News of Note
Dell – Supreme Court of Spain finds that the local premises of a commissionaire were a fixed place of business of the non-resident principal
Email this ContentIn civil law, a commissionaire is an entity that sells in its own name for the account of another. Accordingly, the commissionaire is not a dependent agent for Treaty purposes as it does not habitually exercise “authority to conclude contracts in the name of the [non-]resident.”
The Supreme Court of Spain did not agree with this proposition, finding that in order for the local entity to be a dependent agent there need only be a "functional link" between the customers of the commissionaire and the non-resident principal, so that actual legal authority is unnecessary.
More fundamentally, the Supreme Court held that the premises of the local commissionaire (Dell España SA) constituted a fixed place of business, and thus a PE, of the non-resident (Dell Products Ltd., an Irish company) before even turning to the dependent agent paragraph.
The Court referred to the OECD Commentary statement that premises can be at the disposal of a non-resident even if the non-resident does not hold a formal legal right to use those premises, and then stated “disposal also includes…activity on account of the company.” There was no requirement for the non-resident to have any of its own personnel located on the Spanish premises, as the "fixed place" could be found solely due to activities performed by employees of Dell España SA - so that the business activities performed by Dell España SA should be regarded for treaty purposes as the business of the non-resident carried on in Spain at the Dell España SA premises.
Neal Armstrong. Summary of Gary D. Sprague, "Observations on Treaty Interpretation – Spanish Supreme Court Addresses Commissionaires," Tax Management International Journal, 2016, p 55 under Treaties - Article 5.
Income Tax Severed Letters 5 October 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CGI Holding LLC – Federal Court finds that a dividend to an LLC that was not “fully and comprehensively taxed” in the U.S. could be denied Treaty benefits by CRA
TD Securities found that an LLC was eligible for Treaty benefits. This case was released beyond the expiry of the two-year limitation period in s. 227(6) for another LLC (CGI) to apply for a refund of Part XIII tax on a substantial dividend previously received by it. (It wanted to reduce the effective rate from 25% to 5%.) CGI instead requested the IRS to engage CRA in competent authority proceedings so as to obtain the refund. In 2014, CRA sent a letter advising the IRS that it had concluded that Treaty relief was not available.
In finding that this decision of CRA was not unreasonable, McDonald J stated:
[T]he CRA…concluded that tax avoidance may have been a factor in the corporate reorganization. Further, the CRA was not satisfied that the dividend was fully and comprehensively taxed in the United States. These factors are addressed in the TD Securities decision. … These conclusions are within the range of possible outcomes of the MAP process.
An alternative CGI ground was that CRA should exercise its discretion under s. 227(10.1) to assess Part XIII tax at the reduced rate beyond the two-year period. McDonald J found that CGI'S s. 227(10.1) application was invalid as it had rushed CRA too much by immediatelely applying for judicial relief:
Here … CGI has not demonstrated a refusal on the part of the Minister to exercise her discretion. ... CGI … filed its Notice of Application for Judicial Review… only a few days after the request for an assessment. In the circumstances, CGI did not provide the Minister with a reasonable period of time to consider the assessment request.
Neal Armstrong. Summaries of CGI Holding LLC v MNR, 2016 FC 1086 under Treaties – Art. 4 and s. 227(10.1).
CRA confirms that there is no T1134 filing obligation where a s. 94 trust holds an interest in a non-resident corp through an LP
If a U.S.-resident trust resident to which s. 94 applies is a member of a U.S. partnership holding a U.S.-resident corporation, who is required to file the T1134? CRA considers that none is, given inter alia that the trust is not deemed to be resident in Canada for s. 233.4(1)(c) purposes.
Neal Armstrong. Summary of 13 July 2016 T.I. 2015-0608671E5 under s. 233.4(1)(c).
Further full-text translations of severed letters are available
The table below links to the two full-text translations of the French Technical Interpretations that were published last week, as well as to the summaries thereof. We are also going back in time so that the table also links to the two remaining translations from the releases on the week of May 11 and April 27, as well as to the translations of the French severed letters released on March 23 and February 24, 2016. The translations are paywalled in the usual (4-days per week) manner.
The links to the translations may not have worked in the equivalent post of last week, but now should work.
Quinco Financial – Tax Court of Canada states that taxpayers can be required to apply GAAR to themselves
On similar facts, Bocock J followed J.K. Read in rejecting a taxpayer argument that as a taxpayer could not apply GAAR to itself without CRA intervention, interest did not start accruing respecting denied capital losses until the CRA GAAR assessment rather than from the balance due-date for the year of the losses’ utilization. He noted that on its plain wording, s. 161(1) “imposes interest ‘at any time after a taxpayer’s balance-due day’ where tax payable exceeds amounts paid on account of tax for the year,” and that “to not impose interest from the balance-due day… renders GAAR ineffective in nullifying the deferral portion of the ‘tax benefit’.” Although he perhaps could have stopped there, he also stated:
[A]ll taxpayers, who are directly subject to GAAR assessments, that is, non-third parties, are required to consider and apply GAAR. Taxpayers who are directly or may be directly subject to the nullification of a tax benefit need not ask the Minister for permission to apply GAAR.
