News of Note
Income Tax Severed Letters 30 September 2015
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Great-West Life – Tax Court indicates that ancillary taxable services described in the “financial service” definition generally will be ignored
A third party (Emergis) provided automated claims processing services to Great-West Life, which administered or insured various client drug plans, so that the prescription drug claim of an employee would be processed at the pharmacy counter upon presenting her magnetic card.
Owen J ultimately found that the charges of Emergis to Great-West for this service were taxable under the Financial Services and Financial Institutions (GST/HST) Regulations, as they were "quintessentially administrative in nature." More interestingly, he found that in the absence of this Regulation, the service would have been exempt as being for the payment of insurance policy claims – notwithstanding that the Emergis service entailed the provision of taxable supplies described in para. (r.4) of the financial services definition, e.g., collecting, collating or providing information. He stated that "those services do not represent the essential character or substance of the supply, which is paying drug benefits to plan members."
This "essential character" approach means that (r.4), which refers to services which merely are preparatory or provided in conjunction with something else, will usually not apply, as these components of what usually is a single supply generally will not give the supply its "essential character," i.e., what the recipient is really paying for.
Neal Armstrong. Summaries of Great-West Life Assurance Company v. The Queen, 2015 TCC 225, under Financial Services and Financial Institutions (GST/HST) Regulations, s. 4(2) and s. 123(1) – financial service – (f.1), (r.4) and (r.5).
CRA considers that an LOI does not represent a s. 251(5)(b) right if it is not a contract
When questioned on whether a non-binding letter of intent to acquire shares gave rise to a s. 251(5)(b) right over those shares, CRA indicated that this turned on "whether the LOI constitutes a contract, in equity or otherwise" – which was a legal question it was not prepared to pass on in the context of an external technical interpretation.
CRA appears to have interpreted the reference in s. 251(5)(b) to "a right under a contract, in equity or otherwise" as referring to a contractual right, whether equitable or otherwise, rather than considering "that the 'right' referred to in paragraph 251(5)(b) is not confined to rights arising under a contract, but extends to rights arising in 'equity or otherwise', apart from pure contract" (Rostal).
Neal Armstrong. Summary of 7 July 2015 T.I. 2014-0552711E5 under s. 251(5)(b).
CRA has delegated much of the policy determination of what is CRCE to Natural Resources Canada
CRA has delegated the technical aspects of policy on what is Canadian renewable and conservation expense to Natural Resources Canada. For example, a listing of project development activities that are typically eligible as CRCE is contained in Appendix II of NR Canada’s Technical Guide to Canadian Renewable and Conservation Expenses (CRCE).
Neal Armstrong. Summary of 19 August 2015 T.I. 2015-0587981E5 under Reg. 1219(1).
Using a secondment arrangement may reduce complications when a non-resident provides the services of an employee to a Canadian affiliate
A non-resident who is assigning one of its non-resident employees to Canada may be able to avoid setting up a payroll account with CRA, and being considered to carry on business in Canada, by "seconding" (loaning out) the employee to its Canadian affiliate (Canco) in accordance with the IC-75-6R2 guidelines, so that Canco is treated by CRA as the employer and is "responsible" for the Canadian source deductions – even though the employee stays enrolled with the non-resident’s pension, equity compensation and other benefit plans. In particular, Canco may not have to actually pay remuneration to the seconded employee, so that the non-resident charges Canco for the employee's services and the charge-back (which ideally is reduced by the amount of the Canadian source deductions) is used by the non-resident to pay the seconded employee’s remuneration.
Neal Armstrong. Summary of Ron Choudhury, "An Overlooked Solution for Non-resident Employers", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24 No. 7, September 2015, p. 1643 under Reg. 104(2).
UK Revenue appears to be willing to ignore Anson (and relishes the passive voice)
The UK Supreme Court found that profits of a Delaware LLC belonged to the members as they arose, so that a UK member (Mr Anson) was considered for UK tax purposes to have been taxed on the same income in both countries. HM Revenue & Customs has now stated:
…[T]he [Anson] decision is specific to the facts found in the case. This means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business.
