News of Note
CRA apparently contemplated that a post-amalgamation earnout payment could be applied to increase an s. 88(1)(d) bump of capital property of the amalgamated target
Email this ContentA Canadian Acquisitionco acquired Canadian Targetco for a cash base price plus earnout obligations, and then immediately merged with Targetco under a short-form amalgamation. The Rulings Directorate rejected Amalco’s treatment of the earnout payments subsequently made by it as eligible capital expenditures, stating:
[R]egardless of whether the [Targetco] Shares existed at the time that the Earnout Payments became payable or paid, the Earnout Payments nevertheless are part of the cost of the Shares. Mandel…appears to dictate such a result….
The Directorate went on to note that the cost of the Shares “is only relevant in regards to bump room for the assets of Targetco, if a bump was available under paragraphs 87(11)(b) and 88(1)(c),” - but, of course, there was no bump for eligible capital property, which might have been the principal appreciated asset of Targetco. It then stated:
Allowing…a re-characterization of cost of non-depreciable property to ECE would in effect allow a bump on eligible capital property. Such a result is offensive….
Neal Armstrong. Summaries of 14 March 2016 Internal T.I. 2015-0609671I7 under s. 88(1)(d) and s. 14(5) - eligible capital expenditure.
CRA considers that an executor’s fee of a retired lawyer was free of HST
The ETA definition of a service excludes the services of an officer or employee. However, the position of an executor is not treated as an office “where the person who acts in that capacity is entitled to an amount for doing so that is included in computing… the person’s income from a business.” CRA was prepared to conclude that the fee of a retired lawyer for acting as an executor was not for a supply since it was in respect of an office.
Neal Armstrong. Summary of 28 October 2016 Interpretation 152996 under ETA s. 123(1) – office.
CRA was prepared to accept that a nominee could be a valid GST registrant
CRA quoted with approval the criteria stated in Westcan Malting as to what is a joint venture at law before accepting that a co-ownership arrangement before it likely was a joint venture (so that a joint venture election under ETA s. 273 under which one of the co-owners was appointed as operator was valid).
The co-owned land was held through a nominee, which was registered. CRA stated that its comments were “based on the understanding that the Nominee is engaged in commercial activities as a result of its agency activities on behalf of ACo and BCo and therefore is correctly registered for the GST/HST.”
Quite at odds with the joint venture election, the Nominee was appointed as the co-owners’ agent and was authorized and directed to claim input tax credits on its return on their behalf. Without finding it necessary to discuss the clash between this approach and the GST/HST joint venture election, CRA simply noted that it was contrary to basic tenets of agency law for the agent to treat its purchases as being incurred on its own account, so that the ITCs were only claimable pro rata by the co-owners rather than by the nominee.
Neal Armstrong. Summaries of 14 October 2016 Interpretation 170549 under ETA s. 273(1), s. 240(3)(a), s. 169(1) and General Concepts – Agency.
CRA indicates that a Singapore company recognizing earnings from a foreign branch only on a remittance basis could not measure its “earnings” under Singapore rules
A Singapore company was not required under Singapore income tax law to compute its income from its active business activities carried on through the branches in each of a designated treaty country and one which was not until a subsequent taxation year when the branch profits were remitted to Singapore. Accordingly, the branch “earnings” were to be determined under the income tax law of the designated treaty county (under (a)(ii) of the “earnings” definition in Reg. 5907(1)), or under modified Canadian tax rules (under (a)(iii) of that definition), as the case may be – and not under Singapore tax law (under (a)(i).)
Neal Armstrong. Summary of 24 August 2016 External T.I. 2015-0592921E5 under Reg. 5907(1) – earnings – (a)(i).
Income Tax Severed Letters 11 January 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Igloo Vikski – Supreme Court of Canada finds that an “includes” definition could reasonably be viewed as being limited by the listed items
A decision of the Supreme Court dealt with characterizing the precise nature of the hierarchy of Rule 1 of the General Rules for the Interpretation of the Harmonized System (scheduled to the Customs Tariff Act) over Rule 2(b). Rule 1 indicates that goods shall be classified by the terms of the “headings” (i.e., descriptions) in the Customs Tariff Schedule for the competing tariff items. Rule 2(b) provides that where a good contains a mixture of more than one material, a reference to goods in a heading includes goods that consist partly of the material (provided that the other materials have not transformed the goods’ ability to generally answer the heading’s description).
In her dissenting reasons, Côté J pointed out that the approach of the CITT – that resort can only be made to Rule 2(b) if the goods in question (here, goalie gloves) could first be considered to be described in more than one heading – did not work because (for reasons relating the World Harmonized System Explanatory Notes) they fell within neither mooted heading (gloves, mittens or mitts – or other articles of plastics) – whereas this problem did not arise if the two Rules were applied in a somewhat more integrated manner. Brown J tried, with mixed results, to present a good case in favour of the CITT’s logic, but indicated in any event that substantial deference should be given to their specialized expertise (whereas Côté J, after noting that the Customs Schedule precisely implemented an international Convention, stated: “Given the Convention parties’ intention of creating a uniform classification scheme, I find that the range of reasonable statutory interpretations in this context is narrow.”)
