News of Note
Income Tax Severed Letters 15 June 2016
Email this ContentThis morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Markou – Tax Court of Canada finds that it has jurisdiction, in considering an assessment’s correctness, to determine the existence of equitable remedies
A Quistclose trust (as described by C. Miller J) provides an equitable remedy to a lender where it has lent to a borrower for a specific purpose and it is exposed to the risk of other creditors snatching the advanced funds before the borrower uses them for the intended purpose.
C. Miller J rejected a Crown submission that he lacked the jurisdiction to determine whether a Quistclose trust attached to funds lent to help fund leveraged donations. Although the Tax Court lacks jurisdiction to declare that there is a Quistclose trust, it has the jurisdiction to figure out whether taxpayer assessments are correct, and this requires that the “Tax Court… look at a taxpayer’s circumstances and make a determination as to what facts are true and what legal and equitable rights are available to the taxpayer.”
He went on to make a Rule 58(1) determination that no Quistclose trust attached to the funds advanced by the lender because, under his interpretation of the partially agreed statement of facts, the funds essentially were advanced by the lender directly to the charity so that, on a realistic view, they did not pass first through the hands of the borrower taxpayers.
Neal Armstrong. Summaries of Markou v. The Queen, 2016 TCC 137 under s. 104(1) and Statutory Interpretation – Interpretation Act, s. 8.1.
CRA indicates that a U.S. revocable living trust is not a bare trust
CRA maintained its position (notwithstanding a submission that De Mond was to the contrary) that a (U.S.) revocable living trust is a true trust and not a bare trust given that it has remainder beneficiaries. CRA also indicated that as the capital interests of the remainder beneficiaries are not acquired as a consequence of death (i.e., although the death of the settlor of the trust results in them receiving their remainder interests, this does not occur under a will), s. 70(5)(a) does not deem them to acquire their capitol interests at fair market value. (S. 107 presumably applies, but this was not discussed.)
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.10 under s. 104(1) and s. 70(5).
Société générale valeurs mobilières – Tax Court of Canada finds that a Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income
Although there was limited illumination in the questions of law posed by the Crown under Rule 58(1), the SGVM case seemed to entail the question of whether a tax sparing provision in the Canada-Brazil Treaty, which deemed a Canadian taxpayer to have paid 20% Brazilian withholding tax on interest received by it from Brazil, had the effect of providing to it a Canadian foreign tax credit equal to the amount of that fictional tax, even though its effective Canadian tax rate on that interest income was much lower than 20% (perhaps because of applicable leverage). This question turned on the meaning of a proviso in the Treaty, which stated that the FTC otherwise required by the Treaty to be accorded by Canada:
shall not… exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.
Paris J, in rejecting the taxpayer’s position (and affirming the Crown's position that the FTC effectively should be limited to the low effective Canadian tax rate on the Brazilian interest income), stated, among many other things:
It seems unlikely that the tax sparing provision was intended…to operate to shelter not only Brazilian interest income from Canadian tax, but income from other sources unrelated to Brazil as well. …
In addition, the provision quoted above was similar to the equivalent in the 1977 OECD Model Convention, except that the OECD provision used the word “attributable” rather than “appropriate” (although, both provisions used “correspondant” in their French versions). Paris J noted that the related OECD Commentaries stated that the limitation on the FTC deduction is “normally computed as the tax on net income, i.e. on the income from [the State of source] less allowable deductions.”
Neal Armstrong. Summary of Société générale valeurs mobilières inc. v. The Queen, 2016 TCC 131 under Treaties – Art. 24.
CRA is now requiring transcripts or proof of payment to the IRS in reviewing FTC claims for U.S. taxes
CRA has made two recent changes in its practices when reviewing foreign tax credit claims. First, in 2015 it started no longer exempting claims for U.S. foreign tax credits from the approach, which it already had been applying to FTC claims for other jurisdictions, of requiring a copy of the foreign tax return as well as a copy of the foreign notice of assessment (or other equivalent document) from the foreign tax authority. Then, in response to feedback on this change (including the fact that there usually is radio silence from the IRS rather than the automatic issuance of a notice of assessment), it began to accept proof of payment to (or refund from) the foreign tax authority, rather than insisting on something like a notice of assessment.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.9 under s. 126(7) – non-business income tax.
CRA possibly indicates potential flexibility in applying the transition of LLPs from partnerships to corporations
At 2016 IFA Roundtable, Q. 1, CRA indicated it had finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, but indicated that it was prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is 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 having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018. This position was substantially repeated at the 2016 STEP Roundtable, but with a comment made following a statement of the above conditions that “where some but not all of those conditions are met, those cases may be dealt with on a facts and circumstance basis.”
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.8 under s. 248(1) – corporation.
CRA indicates that a Canadian corporation controlled by a s. 94 (deemed resident) trust is not a CCPC
The fact that a trust which is factually non-resident is deemed to be resident in Canada for the purposes specifically listed in s. 94(3)(a) will not cause a Canadian corporation controlled by it to qualify as a Canadian-controlled private corporation.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.7 under s. 125(7) - Canadian-controlled private corporation.
CRA will continue its policy of not assessing inter vivos trusts for inadequate instalment payments
After a review announced two years ago (see 2014-0526591C6), CRA has now indicated that its policy, of not assessing penalties and interest where an inter vivos trust has failed to make sufficient instalment payments, will continue.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.6 under s. 220(3.1).
CRA will accept amended beneficiary returns to reflect their transfer of previously-allocated capital gains back to a trust making a s. 104(13.2) designation to absorb a capital loss carryback
A year ago, CRA indicated that a trust can carry back an allowable capital loss realized in a subsequent year and file a late s. 104(13.2) designation to include in the income of the trust a taxable capital gain realized for that previous year that previously had been allocated out to the beneficiaries. In a follow-up response, CRA confirmed that it will reassess the beneficiaries’ returns for the previous year to remove that gain provided that their returns for that year are not statute-barred. Turning to the nitty gritty, CRA indicated that:
- the T3A loss carryback request, and the T3 adjustment request for the previous year, should be filed together so that they can be processed concurrently;
- the trust should issue amended T3s; and
- the beneficiaries would need to file T1 adjustment requests.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.5 under s. 104(13.2).
CRA confirms that the preferred beneficiary election and qualified disability trust election potentially can coexist
Where, for example, four grandparents each established a trust for their mutual disabled grandchild under their wills, with one of the trusts (after death) now being intended to be a qualified disability trust, CRA confirmed that the designation of that trust as a QDT would not restrict the availability of the preferred beneficiary election for the other three trusts (and the fourth trust could make the preferred beneficiary election even if it had elected to be a QDT).
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 4 under s. 104(14).