News of Note
Jaamiah Al Uloom – Federal Court of Appeal finds that failure to keep proper books and records is a sufficient basis for revocation of registered charity status
Email this ContentIn rejecting a submission that revocation of registered charity status for failure to keep proper books and records was “too extreme and fails to address the remedial steps that [the charity] has undertaken, in particular, the retention of experienced and qualified accountants,” Ryer JA stated:
[T]his basic requirement is foundational in… that the absence of proper books and records places the Minister in the position of being unable to meet her basic obligation to verify the accuracy and validity of the charitable donation receipts that the Charity has issued.
Neal Armstrong. Summary of Jaamiah Al Uloom Al Islamiyyah Ontario v. MNR, 2016 FCA 49, under s. 168(1)(e).
The s. 248(1) – “disposition” – para. (n) exemption for upstream non-resident mergers is narrower than the s. 87(8) rollover
Where there is a merger of two foreign corporations whose shares are taxable Canadian property (because of an underlying Canadian real estate or resource sub), s. 87(8) may provide rollover treatment – but there still could be a share disposition giving rise to s. 116 filing and withholding requirements unless the para. (n) exception to “disposition” applies.
Para. (n) only applies to a vertical (not horizontal) merger, and might not apply to a survivor-style (absorption) merger, given that subpara. (n)(i) requires that there be a merger to “form” one corporate entity. However, the ruling practice of CRA, before the introduction of s. 87(8.2) to treat absorptive mergers as qualifying foreign mergers to form new corporations, may suggest that this is not a problem.
A non-resident shareholder group may not want the s. 87(8) rollover (or para. (n) exception) to apply to a merger, in order that losses can be used to step up basis However, it may not be clear that electing to not have s. 87(8) apply will accomplish this result given that “the Act does not have a provision to determine the tax cost of assets disposed by a merged company in the event that section 87 does not apply.” A step-up presumably would occur under general principles where the existence of a corporation holding the assets in question is terminated under an absorptive merger.
Neal Armstrong. Summaries of Gordon Zittlau, “Corporate Reorganizations Involving Taxable Canadian Property – Foreign Merger Considerations,” International Tax Planning (Federated Press), Vol. XX, No. 3, 2015, p. 1407 under s. 248(1) – “disposition” – para. (n), and s. 87(8).
Ontario Ministry retroactively repeals an Ontario LTT exemption for REIT or partnership acquisitions of real estate partnerships, but grandfathers transactions with rulings
An Ontario land transfer tax Regulation exempts acquisitions of beneficial interests in real estate occurring by virtue of the disposition of a partnership interest where the purchaser’s partnership profit entitlement does not increase by more than 5% in the year. As a trust (such as a REIT) or partnership is transparent for Ontario LTT purposes, this exemption has applied where a partnership or trust acquired a real estate partnership, provided that no unitholder had a greater than 5% interest in the purchaser.
On February 18, 2016, Ontario released an amending Regulation which provides that the 5% exemption does not apply to a purchaser which is a trust or another partnership.
This amendment is stated to be retroactive to July 19, 1989. However, in a Bulletin released at the same time, the Ministry states:
If a person has received a written ruling from the Ministry on or before February 18, 2016 that applies to a taxpayer-specific disposition of a beneficial interest in land that is a partner's interest in a partnership, the Ministry will generally consider the ruling to continue to apply to the taxpayer-specific disposition.
The retroactive aspect of the amendment is not only abhorrent, but also likely ill-considered. S. 22(2)(b) of the LTTA authorizes the cabinet to make regulations “exempting from tax arising under section 3 prescribed dispositions” but does not explicitly authorize them to make regulations taking away an exemption for a completed transaction which was exempted at the time. Normal canons of construction (see, e.g., Corbett) would suggest that the amendment was unauthorized. Were it invalid, it also would not operate on a prospective basis.
Neal Armstrong. Summary of Ontario Ministry of Finance, "Land Transfer Tax ‘De Minimis’ Partnership Exemption: Clarifying Amendments for Certain Dispositions" under Reg. 70/91.
CRA considers that the new international shipping rules have not significantly curtailed the exemption
CRA considers that the amendments (for taxation years beginning after July 12, 2013) to the exemption in s. 81(1)(c) for international shipping income did not effect any substantial narrowing in its scope. CRA still considers that the non-resident taxpayer’s income can be exempted, even where it is not responsible for the crew, where it has “commercial management” of the ship, i.e., “the ship owner is operating the ship under the Taxpayer’s direction.” In addition, the new “international shipping” definition, which “introduced what may be considered to be a new requirement that the ships must be ‘owned or leased’ by the relevant taxpayer,” can be satisfied by the taxpayer being the charterer under a time charter (provided it has commercial management of the ship).
Neal Armstrong. Summary of 24 December 2015 Memo 2014-0560831I7 under s. 81(1)(c).
