News of Note
CRA appears to have discussed an amendment to the upstream loan rules with Finance
Email this ContentAs noted in a previous post, CRA considers that the amount of an upstream loan owing by Canco to a CFA will be included in Canco’s income when the CFA is wound-up. In CRA’s written responses to the 2014 CTF Roundtable questions which were released on
Thursday evening, CRA stated (more crisply than in its oral presentation):
We anticipate that this issue will likely be resolved eventually through legislative amendment.
Neal Armstrong. 24 November 2015 CTF Annual Roundtable, Q. 8.
There are various arbitrary GST distinctions between corporations and partnerships
There are a number of somewhat arbitrary GST distinctions between corporations and partnerships. Partnerships:
- cannot access the s. 186 election to permit a holding partnership to claim input tax credits;
- cannot use the s. 150 election to exempt intra-group supplies even if the partnership is a listed financial institution or is closely related to a listed financial institution;
- do not qualify for the off-set mechanism permitting a large GST remittance obligation of one member of a closely related group to be reduced by the refund position of another group member;
- do not benefit from any analogue to the s. 272 rule deeming the conveyance on a corporate wind-up to not be a supply.
Neal Armstrong. Summaries of Allan Gelkopf, Zvi Halpern-Shavim, "Five Arbitrary Differences between Corporations and Partnerships for GST/HST Purposes", Sales and Use Tax (Federated Press), Vol. XIII, No. 2, 2015, p. 674 under ETA s. 186(1), s. 150(1), s. 228(7), s. 272 and Selected Listed Financial Institution Attribution Method (GST/HST) Regulations, s. 3(c).
SARs are taxed when they vest
It is not clear that stock appreciation rights become taxable under the salary deferral arrangement rules when such SARs vest, given that this would turn on whether the executive is postponing the SARs' exercise in order to avoid immediate tax consequences. However, CRA likely would view the vested SAR as having been constructively received, so that “it seems likely that the SARs would be taxed at the moment they become fully vested” under general principles if not under the SDA rules.
Neal Armstrong. Summary of Kevin Bianchini and Reuben Abitbol, "Taxation of Stock Appreciation Rights", Taxation of Executive Compensation and Retirement (Federated Press),Vol. 24 No. 8, 2015, p.1655 under s. 248(1) - salary deferral arrangement.
Fiducie Claude Deragon – Tax Court of Canada finds that sales proceeds included contingent reverse earn-out amounts, but could be reduced by the operation a year later of a price adjustment clause
Vendors agreed to sell shares for a sale price of $16 million, of which $2 million was payable in subsequent years only if an EBITDA condition respecting the sold companies was satisfied. The sales agreements contained a simple price adjustment clause based on the final audited shareholders’ equity of the sold companies. When a substantial deficiency in shareholders’ equity subsequently emerged, a negotiated Settlement Agreement concluded more than a year after the sale reduced the gross sale price by $0.5 million (to $15.5 million), increased the portion of the sale price payable under the reverse earn-out to $3 million – and provided that the vendors would reimburse a further portion of the sale price out of amounts received by them under the earn-out.
Favreau J respected the retroactive downward adjustment, pursuant to the Settlement Agreement, of the proceeds of disposition by $0.5 million but, by the same token, considered that the reverse earnout amounts of $3 million could not be excluded from the proceeds of disposition notwithstanding their contingent nature. However, somewhat paradoxically, he did not permit a downward adjustment to the proceeds of disposition for the contingent obligation to refund the sale price to the purchasers.
He also noted that the taxpayer had relied on IT-462, para. 9 to avoid income treatment of the proceeds under s. 12(1)(g). Consistently with this reverse earnout policy, the vendors presumably could have recognized a capital loss in subsequent years when they refunded the sale price, although those years were not before him.
Neal Armstrong. Summary of Fiducie Claude Deragon v. The Queen, 2015 CCI 294, under s. 54 - "Proceeds of Disposition" - para. (a).
