News of Note
CRA clarifies the application of the zero-rating and place-of-supply rules to charter flights
Email this ContentPoints made by CRA in its new Info Sheet on charter flights include:
- A "stopover," a concept which bears on when flights are zero-rated, e.g., for "continuous journeys" whose origin or termination is outside Canada or the continental U.S., as well as on the place-of-supply rules for provincial HST purposes, is considered by CRA not to include a stop of less than 24 hours between two legs of a journey.
- The concept of a "continuous journey," whose definition requires that all related "tickets or vouchers’’ be issued by one supplier or agent, also is expanded by a CRA view that "a document that contains all the information commonly found on a ticket" should be treated as a ticket.
- CRA considers that most charter flights are supplies of a "passenger transportation service," although a mere leasing or licensing of an aircraft does not so qualify.
- The usual single-supply doctrine applies so that, for example, a charge for ferrying a plane from another city to the embarkation point for the charter flight and various airport charges which the carrier has no choice but to incur will be part of the consideration for the passenger transportation service provided by the carrier.
Summaries of GST/HST Info Sheet GI-170 "Charter Flights Supplied to Third-Party Charterers" under Sched. VI, Pt. VII, s. 1(1) – stopover, s. 1(1) – continuous journey, s. 3 and s. 4.
CRA reiterates that the lease/purchase distinction is based on legal rather than economic substance
Before noting that a lease of a transport truck was not eligible for a s. 16.1 election, CRA stated:
[T]he determination of whether a contract is a lease or a sale for income tax purposes is based on the legal relationships created by the terms of the particular agreement, rather than the underlying economic reality. In the absence of a sham, a lease is a lease and a sale is a sale.
Neal Armstrong. Summary of 28 April 2015 T.I. 2015-0566011E5 under s. 16.1(1).
When a DSU was terminated contrary to the DSU rules, CRA applied the SDA rules retroactively
If a DSU plan is amended so that it no longer qualifies then, depending on the circumstances, CRA may consider that this evidences that the plan was never intended to comply, so that it is subject to the salary deferral arrangement rules on a retroactive rather than prospective basis. For example, in an actual situation "where a DSU plan was terminated and all outstanding awards were redeemed in cash…,[a]s the early redemption did not involve extraordinary circumstances…we took the position that the SDA rules applied retroactively with respect to any outstanding awards."
In light of the wording of s. 6(11) (see also Dominion of Canada and Sears Canada), retroactive application would mean that "if an amount was includable in income in a year that is now statute-barred, … the amount [would] be…brought forward and included in income in the earliest non-statute-barred year."
Neal Armstrong. Summaries of 29 April 2015 T.I. 2015-0565181E5 under Reg. 6801(d) and s. 6(11).
CRA confirms application of s. 55(3.01)(g) safe harbour through use of a holdco
CRA has confirmed that s. 55(3.01)(g) generally will permit two unrelated individuals to spin-off real estate from a jointly owned Opco to a newly-incorporated jointly-owned Realtyco provided that they first interpose a holding company between themselves and their two companies (Opco and Realtyco).
Neal Armstrong. Summary of 14 April 2015 T.I. 2015-0570021E5 F under s. 55(3.01)(g).
CRA finds that where shares acquired on a stock option exercise are immediately sold on an earn-out basis, the s. 7 benefit should include the current earn-out value
If an employee exercises options to acquire shares of a private company with a view to immediately becoming party to an agreement for the sale of the shares on an earnout basis, CRA considers that the s. 7 employment benefit recognized on such exercise should take the value at that time of the earnout clause into account.
CRA recognized that the right question is: what was the fair market value of the acquired shares at the time of exercise? Trying to answer by valuing the proceeds for which they in fact were sold might give the wrong number given the difficulties of valuing an earn-out clause.
Neal Armstrong. Summary of 4 May 2015 T.I. 2013-0502761E5 F under s. 7(1)(a).
