News of Note
Airtours – UK Supreme Court finds that a firm paying for PwC accounting services was not entitled to a credit for the VAT because PwC was not contractually obligated to it
Email this ContentA corporation in financial difficulty (Airtours) agreed to pay PwC to prepare a report for its lenders to satisfy them that a proposed restructuring was viable. Lord Neuberger accepted that Airtours would be entitled to a credit for the VAT charged to it by PwC for the report if PwC was contractually obligated to Airtours to provide its report to the lenders (so that Airtours could satisfy the VAT test that it have received a supply from PwC), but instead found that PwC had no such contractual obligation to Airtours, so that no VAT credit was available. The minority, in concluding that PwC also was making a supply to Airtours, found an implied contractual obligation of PwC to Airtours and also paid more heed to the economic reality that Airtours benefited significantly from the PwC report, as it contributed to its successful restructuring.
It is unclear whether a different result would have obtained in Canada. Airtours likely would have been deemed under ETA s. 123 to be the “recipient” of the supply by PwC as it was liable under the engagement agreement to pay PwC’s fee. However, the ETA provision according an input tax credit (s. 169) was amended in April 1997 to replace a reference to property or a service being “supplied to” a particular person by a reference to a property or service being “acquired” by the particular person. In any event, the recognition by both the majority and minority in Airtours, that a contractual right of a person to require service to be provided to a third party represents a supply to that person, is helpful.
Neal Armstrong. Summary of Airtours Holidays Transport Ltd. v. HMRC, [2016] UKSC 21 under ETA s. 169(1).
CRA finds that a land developer can bump the cost amount of land (for use by it as land inventory) which was held by a target as capital property when its control was acquired
Where a corporation engaged in a land development business acquires a corporation holding a parcel of land as capital property, CRA accepts that the cost of the land can be bumped under s. 88(1)(d) if the target corporation is wound-up, even if the land will be acquired by the developer as inventory and even if the wind-up occurs several years later. The posited facts and CRA analysis stipulated that the land was capital property to the target at the time of the acquisition of its control rather than at the time of the wind-up, which may suggest it would not be a concern for the land to have been converted into inventory in the hands of the target after its acquisition and before its wind-up.
Neal Armstrong. Summary of 30 March 2016 T.I. 2016-0629701E5 Tr under s. 88(1)(d).
CRA finds that an accrued loss on shares of an LLC can be recognized by converting it to an LP
Headquarters accepted that the conversion of a Delaware LLC into a Delaware LP (under a procedure that looks similar to a continuance) resulted in a disposition of the LLC units (and an acquisition of the new LP units), so that a capital loss was realized by the LLC unitholder for FAPI purposes. Not surprisingly, Headquarters went on to find that the LLC and LP units were not identical property, so that s. 40(3.4) did not apply to suspend the loss.
As in 2004-0104691E5, no comment was made on how the new LP determined the cost of its property.
Neal Armstrong. Summary of 2015-0588791I7 under s. 40(3.3).
Imperial Oil – Federal Court of Appeal finds that the Tax Court cannot consider appeals of refund interest claims
Noël CJ essentially found that a remission of tax under the Financial Administration Act is only a forgiveness of the tax owing under the Act, so that such remission cannot be treated in a similar manner to a tax instalment payment made under the Act. Accordingly, remission amounts (in this case relating to the Syncrude project) could not generate an entitlement to refund interest.
Of somewhat broader interest is a procedural point. One of the two taxpayers did not immediately apply to the Federal Court for judicial review of a denial by CRA of refund interest (claimed as described above), but instead only filed a prompt Notice of Objection. It did not apply for judicial review until seven years later, and argued at that point that CRA’s “refusal to pay refund interest could only be challenged after the objection process had been exhausted.”
In rejecting this approach, Noël CJ affirmed the finding in McMillen that:
the amount of a refund resulting from an overpayment, although often set out on the notice of assessment, is not an assessed amount… . The objection procedure does not apply to a contested refund and the Tax Court is therefore without jurisdiction to hear an appeal pertaining to its computation… .
As only the Federal Court could deal with the refund interest issue, the taxpayer would have failed on procedural grounds - for following the wrong (Notice of Objection) procedure rather than applying immediately to the Federal Court – even if its claim had substantive merit.
Neal Armstrong. Summaries of Imperial Oil Resources Ltd. v. Canada (AG), 2016 FCA 139 under s. 171(1) and s. 164(7).
CRA confirms that interest on borrowing funding a normal course issuer bid is deductible subject to the usual accumulated profits and stated capital test
The CRA position in S3-F6-C1, para. 1.48 - that interest generally is deductible on money borrowed to redeem shares to the extent of accumulated profits and of stated capital of the redeemed shares - also applies to open market purchases-for-cancellation of common shares. CRA also reiterated that this general position is referring to corporate stated (or paid-up) capital.
Neal Armstrong. Summary of 2015-0621401I7 under s. 20(1)(c).
CRA considers that a QROC distribution by a foreign affiliate to its Canadian shareholder of ECP results in ECE to the shareholder of the property’s FMV
CRA considers that property contributed for no consideration to a corporation by its shareholder, or received by a Canadian corporate shareholder from its wholly-owned foreign affiliate on a return of capital (or other upstream transfer), generally will have a cost to the transferee equal to the property’s fair market value.
