News of Note
CRA rules on transactions where a mine which was planned to be restarted was represented to be excluded property
Email this ContentS. 95(2)(e) generally provides a rollover at the relevant cost base where a foreign affiliate is wound up into another, but not for the wind-up of a partnership – even apparently where the wind-up of the partnership occurs by operation of law as a result of its two FA partners being wound up into their FA parent.
In this general situation, CRA gave a ruling that a distribution of the assets of a mine held by the partnership did not give rise to foreign accrual property income provided that the assets were excluded property. The mine in question had been previously shut down, but now further reserves had been identified and there was a plan to resume operations.
Summary of 2015 Ruling 2014-0536661R3 under s. 95(1) – foreign accrual property income.
CRA finds that lease termination damages received by a non-resident lessor were subject to Part XIII tax
In Transocean, the Federal Court of Appeal found that damages received by a non-resident lessor of a boat for repudiation of the lease before its commencement were received by it in lieu of rent, so that the payment was subject to Part XIII tax under s. 212(1)(d). CRA has applied Transocean to find that a lump sum received by a non-resident lessor of property pursuant to a liquidated damages clause for termination of a lease of Canadian property to a Canadian lessee was subject to withholding.
Neal Armstrong. Summary of 10 March 2015 Memo 2015-0574291I7 under s. 212(1).
Fairmont Hotels – Ontario Court of Appeal confirms that rectification can give effect to an original intention to produce a tax-neutral result - but in a different way
As part of a larger intercompany "reciprocal loan arrangement," a Canadian Fairmont company (FHIW Canada) held U.S. dollar denominated prefs of a U.S. subsidiary which had been financed by matching U.S. dollar denominated prefs in its capital. As a result of a subsequent indirect acquisition of control, there was a s. 111(4)(d) write-down in FHIW Canada’s hands of the prefs held by it reflecting the depreciation of the U.S. dollar, without any ability to eliminate the corresponding accrued FX gain on the prefs in its capital. The fact that FHIW Canada was no longer hedged from a Canadian tax perspective was temporarily forgotten when this structure was unwound a year later through inter alia a redemption of the two matching sets of prefs, so that FHIW Canada realized a s. 39(2) gain on redeeming the prefs in its capital.
In rectifying this redemption to treat it instead as a loan by FHIW Canada to its parent, Newbould J found that there had been a continuing intention for the reciprocal loan arrangement to be tax neutral, and that "the purpose of the … unwind of the loans was not to redeem the preference shares of FHIW Canada … but to unwind the loans on a tax free basis."
The Ontario Court of Appeal has dismissed the Crown’s appeal. Simmons JA stated that "Juliar … does not require that the party seeking rectification must have determined the precise mechanics or means by which the party’s settled intention to achieve a specific tax outcome would be realized," so that it was sufficient that Fairmont’s "settled tax plan" at the time was to achieve "tax neutrality in its dealings with Legacy and no redemptions of the preference shares."
This is inconsistent with the approach in Harvest Operations and Graymar (both in Alberta), suggesting that the rectification "fix" should accord with a specific plan that was in place at the closing.
Neal Armstrong. Summary of Fairmont Hotels Inc. v. A.G. Canada, 2015 ONCA 441 under General Concepts – Rectification.
CRA finds that euro and U.S.-dollar-denominated shares of a foreign affiliate are separate classes of shares
S. 90(2) deems a "pro rata" distribution on all the shares of a class of shares of a foreign affiliate (other than on a liquidation, redemption or QROC distribution) to be a dividend. FA’s articles provided that its share capital was divided into euro-denominated and U.S.-dollar-denominated shares and that when a dividend was declared on all its shares, the dividend would be paid in proportion to the paid-in capital of the respective shares expressed in euros or U.S. dollars – so that, for example, where the euro had appreciated relative to the U.S. dollar, the euro-denominated shares would receive more on a per share basis.
CRA ruled that FA would be considered to have two classes of shares, with the distribution on each class satisfying the pro rata test in s. 90(2). This might be regarded as the flip side of a CRA position that shares labelled as two classes of shares will be regarded by CRA as one class if their substantive attributes are the same (see, for example, 2013-0495821C6).
Neal Armstrong. Summary of 2015 Ruling 2014-0527961R3 under s. 90(2).
