News of Note
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
Email this ContentIf 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).
CRA will not accommodate a late filing under s. 216.1
Where a non-resident actor provides acting services in Canada through a related corporation, for instance, a U.S.-resident actor providing such services through an LLC or S corp, the 23% withholding tax under s. 212(5.1) on the gross consideration paid can be avoided if the corporation files a Part I return for the year by its filing due date therefor and elects therein to have s. 216.1 apply. CRA considers that if the non-resident corporation misses this deadline, there is no ability to access s. 216.1, and (based on s. 115(2.1)) the non-resident corporation cannot late-file a “regular” Part I return where the provision of the acting services had resulted in it having a Canadian permanent establishment under the Treaty.
Neal Armstrong. Summaries of 27 July 2016 T.I. 2015-0603271E5 under s. 216.1(1) and Treaties - Art. 16.
Chriss – Federal Court of Appeal finds that a written resignation must be signed and delivered to the corporation to start the two-year s. 227.1(4) period running
The husband of a director had instructed their law firm to prepare a written resignation for her, which they did, but the resignation form was never provided to her. In reversing a finding of Boyle J that this was sufficient to amount to a written resignation that started the two-year limitation period in s. 227.1(4) running, Rennie JA stated:
…In the absence of the communication of a written resignation to the corporation, a resignation is not effective. …
… Reliance on the subjective intention or say-so of a director alone would allow a director to plant the seeds of retroactive resignation, only to rely on it at some later date should a director-linked liability emerge. …[T]he dangers associated with allowing anything less than delivery of an executed and dated written resignation are unacceptable.
Given these strong words, he unsurprisingly went on to find that it was not a sufficient due diligence defence for the director to think that she had resigned.
Neal Armstrong. Summaries of The Queen v. Chriss, 2016 FCA 236 under s. 227.1(4) and s. 227.1(3).
Lightstream Resources is proposing to eliminate $1.2B in debt under a voluntary recapitalization plan giving 95% of the company to the secured noteholders and 2.75% to the unsecured noteholders
Lightstream Resources carries on its business through two partnerships. As at the end of 2015, it had $1.53B in Canadian tax pools available to it. It had approximately Cdn.$1.53B of long-term debt as at June 30, 2016 comprising Secured Notes of U.S.$650M, Unsecured Notes for U.S.$254M and amounts owing under a Revolving Credit Facility. It defaulted on an interest payment owed to the Secured Noteholders in June 2016, and is proposing a "Recapitalization" transaction (mostly occurring under a CBCA Plan of Arrangement) which, in approximate terms, would entail
- a s. 86 exchange by its common shareholders of their shares for new common shares representing approximately 2.25% of the post-Recapitalization issued and outstanding common shares plus three-year out-of-the-money Warrants to acquire three times that number of common shares,
- the exchange by the Unsecured Noteholders of their Notes for common shares representing 2.75% of that total plus three-year Warrants (not as much out-of-the-money) to acquire the equivalent of 5% of the common shares and
- the exchange by the Secured Noteholders for common shares representing 95% of that total (with Apollo and GSO Capital Partners holding about 75%).
These exchanges (net of some additional secured borrowings) would eliminate Cdn.$1.175B of debt and eliminate Cdn.$108 million of annual interest expense.
The transactions are structured so that the forgiveness respecting the Unsecured Notes will occur immediately before an amalgamation of Lightstream with a wholly-owned numbered company, whereas the exchange of the Secured Notes will occur after the amalgamation. The exchange of the old common shares is to be structured as a s. 86 exchange (with the value of the warrants received not expected to give rise to a deemed dividend), the exchange of the Unsecured Notes will occur on a non-rollover basis and the exchange of the Secured Notes is targeted to occur on a s. 51 rollover basis (assuming the Secured Notes can qualify as capital property), so that a conversion right is first to be added to the Secured Notes before the conversion occurs.
There is a backstop plan to accomplish something similar under the CCAA if this Recapitalization plan is not approved.
Neal Armstrong. Summary of Lightstream Circular under Other – Recapitalizations or note exchanges.