News of Note
Slate Management – Ontario Superior Court finds that a generalized intent to achieve a s. 88(1)(d) bump was a sufficient basis to rectify in order to redo an amalgamation
Email this ContentA purchaser used a newly-formed AcquisitionCo to acquire a Target, and asked for and received a computation from its accounting firm of the amount by which it would be able to bump the assets of the Target under s. 88(1)(d) (although the advice on how to accomplish the bump was quite general), as well as receiving a rep from Target that Target would not do anything to jeopardize the bump. It later learned that it had busted the bump by amalgamating the three corporations in only one amalgamation, rather than using two sequential amalgamations.
Rather surprisingly, a rectification order was opposed by the Crown. Hainey J found that, on this evidence (and even without having received specific advice as to the precise way in which the amalgamations should occur to satisfy s. 88(1)(d)), the parties had a “a continuing specific intention to achieve the amalgamation in accordance with the tax bump rules,” so that a rectification order was granted to Amalco.
Hainey J also made a specific finding that the Fairmont appeal to the Supreme Court of Canada did not justify an adjournment of the application.
Neal Armstrong. Summary of Slate Management Corporation v Canada (Attorney General), 2016 ONSC 4216 under General Concepts – Rectification.
CRA recognizes glitch in the draft rules for Class 14.1 (formerly, eligible capital) properties
Effective January 1, 2017, eligible capital properties will become Class 14.1 depreciable property. There is a glitch in the draft legislation, which CRA has referred to Finance.
Where, prior to 2017, an addition to a taxpayer’s CEC was reduced under variable A.1 based on the gain realized by a non-arm’s length transferor of the eligible capital property, there is no upward adjustment under the draft legislation for this amount where there is an arm’s length sale after January 1, 2017 of what now is a Class 14.1 property – so that effectively there is double recognition of a capital gain.
Neal Armstrong. Summary of 2016-0641851E5 under s. 13(37).
Income Tax Severed Letters 6 July 2016
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIT – Tax Court of Canada finds that a regulated Barbados subsidiary which invested in corporate debt qualified under the s. 95(2)(l) exclusion for foreign banks
The question of whether an indirect Barbados subsidiary (“CCG”) of a Canadian company in the CIT group was earning property income and, thus, generating foreign accrual property income to the Canadian company, turned on whether it came within the “foreign bank” exception in s. 95(2)(l)(iii). Its business appears to have not come within CRA’s concept of banking and instead entailed borrowing money from Barbados (IBC) affiliates and using the borrowed funds to lend money, or purchase debt obligations, in arm’s length transactions.
Owen J noted the breadth of the definition of “foreign bank,” which included a foreign corporation which uses the word “bank” to describe its financial services business, and a foreign corporation which “engages, directly or indirectly, in the business of providing financial services and is affiliated with another foreign bank.” CCG had a U.S. sister company which used the word “bank” in its name and took in deposits and lent out money, so that the “affiliated” part of the quoted definition was satisfied - and CCG’s lending/debt purchasing activities came within the broad concept of “financial services.” Finally, the rather light oversight by the Barbados central bank of CCG (whose business required it to be registered as a Barbados trust and finance company) satisfied the requirement in s. 95(2)(l)(iii) that CCG be regulated.
Hence, no FAPI.
Neal Armstrong. Summary of CIT Group Securities (Canada) Inc. v. The Queen, 2016 TCC 163 under s. 95(2)(l)(iii).
D Marks – Federal Court of Australia finds that an association registered as a limited partnership was not a partnership notwithstanding that its registration was stated to be “conclusive”
A purported Australian limited partnership was not a partnership under general principles of Australian partnership law, as its purported general and limited partners were conceded to not be carrying on business in common with a view to profit. However, the association (to use a neutral label) was registered as a limited partnership, and the relevant Queensland statute stated that such registration “shall be conclusive evidence that the limited partnership to which it refers was formed on the date of registration referred to therein.”
The minority was inclined to follow a recent English decision (Bank of Beirut), which was quoted as standing for the proposition that “once the certificate has been issued the partnership must be regarded as having come into existence.”
The majority read the Queensland deeming provision as only dealing with the timing of when what otherwise is a valid partnership becomes a limited partnership, and stated that it should not be construed as creating “a new fictional category of ‘limited partnerships’ upon registration of associations which had not otherwise been partnerships.” Bank of Beirut was distinguished as dealing only with the narrow question of whether a registration of a limited partnership should be reversed.
If the minority view in this case is correct, it may suggest that in some English limited partnerships (i.e., those whose status as partnerships under English law depends on their registration) will not be accepted as partnerships for Canadian taxation purposes.
