News of Note
McKesson transfer-pricing case is settled in principle
Email this ContentThe McKesson Corporation 10K for its year that ended on March 31, 2015 disclosed that McKesson Canada has reached an agreement in principle to settle its transfer pricing dispute with CRA for all affected years.
Neal Armstrong. Extract from 10K of McKesson Corporation for 2015 under s. 247(2).
Pellerin – Tax Court of Canada finds that relatedness under the 24-month QSBC test need only be tested at the disposition time
Para. (b) of the "qualified small business corporation share" definition requires that "throughout the 24 months immediately preceding the [disposition] time, [the share] was not owned by anyone other than the [disposing] individual or a person or partnership related to the individual." Boyle J found that this test is applied by looking at whoever owned the share during the 24-month period and asking whether they were related at the time of the disposition, so that it does not matter whether they were related at the beginning of the 24 months. For example, if an individual sold her shares to an unrelated individual, and less than 24 months later they married and he sold the shares, the test would be satisfied (subject to a proviso (at para. 21) about "abusive tax avoidance stratagems"!)
The case concerned Mika Pellerin who, at approximately 18 months of age, received a distribution under s. 107(2) of small business corporation shares from the family trust and immediately sold them at a gain. S. 110.6(14)(c)(i) deems a beneficiary of a personal trust to be related to the trust. Boyle J found that under the Quebec general law, when Mika was born he was retroactively deemed to have been a trust beneficiary for his previous nine months as a fetus. However, given the above interpretation of the QSBC definition, this finding appears unnecessary to the conclusion that Mika enjoyed the capital gains exemption.
Neal Armstrong. Summary of Pellerin v. The Queen, 2015 CCI 130 under s. 110.6(1) - "qualified small business corporation share."
Staltari – Tax Court of Canada finds that a property which otherwise might have been held as an adventure in the nature in trade was converted to capital property on donation
A commercial real estate broker donated land to the City of Ottawa, received a charitable receipt for its appraised value and claimed that his (substantial) gain was exempted under s. 38(a.2) (respecting "ecological gifts" of capital property).
Owen J found that the taxpayer’s application for subdivision approval before donating suggested that a secondary intention of developing and selling the land may have partly motivated the taxpayer’s original purchase. However, per Zelinski, "a secondary intention to resell at a profit only acquires importance where a taxpayer follows through on that intention," whereas the land was donated instead, i.e., "any secondary intention to profit that he may have had became irrelevant once he chose to donate the Land."
This suggests that real estate whose sale would be on income account potentially is converted to capital property if it is donated instead.
Neal Armstrong. Summaries of Staltari v. The Queen, 2015 TCC 123 under s. 9 – capital gain v. profit – real estate, General Concepts – Evidence, and s. 39(1)(a).
CRA maintains its policies on principal-business corporation status under the resource rules
Although it replaces an IT Bulletin that (mostly) is almost 40 years old, the Folio on (resource) principal-business corporation status is largely a continuation of IT-400, with the addition of some largely routine discussion regarding provisions in which the PBC concept is used. The interpretive points that have been carried forward include:
- Generally, only the business operations in a year will be considered, but exceptionally a longer period may be considered, e.g., where there has been a temporary mine shut down;
- Management functions necessary to carry on the listed qualifying activities will be assimilated to those activities rather than treated as a separate non-qualifying function;
- To qualify as a PBC it need not perform the required activities on its own property; and
- Activities carried on through a partnership retain their character.
Neal Armstrong. Summaries of S3-F8-C1: "Principal-business Corporations in the Resource Industries" under s. 66(15) – principal business corporation, s. 66.1(3), s. 66(11.4.) and Sched. II, Class 43.2.
The deeming by s. 212(3.1) of Part XIII tax on a back-to-back loan to be payable by the lender to the intermediary rather than by the intermediary may result in loss of a FAT deduction where the loan from the intermediary generates FAPI
Where a subsidiary of CanCo in a Treaty-country (Treaty Co) makes an interest-bearing loan to CanCo that is funded by a non-interest-bearing loan from a subsidiary of Treaty Co in a non-Treaty country (Non-Treaty Co), s. 212(3.1)(d) deems the interest on the loan to CanCo from Treaty Co (which generally will be foreign accrual property income) to be subject to 25% withholding. There is a concern that CanCo will not receive a "FAT" deduction for this Part XIII tax under s. 91(4) given inter alia that s. 212(3.1) may deem this income tax to be payable by an entity (Non-Treaty Co) which did not earn the FAPI.
