News of Note
CRA confirms that exempting a capital gain doubles the CDA addition
Email this ContentThe capital dividend account definition provides for the addition of the difference between the corporation’s capital gain from a disposition and the portion of that capital gain which is a taxable capital gain. Therefore, if the taxable capital gain resulting from the disposition is nil (for example, for a donation of ecologically sensitive lands exempted under s. 38(a.2)(i)), the full amount of the capital gain will be added to the CDA.
Neal Armstrong. Summary of 3 December 2015 T.I. 2015-0613761E5 F under s. 89(1) – capital dividend account.
CRA finds that post-retirement insurance premiums which secure coverage for pre-retirement negligent professional advice can be deductible
After referring to Poulin, CRA accepted that post-retirement premiums paid by a former professional to cover off any negligence claims respecting pre-retirement advice given “during the ordinary course of the professional’s business operation” could qualify for deduction, even though the retired professional no longer had a source of professional income. Otherwise than perhaps quibbling about CRA’s reference to the insured advice having been given in the “ordinary course” rather than the “course” of the professional practice (see McNeill), this looks right.
Neal Armstrong. Summary of 3 December 2015 T.I. 2015-0618981E5 under s. 18(1)(a) - start-up and liquidation costs.
S. 256(1.3) can deem a corporation to be associated even if the minor turns 18 shortly after the start of the given year
S. 256(1.3) deems a corporation, whose shares are owned at any time by a minor (other than one who is managing its business without significant influence by a parent), to be associated with other corporations at that time to the same extent as if those shares were owned by the parent. Given that s. 256(1) provides that corporations are associated if they have the described degree of connection at any time in the year, this means s. 256(1.3) could deem the corporation to be associated even if the minor turns 18 shortly after the start of the given year.
Neal Armstrong. Summary of 8 December 2015 T.I. 2015-0610921E5 F under s. 256(1.3).
Durocher – Tax Court of Canada finds that any potential illegality of an option to acquire control of a private corporation did not nullify the option, so that the corporation was not a CCPC
A financial institution, which was controlled by a non-resident, acquired an option to subscribe at a future date for the majority of the equity of a holding company for an Opco which, if actually exercised by it, would have violated a prohibition in the Act respecting financial services (Quebec) against it or related persons acquiring greater than a 20% stake in the company. Rip J found that the option itself did not violate the statute and that, even if it did, a provision in the Civil Code apparently stipulating nullity of an illegal contract should not be applied where a regulatory body (here, the AMF) was accorded responsibility for sanctioning breaches of the statute - and, in any event, Quebec jurisprudence indicated that the absolute nullity sanction should be applied “with restraint and diligence.”
As the option was valid, the corporation in question was not a Canadian-controlled private corporation, so that subsequent sale of shares in a grandparent corporation by individuals did not qualify for the capital gains exemption.
Neal Armstrong. Summary of Durocher v. The Queen, 2015 TCC 297, under s. 125(7) – Canadian-controlled private corporation.
Revised exemption for non-resident employer withholding provides an alternative ephemeral-presence test and eliminates no-PE requirement
The 2015 Budget introduced an exemption to the Regulation 102 withholding requirement in respect of payments made by "qualifying non-resident employers" to "qualifying non-resident employees." A "qualifying non-resident employees” was a Treaty-exempt non-resident employee who satisfied a test requiring that the employee not be present in Canada for 90 or more days in any 12-month period in which the remuneration was paid. The July 31, 2015 draft legislation now indicates that the ephemeral presence test also will be satisfied if the employee works in Canada for less than 45 days in the calendar year that includes the time of payment. This is an improvement, as many employers may be better able to monitor "work days" than simple presence in Canada.
Another improvement is that the (Treaty-resident) employer no longer is required to not carry on business in Canada through a permanent establishment. However, T4 reporting is still required even where the new withholding exemption is applicable.
Neal Armstrong. Summary of Dov Begun, "Foreign Employers Sending Non-Canadian-Resident Employees to Canada to Work on short-Term Projects May Benefit from Proposed Changes Introduced in the 2015 Federal Budget and Clarified on July 31, 2015," Tax Management International Journal, 2015, p. 634 under s. 153(6) – qualifying non-resident employee.
CRA’s voluntary disclosure practice is to go back only to years for which there is supporting documentation, and no earlier
Although a voluntary disclosure must generally be of information that is at least one year overdue (in order to prevent use of voluntary disclosures to avoid late-filing penalties), where returns for multiple GST reporting periods have not been filed and any one of the returns is more than one year past due, the entire series of returns will be eligible for voluntary disclosure.
