News of Note
CRA confirms that the normal or extended reassessment period ends on the anniversary date of the original assessment
Email this ContentThe normal reassessment period under s. 152(4)(a) or the extended reassessment period under s. 152(4)(b) ends at the end of the anniversary date of the date of the original assessment – so that in effect when counting out 365 (or 366) day years on your fingers you start on the day after the date on which the original assessment was issued.
Neal Armstrong. Summaries of 10 March 2016 Memorandum 2015-0614161I7 under Interpretation Act, s. 27(3) and Interpretation Act, s. 152(3.1).
CRA confirms that debt subject to the thin cap rules does not include accrued interest
The definition of “outstanding debts to specified non-residents” does not include outstanding accrued interest as compound interest thereon is not deductible until the year paid.
Neal Armstrong. Summary of 2016-0626841E5 under s. 18(5) - “outstanding debts to specified non-residents.”
CRA considers the assignment of a right to purchase Canadian real estate to be a disposition of taxable Canadian property
CRA considers that a right to acquire a Canadian real estate property (presumably under an agreement of purchase and sale) is an “option” in respect of the property under para. (f) of the taxable Canadian property definition, so that an assignment of such right by a non-resident constitutes a disposition of taxable Canadian property.
It is unclear why CRA considers such a right to be an option in respect of the property rather than (in a common law province) an equitable interest in the property. It would be news to an options trader that a binding obligation to acquire a property was an option.
Neal Armstrong. Summary of 2015-0608211E5 under s. 248(1) - taxable Canadian property - (f).
Edison LLC – Tax Court of Canada finds that a discretionary finder’s fee is not deductible
Two Florida LLCs of two Florida residents effectively had a joint venture to provide bussing services to the Olympic organizing committee for the 2010 Vancouver Olympics. A third LLC (“Edison”) was formed to provide many of the services. Although the documentation purported to make Edison’s key Canadian employee the owner of its shares, this was mere “window dressing” (to make it look like a separate enterprise in the eyes of the organizing committee), so that effectively the beneficial owner of Edison’s shares was one of the two Florida residents (Pouncey).
All of the estimated profits of Edison were made payable to Pouncey’s company pursuant to an agreement which was not prepared until the Olympics were finished. The rationale presented for the full deduction of this amount was that it was for support services provided by Pouncey’s company and for its services in procuring the Olympic contract work for Edison. CRA accepted the deduction of U.S.$400,000 of the fees as relating to support services provided. Pizzitelli J denied the deduction of the U.S.$2.1 million balance on numerous grounds, including that its amount was “discretionary,” stating:
[E]ven if I accept payment can be made for past services, there must at least be some agreement as to the quantum or calculation of such fee or commission in advance in the context of business in order to characterize such payments as such. It is in the very nature of these types of payments that they are calculable on some objective basis and not merely discretionary… .
Neal Armstrong. Summaries of Edison Transportation, LLC v. The Queen, 2016 TCC 80 under s. 18(1)(a) and General Concepts – Window Dressing.
Income Tax Severed Letters 20 April 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that a cross-border notional cash-pooling arrangement engages the B2B loan rules
CRA considers that a notional cash pooling arrangement between a non-resident parent and its various subsidiaries including Canco, and a non-resident bank, as a result of which Canco has an overdraft balance in its pool account, will be caught by the back-to-back loan rules in ss. 18(6)(c)(i) and 212(3.1)(c)(i) (i.e., some pool account deposits of non-resident affiliates of Canco will be considered to be “intermediary debts”). Accordingly, it was not necessary to consider whether the right of the non-resident bank to offset overdraft balances of any pool participants against deposit balances of other pool participants without prior notice engaged the specified right rules in ss. 18(6)(c)(ii) and 212(3.1)(c)(ii).
Neal Armstrong. Summary of 2015 TEI Roundtable, Q.6, 2015-0614241C6 under s. 212(3.1)(c).
CRA confirms that normal-course dividends (as narrowly defined) are not affected by the s. 55(2) amendments
Consistently with oral comments made at the 2015 CTF annual Conference, CRA stated at the November 2015 TEI Roundtable that:
Where a dividend is paid pursuant to a well-established policy of paying regular dividends and the amount of the dividend does not exceed the amount that one would normally expect to receive as a reasonable dividend income return on equity on a comparable listed share issued by a comparable payer corporation in the same industry, the CRA would consider that the purpose of the payment of such dividend is not described in proposed paragraph 55(2.1)(b).
Neal Armstrong. Summary of 2015-0613821C6 under s. 55(2.1)(b).
CRA rules on non-triangular partly-completed loss shift from lossco parent to profitco sub
Lossco wished to transfer its non-capital losses to its wholly-owned subsidiary, Profitco. Rather than engaging in the conventional form of triangular loss-shifting transactions, Profitco used the proceeds of an interest-bearing loan from Lossco to subscribe for preferred shares of a newly-formed subsidiary, which lent the proceeds in a non-interest-bearing loan back to Lossco. These transactions already had occurred. CRA ruled inter alia respecting the interest deduction to Profitco and the non-application of s. 12(1)(x) to the capital contributions made by Lossco to Newco to fund the pref dividend payments, and opined that s. 55(2) as it is to be amended by the July 31, 2015 draft legislation did not apply.
The unwind also is elegant: Newco delivers the non-interest-bearing loan to Profitco as the redemption proceeds for the preferred shares, and the two loans are set-off.
Neal Armstrong. Summary of 2015-0582101R3 under s. 111(1)(a).
CRA states that Canadian domestic sourcing rules apply in determining whether a Canadian corporate donor to a U.S. charity has US-source income for Treaty purposes
A gift made by a Canadian-resident corporation to a U.S. resident charity that also would qualify as a Canadian registered charity if it were resident in Canada is deemed by Art. XXI, para.7 of the Canada-U.S. Treaty to be a “gift to a registered charity” for purposes of the Act, subject to an assumption that the corporation’s income only includes its income arising in the U.S. considers that the Canadian domestic sourcing rules should be used in determining whether income has a U.S. source for these purposes so that, for example, the policy in Folio S5-F2-C1, paras. 1.62 to 1.65 would apply in determining whether a capital gain had a U.S. source.
The 75% income limitation (re income from U.S. sources) and the five year carryover rule in s. 110.1(1)(a) also apply for these purposes.
Neal Armstrong. Summary of 2015 TEI Roundtable, Q.7, 2015-0614251C6 under Treaties, Art. 21.
Income Tax Severed Letters 13 April 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.