News of Note
CRA is prepared to infer a refund request from a waiver
Email this ContentIn clarifying 2012-0468081I7, CRA has stated that although a waiver itself does not extend the deadline for a taxpayer to apply under s. 164(1)(b) for an income tax refund, it will treat the waiver as such an application where "it is reasonable to conclude the waiver also contains an implicit request for a refund for the particular issue outlined in the waiver." Of course, it is preferable for the waiver to be explicit on this point.
Neal Armstrong. Summary of 15 June 2015 Memo 2015-0583081I7 under s. 164(1).
Income Tax Severed Letters 23 September 2015
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The FAT reinstatement rules likely are more restrictive than the underlying policy intent
The original intent of the foreign accrual tax reinstatement rules may have been to ensure that FAT - representing compensatory payments made to other members of the same U.S. (or other foreign) consolidated group for use of their losses - which has been denied because those losses are business losses, generally will be reinstated when those losses are fully utilized against the active business income of the group. If that is the object, there is a litany of instances where this has not or may not have been achieved under the wording of Regs. 5907(1.5) and (1.6).
More generally, it is not clear whether, in promulgating these Regulations, there was an intention to change the multi-year perspective which previously had been brought to bear by CRA in determining eligible FAT deductions, under which the taxpayer was permitted to judge what its tax payment each year related to by considering taxable income in other years.
Neal Armstrong. Summary of Adam Freiheit, "Reinstated Foreign Accrual Tax and the Multi-Period Perspective", Canadian Tax Journal, (2015) 63:2, 521-42, p. 521 under Reg. 5907(1.6).
Northern Property REIT proposes to acquire True North REIT under s. 132.2, with exchangeable unitholders offered a s. 97(2) election
Northern Property REIT ("NPR" - an Alberta trust), is proposing to acquire True North REIT (an Ontario trust) under an Alberta Plan of Arrangement involving minimal corporate steps. A substantial portion of the equity investment in True North REIT is in the form of exchangeable units in six subsidiary LPs. Holders are given the choice of exchanging their LP units for NPR units or for new redeemable units of the same partnerships, i.e., LP units which are redeemable for NPR units. The tax disclosure treats an exchange for such new redeemable LP units as being eligible for a s. 97(2) rollover.
Neal Armstrong. Summary of Northern Property REIT and True North REIT Circulars under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – REIT Mergers.
Hillis – Federal Court rejects arguments that the FATCA disclosure obligations of CRA should be read down in light of the Canada-U.S. Treaty
Although the Hillis suit is challenging the Canadian FATCA legislation primarily on constitutional grounds, a summary trial has dealt first with the non-constitutional arguments - including that the FATCA procedure, requiring CRA to automatically pass along to the IRS all the U.S. account holder information gathered for it under the FATCA rules by Canadian financial institutions, exceeds an implicit limitation imposed by Article 27 of the Canada-U.S. Treaty that only "relevant" information should be exchanged, i.e., only the account information for U.S. citizens who likely have a substantive liability for U.S. taxes. Martineau J rejected this argument (along with other Treaty-based arguments), noting that this interpretation would render the FATCA Intergovernmental Agreement "practically impossible to perform."
He also noted that the Crown took the position before him "that the IRS cannot use [FATCA] information to administer non-tax laws (such as the US Bank Secrecy Act) or in its dealings with federal entities (such as the Financial Crimes Enforcement Network of the US Treasury Department) who are involved in money laundering repression."
Neal Armstrong. Summaries of Hillis v. A.G. (Canada), 2015 FC 1082 under Treaties, Art. 27, Art. 26A and Art. 25.
CRA considers that a deceased contributor to a trust can be affiliated with the contributor to another trust
Following 2014-0534851C6 F, CRA considers that a deceased contributor is affiliated with a contributor (such as her brother) with whom she was connected by blood relationship during her lifetime. This means, for example, that if her will funded Trust B of which her brother is a discretionary beneficiary, and her brother is the settlor and sole beneficiary of Trust A, then the two trusts are affiliated.
Neal Armstrong. Summary of 25 August 2015 T.I. 2015-0571271E5 F under s. 251.1(3) – contributor.
CRA confirms that a testamentary trust cannot be a graduated rate estate
CRA considers that "only an estate can be a graduated rate estate," so that a spousal testamentary trust formed out of the deceased’s property pursuant to his will cannot qualify even if it receives all of his property.
Neal Armstrong. Summary of 25 June 2015 T.I. 2014-0553181E5 F under s. 248(1) – graduated rate estate.
CRA appears to apply an indirect use test to the s. 17(8.1)(b) safe harbour
S. 17(8.1)(b) provides a safe harbor from interest imputation on a non-interest bearing loan made by a Canco to a CFA ("CFA 3") if (among other requirements) the loan proceeds were used by CFA 3 to repay an amount owing by it for previously acquired property used principally for earning active business income. CRA has found that this requirement was satisfied where this refinanced loan originally was made by another CFA of Canco (CFA 1) to CFA 2, with CFA 2 using the loan proceeds to purchase the shares of CFA 3 (so that the interest on the loan was deemed to be active business income under s. 95(2)(a)(ii)(D)), and with CFA 2 then being merged into CFA 3 with CFA 3 as the survivor - so that the loan was assumed by CFA 3.
CRA stated that "because the assets of CFA 3 were used principally for the earning of income from an active business," the loan assumed by CFA 3 on the merger "was in respect of assets previously acquired by CFA 3 in the course of carrying on an active business." Although cryptic, CRA seems to consider that because the CFA 3 shares previously acquired by CFA 2 with the loan proceeds were "in respect of" the active business assets of CFA 3, the loan after its assumption by CFA 3 qualified as an amount owing in respect of the (indirect) acquisition of those active business assets.
Neal Armstrong. Summary of 5 June 2015 Memo 2015-0569061I7 F under s. 17(8.1)(b).
Income Tax Severed Letters 16 September 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Zhang – B.C. Supreme Court refuses rectification on the basis that the true agreement of parties to a share transfer agreement was accessing the s. 113(1)(a) deduction rather than avoiding capital gains tax
The taxpayer (Mr. Zhang) briefly got advice from his tax accountant (Bob) that he could access the earnings of his Chinese operating company using the exempt surplus system by transferring his shares to a BC holding company. Without getting further advice from Bob (who would have charged $2,000), he effected the transfer for a cash payment of U.S.$150,000. When CRA assessed on the basis that the fair market value of the transferred shares was much higher than this, he filed a late s. 85 election with the holding company and sought a rectification order backdating an issuance of common shares as additional consideration.
In dismissing the petition, Butler J found that "the true agreement between the parties" was the acquisition of Mr. Zhang’s shares by the holding company so as to permit tax-free dividends to be paid – rather than to minimize capital gains tax, which "was a secondary concern and one which Mr. Zhang asked Bob not to investigate."
Neal Armstrong. Summary of Zhang v. The Queen, 2015 BCSC 1256, under General Concepts – Rectification.