Neal Armstrong. Summaries of Mark Coleman, "Treaty Shopping and Back-to-Back Loan Rules," Power Point Presentation for 28 May 2015 IFA Conference in Calgary under s. 95(1) – foreign accrual tax, s. 212(3.1)(d) and s. 212(3.1)(c).
Superior Plus – Tax Court of Canada finds that a taxpayer which was assessed under GAAR for a loss shifting transaction was entitled to see the correspondence between CRA and Finance on the subsequently-introduced s. 256(7)(c.1)
When the Superior Plus Income Fund was converted into a public corporation, the chosen corporate vehicle was a public corporation ("Old Ballard") with substantial losses. The transactions were engineered so that there was no acquisition of control of Old Ballard by a group of persons (unless the former income fund unitholders were factually regarded as a group) and so that the former Ballard shareholders and the old assets were removed from Old Ballard.
CRA assessed inter alia under GAAR. Hogan J has found that the taxpayer (whose position includes that s. 256(7)(c.1) was originally considered as an "extension" rather than a "clarification" of the loss-streaming rules) is entitled to disclosure of a wide range of documents (and answers to questions) relating to the policy deliberations (not just the final recommendations of the GAAR Committee) that preceded the GAAR assessment of the taxpayer, and respecting CRA cajoling Finance into introducing s. 256(7)(c.1) in response to this transaction. As established in Birchcliff, the taxpayer is entitled to know the specific policies which the Minister considers to have been abused, and all these materials bore on that question.
Neal Armstrong. Summaries of Superior Plus Corp. v. The Queen, 2015 TCC 132 under s. 245(4) and s. 232 – solicitor-client privilege.
CRA administratively will permit specified foreign property acquired post-emigration to be ignored in completing a T1135 for that year
Although the "Act technically allows for the CRA to require information on specified foreign property for the entire calendar year," where a resident individual has emigrated in the year, "CRA will only require information relating to the period during which [the] individual was resident in Canada," so that "the individual can complete the Form T1135 as if the taxation year ended on the date of emigration."
Neal Armstrong. Summary of 17 March 2015 T.I. 2014-0529371E5 under s. 233.3(3).
Income Tax Severed Letters 3 June 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kruger – Tax Court of Canada decision calls into question the use of mark-to-market accounting by financial institutions for derivatives
Kruger engaged in extensive trading of FX options, mostly writing European style puts and calls, although it also purchased FX options. It was not a financial institution or subject to oversight of a financial regulator, so that CRA’s policy of letting those entities use mark-to-market a tax accounting for derivatives (which are not covered by s. 142.2) did not apply. Rip J held that "the realization principle is basic to Canadian tax law," so that’s what Kruger was required to follow. An exception was made in the case of purchased FX options, which qualified as inventory, so that accrued losses could be recognized under s. 10. However, as noted, most of the options were ones where Kruger was the writer, which Rip J viewed as liabilities rather than inventory. Rip J also was troubled that because these were European-style options, which were difficult to value, they essentially were being "marked to model" rather than marked to (any) market – although it is not clear if he would have come to any different conclusion if the options were more liquid.
At para. 115 of his reasons there appears to be an implied criticism of CRA for not applying the law (i.e., realization principle) to the banks and other financially regulated enterprises. In 2012, CRA indicated (in 2008-0289021E5) that it may no longer accommodate non-statutory mark-to-market accounting, and this case will not help.
Neal Armstrong. Summaries of Kruger Inc. v. The Queen, 2015 TCC 119, under s. 9 – timing, s. 10(1) and s. 4(1)(a).
CRA’s view of the acting-in-concert doctrine may be overly broad
CRA’s statement in Folio S1-F5-C1 that "Even when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert and therefore are not dealing with each other at arm's length" may very well be an overly expansive reading of the acting-in-concert jurisprudence. The Joint Committee expressed scepticism as well.
Neal Armstrong. Summary of Sandra Mah and Mark Meredith, "Factual Non-Arm's Length Relationships," draft version of paper for CTF 2014 Conference Report, under s. 251(1)(c).