This suggests that taxpayers are required to exercise their own judgment under s. 245(2) as to the tax consequences of avoidance transactions “as is reasonable in the circumstances in order to deny a tax benefit that…would result, directly or indirectly” from the transactions.
Neal Armstrong. Summary of Quinco Financial Inc v. The Queen, 2016 TCC 190 under s. 161(1).
Various Canada-U.S. hybrid structures may still be viable following the proposed Regs under Code s. 385
One of the hybrid structures for the double-dip financing of a U.S. operating subsidiary (“U.S. Opco”) of Canco is for Canco to fund a Lux SARL with MRPS (as to which Luxembourg “has now started again on a limited basis” to issue rulings) or a non-interest-bearing loan (as to which Luxembourg would impute an interest deduction). The MRPS would be targeted to give rise to exempt dividends in Canada - or the loan would be targeted to not be subject to s. 17 interest imputation. The SARL would make an interest-bearing loan to U.S. Opco, the interest on which would be exempt from U.S. withholding under Art. XI of the Canada-U.S. Treaty and would be excluded from FAPI treatment by s. 95(2)(a)(ii).
This and a number of other Canada-U.S. hybrid structures (forward subscription arrangements for a USCo financing of Canco, a tower or repo structure for the financing of U.S. Opco by Canco or a hybrid debt financing by a U.S. lender of a Canadian realty company that has the economics of a share investment) very well may not be hurt by the proposed Regs under Code s. 385 to reclassify debt as equity in various circumstances.
Neal Armstrong. Summaries of Jack Bernstein and Francesco Gucciardo, "Canada-U.S. Hybrid Financing – A Canadian Perspective on the U.S. Debt-Equity Regs,” Tax Notes International, 26 September 2016, p. 1151 under s. 95(2)(a)(ii) and s. 20(1)(c).
A new Starlight fund is acquiring the 4 existing Starlight funds on a rollover basis and making a new unit offering
The existing unitholders of the Starlight Funds Nos. 1 to 4 (all listed LPs) will transfer their units into a new fund (the Starlight No. 5 fund) under Alberta Plans of Arrangement, with eligible Canadian residents able to do so on a s. 97(2) rollover basis. (Combining the multiple funds is attended with significant complexity.) The new Fund will have a multiple unit structure similar to that of the old funds and hold its indirect US apartment buildings under a similar structure. Ontario LPs beneath it will have elected to be corporations for U.S. tax purposes, and the underlying properties (or, to be more precise, the US LLCs holding each property) generally will be held by Maryland corporations which are intended to qualify as US private REITs. Recognition of FAPI is targeted to be avoided through reliance on the more-than-five full time employee exception and the s. 95(2)(a)(i) rule. The Fund is anticipated to have a lifetime of three years, subject to extension. The Fund will enter into FX derivatives, having a term of three years, so that the return of one of the Classes of units will be generated in Canadian dollars (e.g., if the U.S. dollar weakens over the three-year term, this will not adversely affect the return on those units).
Neal Armstrong. Summary of Starlight No. 5 preliminary prospectus under Offerings – REIT and LP Offerings – Foreign Asset Income Funds and LPs.
CRA indicates that it would not apply a correction in its position on a retroactive basis
In a French technical interpretation released in the spring, which we did not translate until now, CRA noted that in 2013-0490901I7 it had reversed its position in 2001-0113237, in finding that the Ontario Healthy Homes Renovation Tax Credit did not reduce the amount which could be claimed as a medical expenses tax credit – and then accepted that the same more favourable position applied to the similar Quebec Tax Credit for Home-Support Services for Seniors. In response to a question whether taxpayers could refile their returns going back 10 years to access this more favourable treatment, CRA stated:
When a change of position is issued in a technical interpretation, and that change is for the benefit of the taxpayer, it usually applies to present and future assessments and reassessments. Thus, an individual who has already filed tax returns for the tax years 2013 and 2014 and treated a CIMAD as a medical expense reimbursement for purposes of paragraph 118.2(3)(b), may obtain, within the normal reassessment period, a correction for a tax return already filed for those years.
Neal Armstrong. Summaries of 11 August 2015 External T.I. 2014-0527291E5 Tr under s. 152(1) and s. 118.2(3)(b).
CRA implicitly recognizes that a business investment loss potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity
Two of the three co-owners of a rental building made interest-free loans to a corporation that was the sole tenant of the building and whose shareholder was the third co-owner. The loans subsequently became bad.
CRA treated MacCallum as standing for the proposition that even though their loans were non-interest-bearing and made to a corporation of which they were not direct or indirect shareholders, the business investment loss claimed by them would not be denied under s. 40(2)(g)(ii) if they had made the loans with “the intention of preserving and recovering a considerable source of income for themselves.” However, in finding that this test was not satisfied, so that their BIL claim was denied, CRA stated that the co-owners “always had the option of renting the property to a tenant other than the Corporation and thus continuing to gain or produce rental income from that property,” i.e., assisting the particular tenant was not necessary to preserving their rentals.
In passing, CRA also acknowledged that Rich established that in order for the loss denial under s. 40(2)(g)(ii) not to apply, an income-producing purpose need not be the “the predominant purpose for the loan” and that “a subordinate purpose is sufficient.”
Neal Armstrong. Summary of 16 June 2016 Internal T.I. 2015-0597971I7 Tr under s. 40(2)(g)(ii).