News of Note
Income Tax Severed Letters 13 May 2015
Email this ContentThis morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that purchasing mortgages or conditional sales contracts is not lending
CRA recognizes that purchasing conditional sales contracts or mortgages does not represent a lending activity, so that a corporation whose only business is making such purchases is not a "loan corporation" for purposes of the HST/GST Regulations applicable to SLFIs (selected listed financial institutions).
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 19 under Selected Listed Financial Institution Attribution Method (GST/HST) Regulations, s. 26(1).
CRA acknowledges that the assignment of a conditional sales contract “may” be a financial service for HST/GST purposes
In response to a query about 112274, which seemed to say the opposite, CRA stated that "when a conditional sales contract is assigned to a third-party and the purpose of the assignment is to transfer to the third- party the right to receive a stream of payments, the assignment of the conditional sales contract may be a financial service."
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 18 under ETA, s. 123(1) – debt security.
CRA rules on an already-completed cross-border butterfly (with targeted s. 86.1 treatment) which entailed TC and Foreign Spinco initially being fiscally transparent in order to achieve Code spin-off treatment
In connection with a spin-off by a U.S. public company (Foreign PubCo) of a U.S. subsidiary (Foreign Spinco) to which one of its businesses was transferred, there was a butterfly split-up of an indirect Canadian subsidiary (DC) directly and indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TCo) of DC was a subsidiary of Foreign Spinco.
In order that the butterfly transactions could qualify as a tax-free spin-off for Code purposes, TC (a ULC) and Foreign Spinco (an LLC) initially were fiscally transparent for Code purposes – then TC elected to be fiscally regarded in order that it could qualify for Treaty benefits and the Foreign Spinco became a C-corp in order that its spin-off could comply with Code rules.
In connection with the s. 55(3.1)(b)(i)(A)(II) rule, which requires that at all times less than 10% of the fair market value of the shares of Foreign Spinco be derived from shares of DC or TC, CRA indicated that indebtedness of Foreign SpinCo will be considered to reduce the FMV of each property of Foreign SpinCo pro rata in proportion to the relative FMV of all property of Foreign SpinCo. There was provision for a second stage transfer of cash by DC to TC if that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC.
CRA also gave a somewhat apodictic ruling respecting qualification of the spin-off of the Foreign Spinco shares as an eligible distribution for s. 86.1 purposes.
As with other cross-border butterflies, there was a three-party share exchange agreement - see 2013 CTF Annual Roundtable, Q. 11. By the issuance of the rulings, all of the transactions were completed.
Neal Armstrong. Summaries of 2014 Ruling 2014-0530961R3 under s. 55(1) – distribution, s. 55(3.1)(b)(i) and s. 86.1.
Caithkin – Federal Court of Appeal affirms a decision which accepted the GST/HST concept of a “re-supply” of a service.
Graham J found that a company which placed children in foster homes for children’s aid societies and assisted the foster parents was making a "re-supply" to the societies of foster care services which it had "acquired" from the foster parents, but that this resupply was not exempt because the company did not satisfy the requirement that its service be provided "in an establishment operated by the supplier for the purpose of providing such service." On appeal, only the latter point was in issue, and Rennie JA found that, in context, "establishment" referred to a place of residence or home for the children (where the foster care services were provided) and did not encompass the business organization of the company.
Neal Armstrong. Summaries of Caithkin Inc. v. The Queen, 2014 TCC 80, aff’d 2015 FCA 118, under ETA, Sched V, Pt. IV, s. 2 and Statutory Interpretation - Redundancy.
B.C. now recognizes that foreign continuation-style amalgamations do not trigger PST
The B.C. Ministry of Finance has reversed its position in PST 210 "Related Party Asset Transfers" to acknowledge that a foreign amalgamation which qualifies as a continuation-style amalgamation will not trigger B.C. provincial sales tax.
Neal Armstrong. Summary of PST 210 "Related Party Asset Transfers under Provincial Sales Tax Act (B.C.), s. 37(1).
CRA states that remuneration is exempt if it “is quite unrepresentative of the services rendered”
When asked about volunteers sent by a charity on missions to developing countries, CRA stated:
[R]emuneration that is quite unrepresentative of the services rendered would not be taxable. However, when it is significant enough to influence the participation of the volunteer, it generally will become taxable as employment or business income.
Most people reading only the first sentence would conclude they were exempt.
CRA would reject the issuance of donation receipts to volunteers who decline the offered remuneration (in this case, a daily fixed allowance for meals and lodging).
Neal Armstrong. Summaries of 12 February 2015 T.I. 2014-0550771E5 F under s. 5(1), s. 6(6) and s. 118.1(1) – total charitable gifts.
CRA rules that finishing a building interior qualifies as “erecting” the building for Reg. 1102(5)(a) purposes.
Reg. 1102(5)(a) deems a building leasehold interest that was acquired "by reason of…the taxpayer erect[ing] a building" to be a Class 1 rather than Class 13 property.
The shell of a large apartment, which had already been erected by a development partnership, was leased by it to a sister partnership, which under the lease was required to finish the work at its expense. CRA ruled that Reg. 1102(5)(a) applied to the cost of this finishing work. This is an expansive interpretation of "erect."
Neal Armstrong. Summary of 2015 Ruling 2014-0552291R3 under Reg. 1102(5).
CRA finds that a foreign partnership did not hold Bitcoins in an active business
The definition of "specified foreign property" for purposes of the foreign property reporting rule in s. 233.3 includes an interest in a (mostly foreign-owned) partnership which holds "funds or intangible property…situated, deposited or held outside Canada," but with an exclusion in para. (j) of the definition for where such property of the partnership "is used or held exclusively in the course of carrying on an active business of the…partnership."
CRA considered that the para. (j) exclusion likely did not apply for a foreign partnership that held Bitcoins and engaged in related FX hedging and arbitrage transactions. Given that the definition of non-portfolio property (which refers only to "property...use[d]…in the course of carrying on a business in Canada") has narrower wording (i.e., merely "holding" in the course of a business is not enough to taint), this suggests that listed Canadian precious metal funds should not be considered to be SIFT trusts (or partnerships) even if they hold their property in Canada.
Neal Armstrong. Summary of 16 April 2015 T.I. 2014-0561061E5 under s. 233.3 – "specified foreign property".
CRA finds that the surplus recognition rule in Reg. 5907(2.01) for drop-down and sale transactions is not available where any liabilities are assumed
Reg. 5907(2.01) potentially allows the recognition for surplus purposes of unrealized gain on a transfer from one foreign affiliate to another, newly incorporated, foreign affiliate where the shares of the new foreign affiliate are then promptly sold to a third party. A requirement for this relief is that the "only consideration received in respect of" the drop-down is shares of the new foreign affiliate.
CRA considers that this requirement will not be satisfied if the new foreign affiliate assumes any liabilities of the transferor FA as part of the purchase. This appears to be technically correct. However, since any normal business or business division will have related liabilities, this interpretation eviscerates the rule.
Neal Armstrong. Summary of 22 April 2015 T.I. 2014-0550451E5 under Reg. 5907(2.01).