchange rate occurring from the beginning of the taxpayer’s first "functional currency year" up to the acquisition of control that would be subject to ss. 111(4) and (12).
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 17 under s. 111(4)(e).
ONEnergy – Tax Court of Canada states obiter that services acquired long after the cessation of commercial activity may give rise to ITCs
A company (“Look”) sold all the assets of its business and then successfully sued its executives for having paid themselves inflated bonuses and option termination payments out of the sales proceeds. In finding that Look was not entitled to input tax credits for the GST on its related legal fees and, in particular, that the lawsuit was not brought “in connection with the…termination of a commercial activity” as per ETA s. 141.1(3)(a), C Miller J stated:
“[I]n connection with”… is a broad expression but does not…, even on a textual reading allow for the remotest of links, such as a link only arising by way of the “but for” test. …
[T]he cost of legal services to chase after directors, who the Appellant claims have absconded with its money, is a need that would have been fulfilled regardless of where the funds emanated from. …
He added this helpful (likely obiter) comment:
[T]his is not an issue of timing. For example, had the Board discovered two years after the [asset] sale that a competitor had wronged Look…and the Board commenced a lawsuit, I would see no difficulty in finding such litigation activity was connected with commercial activity, notwithstanding some considerable time had passed since the termination of the business. Similarly, if Look had to sue the purchaser of [its assets] long after the completion of the sale for breach of a confidentiality provision, again timing would not preclude a finding of a connection.
Neal Armstrong. Summary of ONEnergy Inc. v. The Queen, 2016 TCC 230 under ETA s. 141.1(3)(a).
Ingenious Media – UK Supreme Court finds that statutory exceptions to taxpayer confidentiality should be construed narrowly in light of the common law of confidentiality
A senior British tax official disclosed, in an “off the record” interview with some journalists, that the schemes of a particular promoter of film tax shelters had been generating large losses to the fisc, and they published this and other confidential information. HMRC argued that this disclosure was justified by a statutory provision which authorized a “disclosure … made for the purposes of a function” of HMRC, noting their “general desire to foster good relations with the media or to publicise HMRC’s views about elaborate tax avoidance schemes,” as well as to the possibility of getting tips from the journalists.
In rejecting HMRC’s position, Lord Toulson noted that under “the common law of confidentiality:”
where information of a personal or confidential nature is obtained or received in the exercise of a legal power or in furtherance of a public duty, the recipient will in general owe a duty to the person from whom it was received or to whom it relates not to use it for other purposes.
Under the “principle of legality,” this “fundamental right…cannot be overridden by general or ambiguous words,” as HMRC was trying to do here.
The same restrictive interpretive approach likely would be applied to ITA s. 241(4)(a), which authorizes the provision to any person of “information that can reasonably be regarded as necessary for the purposes of the administration or enforcement of this Act.”
Neal Armstrong. Summaries of Ingenious Media Holdings plc & Anor, R (on the application of) v Commissioners for HMRC [2016] UKSC 54 under s. 241(4)(a) and Statutory Intepretation - Principle of Legality.
The Tax Interpretations paywall is changing
Currently, non-generic content on the site is paywalled four days a week. Effective Monday morning, this will change so that the same content will be paywalled five days a week (Monday to Friday, including statutory holidays) except for the first full work week in each month. Thus, the site will be “open” for approximately one additional day each month, and potential subscribers will have a full week each month (plus weekends) to test-drive the site.
CRA effectively confirms that s. 119 does not provide relief from double taxation re non-TCP shares
S. 119 applies to the withholding tax on dividends on shares subject to the stop-loss rules in subsection 40(3.7) and provides a credit against the tax that was payable under s. 128.1(4) by virtue of the taxpayer’s departure from Canada. (See Shew.) CRA read the clear words of s. 119 and confirmed that, for it to apply, the shares (which were deemed to be disposed of) must have been taxable Canadian property continuously from the time of emigration.
Accordingly, double taxation can occur.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.18 under s. 119.
CRA confirms that there generally is no domestic secondary adjustment doctrine
The secondary adjustment doctrine in the transfer pricing area indicates, for example, that if it is found that Canco has been understating its income by undercharging for sales to its non-resident parent, then not only should there be a transfer-pricing adjustment to increase its income accordingly, but there also is a taxable benefit (subject to Part XIII tax) conferred on its parent if it does not promptly charge for the additional amount (see, e.g., TPM-02).
There is no comparable general doctrine lurking within the domestic attribution rules (e.g., s. 74.1 et seq.) or reallocation or imputed benefit rules (e.g., s. 103, 69 or 56(2)) so that, for example, if Partner B from a s. 103 perspective should rightfully have received 40% rather than 10% of the income of the partnership, there is no imputed obligation of Partner A to repay its excess draws to the partnership or Partner B.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.19 under s. 103(1) and s. 74.1(1).
Income Tax Severed Letters 26 October 2016
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA accepts Poulin distinction between accommodation parties and tax advantaged arm’s length dealings
In the Poulin decision, D’Auray found that s. 84.1 applied to the sale by an individual of his shares of a CCPC to the holding company of an unrelated employee (“Hélie Holdco”), given that Hélie Holdco was essentially just acting as an accommodation party (i.e., the sale was not an arm’s length transaction)– but also found that s. 84.1 did not apply to a purchase of shares in the same CCPC under a similarly structured transaction from the other major shareholder, as they each were advancing their own interests (arranging an exit on advantageous terms, and acquiring control of the CCPC, respectively) – so that it was an arm’s length transaction.
CRA accepts both aspects of the decision. It accepts the finding in Poulin that the structuring of a sale transaction so that the vendor secured a tax advantage (the capital gains deduction) “does not mean that the parties acted in concert without separate interests.” Respecting the accommodation party aspect, it stated:
Hélie Holdco… incurred no economic risk in participating in the transaction, did not derive any benefit from the purchase of shares, had no interest other than to allow the employee/shareholder to realize a capital gain and benefit from the deduction, and had no function independent of the employee/shareholder or the operating corporation - and, in short, it only participated in the transaction as an accommodation for the benefit of the employee/shareholder.
Neal Armstrong. Summary of 7 October APFF Roundtable, Q. 20 under s. 251(1)(c).