News of Note
CRA indicates that it likely is not problematic for an RRSP to make a 4900(1)(j.1) mortgage loan to its annuitant, who on-lends the proceeds interest-free to a wholly-owned corporation
Email this ContentCRA indicated that where an individual who is the annuitant of an RRSP receives an mortgage loan from the RRSP and uses the loan proceeds to make an interest-free loan to a corporation wholly-owned by the individual (the “Corporation”), with the Corporation using the proceeds to pay off a corporate line of credit, the interest on the Mortgage Loan may be deductible to the individual provided that the on-loan to the Corporation “increases the Corporation’s income-earning capacity (i.e., by reducing the Corporation’s interest expense) and the shareholders’ potential future dividend income from the Corporation.”
Assuming that the mortgage loan satisfies the conditions of Reg. 4900(1)(j.1) (e.g., satisfying the conditions for mortgage insurance), the loan likely would be considered to be acquired by the RRSP at fair market value and to have been made on arm’s length terms, so that the RRSP advantage and strip rules would not apply, provided that there was no default.
Neal Armstrong. Summaries of 1 June 2016 T.I. 2015-0601211E5 under s. 20(1)(c), Reg. 4900(1)(j.1), s. 207.01(1) – advantage – para. (d), and s. 207.01(1) – RRSP strip.
ExxonMobil acquisition of InterOil would include a contingent U.S.$1.4B cash payment to the InterOil shareholders which very well would have to be repaid in whole or in part
It is proposed that a newly-incorporated B.C. subsidiary of ExxonMobil will acquire InterOil under a Yukon Plan of Arrangement. InterOil is a Yukon corporation listed on the NYSE but essentially all of whose assets are natural gas assets held in a Papua New Guinea (“PNG”) subsidiary. The consideration for each InterOil share consists of that number of ExxonMobil shares having a fixed value of U.S.$45.00 per share, plus a cash payment of U.S.$26.87 per share (or U.S.$1.37B in total). However the cash “contingent resource payment” (or “CRP”) of U.S.$26.87 per share, which will be held under an escrow arrangement, will have to be repaid in full if an interim resource assessment of a PNG natural gas project of InterOil, which is expected to be completed in the 2nd quarter of 2017, shows a resource of less than 6.2 trillion cubic feet equivalent ("tcfe"), and with the CRP having to be repaid on a pro rata basis if the interim assessment shows a resource of between 6.2 and 10 tcfe.
The Canadian tax disclosure indicates that the full U.S.$26.87 per share CRP consideration (as well as, of course, the share consideration of U.S.$45 per share) will be required to be included in computing a resident InterOil shareholder’s proceeds of disposition for 2016, but (under s. 43) if the repayment obligation is triggered before the filing due-date for the shareholder’s return, the repayment would reduce those proceeds of disposition. If the reduction does not occur until later, it instead will be recognized separately as a capital loss.
The U.S.$1.37B up-front CRP payment will be lent on behalf of the former InterOil shareholders back to ExxonMobil under a loan which will mature after the completion of the interim resource assessment and at an interest rate which will not be determined until such maturity date. The disclosure discusses whether the contingent nature of the interest rate means that there is no interest accrual obligation.
In the previous agreement of InterOil with Oil Search (which was terminated with the payment of a $60M break fee on behalf of InterOil), Oil Search offered a contingent cash payment which was not capped at 10 tcfe, which resulted in significantly different tax issues.
Neal Armstrong. Summary of InterOil Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Hôpital Santa Cabrini – Federal Court of Appeal finds that a hospital which contracted for the services of nurses employed by a personnel-services agency was not receiving an exempt supply of nursing services
Boivin JA affirmed the finding of Archambault J below that a hospital which paid outside personnel-services agencies to receive the services of salaried nurses employed by the agencies was not thereby receiving an exempt supply of nursing services under Sched. V, Pt II, s. 6 given that the nurses were providing their services under the direction and control of the hospital rather than of managers at the agencies – and, in fact, delegation by the hospital of its responsibility for patient care would have been contrary to the Quebec Occupational Health and Safety Act.
This essentially confirms the CRA policy in Excise and GST/HST News - No. 89.
Neal Armstrong. Summary of Hôpital Santa Cabrini v. The Queen, 2016 CAF 207 under ETA, Sched. V, Pt II, s. 6, ITA, s. 180(3), General Concepts - Illegality.
Joint Committee makes submissions on the draft small business deduction rules
The Joint Committee has made various submissions to Finance respecting the proposed small business deduction rules including respecting potential pitfalls and deficiencies regarding the assignment of the business limit among associated corporations, the CRA discretion to add an amount to specified corporate income, the absence of a de minimis safe harbour in the designated member definition and the zeroing (rather than limiting) of specified partnership income where a partnership earns some non-arm’s length income. and inappropriate inflexibility in the specified partnership business limit definition.