Of perhaps broader interest was their debate about the interpretation of “includes.” The Explanatory Note for the other plastics heading said this heading included various listed categories of items, the first of which was was articles of apparel and clothing, whose description did not encompass the goalie gloves. Côté J essentially stated (citing the usual authority) that “includes” merely expands and does not limit. Brown J essentially stated that it was reasonable for the CITT to consider that if the gloves were not covered by the specific paragraph dealing with clothing items, they should not be considered to be intended to be included in that heading.
Neal Armstrong. Summary of Canada (A. G.) v. Igloo Vikski Inc., 2016 SCC 38 under Customs Tariff Act - General Rules for the Interpretation of the Harmonized System – Rule 2(b), and Statutory Interpretation – Interpretation/Definition Provisions.
Our severed letter translations go back to December 23, 2015
We continue to move backwards in providing full-text translations of severed letters. The table below lists translations of the French technical interpretations released on December 23, 2015.
Meilleur – Tax Court of Canada finds that high-risk and high-yield loans were not made in the course of a money-lending business
Bocock J found that a retired husband and wife, who used their own retirement funds and their line of credit in 2006 and 2007 to make five loans to two real estate developers at interest rates ranging from 15% to 24%, were not thereby engaged in a money-lending business given inter alia that they made the loans on a pooled basis along with other investors rather than being involved in negotiating and managing the loans. (Somewhat oddly, he also referenced in this regard that they “advance[d] funds solely for the purpose of earning interest, rather than turning the loans over for a profit in the nature of a business.”)
Consequently, the almost complete loss of their investments was a capital loss.
Neal Armstrong. Summary of Meilleur v. The Queen, 2016 TCC 287 under s. 20(1)(p)(ii).
Veracity - B.C. Court of Appeal finds that a “Quebec year-end shuffle” avoiding provincial capital gains tax was not GAARable in B.C. as there was no abuse of the B.C. Act itself
In order to avoid most of the B.C. capital gains tax otherwise applicable to a share sale which closed in July 2002, the B.C. shareholders rolled their shares into a Newco (“Veracity”), which had a taxation year ending on August 31, 2002 for Quebec taxation purposes, and ending on June 30, 2003 for federal and B.C. purposes. In order that 100% of the taxable capital gain would be allocated to B.C. for Quebec purposes, small fees were paid to B.C. directors in July 2002 (i.e., before the August 31, 2002 Quebec year end). In order that 90% of the taxable capital gain would be allocated to Quebec for B.C. purposes, Veracity purchased units of a listed limited partnership with a September 30 year end, so that as at September 30, 2002 (i.e., after the Quebec year end) a pro rata portion of the gross revenues and salary expense of the LP would be allocated to Veracity qua unitholder.
In reversing the decision below that the B.C. GAAR was applicable so as to reallocate the 90% of the taxable capital gain back to B.C., MacKenzie JA found that the B.C. GAAR referred only to abuse of the B.C. Act, which did not include ITA s. 85(1), so that the rollover was not an abuse under the B.C. Act – and, in any event, the real complaint of CRA was not that the gain was (temporarily) deferred, but that when the gain was realized, the allocation rules caused that gain to mostly not be taxed, which had nothing to do with the purpose of s. 85(1).
The inter- provincial income allocation rules in Part IV of the ITA Regs. were effectively incorporated by reference into the B.C. Act, so that their abuse could come within the scope of the B.C. Act. However, essentially the same point applied:
The purpose of the Allocation Rules is to allocate the income to the provinces. How the provinces tax that income, if at all, is beyond the purpose, object and spirit of the Allocation Rules.
Tax was avoided because Veracity exploited its ability under the Quebec Act to pick a different year end.
Neal Armstrong. Summaries of Veracity Capital Corp. v. The Queen, 2017 BCCA 3 under s. 245(4) and Statutory Interpretation – Inserting words.
CRA accommodates a pension plan correcting excess borrowing on a going-forward basis through assumption of the debt by a 149(1)(o.2)(ii) sub
The Directorate considered that a pension plan breached Reg. 8502(i) as the amount of borrowing in respect of certain real estate properties of the Plan exceeded their cost. The Directorate thus considered that this excess borrowing limitation applies on a property-by-property basis. (It did not discuss IA s. 33(3): “singular include[s] the plural.”)
The Plan’s advisor proposed that the Plan transfer all real properties for which there were borrowing issues to a newly-formed s. 149(1)(o.2)(ii) subsidiary, which would assume the related debts, with the Plan being released but providing some guarantees. The Directorate stated that this “appears to be a reasonable solution to resolve past non-compliance.” (This appears to accept that a 149(1)(o.2)(ii) corp. can incur purchase price indebtedness on an internal transfer in excess of historic cost and that Reg. 8502(i) does not prohibit guarantees.)
The Directorate went on to state:
If the Plan is a defined benefit plan, there is perhaps less of a concern about leveraged investing as the income tax rules provide for a self-adjusting mechanism. A higher rate of return than appropriate results in lower employer contributions. However, if the Plan is a money purchase plan, the concern about leveraged investing takes on greater importance as the borrowing would have served in effect to circumvent the RPP contribution limits. In this case, consideration should be given to requiring any excess investment earnings to be withdrawn from the Plan.
Neal Armstrong. Summaries of 10 May 2016 Internal T.I. 2016-0644761I7 under Reg. 8502(i) and s. 149(1)(o.2)(ii).