News of Note
Income Tax Severed Letters 24 February 2016
Email this ContentThis morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Canadian Forest Navigation – Tax Court finds that foreign rectification orders are not binding on the Tax Court (but can be given weight)
After receiving dividends from Barbados and Cyprus subsidiaries, a Quebec company responded to reassessments of the dividends by obtaining rectification orders from the applicable Barbados and Cyprus courts declaring that the amounts instead were loans to it. In response to a question to this effect posed under Rule 58, Lamarre ACJ found that the federal Crown “is not bound by the foreign judgments since they have not been recognized in Canada by a court of competent jurisdiction, and therefore [the Crown] is not precluded from taking the position at trial that the [taxpayer] received dividends, rather than…loans.”
She also stated that “it will be up to the presiding judge to determine the weight to be given to the Foreign Judgments when ruling on the correctness or incorrectness of the assessments being appealed.”
Neal Armstrong. Summary of Canadian Forest Navigation Co. Ltd. v. The Queen, 2016 TCC 43 under General Concepts – Rectification.
CRA indicates that it will not double-count shares in applying the s. 256(1.3) share re-attribution rule to shares deemed to be owned by minor trust beneficiaries
Father and Mother each hold 80 shares of Newco and Opco, respectively, and two discretionary trusts, with their three minor children as beneficiaries, hold 20 shares, respectively, of Newco and Opco. S. 256(1.2)(f)(ii) would deem, say, the eldest child to own the 20 share bloc in each corporation and that bloc of shares would then be re-attributed to a parent under s. 256(1.3), so that Newco would be deemed to be owned as to 80 and 20 shares by Father and Mother, respectively, and Opco would be deemed to be owned as to 80 and 20 shares by Mother and Father, respectively.
If the same process were repeated for the other two children, the deemed cross-shareholdings would be increased to 60 shares for each corporation. However, CRA will not do this, stating that the shares “would not be counted two or more times.” Consequently, as the cross-shareholdings would be under 25%, Newco and Opco would not be associated.
Neal Armstrong. Summary of 8 December 2015 T.I. 2015-0608781E5 F under s. 256(1.2)(f)(ii).
CRA considers that a pipeline transaction can be coupled with a butterfly split-up
CRA favourably addressed whether the application of deemed dividend treatment under s. 84(2) would still be avoided if, during the second year of conventional pipeline transactions, the Newco was split between the estate beneficiaries under a butterfly reorg. CRA considered these transactions:
- The shares of the opco (“Corporation 1”), whose ACB was stepped up on death, are sold by the estate to its newly-incorporated “Corporation 2” for high-PUC prefs (rather than the more usual note);
- after the wind-up of Corporation 2 into Corporation 1 a year later under s. 88(1), the shares (both common and pref) of Corporation 1 are distributed to the two beneficiaries;
- two months later, there is a split-up butterfly of Corporation 2 between the two newcos (Corporations 3 and 4) of the two beneficiaries, so that Corporations 3 and 4 between them continue to carry on the business which previously was carried on by Corporations 1 and 2. In the meantime during the year following the winding up of Corporation 1, there is no bulk redemption (“rachat massif”) of the prefs of Corporation 2 or the successor prefs of Corporations 3 and 4.
CRA concluded:
[W]e could accept, in such a case, that the beneficiaries of the estate would not receive the property or funds of Corporation 1, in any manner whatever, on the winding-up, discontinuance or reorganization of the business of Corporation 1 and that what they received came instead from Corporation 2, or Corporations 3 or 4. In such circumstances, subsection 84(2) would not apply.
CRA considered that there was nothing inherent in these bare-bone transactions that would necessarily preclude the butterfly exemption from being potentially available. In particular, there was nothing especially problematic about both Corporations 1 and 2 being distributing corporations for purposes of s. 55(3.1)(b). (Only Corporation 2 would be a distributing corporation for purposes of ss. 55(3.1)(a) , (c) and (d).)
Neal Armstrong. Summaries of 22 January 2016 T.I. 2015-0617601E5 F under s. 84(2), s. 55(3.1)(b).
CRA considers that an Opco dividend to Holdco whose sole purpose is creditor-proofing is subject to s. 55(2)
CRA was asked whether the draft s. 55(2) rules would apply, where in order to “shelter” the assets of a construction company, the company dividends its retained earnings to its holding company shareholder with the money being lent back to it. This was different from a similar question posed two times previously (2015 APFF RT, Q. 12 and 2015 CTF RT, Q. 6(e)), as there was a more emphatic assumption that the sole purpose of the dividend was creditor-proofing.
No matter. After questioning, then accepting for discussion purposes, a dubious assumption that the shares in the oeprating company had no safe income on hand, CRA indicated that the amount of the dividend would be deemed to be a capital gain, as it considered that the purpose of the transactions was “to secure those [construction business] assets by diminishing the total value of the operating corporation and augmenting the value of its shareholder (the holding company).”
Neal Armstrong. Summary of 21 December 2015 T.I. 2015-0617731E5 F under s. 55(2.1)(b).
Jaamiah Al Uloom – Federal Court of Appeal finds that failure to keep proper books and records is a sufficient basis for revocation of registered charity status
In rejecting a submission that revocation of registered charity status for failure to keep proper books and records was “too extreme and fails to address the remedial steps that [the charity] has undertaken, in particular, the retention of experienced and qualified accountants,” Ryer JA stated:
[T]his basic requirement is foundational in… that the absence of proper books and records places the Minister in the position of being unable to meet her basic obligation to verify the accuracy and validity of the charitable donation receipts that the Charity has issued.
