News of Note
CRA appears to consider that generally a Canadian enterprise may not pass along the benefit of government assistance to a non-resident affiliate in its transfer pricing
Email this ContentCRA considers that:
When a cost-based transfer pricing methodology is used to determine the transfer price of goods, services, or intangibles sold by a Canadian taxpayer to a non-arm's length non-resident person and the Canadian taxpayer receives government assistance, the cost base should not be reduced by the amount of the government assistance received, unless there is reliable evidence that arm's length parties would have done so given the specific facts and circumstances.
CRA provides an example of a Canadian enterprise providing R&D services to an affiliate at a price equal to cost (as reduced by SR&ED tax credits) plus 10%, so that CRA in the absence of such “reliable evidence” would increase the transfer price to 110% of the gross cost.
It may be difficult or impossible for the Canadian enterprise to find evidence of arm’s length parties passing on the cost reduction from government assistance.
Neal Armstrong. Summary of TPM-17 “The Impact of Government Assistance on Transfer Pricing” under s. 247(2).
Conventional equity forwards likely are not DFAs, and equity derivatives may be held as investments
The definition of “synthetic equity arrangement” (which is used under the July 31, 2015 draft legislation to extend the scope of the dividend rental arrangement rules) excludes agreements that are traded on a “recognized derivative exchange,” subject to anti-avoidance provisions. Although the explanatory notes contemplate that foreign exchanges will be recognized by provincial securities commissions, the commissions instead usually exempt foreign exchanges from the requirement to be recognized or registered.
It is unlikely that the effect of prevailing interest rates on the negotiated (fixed) forward price under an equity forward causes the forward to be a derivative forward agreement, even where the taxpayer is the seller rather than purchaser.
CRA appears to assume that a derivative that is not entered into for hedging purposes is speculative and, therefore, held on income account. This is questionable where a long position under an equity derivative, e.g., a total return swap, has been acquired as an alternative to investing in the underlying equities.
Neal Armstrong. Summaries of Raj Juneja, “Taxation of equity derivatives,” draft 2015 CTF Annual Conference paper under s. 248(1) – synthetic equity arrangement, s. 248(1) – derivative forward agreement, s. 9 – capital gain v. profit – futures/forwards, s. 212(1)(b), s. 212(1)(d).
CRA confirms that it will be exchanging rulings under BEPS
Yesterday’s budget (after noting that Canada's information exchange agreements "restrict the use of the exchanged information...typically...to the enforcement of tax laws...and...ensure the confidentiality of the information") confirmed “the Government’s intention to implement the BEPS minimum standard for the spontaneous exchange of certain tax rulings” so that CRA “will commence exchanging tax rulings in 2016 with other jurisdictions that have committed to the minimum standard.” CRA indicated today that effective April 1, 2016, it will be providing summaries (and, if so requested, further details) of the contents of the following categories of rulings with the countries of residence of the immediate and ultimate parent and certain other parties (which countries may then ask to receive relevant portions in more detail) - re:
a) preferential regimes (for Canada, including international shipping and certain foreign life insurance operations of a Canadian company);
b) cross-border transfer pricing;
c) downward adjustment not directly reflected in the taxpayers’ accounts;
d) permanent establishments; and
e) related party conduits.
Neal Armstrong. Summary of 22 March 2016 Memo 2016-0632941I7 under Article 27.
Income Tax Severed Letters 23 March 2016
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Soutar Décor – Tax Court of Canada finds that seizure of a guarantor’s security constitutes a transfer by the guarantor for s. 160 purposes
Bocock J found that when a bank seized the security (a GIC) provided by a tax debtor to secure his guarantee of a bank loan to his son’s company, this constituted a transfer of property by him to that company for s. 160 purposes. It made no difference that the transfer was involuntary.
This result is broadly consistent with the proposition that payment of another’s debt constitutes payment to that person (see Innovative Installation and Great-West).
Neal Armstrong. Summary of M. Soutar Décor 2000 Ltd. v. The Queen, 2016 TCC 62 under s. 160(1).
Kokanee Placer – Tax Court of Canada indicates that a due diligence defence can be raised to a penalty under s. 162(7) for failure to file electronically
A corporation which had marginally more revenue than the $1 million threshold triggering an electronic return-filing requirement was liable for a s. 162(7) penalty for instead filing in paper form even though it had no taxes payable. A mistake as to the electronic filing requirement was a mistake of law and not a defence to the penalty. Paris J also found that although due diligence defences may be raised to s. 162(7) penalties, no such defence was established here.
Neal Armstrong. Summary of Kokanee Placer Ltd. v. The Queen, 2016 TCC 63 under s. 162(7.2).