CRA finds that the fix in s. 87(8.2)(f) for absorptive mergers (where no shares are issued) also indirectly extends to the s. 87(4) basis adjustment rules
In the case of an absorptive merger of FA2 into FA1 (as the survivor) where FA2 ceases to exist and its shares are cancelled, s. 87(8.2)(f) deems the cancelled shares to have been exchanged by the Canadian shareholder (Canco) for purposes of the foreign merger definition in s. 87(8.1), so that the requirement in s. 87(8.1)(c) of that definition - that there be such a share exchange - is satisfied. However, s. 87(8.2)(f) does not explicitly deem there to be such a share exchange for purposes of s. 87(4), which deems shares of Amalco acquired in exchange for shares of a predecessor to have been acquired at a cost equal to the exchanged shares’ ACB. However, also note that s. 87(8) provides that the s. 87(4) rules apply to a foreign merger (so that this effect quite arguably is one of the purposes of the foreign merger definition).
Not surprisingly, CRA has concluded that the deemed exchange rule in s. 87(8.2)(f) also applies for purposes of the application of s. 87(4) to a foreign merger so that, for example, the ACB of the cancelled shares of FA2 is deemed to be added to the cost to Canco of its shares of the survivor (FA1).
Neal Armstrong. Summary of 8 July 2015 T.I. 2014-0550641E5 under s. 87(4).
Income Tax Severed Letters 17 February 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Using agency structures can save GST
Utilizing an agency relationship may save GST or HST. For example:
- Given that, with the exception of accident and sickness insurance, the supply of insurance is considered a financial service for GST purposes only in situations where the insurance is provided by an insurer, it generally will be preferable for a company to secure insurance for other group members as their agent - rather than acting as principal in acquiring the insurance and resupplying the benefits of the insurance coverage to the group companies.
- A s. 150 election generally exempts intragroup leases or servicing agreements, which may result in loss of input tax credits. For example, if in this situation a bank is subleasing premises to subsidiary asset manager, it will be denied ITCs on its corresponding headlease payments to a 3rd party landlord. However, if it instead headleases the premises as agent for the asset manager, the asset manager could generate ITCs for the GST on such rent.
- In order to avoid GST on intercompany management fees, a group company may employ individuals as agent for multiple group companies, while using one payroll account.
- If a mutual fund manager earned redemption fees directly from the mutual fund trust, such fees would be taxable. Instead, the redemption fee is structured as an obligation of the redeeming unitholder to the manager – but with the trust paying the redemption fee directly to the manager on behalf of the unitholder.
- If a person providing out-sourced government services is doing so as agent for a public sector body, then an exemption is more likely to apply.
In addition, having the operator of a real estate joint venture appoint the bare trustee as its agent to enter into contracts to procure property and services at its direction (in order to avoid disclosing the identity of any of the participants including the operator) “has become fairly common.”
Neal Armstrong. Summary of Brent Murray, "Cost-Sharing, Agency & Resupply Agreements: the When and the Why", Canadian GST/HST Monitor (Wolters Kluwer), No. 329, February 2016, p.1 under General Concepts – Agency.
M. Tech India – Delhi High Court finds that the mere right to customize software purchased for resale does not render the consideration a royalty
The Indian case law on the distinction between a software royalty (subject to withholding) and the purchase of software as a product apparently is well developed. The purchase price of specialized software acquired by an Indian company from a non-resident for resale to Indian end users was found not to be a royalty in the face of a Revenue argument that the right of the purchaser to customize the software established that it could use the software and, therefore, the payment, in fact, was a royalty. Bakhru J. stated:
In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.
Neal Armstrong. Summary of Principal Commissioner of Income Tax-6 v. M.Tech India P. Ltd., ITA 890/2015, under s. 212(1)(d).
CRA still generally accepts backdated GST JV (s. 273) elections
In P-187 dated October 16, 1997 respecting the GST joint venture election, CRA states that “as a result of the requirement that an effective date be specified, the participants in the joint venture may complete the election form after the fact.” CRA has dealt with this point in more detail, in the context of a co-ownership arrangement that qualifies as a joint venture, stating:
Where in a particular fact situation, there is a valid operator, it can be clearly established that a joint venture exists for purposes of the section 273 election, and the parties were acting as if the election were in place, a back-dated election can be made that dates back to the date of the written co-ownership arrangement.
Neal Armstrong. Summaries of 26 February 2015 CBA Roundtable, Q. 15 under ETA s. 273(4), s. 156(4).
Notwithstanding 6051944, CRA will not revisit its policy on potentially limiting the deductibility of management fees paid by an opco to a management holdco
In the 6051944 Canada Inc. case, Favreau J found that a fee paid by a private company (engaged in a new home construction business) to its two shareholder-management companies, which was significantly higher than for other years when operating profits had been lower, was reasonable for ETA purposes (rather than being "merely a profit distribution mechanism," as alleged by the Crown). In response to a query on whether CRA would revisit its position on the reasonableness of management fees paid by an operating company to a holding company that is owned by an individual who is the ultimate operator/manager, CRA indicated that this was a (GST/HST) informal procedure case that “therefore” had limited precedential value, there were no plans for such a review and the reasonableness of an expense under ITA s. 67 was a question of fact.
There does not appear to a lot of difference in the judicial weight given to informal procedure cases which have been properly argued by counsel, and regular cases. It is difficult to extract any broad principles from the 6051944 case (other than, perhaps, that there is nothing particularly wrong with a management fee that varies with the success of the business), so that CRA instead should have used its other stock response, that the case was decided on its facts.
Neal Armstrong. Summary of 5 January 2016 T.I. 2015-0622991E5 under ITA s. 67.