Neal Armstrong. Summary of Jaamiah Al Uloom Al Islamiyyah Ontario v. MNR, 2016 FCA 49, under s. 168(1)(e).
The s. 248(1) – “disposition” – para. (n) exemption for upstream non-resident mergers is narrower than the s. 87(8) rollover
Where there is a merger of two foreign corporations whose shares are taxable Canadian property (because of an underlying Canadian real estate or resource sub), s. 87(8) may provide rollover treatment – but there still could be a share disposition giving rise to s. 116 filing and withholding requirements unless the para. (n) exception to “disposition” applies.
Para. (n) only applies to a vertical (not horizontal) merger, and might not apply to a survivor-style (absorption) merger, given that subpara. (n)(i) requires that there be a merger to “form” one corporate entity. However, the ruling practice of CRA, before the introduction of s. 87(8.2) to treat absorptive mergers as qualifying foreign mergers to form new corporations, may suggest that this is not a problem.
A non-resident shareholder group may not want the s. 87(8) rollover (or para. (n) exception) to apply to a merger, in order that losses can be used to step up basis However, it may not be clear that electing to not have s. 87(8) apply will accomplish this result given that “the Act does not have a provision to determine the tax cost of assets disposed by a merged company in the event that section 87 does not apply.” A step-up presumably would occur under general principles where the existence of a corporation holding the assets in question is terminated under an absorptive merger.
Neal Armstrong. Summaries of Gordon Zittlau, “Corporate Reorganizations Involving Taxable Canadian Property – Foreign Merger Considerations,” International Tax Planning (Federated Press), Vol. XX, No. 3, 2015, p. 1407 under s. 248(1) – “disposition” – para. (n), and s. 87(8).
Ontario Ministry retroactively repeals an Ontario LTT exemption for REIT or partnership acquisitions of real estate partnerships, but grandfathers transactions with rulings
An Ontario land transfer tax Regulation exempts acquisitions of beneficial interests in real estate occurring by virtue of the disposition of a partnership interest where the purchaser’s partnership profit entitlement does not increase by more than 5% in the year. As a trust (such as a REIT) or partnership is transparent for Ontario LTT purposes, this exemption has applied where a partnership or trust acquired a real estate partnership, provided that no unitholder had a greater than 5% interest in the purchaser.
On February 18, 2016, Ontario released an amending Regulation which provides that the 5% exemption does not apply to a purchaser which is a trust or another partnership.
This amendment is stated to be retroactive to July 19, 1989. However, in a Bulletin released at the same time, the Ministry states:
If a person has received a written ruling from the Ministry on or before February 18, 2016 that applies to a taxpayer-specific disposition of a beneficial interest in land that is a partner's interest in a partnership, the Ministry will generally consider the ruling to continue to apply to the taxpayer-specific disposition.
The retroactive aspect of the amendment is not only abhorrent, but also likely ill-considered. S. 22(2)(b) of the LTTA authorizes the cabinet to make regulations “exempting from tax arising under section 3 prescribed dispositions” but does not explicitly authorize them to make regulations taking away an exemption for a completed transaction which was exempted at the time. Normal canons of construction (see, e.g., Corbett) would suggest that the amendment was unauthorized. Were it invalid, it also would not operate on a prospective basis.
Neal Armstrong. Summary of Ontario Ministry of Finance, "Land Transfer Tax ‘De Minimis’ Partnership Exemption: Clarifying Amendments for Certain Dispositions" under Reg. 70/91.
CRA considers that the new international shipping rules have not significantly curtailed the exemption
CRA considers that the amendments (for taxation years beginning after July 12, 2013) to the exemption in s. 81(1)(c) for international shipping income did not effect any substantial narrowing in its scope. CRA still considers that the non-resident taxpayer’s income can be exempted, even where it is not responsible for the crew, where it has “commercial management” of the ship, i.e., “the ship owner is operating the ship under the Taxpayer’s direction.” In addition, the new “international shipping” definition, which “introduced what may be considered to be a new requirement that the ships must be ‘owned or leased’ by the relevant taxpayer,” can be satisfied by the taxpayer being the charterer under a time charter (provided it has commercial management of the ship).
Neal Armstrong. Summary of 24 December 2015 Memo 2014-0560831I7 under s. 81(1)(c).
CRA finds that the fix in s. 87(8.2)(f) for absorptive mergers (where no shares are issued) also indirectly extends to the s. 87(4) basis adjustment rules
In the case of an absorptive merger of FA2 into FA1 (as the survivor) where FA2 ceases to exist and its shares are cancelled, s. 87(8.2)(f) deems the cancelled shares to have been exchanged by the Canadian shareholder (Canco) for purposes of the foreign merger definition in s. 87(8.1), so that the requirement in s. 87(8.1)(c) of that definition - that there be such a share exchange - is satisfied. However, s. 87(8.2)(f) does not explicitly deem there to be such a share exchange for purposes of s. 87(4), which deems shares of Amalco acquired in exchange for shares of a predecessor to have been acquired at a cost equal to the exchanged shares’ ACB. However, also note that s. 87(8) provides that the s. 87(4) rules apply to a foreign merger (so that this effect quite arguably is one of the purposes of the foreign merger definition).
Not surprisingly, CRA has concluded that the deemed exchange rule in s. 87(8.2)(f) also applies for purposes of the application of s. 87(4) to a foreign merger so that, for example, the ACB of the cancelled shares of FA2 is deemed to be added to the cost to Canco of its shares of the survivor (FA1).
Neal Armstrong. Summary of 8 July 2015 T.I. 2014-0550641E5 under s. 87(4).