Evidently, HMRC does not write as well as CRA. Presumably, it is irrelevant for UK tax purposes whether an LLC has elected to be disregarded solely for Code purposes, so that HMRC appears to be willing to treat an LLC as not being fiscally transparent even where it has so elected.
Neal Armstrong. Summary of [U.K] Revenue and Customs Brief 15 (2015): HMRC response to the Supreme Court decision in George Anson v HMRC (2015) UKSC 44 under Treaties – Art. 24.
Denison acquisition of Fission Uranium caps the number of Denison shares to be issued so as to avoid a reverse takeover
Denison is to acquire all the shares of Fission under a CBCA Plan of Arrangement in consideration for around 487 million Denison shares and nominal cash, so that Fission resident taxable shareholders desiring rollover treatment must elect under s. 85 – with the tax elections being generated and completed using a special dedicated website. Although it is expected that the pre-combination shareholders of Denison and Fission will own approximately 51.86% and 48.4%, respectively, of Denison post-Arrangement (excluding impacts of exercises of stock options and warrants), someone felt strongly that the Fission shareholders should not become majority owners of Dension - so that the exchange ratio of 1.26 Denison shares for each Fission share is subject to a cap on the total number of Denison shares issued on the exchange equal to the current number of Denison shares outstanding, minus 100,000.
Following the exchange, Denison will transfer its Fission Shares to a wholly-owned subsidiary (Subco), and amalgamate with Subco, with Subco as the survivor. (Such a non-continuation style amalgamation likely will qualify as an amalgamation for ITA s. 87 purposes - see 2006-0178571R3). The transaction is stated in the Plan of Arrangement itself to be intended to qualify as a forward triangular (D) reorganization under the Code. However, as Fission and Denison are believed to be a PFIC and not a PFIC, respectively, the PFIC rules may trigger taxable gain or income subject to tax at ordinary income tax rates plus an interest charge.
Neal Armstrong. Summary of Fission Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
AB LLC – South Africa Tax Court finds that a client’s boardroom can be a PE of a consultant
5(1) of the OECD Model Treaty defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on" and 5(2) states that the term "includes especially" places listed in subparas. (a) to (f). The OECD Commentary states these listed examples "constitute permanent establishments only if they meet the requirements of paragraph 1," i.e. they must also represent a fixed place of business.
A US corporation, which spent 15 months based in the boardroom in South Africa of a South African client providing consulting services, argued that this limitation also applied to the services PE paragraph (i.e., 5(2)(k)) of the US-South Africa Treaty, so that the corporation’s provision of the consultancy services for a period of more than 183 days was exempted under the business profits Article as it did not have a fixed place of business there. In rejecting this argument, Vally J noted inter alia that 5(2)(k) "is very different …[as] it does not refer to a place of work, but rather to a form of work."
However, even if the OECD comment applied, the client’s boardroom nonetheless constituted a fixed place of business (in contrast to Dudney, where "a sole individual providing services moved from one area to another.")
Neal Armstrong. Summaries of AB LLC and BD Holdings LLC v. Commrs. of South African Revenue Services, Case No. 13276, 15 May 2015, South Africa Tax Court under Treaties – Art. 5, Art. 7.
CRA is prepared to infer a refund request from a waiver
In clarifying 2012-0468081I7, CRA has stated that although a waiver itself does not extend the deadline for a taxpayer to apply under s. 164(1)(b) for an income tax refund, it will treat the waiver as such an application where "it is reasonable to conclude the waiver also contains an implicit request for a refund for the particular issue outlined in the waiver." Of course, it is preferable for the waiver to be explicit on this point.
Neal Armstrong. Summary of 15 June 2015 Memo 2015-0583081I7 under s. 164(1).
Income Tax Severed Letters 23 September 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.