News of Note
CRA requires Florida and Delaware LLPs and LLLPs to convert to “true” partnerships before 2018
Email this ContentCRA has finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes in light inter alia of their separate legal personality and limited liability. However, CRA is 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.
Neal Armstrong. Summary of 2016 IFA Roundtable, Q. 1 under s. 248(1) – corporation.
CRA provides example of deduction of loss deduction under s. 88(1.1) being postponed until year in which sub is dissolved
CRA has provided a simple example of the proposition that a Canadian parent generally may deduct a loss of a subsidiary that has been wound up in any taxation year of the parent commencing after the winding-up.
The subsidiary, which has losses for its taxation years ending on June 30, 2013 and June 30, 2014, commences its winding-up on June 15, 2014 and is dissolved in October 2015. The parent can deduct those losses only in its 2015 calendar taxation year, and not in its 2014 year, as 2015 is the year of the dissolution.
Neal Armstrong. Summary of 2015-0618211E5 under s. 88(1.1).
CRA states that no intention to claim exemption on future recognition of a capital gains reserve claimed on a s. 84.1 transfer to a purchaser corporation is irrelevant to the operation of the ACB grind
CRA considers that s. 84.1(2.1) essentially treats a resident individual who. having made a non-arm’s length transfer of shares to a purchaser corporation, then claims a capital gains reserve on the disposition, to have claimed a capital gains deduction on the disposition to the extent of the individual’s unused capital gains exemption room in that year, irrespective of whether such exemption was actually claimed and regardless whether there is no intention to claim the deduction when the reserve is recognized in future years.
Neal Armstrong. Summary of 2015-0594461E5 under s. 84.1(2.1).
Income Tax Severed Letters 25 May 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an employee received a retiring allowance under a “non-compete” if it compensated for a loss on an investment sale occurring because of his termination
CRA indicated that an amount received by a former employee from his employer under a non-compete agreement entered into after the termination of his termination of employment would generally be deemed to be employment income to him pursuant to s. 6(3)(b). However, in this case, the amount paid to the employee was equal to the loss he sustained on disposing of an investment following his termination. CRA stated that if the investment was sold only because of the termination, i.e., the investment would not otherwise have been sold, the amount received from the employer could reasonably be regarded as compensation for loss of employment, so that it would be a retiring allowance.
Neal Armstrong. Summary of 2015-0599581E5 under s. 248(1) – retiring allowance.
Adobe – Delhi High Court finds that India had no ability under Art. 7 of the U.S. Treaty to tax Adobe US on R&D servicing by its Indian sub whose fees already were subject to Indian tax in accordance with the arm's length pricing standard
Adobe U.S. received software-related R&D services on a cost plus 15% basis from its wholly-owned Indian subsidiary ("Adobe India"). The assessment officer (AO) had assessed Adobe India on the basis that its fees did not accord with the arm’s length standard. Adobe India had successfully appealed that assessment to the ITAT, and an appeal by the AO of that loss to the High Court of Delhi was in process. Bakhru J found that even if the taxpayer had a permanent establishment in India, the AO had no ability under Art. 7 of the U.S.-India Treaty to tax Adobe U.S. respecting the R&D services business of Adobe India as the latter’s fees already was subject to Indian tax in accordance with the arm's length pricing standard.
He went on to find that Adobe U.S. had no PE in India given that it had no right to use Adobe India’s premises – and there was no service PE as the only Adobe U.S. “service” potentially provided in India that the AO could point to was the right to audit Adobe India’s performance.
Neal Armstrong. Summaries of Adobe Systems Inc. v. ADIT, W.P.(C) 2384/2013 (Delhi High Ct) under Treaties Art. 7, Art. 5.
Air Canada – Quebec Court of Appeal finds that ARQ is obligated to send a copy of its notices of further reassessment to the lawyer who was its contact on a tax dispute
The lawyer acting for Air Canada in a tax dispute with ARQ was copied on a letter to Air Canada indicating that ARQ would be reassessing in a smaller amount than the original reassessment under dispute. This occurred several weeks later, but without the lawyer being copied. The Montreal head office of Air Canada forwarded the reassessment to its Winnipeg office (which dealt with tax matters), where something went awry, so that no action was taken. The lawyer did not find out about this until the 90-day objection period had expired.