Income Tax Severed Letters 17 June 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
True North REIT proposes a Deferred Unit Plan that gives the right to receive REIT units before retirement
The safe harbor from the salary deferral arrangement rules provided in Reg. 6801(d) for deferred share unit plans is only available for corporations and not REITs. However, much the same thing can be accomplished by issuing qualifying participants "deferred units," which essentially are options to acquire REIT units at a nil exercise price. In IT-113R4, para. 6, CRA accepts that an option can qualify for treatment under the s. 7 rules (i.e., no recognition of employment income until exercise) even if the option can be exercised without the payment of monetary consideration.
Given that a REIT Deferred Unit Plan need only comply with the s. 7 rules, it can depart from what would be permitted under a DSU. For example, the currently proposed Deferred Unit Plan of True North REIT provides that a participant can redeem 20% of his or her Deferred Units every five years.
Neal Armstrong. Summary of Circular of True North Apartment REIT under Other – Deferred Unit (or RUR) Plans.
Hypercube - software bugs did not constitute technological uncertainty sufficient to qualify a software project as SR&ED
Lamarre ACJ found that the taxpayer's development of code analysis software for websites did not qualify as SR&ED. All problems encountered on the project were "resolved in the end by using recognized programming techniques to modify the program’s code."
Neal Armstrong. Summary of Hypercube Inc. v. The Queen, 2015 TCC 65 under s. 248(1) – scientific research & experimental development.
Nortel – Ontario Superior Court of Justice applies the proposition that the OECD transfer pricing guidelines require the assessment of risk sharing on an ex ante basis
Under Nortel's transfer pricing methodology, the entities performing R&D, including Nortel itself and a UK subsidiary, were entitled to all residual profits after payment of returns to the Nortel subsidiaries that performed sales and distribution functions. The related agreement specified that restructuring costs incurred by each R&D subsidiary were not to be shared.
Following Nortel’s insolvency, Newbould J. rejected various submissions made by the administrators of the pension plan for the UK subsidiary respecting transfer pricing, including that this arrangement failed to properly compensate the UK subsidiary for its restructuring costs. He accepted the monitor’s position that "Chapter 9 of the OECD Guidelines explicitly frames the issue of restructuring costs and benefits as a question of ex ante risk allocation by way of an intercompany contract, rather than an ex post examination of who should bear the realization of a risk (i.e., restructuring costs)." Accordingly, as this cost-bearing clause satisfied the arm’s length standard at the time of the agreement, its actual operation following an unanticipated insolvency was not a basis for overturning it.
Furthermore, the approach of the claimants’ expert that "one starts with the economic substance and then looks to see if the legal form follows the economic substance" was "the opposite of what the OECD Guidelines call for."
Neal Armstrong. Summary of Re Nortel Networks Corp., 2014 ONSC 6973 under Treaties – Art. 9.
CRA maintains its positions on s. 85.1(1) in its new Folio
CRA has rewritten IT-450R – "Share for Share Exchange" to use somewhat more pasteurized and laconic prose, but without making any substantive changes - except that a statement has been added that a right to receive shares of the purchaser in the future is treated the same as boot. (Presumably, CRA would not intend to make an issue of this statement respecting a Plan of Arrangement which stated that every listed step shall be deemed to occur at five minute intervals.)
Positions maintained in the new Folio include:
- the s. 85.1 rollover can apply to an exchange of x% of each vendor share for a purchaser vendor share, with (100%-X%) of each share being exchanged for boot, provided that this is clearly specified in the purchaser’s offer
- up to $200 in cash can be received in lieu of fractional shares of the purchaser
Neal Armstrong. Summaries of S4-F5-C1: "Share for Share Exchange" under s. 85.1(1), s. 85.1(2.1) and ITAR 26(26).
Rae – Federal Court refuses to certify a class action for CRA's delays in assessing returns claiming gifting tax shelter credits.
CRA has held in abeyance the processing of 2012 and 2013 tax returns which claimed tax credits from 12 mass-marketed gifting tax shelters (8 for 2012, and 4 for 2013).
The Federal Court declined to certify a class action, based on the failure of CRA to assess the affected 2013 returns with "due dispatch," given inter alia problems with the applicant's definition of the class and deficiencies in her litigation plan (re fees and notifications).
Even if the action had been certified, there presumably would be minimal damages if CRA ultimately denies the credits (e.g., based on the tax shelters, such as that for the applicant, using leveraged gifts – see Maréchaux).
Neal Armstrong. Summary of Rae v. MNR, 2015 FC 707, under Federal Court Rules, Rule 334.16(1).