News of Note
Birch Hill – Ontario Superior Court of Justice refuses to rectify stock option transactions on the basis that the s. 110(1)(d) deduction was peripheral to the larger sale transaction
Email this ContentTen executives who were denied the ½ s. 110(1)(d) deduction for their $17 million stock option benefit on the basis inter alia that they had sold the shares acquired by them on exercise of their options to a specified person (who on-sold to the arm’s length purchaser of the corporation, namely, Rogers), rather than directly to Rogers, were denied a rectification of the sales agreement to add them as parties to it and to provide for the transfer by them of their optioned shares directly to Rogers. Dunphy J found that there was “insufficient evidence… of an initial mutual ‘mistake’ as to a dominant or even important issue to the [sale] transaction itself,” noting that “I cannot characterize as a mistake a matter which was simply too insignificant to the parties to make its way on to the radar screen when they were negotiating their $425 million transaction.”
Although CRA did not contest the rectification application, it also took the position that the shares were not prescribed shares because the Board on liquidation had the discretion to establish a fixed liquidation amount for the shares, and reserved the right to maintain its denial of the s. 110(1)(d) deduction on this alternative basis . This was a further ground for denying rectification, i.e., the proposed “fix” might not be effective.
Neal Armstrong. Summaries of Birch Hill Equity Partners Management Inc. v Rogers Communications Inc., 2015 ONSC 7189, under General Concepts - Rectification and Reg. 6204(1)(a).
Green – Tax Court of Canada finds that limited partnership losses flow through a 2-tier LP structure
Paris J found that the business losses of a limited partnership allocated to an upper-tier partnership in excess of its at-risk amount continue to be business losses in its hands, so that such losses can, in turn be allocated to the partners in the upper-tier partnership – so that, if the at-risk amount rules apply, it is only to restrict the losses that are allocated to the partners in the upper-tier partnership. This runs contrary to CRA positions (2012-0436521E5, 2004-0107981E5, 2004-0062801E5 and 5-94077) that business losses generated in a lower-tier limited partnership effectively can be extinguished.
Paris J thought that the Crown was reading too much into s. 96(2.1)(c), which provides that a business loss in excess of the at-risk amount “shall not be deducted in computing the taxpayer’s income for the year.” The upper-tier partnership (like other partnerships) only computes income for purposes of allocating it to its partners and is not itself a taxpayer for computing income under s. 3, so that s. 96(2.1)(c) does not apply to deny the recognition of business losses in the hands of the upper tier partnership for such computation purposes. Conversely, s. 96(2.1)(e), which deems the excess business loss to be a limited partnership loss, is intended to operate only at the level of a taxpayer who is required to compute income and taxable income, i.e., only at the level of the partners in the upper-tier partnership.
Neal Armstrong. Summary of Green v. The Queen, 2016 TCC 10, under s. 96(2.1).
Lupien – Tax Court of Canada finds that a distributor earning significant relative profits had no goodwill
Shortly before a corporation (“Antoni”) sold all its assets to a third party, it acquired all the assets of a corporation (“LCR”) owned by its shareholder’s brother, which had been distributing one of its imported product lines in North America. Although LCR earned a significant portion of the combined profits, Lamarre ACJ found that the assets so acquired from LCR did not include any valuable goodwill given inter alia that there was no evidence of a distributorship agreement with LCR that could not be terminated on short notice and that the asset sale agreement between LCR and Antoni had not listed goodwill as a transferred asset. As the consideration paid by Antoni was inflated, s. 160 applied to make LCR liable for Antoni’s unpaid taxes (jointly with LCR’s shareholder given subsequent dividends to him).
Neal Armstrong. Summary of Lupien v. The Queen, 2016 CCI 2, under General Concepts - fair market value – other.
CRA considers that payment by a spousal trust of life insurance premiums on the spouse’s life disqualifies the trust
One of the requirements to have a good spousal trust is that noone other than the spouse obtain the use of trust capital or income before the spouse’s death. CRA considers this requirement to be violated where a purported spousal trust pays insurance premiums on the spouse's life even though the life insurance proceeds will not be paid out until the spouse’s death.
Neal Armstrong. Summary of 16 November 2015 T.I. 2014-0529361E5 under s. 73(1.01)(c).
Leibovich – Tax Court of Canada finds that accommodations at a private school for students with special needs were not major enough to qualify the tuition as a medical expense
The tuition fees for a student who suffered from “Central Auditory Processing Dysfunction” did not qualify as a medical expense under s. 118.2(2)(e) given that major adaptations were not necessary (or recommended in the related clinical report) to accommodate him (and other students with learning disabilities) at the school.
Neal Armstrong. Summary of Leibovich v. The Queen, 2016 TCC 6 under s. 118.2(2)(e).
Big Bird Trucking – Tax Court of Canada finds that drivers regularly hired on a per-load basis were independent contractors
C. Miller J. found that three particular drivers regularly hired by a trucking company, but on a per-load basis, were independent contractors for EI and CPP purposes notwithstanding that the company provided the trucks and insurance, stating:
There is a lack of commitment on either side, a lack of security, a lack of continuity and inherent risk that one seeking employment would find unattractive… .