CRA rules on s. 55(3)(a) real estate spin-off beneath new holdco for unrelated shareholders
In 2015-0570021E5 F, CRA confirmed that s. 55(3.01)(g) generally permitted two unrelated individuals to spin-off real estate from a jointly owned Opco to a newly-incorporated jointly-owned Realtyco provided that they first interposed a holding company between themselves and their two companies (Opco and Realtyco). CRA has now ruled (as well as providing an opinion under the July 31, 2015 draft amendments) on somewhat similar transactions, which start with individuals (who apparently are unrelated for s. 55 purposes) holding their shares of Opco through their respective holding companies, then entail the holding companies transferring their Opco shares to a common holding company (Holdco) and, following a spin-off of Opco real estate to a new subsidiary of Holdco (Realtyco), Holdco ends up holding each of Opco and Realtyco as standalone subsidiaries.
The proposed transactions contemplate that CRA would approve Opco cutting short its taxation year (with CRA consent) immediately before the spin-off by it of the real estate to Realtyco, so as not to lose CCA claims. "The fiscal period of Realtyo will be fixed at a date which will permit the avoidance of Part IV tax circularity."
Neal Armstrong. Summaries of 2015-0605901R3 F under s. 55(3.01)(g) and s. 249.1(7).
UBS AG – UK Supreme Court infers a Parliamentary intention to give relief for restrictive conditions affecting shares' marketability only where those conditions have a commercial purpose
Lord Reed found that a scheme to avoid income tax on bankers’ bonuses, which entailed awarding the employees redeemable shares in an offshore company which were subject to a commercially remote risk of forfeiture of all or a significant portion of their value (e.g., in the case of one bank, forfeiture of the shares if the employee was dismissed for misconduct or voluntarily resigned within the next six weeks), did not avoid immediate taxation on the value of the offshore company shares when awarded to them. He applied a variant of the Ramsay principle, which turned on whether “the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
In response to arguments that in the presence of rules governing "restricted shares" which were “extensive and highly detailed…it was impossible to attribute to Parliament an unexpressed intention to exclude schemes of the present kind,” he stated:
[I]t appears from the background to the legislation that the exemption…was designed to address the practical problem which had arisen of valuing a benefit which was, for business or commercial reasons, subject to a restrictive condition involving a contingency. The context was one of real-world transactions having a business or commercial purpose. There is nothing in the background to suggest that Parliament intended that [the exemption] should also apply to transactions having no connection to the real world of business, where a restrictive condition was deliberately contrived with no business or commercial purpose but solely in order to take advantage of the exemption… .
Neal Armstrong. Summaries of UBS AG v Commissioners for HMRC; DB Group Services (UK) Ltd v. Commissioners for HMRC, [2016] UKSC 13 under General Concepts – Tax Avoidance, and General Concepts – Fair Market Value – Shares.
Home Capital is making an issuer bid under a Dutch auction with a specified amount based on the closing market price at the offer expiration
Home Capital is proposing to repurchase approximately 6% of its outstanding common shares under a Dutch auction at a price of between $34.00 and $38.00 per share (or $150 million in aggregate). Most of the proceeds will be subject to deemed dividend treatment, as the paid-up capital per share is around $1.29.
Ss. 191(4) and (5) provide a safe harbour from Part VI.1 tax for repurchase amounts paid up to an amount "specified” in the repurchase agreement not exceeding the fair market value of the shares immediately before the repurchase agreement was entered into. The Offer has a stand-alone statement that “for the purposes of subsection 191(4) of the Tax Act, the ‘specified amount’ in respect of each Share will be an amount equal to the closing trading price for the Shares on the TSX on the [offer] Expiration Date.” This contrasts with the recent TransForce offer, which specified a fixed dollar amount that was in the lower part of the potential range of purchase prices to be determined under the Dutch auction.
Under Code s. 302, a U.S. shareholder whose shares are sold under the offer will be subject to sale rather than distribution treatment if such transaction (a) constitutes a "substantially disproportionate" distribution by Home Capital respecting such U.S. Holder, (b) results in "complete termination" of its equity interest in Home Capital, or (c) is "not essentially equivalent to a dividend."
Neal Armstrong. Summary of Offer of Home Capital under Other – Issuer Bids – Share Offer.
CRA confirms that the status of a location as a “place of amusement” for purposes of the public sector body exemption may be determined on an event-by-event basis
Charges for events by a charity which otherwise might be exempt from GST/HST generally will be taxable if they are characterized as admissions to a “place of amusement” for more than nominal (over $1.00) consideration (and they do not come within an exemption for non-recurring fund-raising). The definition of “place of amusement” includes premises at which various listed types of entertaining events are staged or held, as well as any place, structure or device whose purpose is to provide any type of amusement or recreation.
CRA considers that “regardless of the usual purpose of a place or its day-to-day use, a place may, under the first [branch] become a place of amusement at a particular moment in time due to an activity being staged or held there.” For example, a church that charges admissions to see its unique architecture would not thereby be a place of amusement under the first branch – but would become a place of amusement if a concert (other than a non-recurring fund-raiser) were held there for ticket purchasers.
In CRA's view, a place (e.g., the church) will not be a place of amusement under the second branch if its "ordinary day-to-day purpose" is not to provide amusement or recreation.
Neal Armstrong. Summary of Excise and GST/HST News - No. 98 under ETA s. 123(1) – place of amusement.