The Joint Committee also submitted that proposed life insurance policy amendments should not have retroactive effect to transfers of policies that were undertaken on a non-arm’s length basis prior to March 22, 2016.
CRA rules that where CFAs hold commercial properties needed for their regulated active businesses through individual property subsidiaries of a Holdco proportionately owned by them, the property rents are s. 95(2)(a)(i) income
A group of regulated non-resident subsidiaries (the “Regional FAs”) of Canco have held commercial estate as part of and in support of their regulated active businesses. In order to diversify risk, it is proposed that: the existing real estate as well as further real estate acquisitions will be held in individual “Property Cos;” the holdings in all the Property Cos will (subject to exceptions) be held in a single holding company (“FA Holdco”); and the Regional FAs will (where permitted) hold pro rata portions of the shares of FA Holdco rather than direct interests in the Property Cos or in the underlying commercial real estate.
CRA ruled that the income of the Property Cos (to the extent of the percentage interest therein of the Regional FAs held directly or “via” FA Holdco) will be deemed active business income under s. 95(2)(a)(i). Although the ruling letter is laconic, this presumably is based on the proposition that the properties held through the Property Cos are directly related to the active business activities of the Regional FAs because they support the regulatory requirements for those businesses in some manner, and would have given rise to active business income in the hands of the Regional FAs if they instead had continued to be held directly.
Neal Armstrong. Summary of 2016 Ruling 2015-0604451R3 under s. 95(2)(a)(i).
Granofsky – Tax Court of Canada finds that a taxpayer’s counsel can consent in writing to reassessment of the taxpayer
S. 169(3) provides that Minister may at any time reassess, with the consent in writing of “the taxpayer.” D’Auray J found that this requirement can be satisfied through a signature of the taxpayer’s counsel acting within the scope of her mandate (and went on to find that, in the case before her, counsel had the mandate).
Neal Armstrong. Summary of Granofsky v. The Queen, 2016 TCC 181 under s. 169(3).
Income Tax Severed Letters 24 August 2016
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The narrowing of “taxable Canadian property” also has narrowed s. 119 relief
S. 119 provides relief from double taxation where an individual paid income taxes under s. 128.1(4), on emigrating from Canada, on accrued gains on shares and subsequently received dividends on those shares that were subject to Part XIII tax. However, such relief is only available where the shares were taxable Canadian property.
Neal Armstrong. Summary of Henry Shew, "Section 119: Flawed Relief from Departure Tax," Canadian Tax Focus, Vol. 6, No. 2, May 2016, p.9 under s. 119.
Foreign income taxes imposed on business income which is allocated to a provincial PE generally is non-creditable
The provinces do not accord a foreign tax credit for foreign taxes imposed on business income because, from their perspective, they only impose tax on income which is allocated to provincial permanent establishments under the Reg. 400 rules. There thus is an obvious problem if in fact foreign income tax is imposed on such business income. This happens where the foreign rules for allocating business income are different from the Canadian and provincial rules.
Neal Armstrong. Summary of Kyle B. Lamothe, "The Missing Provincial Tax Credit for Foreign Business-Income Tax," Canadian Tax Focus, Vol. 6, Number 2, May 2016, p. 10 under s. 126(2).
CRA applies a pro-rating approach to money borrowed from an affiliate to return capital used to fund both exempt and non-exempt activities
Where FA1 borrows from a sister (FA3) to make a capital distribution on its Class A common shares, which had previously been issued solely to finance FA1’s active business, CRA would accept that the interest on this loan would be received as deemed active business income by FA3 under s. 95(2)(a)(ii)(B), on the basis that it was deductible in computing FA1’s earnings from an active business under Reg. 5907. This would be so even if FA1 had issued shares of another class (its Class B common shares), to finance the acquisition of shares which were not excluded property, at the same time as it issued the Class A common shares – so that even though CRA did not articulate it this way, a tracing approach evidently is accepted.
In the situation where FA1 was required to compute its income (pursuant to Reg. 5907(1) – earnings – (a)(iii)) under Part I of the Act, CRA indicated that the interest was deductible under s. 20(1)(c) “because the borrowed funds replaced capital that…had been used by FA1 for the purpose of earning income from an active business,” whereas in the situation where the earnings were computed pursuant to (a)(i) or (iii) of the earnings definition under local tax law and the interest was non-deductible under such law, CRA laconically stated that the interest would be deductible under Reg. 5907(2)(j) without explicitly indicating that it was applying the fill-the-hole approach here as well.
If instead, shares of only one class had been issued to fund the two (good and bad) uses of funds, as to 80% and 20%, respectively, CRA would consider that “the portion to which clause 95(2)(a)(ii)(B) applies should be determined on a pro-rata basis based on the current use of the capital (i.e., prior to its replacement with the borrowed funds)…[so that] 20% of the interest income of FA3 would not be recharacterize.” as active business income.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable Q. 8, 2016-0642041C6 under s. 95(2)(a)(ii)(B).