Neal Armstrong. Summary of D Marks Partnership by its General Partner Quintaste Pty Ltd v Commissioner of Taxation, [2016] FCAFC 86 under s. 96.
Russell – Tax Court of Canada finds that research assistance to an undergraduate student was not employment income
The dominant character of payments (funded partly by an NSERC grant) made to an undergraduate student doing research on an undergraduate thesis under supervision of a professor/researcher was found by Visser J to be financial assistance rather than compensation for the research work, so that they were not employment income.
Neal Armstrong. Summary of Russell v. M.N.R., 2016 TCC 143 under s. 5(1).
Felty – BC Court of Appeal finds that an engagement agreement for accounting firm tax advice which limited liability to the fee was not contrary to public policy
The BC Court of Appeal found that exclusion clause in an engagement agreement between a BC client and E&Y which limited E&Y liability to its fee was binding. Although the engagement agreement had been entered into by the client’s BC family law firm with E&Y rather than by her directly, the Court applied the principle “that as a general rule, solicitors will be taken to be contracting on behalf of their clients in the course of their practice.” Furthermore, giving negligent U.S. tax advice is not “so reprehensible that it would be contrary to the public interest to allow [the defendant] to avoid liability.”
Law firms may be prohibited from limiting liability for negligence, e.g., in Ontario and B.C.
Neal Armstrong. Summaries of Felty v. Ernst & Young LLP, 2015 BCCA 445 under General Concepts – Negligence and General Concepts – Agency, and summary of Bernstein, Jack, "Accountants Limit Liability for Negligence", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 11 under General Concepts – Negligence.
Conversions of LLPs or LLLPs after 2017 to LPs may occur at FMV
At 2016 IFA Roundtable, Q. 1, CRA orally indicated that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes – but indicated it will treat an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) as a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP have been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018.
26 U.S. states provide for LLLPs, and nearly all of these also allow for the formation of LLPs. LLLPs and LLPs are essentially LP, except that the general partner also has limited liability.
An LLP may be a partial shield or a full shield. In a partial-shield jurisdiction, a partner is protected from partnership obligations that arise from the negligence of another partner, but not those that arise in the ordinary course of business. (The CRA oral comments did not address this distinction.)
A Canadian who is a minority partner of an LLP may not be able to convince the majority to convert to an LP by the end of 2017. If such a conversion occurs after this grace period, it may be challenged by CRA as giving rise to a FMV disposition at both the partnership and partner level given existing CRA views on conversions from a U.S. corporation to partnership (see 2004-0104691E5).
Neal Armstrong. Summaries of Allan Lanthier, "Limited Liability Partnerships", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 10 and Roy A. Berg, "CRA Classifies US LLLPs and LLPs as Corporations", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 9 under s. 96.
The new CRA Organschaft policy may engage s. 95(2)(a)(ii)(D)
In an “Organschaft” a German parent and its German subsidiary agree for Subco to annually transfer its entire accounting profit to the parent, and for the parent to compensate for any loss sustained by the subsidiary. At 2016 IFA Roundtable, Q. 6, CRA confirmed that, at least in the simple case of a wholly owned subsidiary with one class of shares, the annual profit transfers will be deemed to be dividends under s. 90(2) – in replacement of an earlier position (e.g., 2001-0093903) that a profit transfer payment made by Subco to Parentco could be re-characterized as active business of Parentco under s. 95(2)(a)(ii) to the extent that Subco had earnings from an active business – so that this previous position can apply only to profit transfer payments made before 2017.
It is unclear whether the new view will apply where the taxpayer has elected under Reg. 5901(2)(b) for s. 90(2) to apply retroactively to distributions made by the German sub after December 20, 2002. Furthermore:
For structures that are funded with a loan from a financing FA to the German parent, the financing FA's interest income, under the CRA's new position, is now subject to the recharacterization requirements in clause 95(2)(a)(ii)(D) instead of those in clause 95(2)(a)(ii)(B). Clause D requires that the German subsidiary's shares be excluded property; thus, the subsidiary's excluded property status must be regularly reviewed and monitored.
Neal Armstrong. Summary of Melanie Huynh and Paul Barnicke, "German Organschafts", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 5 under s. 90(2).
Credit Counselling Services of Atlantic Canada – Federal Court of Appeal finds that the prevention of poverty is not a charitable head
Webb JA found that the purpose for which a credit counselling registered charity had been operating since 1993 should be characterized as the prevention of poverty which (unlike the relief of poverty) was not a recognized charitable purpose, so that the annulment of its registration was confirmed.
Neal Armstrong. Summary of Credit Counselling Services of Atlantic Canada Inc. v. The Queen, 2016 FCA 193 under s. 149.1(1) – charitable organization.