Although CRA can go back more than four years where there has been a neglectful misrepresentation etc., “in practice, however, the CRA will (by administrative largesse) only include reporting periods for which supporting documentation is available in the disclosure.”
Neal Armstrong. Summary of Ryan Rabinovitch, Angelo Discepola, "Solving Sales Tax Non-compliance Through the Canadian Voluntary Disclosure Program," Tax Litigation (Federated Press), Vol. XIX, No. 4, 2015, p. 1175 under ETA s. 281.1(1).
The Gold and Silver Notes of Gran Columbia Gold are to be exchanged for PIK notes with PDO and OID issues and with “receipt” by the Noteholders of a “Restructuring Fee”
On December 22, 2015 the shareholders and relevant noteholders of Gran Columbia Gold voted in favour of a B.C. Plan of Arrangement under which the Company’s U.S.$100 million of “Gold Notes” would be exchanged for new notes (the “2020 Debentures”) or (at each Noteholder’s option) common shares of the Company, and its U.S.$78 million of “Silver Notes” (which, like the Gold Notes, are in default) would be exchanged for the 2018 Debentures or (at the noteholder’s option) common shares. The Gold Notes bear cash interest at 10% p.a. and entitle the holder to receive cash on maturity, or earlier exercise of put rights, equal to the greater of their principal and the value of specified numbers of gold ounces, so that there is proportionate participation as the price of gold exceeds U.S.$1400 per ounce. The Silver Notes are somewhat similar. The 2020 Debentures have no gold appreciation feature, are convertible into common shares and bear cash interest at a rate of 6.00% per annum, payable monthly in arrears, unless the Company elects for any month to pay pay-in-kind (PIK) interest (i.e., through the issuance of more debentures) at a rate of 9.00% per annum; and somewhat similarly for the 2018 Debentures.
The amount of Gold Notes which is exchanged for the equivalent principal amount of 2020 Debentures (except to the extent that the Gold Noteholders elect to receive common shares) includes not only their principal and accrued interest but also an increase (styled as an increase to their principal amount and labelled the “Restructuring Fee”) of $2 million. The Canadian advisors think that the Restructuring Fee will be income to the Gold Noteholders, whereas the U.S. advisors think that it instead represents additional proceeds (in the form of additional 2020 Debentures or common shares) to be received for the Gold Notes.
The Debentures "may be" prescribed debt obligations, so that holders might be required to accrue interest at the higher PIK rate under Reg. 7000(2)(c) even if the Company chooses to pay at the lower cash rate. The PIK interest rate option will cause the Debentures to be subject to the U.S. OID rules (requiring inter alia the accrual of original issue discount based on the initial fair market value of the Debentures.)
Although the exchange under the Plan of Arrangement of Gold or Silver Notes for shares occurs at the noteholder’s election, s. 51 non-recognition treatment is not considered to apply, and the note-for-debenture exchanges are considered to also occur on a taxable basis (no s. 51.1). In the U.S., it is not clear that the exchanges would qualify as recapitalizations as contrasted to taxable exchanges given inter alia that the Debentures have relatively short-term maturities and, therefore, may not qualify as “securities.”
Neal Armstrong. Summary of Gran Columbia Gold Circular under Other - Recapitalizations.
Income Tax Severed Letters 6 January 2016
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A US enterprise arguably can acquire a Canadian services PE by providing services only to related Canadian enterprises
The US Joint Committee on Taxation stated that the services PE concept in the Canada-U.S. Treaty “only applies to services provided by the enterprise to third parties and not to services provided to that enterprise (i.e. inter-company services)." In 2009-0319441C6, CRA rejected the proposition that this means that there can be no services PE where services are only rendered between related parties. The CRA position might correct on the basis that the Joint Committee report was merely indicating “that services provided to the nonresident enterprise by its affiliates do not result in a PE to the enterprise to whom the services are provided,” as contrasted to excluding services provided by a non-resident enterprise to related parties.
Neal Armstrong. Summary of Abraham Leitner and Peter Glicklich, "Uncertainty Remains Under the Services PE Provision in the U.S.-Canada Income Tax Treaty," Tax Management International Journal, 2015, p. 784 under Treaties – Art. 5.
Emotion Picture Studios – Tax Court of Canada finds that “research” to figure out how to maximize Google search rankings was not SR&ED
C Miller J found that “experiments” engaged in to figure out how to improve Google search rankings for websites were not SR&ED, stating:
I fail to see how it is a scientific advancement to figure this out. It strikes me more of solving an equation someone has already solved, rather than coming up with a new proof.
Neal Armstrong. Summary of Emotion Picture Studios Inc. v. The Queen, 2015 TCC 323, under s. 248(1) - scientific research & experimental development.