News of Note
Unpaid fees owing by Canco to FA potentially may give rise to a double income-inclusion to Canco
Email this ContentIf Canco owes fees to FA, there potentially could be a double income inclusion to Canco (albeit, in different years) under ss. 90(6) and 78(1). The double inclusion might be addressed by filing a s. 78(1)(b) agreement. "However, it is not clear whether and how subsection 90(6) will apply to the loan that is then deemed to be made to the taxpayer (Canco) by the creditor (FA) on the first day of the taxpayer's third taxation year."
Neal Armstrong. Summary of Clara Pham, "An Unpaid Amount Could Be an Upstream Loan", Canadian Tax Focus, Vol. 5, No. 3, August 2015, p.5 under s. 90(6).
Income Tax Severed Letters 19 August 2015
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on hybrid pipeline transaction
CRA has ruled on a sort of hybrid post-mortem transaction in which a portion of the estate’s common shares of "Investments" (which holds marketable securities and cash) are redeemed in its hands for a promissory note (thereby giving rise to a capital loss which will be carried back under s. 164(6) to the terminal year) and it sells the balance of its shares to a "Newco" in consideration for a Newco promissory note. Under the latter pipeline transaction, Investments will be amalgamated with Newco after one year, and the notes will thereafter be repaid at the rate of 25% per quarter. These 12 mo./25% parameters also managed to escape the CRA propensity for over-redaction in 2014-0559481R3 F.
Neal Armstrong. Summary of 2014 Ruling 2014-0540861R3 F under s. 84(2).
CRA rules on transferring already-earned profits to an affiliate through use of a partnership
It may be possible to transfer profits which already have been earned to a Lossco in the same group in order to access Lossco’s non-capital losses. CRA has ruled on a transaction in which (to simplify somewhat) the units of an LP which already has earned profits for the year will be transferred to the Lossco before the fiscal year end of the LP – so that most of those LP profits will be allocated to Lossco. The partnership agreement for LP will be amended "to clarify that it allocates its income for income tax purposes only to those partners that are partners at the end of its fiscal period."
Neal Armstrong. Summaries of 2014 Ruling 2013-0516071R3 under s. 111(1)(a), s. 34.2(14) and s. 96(1)(f).
Tele-Mobile – Tax Court of Canada rejects an attempt to bifurcate U.S.-to-Canada cell phone calls into a non-taxable U.S.-roaming service and a taxable Canadian leg
When Telus charged its Canadian customers for calls made from the U.S. to Canada, its invoices contained a separate charge for a roaming service, relating to the part of the service that was performed in the U.S., on which it did not charge GST, and a second charge for connecting the call from the U.S. to Canada, which it conceded was subject to GST. C Miller acknowledged that in the context of local calls in the U.S., a roaming service had "commercial efficacy as a standalone supply." However, in this context of cross-border long distance calls, insofar as the customers were concerned they were getting a "seamlessly integrated" service of the long distance call. As there was only a single supply, all the charges therefor were subject to GST under ETA s. 142.1(2)(b)(ii) given that a part of the supply (i.e., the receiving of the telecommunication in Canada) was performed in Canada.
Similar issues respecting whether a supply can be bifurcated arise, for example, under ETA 142(1)(g), which deems a supply of a service to be made in Canada if the service "is to be performed in whole or in part in Canada."
Neal Armstrong. Summary of Tele-Mobile Company v. The Queen, 2015 TCC 197 under ETA, s. 123(1) – supply.
Discovery Trust – a trust, whose Alberta trustee (Royal Trust) followed all the requests of the Newfoundland beneficiaries after careful review, was resident in Alberta
A trust with Newfoundland beneficiaries but whose sole trustee was the Calgary office of Royal Trust was resident in Alberta, notwithstanding that essentially everything it did was on the recommendation of the non-Alberta advisors for the Newfoundland beneficiaries. Royal Trust carefully reviewed each suggested trust action first, before agreeing to it, to ensure that it seemed to be in the interests of the beneficiaries – which indicated that Royal Trust was an independent trustee rather than that the trust’s central management and control was in Newfoundland.
Neal Armstrong. Summary of Discovery Trust v. MNR, 2015 CanLII 34016 (NL SCTD) under s. 2(1).
CRA considers that life insurance policy premiums on a corporate-owned policy reduce safe income on hand if they do not increase the policy’s CSV
Where prior to a sale by Holdco of all the shares of Opco to an arm's length purchaser, Opco transfers a life insurance policy on the life of Holdco’s shareholder to Holdco through a dividend-in-kind, CRA considers that the resulting gain to Opco (based on the policy’s cash surrender value ("CSV")) will not increase the safe income on hand ("SIOH") for purposes of the sale because that time will be before the realization of that gain.
The (non-deductible) policy premiums that had been paid by Opco would reduce its SIOH except to the extent that their payment increased the policy’s CSV and thereby increased the accrued gain on the shares of Opco.
Neal Armstrong. Summaries of 14 May 2015 CLHIA Roundtable, Q. 5, 2015-0573821C6 under s. 55(2) and s. 148(7).
CRA finds that income from the sale of life insurance business asset by a Canadian insurer’s FA to the insurer’s non-resident branch generally will not generate FAPI
S. 95(2)(a.1) may deem business income realized by FA from a sale of property to its Canadian parent to be foreign accrual property income where the cost to Canco of the property "is relevant" in computing its business income. However, if Canco is an insurer which acquires property (previously used by FA in its foreign life insurance business) for use in Canco’s foreign life insurance branch, CRA accepts that the cost to that branch of the property will not be relevant to computing Canco’s business income (so that s. 95(2)(a.1) will not apply) as any gain or loss to Canco from a subsequent sale of the property would be excluded from its income by ss. 138(2) and (9).
Neal Armstrong. Summary of 14 May 2015 CLHIA Roundtable, Q. 2, 2015-0573801C6 under s. 95(2)(a.1).
CRA accepts that a designation (but not an election not listed in Reg. 600) can be made late
Reg. 2411 prescribes an amount which is intended to ensure that a multinational insurer’s net investment revenue derived from its designated insurance properties is not less than the net investment revenue that would be determined for that property if the average rate of return on its designated assets of each class equaled an average rate of return on all its investment property of each class. Reg. 2411(3)(a) provides that in specified circumstances the insurer may elect in its return for a specific formula to be used for these purposes.
If this election is not made in the return, CRA will not accept a late election, given that it is not listed in Reg. 600. It considers decisions on late-filed designations (e.g., Nassau Walnut, Lussier) to be inapplicable to late elections.
Neal Armstrong. Summary of 14 May 2015 CLHIA Roundtable, Q. 3, 2015-0573861C6 under Reg. 2411(3)(a).
CRA considers that a s. 88(2) distribution of an insurance policy occurs at FMV rather than CSV
CRA considers that where an insurance policy is distributed on the winding-up of a corporation under s. 88(2), s. 69(5), as "the more specific provision," generally will take precedence over s. 148(7), so that the policy would be disposed of at fair market value rather than cash surrender value.
Neal Armstrong. Summary of 14 May 2015 CLHIA Roundtable, Q. 4, 2015-0573841C6 under s. 69(5).