News of Note
Has anyone seen a (non-cash) specified right?
Email this ContentIn simple terms, a "specified right" under the back-to-back loan rules is the right of a person to treat property as it if it were its own property. "Such a right would rarely if ever be granted in respect of a property used to secure a debt or other obligation, except possibly in the case of cash collateral."
Where Canco owes $50 to a Netherlands company (an intermediary under the back-to-back loan rules), which owes $40 to Caymanco and $100 to USCo, s. 212(3.3) rightfully would permit Canco to effectively designate $40 of its $50 debt as owing to USCo, thereby avoiding withholding tax at 25% on the $40. However, there is no such relief because the s. 212(3.3) rule applies only to debt that is subject to withholding under the back-to-back loan rule – and such withholding only applies where the ultimate creditor is in a jurisdiction with a lower withholding rate (i.e., 0% for the U.S.) than that of the intermediary (i.e., 10% for the Netherlands). On the other hand, the s. 212(3.3) relief is available where the lenders to the intermediary are resident in jurisdictions with a higher withholding rate (e.g., 15%) than that of the intermediary’s jurisdiction. This is anomalous.
Neal Armstrong. Summaries of John Lorito and Trevor O'Brien, "International Finance – Cash Pooling Arrangements," draft version of paper for CTF 2014 Conference Report under s. 18(5) – specified right, s. 212(3.3), s. 90(15) – specified debtor, s. 15(2.3), s. 227(6.1), s. 15(2), s. 212.3(10)(c), s. 95(2)(a)(ii)(B) and s. 261(21).
Ss. 143.3 and 143.4 are as badly drafted as they look
The definition of a "contingent amount" in s. 143.4 turns on the definition of a "right to reduce," which refers to a right (including a contingent right) to reduce or eliminate the amount which it is reasonable to conclude "will become exercisable." Discussions with Finance indicate that automatic adjustments are intended to be captured by this (i.e., not just adjustments exercised at the taxpayer's option).
It is suggested that the amount of the reduction in expenditure occurring under s. 143.4(2) is only the amount of the expenditure which potentially may be reduced rather than all of the expenditure.
It is unclear whether s. 143.4(2) applies only to unpaid amounts or whether it extends to refunds or reimbursement rights.
S. 143.4(3) permits the recognition of contingent amounts as they are paid in cash. This seems to suggest that there will be no reduction for a potential refund of a cash expenditure. However, if the right to reduce an expenditure arises in a subsequent year so that s. 143.4(4) applies, thereby generating a s. 12(1)(x) income inclusion in the subsequent year, there is no deduction under s. 143.4 if the amount in question is in fact ultimately paid.
Given that s. 143.3(3) generally denies any recognition of any cost of property acquired in consideration for issuing an option, and given that this rule may not apply to the issuance of options for cash, consideration should be given to issuing options for cash and applying that cash to purchase property that otherwise might have been acquired in consideration for the option.
Neal Armstrong. Summaries of Chris Falk, Stefanie Morand and Brian O'Neill, "Is there Always Certainty Regarding Tax Basis? – Limitations on Expenditures Pursuant to Sections 143.3 and 143.4," draft version of paper for CTF 2014 Conference Report under s. 143.4(1) – right to reduce, s. 143.4(2), s. 143.4(4), s. 143.3(2), s. 143.3(3)(a) and s. 143.3(5)(b).
CRA accepts that the 10-year deferral election under s. 159(6.1) is available for tax on s. 104(5.2) deemed dispositions of resource properties
S. 159(6.1) allows trusts to elect to spread a tax liability, arising as a result of a deemed disposition occurring at a time specified in s. 104(4)(a) to (c) (e.g., under the 21-year deemed disposition rule), over 10 years. CRA accepts that since s. 104(5.2) indirectly references those deemed disposition times, the election can also be used for a liability arising from a deemed disposition of resource properties under s. 104(5.2).
Neal Armstrong. Summary of 29 July 2015 T.I. 2015-0594201E5 under s. 159(6.1).
CRA finds that recording cross-currency swaps on the Security rather than Inventory line of a s. 85(1) election form did not invalidate the election
CRA found that cross-currency swaps with accrued gains, which for redacted reasons were considered to be held on income rather than capital account, qualified as "inventory" under the broad s. 248(1) definition, so that they could be transferred on a rollover basis into subsidiaries under s. 85(1). Including the swaps on the line of the T2057 Schedule for Securities or debt obligations, rather than on the Inventory line, was a merely "clerical" error which did not invalidate the election.
