News of Note
Income Tax Severed Letters 9 March 2016
Email this ContentThis morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA requires detailed property listings on the ETA s. 167 election form
The ETA s. 167 election form requests a listing of all the types of property acquired. A generic description such as “substantially all the property” is not acceptable. CRA states:
[A] detailed list of all property acquired should be provided in order for CRA to make a determination that all or substantially all of the business has been acquired.
Neal Armstrong. Summary of May 2015 CPA Roundtable, GST Q.4 under ETA s. 167(1).
The ITRD and LAS respectively interpret the ITA and assist in applying those interpretations to the audit facts
The Legislative Application Section (LAS) “provides technical assistance to large case auditors in the application of the ITA to specific facts and issues identified in the context of an income tax audit,” whereas the Income Tax Rulings Directorate “focuses on interpretive issues” - but the two consult frequently.
The LAS issues its memoranda directly to the auditor with that memo being distributed at the discretion of the auditor. However, the taxpayer may formally request a severed copy of the memo under the Access to Information procedure or (preferably) informally request a copy.
Neal Armstrong. Summary of May 2015 CPA Roundtable, Plenary Q.2 under s. 152(1).
CRA responds to allegations it is soft on off-shore tax evasion or aggressive tax avoidance
Perhaps in response to today’s stories in the Press (see “Canada Revenue offered amnesty to wealthy KPMG clients in offshore tax 'sham': Federal authorities demanded secrecy in no-penalty, no-prosecution deal to high net worth Canadians,”) CRA issued a Press Release today indicating inter alia:
- It is actively pursuing the KPMG case referenced in the press including auditing and reassessing those clients identified to date and taking “legal action to obtain the identities of all remaining KPMG LLP clients who have not been identified to date.”
- CRA will pursue penalties or prosecution against tax professionals who “who offer, assist or create opportunities for clients to participate in offshore tax evasion… to the fullest extent possible, based on the law and the facts of each case.”
- “Early dispute resolution [i.e., settlement], where appropriate, is in the public interest.”
Neal Armstrong. Summary of 8 March 2016 CRA Press Release under s. 152(1).
S. 49 option rules only are expected to apply to the Slate REIT rights offering
Slate Retail REIT is making a rights offering to the holders of its units (including the holders of exchangeable units in subsidiary LPs) to acquire REIT units at a discount to their pre-announcement trading price. The rights will be tradeable on the TSX.
In the unlikely event that the rights were to trade at a significant value, there would be a technical concern that their value represented a taxable benefit under s. 105(1). However, the disclosure indicates that CRA likely would accept that there would be no consequences of the distribution of the rights to the unitholders other than under the s. 49 rules.
Neal Armstrong. Summary of Circular of Slate Retail REIT for rights offering under Offerings – Rights Offerings – Units.
TransForce is making an issuer bid under a modified Dutch auction with a specified amount in the lower part of the potential range of purchase prices
TransForce is proposing to repurchase approximately 11% of its outstanding common shares under a modified Dutch auction at a price of between $19.00 and $22.00 per share. Deemed dividends will result, as the paid-up capital per share is around $8.00. Consistently with other issuer bids, the safe harbour from Part VI.1 tax for repurchase amounts paid up to the "specified amount" is considered to be available even where the specified amount is meaningless from a commerical standpoint. The Offer has a stand-alone statement that: “For the purposes of subsection 191(4) of the Income Tax Act (Canada), the "specified amount" in respect of each Share will be $19.61.”
Neal Armstrong. Summary of Offer of TransForce Inc. under Other – Issuer Bids – Share Offer.
TDL Group – Federal Court of Appeal sticks with the direct use test, so that interest on money borrowed to acquire (non-dividend producing) common shares of a subsidiary was deductible
The Canadian taxpayer ("TDL") used money, which it had indirectly borrowed from its U.S. parent ("Wendy’s"), to subscribe for common shares of its wholly-owned U.S. subsidiary ("Tim's U.S.") which, in turn, lent the money back to Wendy’s – initially on a non-interest-bearing basis until it was changed to interest-bearing seven months later (upon being contributed to a new U.S. subsidiary of Tim's U.S.). Pizzitelli J had denied an interest deduction to TDL on its borrowing during the seven-month period, finding that TDL did not have "any reasonable expectation of earning non-exempt income of any kind" on its common share investment in Tim’s U.S.
Dawson JA noted the “paradox” of finding that “there was no income-producing purpose during the first seven months…but an income earning purpose thereafter” given that the same common shares were held by TDL throughout, indicated that there was no requirement that the Tim's U.S. shares generate income during the first seven months of their holding, and stated:
[T]he temporary use of the subscription proceeds by Tim’s U.S. did not detract from the appellant’s income earning purpose behind its acquisition of additional shares in Tim’s U.S.
