News of Note
Mac’s Convenience Stores - Quebec Court of Appeal finds that as the parties did not think about the thin cap consequences of a dividend, they could not subsequently rectify to solve a thin cap problem
Email this ContentMac’s Convenience Stores Inc. didn’t realize at the time that paying a substantial dividend to its Canadian parent would cause the thin cap rules to apply to interest on a loan from a related non-resident corporation. Schrager JA took essentially the same approach as in Groupe Jean Coutu in finding that rectification was not available to convert the dividend into a stated capital distribution.
Although rectification was appropriate to correct an "error to achieve the tax consequences originally and specifically intended and agreed upon," here the parties had not cast their minds to the thin cap rules, so that correcting a thin cap problem was not necessary to give effect to their intentions at the time.
Neal Armstrong. Summary of Mac’s Convenience Stores Inc. v. A.G. of Canada, 2015 QCCA 837 under General Concepts – Rectification.
Le Groupe Jean Coutu – Quebec Court of Appeal finds that rectification is not available to reverse an adverse tax consequence (FAPI) that the parties did not think about
The taxpayer implemented a plan, to neutralize the effect of FX fluctuations on its investment in a U.S. sub, that overlooked FAPI considerations – so that interest on a loan made by the sub back to Canada was included in the taxpayer’s income. Schrager JA reversed a decision below that the transactions could be rectified to retroactively adopt a Plan B, which had been considered before the bad plan was implemented instead, and which would have avoided the FAPI problem.
Per Graymar, "rectification is available in order to avoid a tax disadvantage which the parties had originally transacted to avoid, it is not available to avoid an unintended tax disadvantage which the parties had not anticipated." Since the parties had not thought about FAPI, rectification to reverse FAPI was not available, i.e., a "general intent…that their transaction be ‘tax neutral’ is not sufficiently determinate."
Neal Armstrong. Summary of A.G. Canada v. Le Groupe Jean Coutu (PJC) Inc., 2015 QCCA 838 under General Concepts - Rectification.
CRA rules that a 2-step distribution (PUC increase and distribution) by a ULC sub of U.S. parent avoids the anti-hybrid rule even though the distribution is funded by a hybrid dividend
A Canadian holding company (‘Holdco") is wholly-owned by the unlimited liability company subsidiary ("ULC") of the U.S. parent, with the exception of exchangeable preferred shares held by Canadian taxable investors. ULC (which is fiscally transparent for U.S. purposes) will increase the stated capital of its shares held by U.S. parent, and then use a dividend received from Holdco to fund a distribution to U.S. parent of the resulting paid-up capital.
The fact that this PUC distribution will be funded out of a hybrid dividend (i.e., a dividend which for Code purposes will be treated as being paid directly to U.S. parent) is irrelevant for purposes of the anti-hybrid rule in Art. IV, para. 7(b) of the Canada-U.S. Treaty. CRA gave its standard ruling that the s. 84(1) deemed dividend arising on the stated capital increase by ULC will be subject to a Treaty-reduced (5%) rate of Part XIII tax.
Neal Armstrong. Summary of 2014 Ruling 2014-0534751R3 under Treaties, Art. 4.
Compensation can be converted to DSUs up to the time of constructive receipt or of legally enforceable entitlement to receive it
A deferred share unit plan can be drafted so as to permit a participant to wait to the very last moment before choosing to defer compensation and receive it instead in the form of DSUs, i.e., up the time that the executive (i) has a legally enforceable right to receive the compensation or (ii) it is "constructively received," i.e., the executive "has unfettered control over, access to, or use of, the compensation."
Neal Armstrong. Summary of 10 April 2015 T.I. 2014-0535951E5 under Reg. 6801(d).
Large businesses are subject to penalties for late reporting of recaptured input tax credits even if claims for the related ITCs also are deferred
Large businesses in, for example, Ontario are subject to the "recapture" (i.e., reversal through an add-back adjustment) of their provincial input tax credits for acquisitions of specified supplies or services, such as electricity. Businesses generally are entitled to defer claiming ITCs for quite a number of months by reporting them in a subsequent reporting period, so that it makes intuitive sense that they also should be able to defer reporting their recaptured ITCs to the same extent.
Not so! The large business generally is required to report the RITC by the month following the month in which the ITC was first claimable, so that a penalty of 10% of the unreported RITC amount will be payable if the ITC and the related RITC are reported only in the monthly return which is filed, say, a year later.
A large business also generally will be subject to penalties if it does not report the correct province to which an RITC relates, even if the correct net amount (ITC minus RITC) is reported.
Neal Armstrong Summaries of National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 22 and 2014 GST/HST Questions for Revenue Canada, Q. 21 under Electronic Filing and Provision of Information (GST/HST) Regulations, s. 7.
CRA confirms that repayment by a non-resident debtor of a s. 15(2) loan to a non-resident assignee of the Canadian creditor can generate a s. 226(6.1) refund to it
In 2013-0482991E5, CRA considered that where Canco seeks to avoid the application of s. 15(2) to a loan (the "Debt") owing to it by a non-resident sister company (Debtco) by assigning the Debt to their non-resident parent (Parentoco) in repayment of a loan owing by it to Parentoco, this assignment will not qualify as a repayment of the Debt (so that s. 214(3)(a) could then apply to impose Part XIII tax on the Debt amount).
In a follow-up, CRA confirmed that if Debtco subsequently repays the Debt to Parentco, it can obtain a refund under s. 227(6.1) of the Part XIII tax remitted by Canco, i.e., a payment from one non-resident to the other generates a refund of the Canadian tax.
Neal Armstrong. Summary of 24 April 2015 T.I. 2014-0560401E5 under s. 227(6.1).
CRA recognizes cross-border client list utilization payments made to a U.S. resident as being Treaty-exempt
CRA considers that payments made to a U.S. resident (formerly, a Canadian resident) based on a Canadian purchaser’s use of a client list for a business previously carried on by the U.S. resident in Canada generally would be exempt, under Art. XII, para. 3 of the Canada-U.S. Treaty, from Part XIII tax otherwise applicable under s. 212(1)(d)(v) as being for the use of information concerning industrial or commercial experience.
Neal Armstrong. Summaries of 21 April 2015 T.I. 2013-0494251E5 under Treaties – Art. 12 and s. 128.1(4).
Income Tax Severed Letters 13 May 2015
This 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.