News of Note
CRA considers that a member of an LLC is subject to U.S. income taxation on the LLC income for purposes of s. 95(2)(a)(ii)(D)(IV)(2) even though the net inclusion in its income is reduced by interest payable to a financing foreign affiliate
Email this ContentS. 95(2)(a)(ii)(D) may apply to deem interest payments received by FA #1 from FA #2 in a year on money borrowed by FA #2 to acquire shares of a foreign affiliate (Target) to be active business income. Among other conditions, s. 95(2)(a)(ii)(D)(IV) requires that in respect of both FA #2 and Target, either:
- the affiliate is subject to income taxation in a foreign country in the year; or
- the affiliate's shareholders are subject to income taxation in a foreign country on substantially all of the affiliate's income for the year.
CRA considers that the 2nd test above will be satisfied, in the situation where Target is an LLC that is treated for U.S. purposes as a partnership in which FA #2 has a 95% partnership interest, if substantially all (i.e., 95% in this example) of the Target income is included in the computation of the income of FA #2, even though that computed income is reduced by the interest expense payable by FA #2 to FA #1 on the borrowed money that had been used to acquire Target.
Neal Armstrong. 24 November 2015 Annual CTF Roundtable, Q. 9.
DMWSHNZ Ltd. – English Court of Appeal finds that the repayment of a note does not entail its disposal to the debtor
Lewison LJ rejected a U.K. taxpayer’s submission that when a debtor repays a note, there is a disposal of the note to the debtor given that following such repayment the debtor is still required to cancel the note (stating that “In the real world when the debt was repaid the obligation to pay was discharged; and there were no remaining creditor's rights that could have been transferred to the Issuer.”)
The correctness of this view is even more apparent in Canada, given that s. 84(9) deems the cancellation of a security to entail its disposition to the issuer only in the case of a share, although CRA professes (e.g., in 2010-0385771E5) that a trust distribution to capital beneficiaries in satisfaction of their interest entails an acquisition of property by the trust.
Neal Armstrong. Summaries of DMWSHNZ Ltd. v. Commissioners for Her Majesty's Revenue and Customs, [2015] BTC 32, [2015] EWCA Civ 1036, under s. 69(1)(b) and Statutory Interpretation – Purpose.
CRA considers that s. 94(10) can impose a retroactive obligation on a non-resident trust to file returns for up to five previous taxation years
In its published version of Q.7 at the 2015 STEP Roundtable, CRA has provided an extended example illustrating that where a previous long-term Canadian resident left Canada, made a contribution more than five years later (say, in 2010) to a non-resident trust with Canadian beneficiaries, and then returned to Canada in 2015, less than 60 months later, s. 94(10) would then apply retroactively to all the post-contribution years, i.e., 2010 through to 2015, to deem the trust to be resident in Canada in those years. Consequently, it would be retroactively delinquent for having failed to file (and pay) the requisite returns (and tax) for those years. If he instead made the contribution to the trust in 2010 when he had been a non-resident for less than five years (and again returned to Canada in 2015 less than 60 months after that contribution), the Trust would be deemed fron the time of his contribution to be resident in Canada (i.e., from 2010 onwards) - rather than s. 94(10) applying retroactively at the time of his return to Canada to deem this result.
Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.7(b), 2015-0572141C6, under s. 94(10).
Amos-Yeo – England and Wales High Court finds parties' intention to distribute enough shares to trust beneficiaries to access a reduced capital gains rate was sufficient to rectify a miscalculation of the shares’ number
In order that some trust beneficiaries could access a reduced U.K capital gains rate on a share sale, they were required to hold over 5% of the nominal share capital of the company before they sold their shares. Accordingly, the trusts distributed over 5% of the shares to them more than one year before a sale closed. However, due to the trust advisor overlooking the higher nominal capital of some of the other shares, the shares which were so distributed to them represented only 4.97% of the company’s share capital.
The intention of the parties to transfer enough shares to access the reduced rate of tax was found to be a sufficiently specific intention to permit rectification of the number of shares transferred, even though the parties had left the determination of the precise number to their advisor.