The Quebec Court of Appeal found that, in light of considerations of procedural fairness, the Quebec equivalent of ITA s. 165(3) should be read as if it contained the additional bolded words noted below:
[T]he Minister shall … reconsider the assessment and … make a reassessment, and send the Minister's decision to the person by mail and to its designated representative, if any.
The same reasoning could apply federally.
Notwithstanding that ARQ thus had made a procedural error, the Court nonetheless declined to grant an extension of the 90-day appeal period under the more stringent Quebec equivalent of s. 166.2, which required that the taxpayer demonstrate that “it was impossible in fact” for it to appeal promptly. Air Canada, in the absence of any evidence as to why nothing had happened after the reassessment was forwarded to Winnipeg, had not established due diligence.
Neal Armstrong. Summaries of Air Canada v. ARQ, 2016 QCCA 710 under s. 165(3) and s. 166.2(5).
Airtours – UK Supreme Court finds that a firm paying for PwC accounting services was not entitled to a credit for the VAT because PwC was not contractually obligated to it
A corporation in financial difficulty (Airtours) agreed to pay PwC to prepare a report for its lenders to satisfy them that a proposed restructuring was viable. Lord Neuberger accepted that Airtours would be entitled to a credit for the VAT charged to it by PwC for the report if PwC was contractually obligated to Airtours to provide its report to the lenders (so that Airtours could satisfy the VAT test that it have received a supply from PwC), but instead found that PwC had no such contractual obligation to Airtours, so that no VAT credit was available. The minority, in concluding that PwC also was making a supply to Airtours, found an implied contractual obligation of PwC to Airtours and also paid more heed to the economic reality that Airtours benefited significantly from the PwC report, as it contributed to its successful restructuring.
It is unclear whether a different result would have obtained in Canada. Airtours likely would have been deemed under ETA s. 123 to be the “recipient” of the supply by PwC as it was liable under the engagement agreement to pay PwC’s fee. However, the ETA provision according an input tax credit (s. 169) was amended in April 1997 to replace a reference to property or a service being “supplied to” a particular person by a reference to a property or service being “acquired” by the particular person. In any event, the recognition by both the majority and minority in Airtours, that a contractual right of a person to require service to be provided to a third party represents a supply to that person, is helpful.
Neal Armstrong. Summary of Airtours Holidays Transport Ltd. v. HMRC, [2016] UKSC 21 under ETA s. 169(1).
CRA finds that a land developer can bump the cost amount of land (for use by it as land inventory) which was held by a target as capital property when its control was acquired
Where a corporation engaged in a land development business acquires a corporation holding a parcel of land as capital property, CRA accepts that the cost of the land can be bumped under s. 88(1)(d) if the target corporation is wound-up, even if the land will be acquired by the developer as inventory and even if the wind-up occurs several years later. The posited facts and CRA analysis stipulated that the land was capital property to the target at the time of the acquisition of its control rather than at the time of the wind-up, which may suggest it would not be a concern for the land to have been converted into inventory in the hands of the target after its acquisition and before its wind-up.
Neal Armstrong. Summary of 30 March 2016 T.I. 2016-0629701E5 Tr under s. 88(1)(d).
CRA finds that an accrued loss on shares of an LLC can be recognized by converting it to an LP
Headquarters accepted that the conversion of a Delaware LLC into a Delaware LP (under a procedure that looks similar to a continuance) resulted in a disposition of the LLC units (and an acquisition of the new LP units), so that a capital loss was realized by the LLC unitholder for FAPI purposes. Not surprisingly, Headquarters went on to find that the LLC and LP units were not identical property, so that s. 40(3.4) did not apply to suspend the loss.
As in 2004-0104691E5, no comment was made on how the new LP determined the cost of its property.
Neal Armstrong. Summary of 2015-0588791I7 under s. 40(3.3).