CRA has extended this position to a return-of-capital distribution by the foreign affiliate of a Canadian corporation of eligible capital property (in this case, intellectual property with an unlimited life), so that the distribution gave rise, for purposes of applying the eligible capital expenditure definition to the Canadian shareholder, to an expenditure incurred by it equal to the FMV of the property at the time of distribution.
Neal Armstrong. Summaries of 2013-0506561I7 under s. 14(5) – eligible capital expenditure, s. 69(1)(c) and s. 69(4).
Income Tax Severed Letters 18 May 2016
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Montminy – Tax Court of Canada finds that the exercise of employee stock options and immediate sale of the acquired shares to the controlling shareholder following an asset sale did not generate a s. 110(1)(d) deduction
When a third-party purchaser agreed to acquire all the assets of Opco, the management employees agreed with the 100% shareholder of Opco (“Holdco”) that when the asset sale closed, they would exercise their options to acquire common shares of Opco and immediately sell their newly-acquired shares to Holdco for an agreed cash sale price.
The Crown accepted that this right to sell their shares to Holdco was a fair market value liquidity right described in Reg. 6204(2)(c), so that the shares were not prevented from being prescribed shares under Regs. 6204(1)(a)(iv) and (vi) (re right for their shares to be acquired by a specified person, i.e., Holdco). However, D’Auray J accepted the Crown’s submission that the shares were tainted under Reg. 6204(1)(b). In addition to noting the text of Reg. 6204(1)(b), which on its face referenced a reasonable expectation of the shares being acquired by a specified person within two years rather than legal rights and obligations, she also noted that:
The underlying tax policy of paragraph 110(1)(d)…and paragraph 6204(1)(b)…is to ensure that the stock option regime does not become disguised remuneration and that the employees who subscribe for the shares are subject to a certain level of risk.
Accordingly, the employees were not able to reduce their employee stock option benefits by the s. 110(1)(d) deduction.
Neal Armstrong. Summary of Montminy v. The Queen, 2016 CCI 110 under Reg. 6204(1)(b) and General Concepts – FMV - shares.
Herbalife – Delhi High Court finds that an Indian domestic provision denying the deduction of technical services fees paid to a non-resident where there was a failure to withhold back-up withholding violated the non-discrimination provision in the U.S.-India Treaty
Art. 26(3) of the U.S.-India Treaty, which is similar to Art. XXV(6) of the U.S.-Canada Treaty, provided that:
Except where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest), or paragraph 8 of Article 12 (Royalties and Fees for included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.
The Delhi High Court applied Art. 26(3) to override a domestic provision, which denied the deduction of technical service fees paid to a non-resident (in this case, a U.S. affiliate) where the Indian payer had failed to withhold back-up withholding. (This domestic provision applied even where, as here, the fees were exempt from Indian tax under the business profits/PE Articles of the Treaty.) Muralidhar J saw the matter quite simply:
[T]he condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. … The lack of parity in the allowing of the payment as deduction is what brings about the discrimination.
Neal Armstrong. Summary of CIT v. Herbalife International India PVP. Ltd., ITA 7/2007, 13 May 2016 (Delhi HC) under Treaties – Art. 25.
Revised s. 212.1(4) rule generates anomalous results
The exception in s. 212.1(4) from the application of the surplus-stripping rule in ss. 212.1(1) permits the unwinding of a sandwich structure resulting from a Canadian corporate purchaser having acquired a non-resident corporation holding a Canadian subsidiary – so that such non-resident corporation can transfer the shares of the Canadian subsidiary to the Canadian purchaser. The 2016 federal budget proposed a significant narrowing of s. 212.1(4), so that it will not apply where, at any time as part of the series of transactions, a non-resident who did not deal at arm’s length with the Canadian purchaser owned directly or indirectly any share of the purchaser.
Even accepting the general policy of this proposal, it could produce inappropriate results. For example:
- The proposed rule could penalize a Canadian shareholder of the Canadian purchaser if a non-resident shareholder of the purchaser does not deal at arm’s length with the purchaser.
- If a Canadian corporation (with no non-resident shareholders) had previously acquired the purchaser from a non-resident vendor, and the purchaser corporation now is used to acquire a non-resident corporation holding an underlying Canadian corporation, the s. 212.1(4) exception will not be available if the prior acquisition occurred as part of the same "series" - even though no non-resident now indirectly holds any interest in the acquired corporation.
- Similarly, if a Canadian corporation (with no non-resident shareholders) had previously acquired the purchaser from a non-resident vendor, and the purchaser already held a non-resident corporation that, in turn, held an underlying Canadian corporation, s. 212.1(4) will not apply to permit the sandwich to be unwound into the purchaser.
- Where the s. 212.1(4) exception is not available because there is a non-resident corporation atop a double-decker sandwich structure, the unwinding of that structure could result in double withholding tax.
- Purchasers who are Canadian public corporations with non-resident shareholders, or private-equity funds with non-resident partners, may have difficulty in demonstrating satisfaction of the arm’s length test.
Neal Armstrong. Summary of Angelo Nikolakakis, "Cross-Border Surplus Stripping – Stripping Bona Fide Non-Resident Purchasers," International Tax (Wolters Kluwer CCH), No. 87, May 2016, p.4 under s. 212.1(4).