Income Tax Severed Letters 2 December 2015
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Discovery Trust and Boettger have not changed CRA’s application of the Fundy residency test to provincial trusts
CRA's views regarding the application of the "central management and control" test in determining the residency of a trust for provincial tax purpose (so as to determine whether such control is exercised by the settlor or beneficiaries rather than the named trustee) has not changed as a result of Discovery Trust and Boettger, so that it will continue to look at who makes the substantive decisions (being the high-level, strategic decision-making and governance rather than the day-to-day functions), where the power and discretion is really being exercised, and where the real business is carried on.
Neal Armstrong. 24 November CTF Annual Roundtable, Q.3.
Thibeault – Tax Court of Canada finds that a bare boat lease did not qualify as a business
D’Auray J applied a test derived by her from Oke, that a taxpayer’s activities must “surpass those which are usually provided under a lease,” to find that a bare boat lease by an individual of his boat to his company for use by it in operating whale-sighting cruises did not qualify as a business activity under Reg. 1100(17.3)(b), so that his CCA deductions were limited by the leasing property restriction rule. In particular, his distributing pamphlets, constructing a ticketing booth, landscaping around the booth and selecting a caterer, were effected in his capacity of shareholder of the company rather than of lessor.
Neal Armstrong. Summary of Thibeault v. The Queen, 2015 CCI 271, under Reg. 1100(17.3)(b) and 20(1).
Hôpital Santa Cabrini – Tax Court of Canada finds that a hospital which contracted for the services of nurses employed by a personnel-services agency was not being supplied an exempt supply of nursing services
Archambault J found that a hospital which paid outside personnel-services agencies to receive the services of salaried nurses employed by the agencies was not thereby receiving an exempt supply of nursing services under Sched. V, Pt II, s. 6 given that the nurses were providing their services under the direction and control of the hospital rather than of managers at the agencies. In fact, he even found that the agreement between the hospital and each agency only gave rise to rights which were property so that the object of the agreement was property rather than services.
Neal Armstrong. Summary of Hôpital Santa Cabrini v. The Queen, 2015 CCI 264 under ETA, Sched. V, Pt II, s. 6.
CRA considers that a member of an LLC is subject to U.S. income taxation on the LLC income for purposes of s. 95(2)(a)(ii)(D)(IV)(2) even though the net inclusion in its income is reduced by interest payable to a financing foreign affiliate
S. 95(2)(a)(ii)(D) may apply to deem interest payments received by FA #1 from FA #2 in a year on money borrowed by FA #2 to acquire shares of a foreign affiliate (Target) to be active business income. Among other conditions, s. 95(2)(a)(ii)(D)(IV) requires that in respect of both FA #2 and Target, either:
- the affiliate is subject to income taxation in a foreign country in the year; or
- the affiliate's shareholders are subject to income taxation in a foreign country on substantially all of the affiliate's income for the year.
CRA considers that the 2nd test above will be satisfied, in the situation where Target is an LLC that is treated for U.S. purposes as a partnership in which FA #2 has a 95% partnership interest, if substantially all (i.e., 95% in this example) of the Target income is included in the computation of the income of FA #2, even though that computed income is reduced by the interest expense payable by FA #2 to FA #1 on the borrowed money that had been used to acquire Target.
Neal Armstrong. 24 November 2015 Annual CTF Roundtable, Q. 9.
DMWSHNZ Ltd. – English Court of Appeal finds that the repayment of a note does not entail its disposal to the debtor
Lewison LJ rejected a U.K. taxpayer’s submission that when a debtor repays a note, there is a disposal of the note to the debtor given that following such repayment the debtor is still required to cancel the note (stating that “In the real world when the debt was repaid the obligation to pay was discharged; and there were no remaining creditor's rights that could have been transferred to the Issuer.”)
The correctness of this view is even more apparent in Canada, given that s. 84(9) deems the cancellation of a security to entail its disposition to the issuer only in the case of a share, although CRA professes (e.g., in 2010-0385771E5) that a trust distribution to capital beneficiaries in satisfaction of their interest entails an acquisition of property by the trust.
Neal Armstrong. Summaries of DMWSHNZ Ltd. v. Commissioners for Her Majesty's Revenue and Customs, [2015] BTC 32, [2015] EWCA Civ 1036, under s. 69(1)(b) and Statutory Interpretation – Purpose.