Shareholders of Continental Gold, a Bermuda company with Canadian residence, will transfer their shares under a Bermuda Scheme to a new Ontario holding company
The common shareholders of Continental Gold, which is a TSX-listed Bermuda corporation with central management and control in Canada, will transfer all their shares to Continental Holdco (a newly incorporated Ontario corporation) under a Bermuda Scheme of Arrangement for the same number of Continental Holdco common shares. Taxable resident shareholders can elect under s. 85 to achieve rollover treatment. The s. 85.1 rollover is not available as Continental Gold is not a taxable Canadian corporation.
The transaction is less innocuous in the U.S. Although it fits under the description of a "B" (share-for-share) reorg or a Code s. 351 contribution, U.S. shareholders who acquired their shares before 2014 (when Continental Gold ceased to be a PFIC) generally will not be eligible for tax-free exchange treatment unless they made a timely election to hold their Continental Gold shares on a mark-to-market basis or made a "purging election" to recognize gain (and pay U.S. tax) on a deemed sale of their shares at the end of 2013.
Neal Armstrong and Abe Leitner. Summary of Continental Gold Circular under Other – Continuances/Migrations – New Canadian Holdco.
CRA considers that a partnership’s affairs can be considered to have been wound-up even if title still shows land as being held for the partnership
The s. 85(3) rollover respecting a disposition of property by a partnership to its corporate partners requires inter alia that "the affairs of the partnership were wound-up within 60 days after the disposition." CRA considers that provided beneficial ownership has been transferred within the 60-day period, it is acceptable if, due to requirements of the applicable land titles authority:
the partnership still holds legal title to the property after the 60-day period only because the parties are awaiting the valuation necessary to effect the transfer of title, and legal title to the property in question will be transferred as soon as is practical after the valuation is completed.
Neal Armstrong. Summary of 14 January 2015 T.I. 2014-0559731E5 under s. 85(3).
Income Tax Severed Letters 20 May 2015
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
DeeThree Exploration effects a butterfly spin-off of Boulder Energy
DeeThree, an Alberta TSX-listed oil and gas company, has completed a butterfly spin-off of Boulder Energy, which holds what was a major development property of DeeThree. In contrast to the recent FirstService/Collier butterfly spin-off, no tax ruling was sought, no indemnities were given respecting post-Arrangement actions that might cause the butterfly to be taxable and no tax risks were disclosed.
Similarly to FirstService/Collier, the U.S. tax disclosure contemplates that the reorganization will be treated as a qualifying Code s. 355 distribution on the basis of the form of the transactions being disregarded.
Neal Armstrong. Summary of DeeThree Circular under Spin-Offs & Distributions – Butterfly spin-offs.
Advantages of electing under s. 89(11) to not be a CCPC are more achievable if, in the case of a CCPC also holding investments, it transfers its business to a new Opco, which so elects
A Canadian-controlled private corporation (Famco) whose taxable capital exceeds $15 million (so that it cannot enjoy the small business deduction) may wish to elect to cease to be a CCPC in order that it no longer is required to keep track of its general rate income pool (which in low-rate provinces does not reflect the full amount of its actual after-tax full-rate income). However, if it does this directly, it may generate a low rate income pool (generally based on its tax retained earnings in excess of its GRIP at the end of the prior taxation year and its capital dividend account), which must be distributed first before it can distribute eligible dividends to its shareholders.
A better result may be achieved by rolling down its business assets to a new subsidiary (Opco), with Opco (rather than Famco) electing not to be a CCPC. The tax cost of Opco’s assets should be equal to the sum of its debts and the paid-up capital of its shares, so that it should have no starting LRIP balance, nor should it subsequently generate LRIP if it only earns business income.
Accordingly, all the dividends paid by Opco to Famco can be eligible dividends and, as a CCPC, Famco can fully distribute these eligible dividends to its (individual) shareholders. In some provinces, the dividend refund to Famco will exceed their dividend tax.
Neal Armstrong. Summary of John Granelli, "Getting a Handle on GRIP", Tax Topics (Wolters Kluwer), No. 2252, May 7, 2015, p. 1 under s. 89(1) – GRIP.