News of Note
No CRA relief from the tainting of an estate as the beneficiary of an inter vivos trust
Email this ContentCRA has confirmed the obvious (but harsh) point that any contribution of property by an inter vivos trust to an estate causes the estate to cease to qualify as a testamentary trust, so that it cannot qualify as a graduated rate estate.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 3 under s. 248(1) - graduated rate estate.
CRA considers in the GRE context that a deceased has one estate even if an offshore will is unknown to the domestic executors
CRA’s position respecting the graduated rate estate rules, that there is only one estate, which encompasses all of the world-wide property of the deceased, applies even where the executors of a domestic will are not even aware of the existence of a second will pertaining to the deceased’s foreign assets. CRA noted that this very well could give rise to problems, without getting granular.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 2 under s. 248(1) - graduated rate estate.
CRA considers that the division of an estate into testamentary trusts can accelerate (perhaps to Day 1) the demise of the estate as a GRE
If the will of the deceased provides for the division of the residue into testamentary trusts (e.g., a spousal and children’s trust), the estate can no longer qualify as a graduated rate estate (i.e., even before the passage of 36 months from death) if all the assets become held in those testamentary trusts. Once this occurs, the problem cannot be solved by transferring the assets in the testamentary trusts back to the estate. CRA also considers that the testamentary trusts arise at the time of death.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q. 1 under s. 248(1) – graduated rate estate.
A senior Finance Canada/OECD official comments on BEPS issues including CbC reporting, the Nexus Approach and examples of unilateral downward adjustments
BEPS comments of Kevin Shoom, a senior Finance Canada official who currently is working at the OECD, include:
- Insofar as the OECD is concerned, the country-by-country (CbC) reporting contemplated under Action 13 of BEPS can take the so-called bottom-up approach of working from individual company accounts to create the line in the CbC report for the full country, or the top-down approach of taking the group’s consolidated accounts and then breaking them down for individual countries.
- The Action 13 report limits the use of CbC reports by the countries receiving the reports to “assessing high-level transfer pricing risks and other BEPS related risks, and stating that the reports cannot be used, for example, as the sole basis for a reassessment.” These restrictions are also in the competent authority agreements, and are subject to the peer review process.
- The Nexus Approach requires the amount of income eligible for benefits in an IP regime to be proportional to the amount of expenditures undertaken by the taxpayer to develop the IP. “In the process of developing the Nexus Approach, 16 IP regimes were identified in OECD and G20 countries. They were all found to be, in whole or in part, inconsistent with the Nexus Approach.”
- Examples of “unilateral downward adjustments” are the Belgian and Netherlands regimes excluding excess profits from income. “[T]he OECD…is not considering whether they constitute harmful tax practices - but instead relying on transparency, so that tax administrations that provide these regimes are expected to engage in automatic spontaneous exchanges of information on the granting of these benefits under these regimes.”
Neal Armstrong. 2016 IFA Conference transcript and slides of Kevin Shoom on BEPS
Uber Canada – Quebec Superior Court indicates that Uber drivers, as "taxi" operators, should have QST-registered – and ARQ officials on a search could seize computers and smart phones for complete copying
The ARQ obtained a search warrant for searching an Uber Canada office in Montreal. In order to be granted the search warrant, the ARQ employee laying the information was required to have reasonable grounds to believe that Uber Canada was committing an offence. The search warrant was granted inter alia on the suspected grounds (found to be reasonable) that Uber Canada was aiding the drivers in committing the offence of wilfully evading the collection of QST. This was alleged to be occurring inter alia by virtue of its system - for collecting the customer fares (through the customers’ credit cards) - not treating those fares as being subject to QST (or GST).
Cournoyer JCS, in his capacity of judge reviewing the validity of the search warrant after it had been granted and executed, rejected an argument that many of the Uber drivers could be considered to be small suppliers who, thus, were not required to register. Under the Quebec equivalent of ETA s. 240(1.1), a small supplier who carried on a taxi business was required to register, and the Quebec Act respecting transportation services by taxi required the registration of the Uber drivers’ cars as taxis.