Neal Armstrong. Summary of Prowting 1968 Trustee One Limited v. Amos-Yeo, [2015] EWHC 2480 (Ch), under General Concepts – Rectification.
Bueti – Tax Court of Canada seems to imply that s. 70(5)(b) cannot apply to property acquired by a residuary beneficiary
Owen J made a factual finding that a particular property (a house in the estate of the taxpayer’s father) was purchased for cash consideration by her and her husband, as joint tenants, rather than being devised to her under her father’s will. Accordingly, it was clear that her and her husband’s cost of the property was their cash purchase price rather than being deemed by s. 70(5)(b) to be its higher fair market value at the time of their purchase.
Before so concluding, he made the interesting observation that, under the laws of Ontario, residuary beneficiaries do not acquire an interest in any specific property in the residue of the estate and it is instead the executors who acquire the property in the residue – with a possible implication that s. 70(5)(b) cannot apply to property acquired by a residuary beneficiary (as contrasted to property acquired by specific devise or bequest). Neither counsel mentioned s. 248(8)(a), which deems property acquired “as a consequence of the terms of the will” to be acquired “as a consequence of the death” (being the triggering phrase in s. 70(5)(b).)
Neal Armstrong. Summary of Bueti v. The Queen, 2015 TCC 265, under s. 70(5).
CRA is now permitting PHSPs to handle incidental non-qualifying medical expenses
Since January 1, 2015, CRA has only been requiring that substantially all (rather than all) of the premiums paid under a private health services plan relate to medical expenses that are eligible for the medical expense tax credit. CRA “did not want plans to be considered offside on the basis of nominal or incidental non-METC coverage” such as for non-prescription vitamins.
Neal Armstrong. Summaries of New position on private health services plans - Questions and answers and 24 November 2015 CTF Annual Roundtable, Q.5 under s. 6(1)(a)(i).
CRA indicates that normal course dividends and loss-shifting transactions generally do not engage the new s. 55(2) rules
Points made by CRA respecting the new s. 55(2) rules include:
- "Normal course" dividends (albeit with a narrow description of the only clear safe harbour) should not be subject to the new rules.
- CRA is willing to issue opinions (and presumably rulings, once the new rules are enacted) on the non-application of s. 55(2.1), although as a purely technical matter they will be somewhat meaningless, as the required representations will beg the (purpose) question.
- Conventional loss shifting transactions (which CRA has already been requiring not to create additional basis) will not be subject to the new rules.
- Where a non-participating discretionary shares has no accrued gain, then a dividend paid thereon which violates the purpose test cannot benefit from safe income. However, where this occurs, CRA is prepared to accept that the safe income on the participating shares of the same corporation will not be affected.
- CRA considers it to be offensive to redeem a share for a note in a s. 55(3)(a) reorganization, with the note being used to generates basis in excess of redeemed shares’ ACB.
- Also offensive is "ACB streaming prior to a reorganization under 55(3)(a) or (b), where the redemption would be of low-ACB shares, while the high ACB shares would be preserved."
- CRA appears to consider creditor-proofing transactions to per se entail a purpose that engages the new rules.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q.6 under 2015 CTF Roundtable.
CRA translates USD debt at the historical rate for thin cap purposes
CRA considers, based on s. 261(2), that the amount of U.S.-dollar denominated debt is to be measured for thin cap purposes in Canadian dollars based on the FX rate at the time the loan was made.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 10 under 2015 CTF Rountable.
Income Tax Severed Letters 25 November 2015
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA currently is inclining to classify Delaware and Florida LLPs and LLLPs as corporations
CRA is "heavily leaning" towards characterizing Florida limited liability partnerships (LLPs) and Florida limited liability limited partnerships (LLLPs) as corporations, and is a few weeks away from reaching a definitive conclusion on this point. Its preliminary view is that the equivalents under Delaware law also are corporations.
Neal Armstrong. Summary of 24 November 2015 CTF Annual Roundtable, Q. 7(b) under 2015 CTF Roundtable.