The interest was deductible.
Neal Armstrong. Summary of TDL Group Co. v. The Queen, 2016 FCA 67 under s. 20(1)(c).
Canadian private equity investors often prefer to invest in a parallel Canadian fund to that used by foreign investors
A non-Canadian private equity fund that expects to have significant investor capital sourced in Canada and to invest in Canadian portfolio companies should consider forming a separate fund restricted to Canadian investors that would invest in parallel with the main fund. If the Canadian fund sells taxable Canadian property, it will not be subject to the s. 116 withholding requirements. In addition, it will not be subject to Part XIII withholding, which might be a concern where an exit strategy entails an asset sale which would give rise to a substantial dividend or deemed dividend. CRA has indicated that no amount in respect of the portion of such payments allocable to a Canadian resident partner of a non-Canadian fund would be required to be withheld by a Canadian portfolio company.
“However, this policy, for which there is no legislative basis, does not expressly supersede past contrasting published positions. Some Canadian investors have expressed uneasiness with this uncertainty and are not receptive to investing jointly with non-Canadians in a fund that is subject to Canadian withholding tax.” Where there is a resulting insistence on the use of a parallel fund, “this is typically easier for Canadian private equity fund sponsors to accommodate than for non-Canadian sponsors, who would otherwise not consider forming a Canadian partnership having a Canadian resident general partner.”
Neal Armstrong. Summaries of Timothy Hughes, Matias Milet and Marc Richardson-Arnould, "Private Equity Funds – Selected Canadian Tax Issues,” Tax Management International Journal, 2016, p.84 under Treaties - Art. 10, s. 115.2(2)(b) and s. 248(1) - taxable Canadian property.
Lowe’s acquisition of RONA through a Nova Scotia ULC is not conditional on approval of prefs
It is proposed that RONA will be acquired for cash consideration under a Quebec Plan of Arrangement. The proposed purchaser is the existing Nova Scotia ULC operating subsidiary of Lowe’s, a North Carolina public corporation.
RONA has 7 million of outstanding TSX-listed preferred shares in addition to 107 million TSX-listed common shares. The transaction is not conditional on approval of the preferred shareholders, so that if the preferred shareholders do not approve the Arrangement, the transaction to purchase the common shares for $24 per share will proceed without them (so that the preferred shares do not have any extortive advantage).
Neal Armstrong. Summary of Circular of RONA Inc. under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound - Canadian Buyco.
Inwest – B.C. Supreme Court finds that a reasonable filing position cannot be a “misrepresentation” for statute-barring purposes, and suggests that there is no fixed place of “business” if there is no source of business income
A decision (released back in August) dealt with a plan which avoided the high rate of B.C. corporate income tax through rolling shares into a Yukon corporation (“Wesbild”), which purported not to have a B.C. permanent establishment, before a sale of the shares closed (giving rise to a $336M capital gain). Wesbild’s position was that, applying Marconi, it was not carrying on business, so that under Reg. 400(2) it did not have a fixed place of “business” in B.C. CRA reassessed (but not until after the normal reassessment period) on the basis that, in the context of Reg. 400 et seq., “business” included having property or taxable capital gains as the only sources of income.
Fitzpatrick J., after noting that the French version of s. 152(4)(a)(i) rendered “misrepresentation” as “misrepresentation of facts,” found that “a statement of a filing position that, even if that position may be incorrect, involves a determination of law or mixed fact and law will not be a misrepresentation if that filing position is reasonable" and that it is sufficient "if that reasonable filing position is evident from the tax return.” Thus, it was not even necessary to get to the “neglect or carelessness” branch of s. 152(4)(a)(i) to determine that the reassessment was statute-barred. In any event, CRA did not establish neglect or carelessness given that the no-PE position had been carefully considered by Wesbild’s in-house tax lawyer – and furthermore (although this was not necessary to establish lack of carelessness), he had consulted outside counsel (Robert Kopstein at Blakes).
Respecting the latter point, Fitzpatrick J. found that it was sufficient for Wesbild to indicate that it had gotten detailed written advice from Kopstein and that it was unnecessary to put his opinion in evidence, given that it should not be compelled to waive its privilege.
Respecting CRA’s broad interpretation of “permanent establishment,” he also stated obiter:
There is no indication that the CRA’s currently-advanced dictionary definition of “business” had any support at all in 2001/2002 or even at this time.
Neal Armstrong. Summaries of Inwest Investments Ltd. v. The Queen, 2015 BCSC 1375 under s. 152(4)(a)(i), s. 232(1) – solicitor-client privilege, Reg. 400(2), Statutory Interpretation – French and English Version.