On the search, 74 smart phones and 14 computers, which included personal information, were seized. Cournoyer JCS quoted approvingly an American view that given “the massive storage capacity of computers, combined with the ease of hiding evidence inside them,” government officials should be permitted to “seize the entire haystack for subsequent searching off-site.” (He was not über-impressed by the remote rebooting (from San Francisco) of the Montreal office computers when the search commenced, terming this an "obstruction of justice" evidencing an intent to hide illegal conduct.)
It was unnecessary for him to address an alternative alleged offence, namely, that Uber Canada was committing tax evasion by not charging QST on the 20% commissions that it charged its drivers. The judgment (at para. 154) discloses that CRA also has assessed Uber Canada for uncollected HST on its Ontario commissions.
Neal Armstrong. Summaries of Uber Canada Inc. v. ARQ, 2016 QCCS 2158 under ETA s. 240(1.1), ITA s. 231.3(1), General Concepts – Illegality.
CRA notes that the excessive eligible dividend election must be made on a pro rata basis rather than being streamed
When an Canadian-controlled private corporation has been assessed Part III.1 tax for having designated eligible dividends in excess of its general rate income pool (GRIP), it can eliminate that tax by making valid excessive eligible dividend designations (EEDDs) to effectively convert the excess into ordinary (full rate) dividends.
The amount of the EEDD must be pro-rated among the eligible dividends paid in the year. This means, for example, that if three shareholders of a CCPC holding separate classes of shares each received a $30,000 dividend (designated to be an eligible dividend) and CRA then assessed the CCPC on the basis that the year-end GRIP was only $60,000, not $90,000, the maximum EEDD for each dividend would be $10,000 – so that it would not be possible to make the election so that one shareholder would be considered post-election to have received an ordinary dividend of $30,000, with the other two shareholders each continuing to benefit from full eligible dividends of $30,000 each.
The EEDDs for all shareholders can be combined into one letter.
Neal Armstrong. Summary of 2016-0626371E5 under s. 185.1(2)(a).
CRA indicates that income distributions from a non-resident trust are deemed to be property income
CRA indicated, in light of the wording of ss. 250.1(b) and 104(13), that s. 108(5) extends to non-resident trusts, so that income distributions from a non-resident trust are deemed to be income from property.
Neral Armstrong. Summary of 24 March 2016 Memo 2016-0634191I7 under s. 108(5).
Income Tax Severed Letters 8 June 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Andrei 95 Holdings – Tax Court of Canada finds that legal fees for litigation respecting minority shareholdings were ineligible for input tax credits notwithstanding their being a source of management fees
A private company together with its individual shareholder had a 50% interest in two operating companies from which it earned management fees. Legal fees incurred in connection with negotiations with the other 50% shareholder for either one to buy out the other, and in connection with a lawsuit brought by the other shareholder against them for breach of an agreement not to compete with the operating companies, were found not to be eligible for input tax credits notwithstanding that the two companies were a source of management fees. Paris J focused on the fact that the shares were financial instruments.
Neal Armstrong. Summary of Andrei 95 Holdings Ltd. v. The Queen, 2015 TCC 224 under ETA, s. 169(1).
Brian Ernewein indicates that there are major issues to be addressed in deciding the process for the country-by-country choice of options in the proposed multilateral instrument
Brian Ernewein noted that there will be numerous options to choose from in the proposed BEPS multilateral instrument. In order for the MLI not to degenerate into the effective equivalent of a multitude of bilateral negotiations, it may be contemplated that countries may, for example
choose their type of platform - minimum standards plus whatever things they want to do - and that is what they have to offer to everyone.
Another issue arises where the standards to be addressed in the MLI may already be addressed in existing treaties – would any change be required in that regard to those treaties? Also, a country may not want the MLI to affect its treaties with some countries, and may wish to opt out respecting those countries. Yet another complexity relates to the fact that under one of the minimum standards there is a choice between using a principal purpose test or LOB standard - whose standard prevails, or could each country agree to provide its own standard to its own treaty benefits?
Brian indicated that these and other complexities indicate that the MLI is a very ambitious undertaking.
Neal Armstrong. Brian Ernewein on BEPS under Multilateral Instrument process.