Neal Armstrong. Summary of Big Bird Trucking Inc. v. M.N.R., 2015 TCC 340, under s. 5(1).
The new form for qualifying non-resident employer certification requires only basic details
On January 12, 2016, CRA released the form for (Treaty-exempt) non-resident employers to apply for certification as "qualifying non-resident employers" so as to be exempt from source deduction requirements on remuneration paid to "qualifying non-resident employees" (broadly, Treaty-exempt non-resident employees who work in Canada for less than 45 days in the calendar year of payment or are present in Canada less than 90 days in any 12-month period that includes the payment time). The RC473 form must be filed by the end of February 1, 2016 in order for certification to be treated as retroactive to January 1, 2016.
The applicant non-resident employer is not required to provide employee details or any travel data, so that the form mainly serves as a notification to CRA that the non-resident employer will have non-resident employees working in Canada during the certified period.
Neal Armstrong. Summaries of RC473 Application for Non-Resident Employer Certification and PWC, “New Non-Resident Employer Certification program: Payroll withholding relief for foreign employers with frequent business travellers to Canada” Tax Insights, Issue 2016-02, 15 January 2016 under s. 153(7).
Lloyds Bank decisions suggest that structured transactions have tax reductions as one of their main objects
In IRC v Brebner (1967), 43 TC 705 (HL), Lord Upjohn stated:
"... when the question of carrying out a genuine commercial transaction ... is considered, the fact that there are two ways of carrying it out—one by paying the maximum amount of tax, the other by paying no, or much less, tax—it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is ... avoidance of tax.
Following the Lloyds Bank decisions ([2014] EWCA Civ 1062, remitted to [2015] UKFTT 401) dealing with an anti-avoidance provision which was engaged if the obtaining of a writing-down allowance of 25% was “one of the main objects" of ship-leasing transactions, a U.K. writer has inferred that
the courts have now made it difficult for taxpayers to show that tax is not "a main object/purpose" in any situation where they have taken tax advice, and elected to adopt a more rather than less tax-efficient structure for a commercial transaction.
Neal Armstrong. Summaries of Michael McGowan, "HMRC v Lloyds Bank Leasing (No 1) Ltd: the troublesome increase in the scope of the "sole or main object" test", [2015] British Tax Review (Thomson Reuters (Professional) UK Limited), 2015, No. 5, p. 649 under General Concepts – Intention and s. 83(2.1).
Gervais – Federal Court of Appeal finds that a scheme to use basis averaging to permit spousal use of the capital gains exemption technically worked
The taxpayer purchased 1.04M preferred shares from her husband at a cost of $1.04M and was gifted a further 1.04M shares on a rollover basis by him under s. 73, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to her husband on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.
In reversing the finding by Jorré J below that the taxpayer’s resale of the 1.04M preferred shares occurred on income account given that ”not only was there a rapid resale, but the resale… was programmed in advance,” Boivin J found that as it was predetermined that she would resell at her acquisition cost, it would be “at the very least incongruous to impute to Mrs. Gendron a reasonable expectation of profit and to categorize this transaction as an adventure or concern in the nature of trade.” (See also see Continental Bank, Loewen and 2012-0438651E5). Acquiring shares in order to gift them also was not an adventure.
The transactions thus “worked” on a technical basis. Rather than dealing with the GAAR issue raised by the Crown (which Jorré J had ducked), Boivin JA remitted the file to the Tax Court for consideration of this issue.
Neal Armstrong. Summary of Gervais v. The Queen, 2016 CAF 1 under s. 9 – capital gain v. profit – shares.
Upstream loans may still be preferable to paying actual dividends
Notwithstanding the upstream loan rules, a “distribution from a foreign affiliate by means of an upstream loan may still be preferred to a (permanent) distribution from a foreign affiliate by means of an actual dividend, because the upstream loan may avoid foreign withholding and other taxes that would be incurred with an actual dividend.” This may work because the Canco recipient of the loan generally can use the ACB of its shares in the foreign affiliate at the time of the upstream loan (or other surplus), provided that such attributes are not put to use respecting other upstream loans or distributions. A sale of the foreign affiliate to a third party (with the loan kept outstanding) would not preclude continued use of such ACB as at the initial time of the upstream loan.
CRA indicated that Finance is likely to amend the rules so that there is not an inappropriate income inclusion under these rules when an upstream loan is extinguished by operation of law on the winding-up of the foreign affiliate (FA1) under s. 88(3) into the Canco. In policy terms, the upstream loan likely should be considered to be settled for “the paragraph 88(3)(d) determination of Canco's proceeds of disposition of the FA1 shares based in turn on the net distribution amount in respect of the liquidation.”
Neal Armstrong. Summary of Geoffrey S. Turner, "Upstream Loans and Dispositions of Foreign Affiliate Shares", International Tax (Wolters Kluwer CCH), No. 85, December 2015, p.1 under s. 90(9).