Neal Armstrong. Summaries of 29 January 2015 Memo 2014-0544651I7 under s. 85(1.1) and s. 85(1).
Easy Way Cattle Oilers – Tax Court of Canada finds that failure to timely file a Schedule 31 eliminated the taxpayer’s SR&ED credits
D'Arcy J found that the taxpayer’s late-filing (by six weeks) of Schedule 31 meant that its SR&ED credits for the year in issue were properly denied – even though the information needed to calculate the credits was in its return and on Form 661, which it had filed on a timely basis.
Neal Armstrong. Summary of Easy Way Cattle Oilers Ltd. v. The Queen, 2015 TCC 211, under s. 127(9) – investment tax credit – (m).
Income Tax Severed Letters 2 September 2015
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
OceanaGold is proposing to acquire Romarco under s. 85.1
OceanaGold, which is a BC corporation headquartered in Australia, is proposing to acquire all the shares of Romarco (a B.C. corporation with a South Carolina gold property) under a B.C. plan of Arrangement in consideration for OceanaGold shares, so that s. 85.1 should apply (no nominal cash consideration). Although the exchange should qualify as a Code s. 368(a) reorganization, it is believed that Romarco may be a PFIC, and that OceanaGold is not, so that the PFIC rules may apply to the exchange.
There also is a s. 7(1.4) exchange of Romarco stock options for OceanaGold options. Taking into account the OceanaGold shares covered by such options, the Romarco shareholders and optionholders collectively will receive a majority interest in OceanaGold. However, the OceanaGold shares to be issued under the Plan of Arrangement represent only 98.6% of the shares currently outstanding.
Neal Armstrong. Summary of OceanaGold and Romarco Circular under Mergers & Acquisitions – Mergers – Share-for-Share.
CRA accepts that seniors in a Saskatchewan personal care home were “disabled” so that their fees were exempted from GST
ETA, Sched. V, Pt. IV, s. 2 exempts "a supply of a service of providing care, supervision and a place of residence to… individuals with a disability in an establishment operated by the supplier for the purpose of providing such service."
CRA considers that "‘disability’ generally refers to a long-term impairment that restricts an individual in carrying out his or her activities of daily living," and ruled that the fees charged to the senior residents of a Saskatchewan personal care home were exempted on the basis inter alia of a representation that each resident suffered an impairment restricting the conduct of such activities.
Neal Armstrong. Summary of 21 November 2014 Ruling 150099a under ETA, Sched. V, Pt. IV, s. 2.
Sood – Federal Court states that CRA is required to breach a settlement agreement that does not accord with tax law
When the taxpayer brought a Federal Court action to enforce an agreement with CRA for the settlement in his favour of a dispute respecting the new housing HST rebate, Gascon J found that he lacked the jurisdiction to consider the application (as it represented a "collateral attack on the validity of the tax reassessment" in question). After referring to the Galway and Cohen line of cases, he went on to state that "the Agency was required to revoke the settlement agreement since no legal or factual basis supports Mr. Sood’s claim to the provincial new housing rebate."
Neal Armstrong. Summaries of Sood v. M.N.R., 2015 FC 857 under s. 152(1) and Federal Court Act, s. 18.5.
Hatt – Tax Court of Canada finds that a pension contribution which was only currently deductible from income could be carried forward as a non-capital loss
Although s. 111(9) limits the sources which can give rise to a non-capital loss of a non-resident, a loss from Canadian employment is not excluded. A non-resident who had nominal income from a Canadian job from which she was on leave but who generated a significant deduction under s. 147.2(4)(a) by using a retiring allowance (which was taxable under Part XIII rather than Part I) to contribute to her registered pension plan, thereby generated a non-capital loss for that year. After her return to Canada, she deducted this loss.
CRA was offended: s. 147.2(4) does not permit the carry-forward of RPP contributions, and this limitation was "frustrated" by permitting them to in effect be carried forward as non-capital losses.
In the laconic common law tradition, D’Arcy J did not launch into a speech on the primacy of ordinary meaning over unexpressed policy, and merely noted that the statutory words permitted the carryforward.
Although this situation is more common on the GST side, this case illustrates that if CRA gets the bit in its teeth, it may proceed to the Tax Court irrespective of the technical merits.
Neal Armstrong. Summary of Hatt v. The Queen, 2015 TCC 207 under s. 111(1)(a).