News of Note
CRA states that a shareholder benefit arising on a corporate tenant improvement must be estimated even if reimbursement for the improvement is required on lease termination
Email this ContentIn IT-432R2, CRA states (based inter alia on Kennedy and Ginter) that if a corporate tenant improves a building owned by its shareholder, a shareholder benefit arises at that time based on the present value of the increase in the shareholder/landlord’s reversion. But what if under the lease the corporation at lease end must be repaid by its shareholder for the value of the improvements?
CRA was unwilling to discuss the mitigation or elimination of the shareholder benefit that thereby arises and instead stated that "the extent to which the reimbursement would reduce the present value of the shareholder benefit under subsection 15(1) will depend on the relevant circumstances."
Neal Armstrong. Summary of 24 September 2014 T.I. 2014-0522261E5 under s. 15(1).
Income Tax Severed Letters 1 April 2015
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that the s. 98(1)(a) partnership relieving rule does not apply to a former partner
s.98(1)(a) indicates that until all the property of a dissolved partnership has been distributed, the partnership and the partnership property are deemed to continue.
CRA has confirmed that this rule does not apply to someone who has already ceased to be a partner at the time of dissolution, but notes that this point does not have much significance since ss. 98.1(1)(a) and (b) for various purposes deem the former partner not to have disposed of its partnership interest until the later of its residual entitlement (otherwise than under s. 96(1.1)) to partnership property being satisfied, and the end of the dissolution year.
Neal Armstrong. Summary of 26 January 2015 T.I. 2014-0545051E5 under s. 98(1).
The cashless application of cross-border interest payments (owing Canco to USCo) to satisfy a subscription obligation for shares of Canco is targeted to generate interest deductions in Canada and no income inclusions in the U.S.
A technique for a U.S. corporation ("USCo") to use double-dip financing of an acquisition of Canadian "Target" starts in a conventional manner with a Canadian acquisition vehicle ("Buyco") being capitalized by it with interest-bearing debt and equity in conformity with the Canadian thin cap rule and with Buyco ultimately being amalgamated with Target to form Canco. However, before the amalgamation, a three-party arrangement is entered into among USCo, Buyco and an LLC sub of USCo under which
- USCo will direct Buyco (or its successor, Canco) to satisfy its interest obligations as they come due by paying the interest amounts to LLC in satisfaction of its obligations under a forward sale agreement ("FSA") to subscribe for membership interest in LLC in equal amounts (with this FSA also containing a matching obligation to subscribe for a further membership interest when the principal of the loan comes due), and
- LLC will redirect that Canco instead retain those amounts on account of the subscription price for shares of Canco under a similar FSA between LLC and Buyco — so that Canco issues shares to LLC.
The targeted results are for the loan to be treated as equity for Code purposes (so that the shares issued by Buyco/Canco are treated as a tax-free stock dividend – and so that USCo can enjoy a U.S. interest deduction for any related financing), and for it to generate an interest deduction for Canadian purposes (with no withholding).
Neal Armstrong. Summary of Jack Bernstein and Francesco Gucciardo, "Update on Canada-U.S. Merges and Acquisitions," Tax Notes International, March 16, 2015, p. 993 under s. 20(1)(c).
CRA will apply the instalment method that minimizes the Canadian-dollar taxes payable of a functional currency reporter when it assesses for carried-back losses
Where a Canadian corporation uses an "elected functional currency" (e.g., the U.S. dollar) for purposes of computing its Canadian tax liabilities, it nonetheless computes its instalment obligations under the first instalment base method (s. 157(1)(a)(ii)) or second instalment base method (s. 157(1)(a)(iii)) based on its ultimate taxes payable in Canadian dollars for its previous taxation year or previous two taxation years, as the case may be (although instalments under the estimated method (s. 157(1)(a)(i)) effectively are computed in U.S. dollars). The remainder of its taxes payable for a year is computed by converting each of its required Canadian dollar instalment payment obligations into U.S. dollars at the applicable spot rates for the instalment due dates, with the total of the required instalments (expressed in U.S. dollars) deducted from its U.S. dollars payable for the year and with the difference converted to Canadian dollars at the spot rate on the balance-due day. A result of this is that where the corporation has carried back non-capital losses from subsequent years in computing its taxable income for, say, Years 1 and 2, the choice of instalment method for Year 1 or 2 may affect the Canadian dollar quantum of its adjusted tax liability for Year 1 or 2.
CRA considers that when in these circumstances it reassesses Years 1 and 2 to give effect to the carry-backs, it generally should use the instalment method that minimizes the Canadian dollar taxes payable – i.e., the same instalment method that was originally used for Year 1 or 2 is not required to be used in this recalculation.
Neal Armstrong. Summary of 21 January 2015 Memo 2014-0540631I7 under s. 261(11)(a).
CRA indicates that the $10,000 safe harbour for Canadian employment income of U.S. resident is applied on calendar year basis even where she was a part-year resident
Art. XV, 2(a) of the Canada-U.S. Treaty provides a safe harbour, from the application of a general rule permitting Canada to tax the employment income of a U.S. resident derived from "an" employment exercised in Canada, where the remuneration from such remuneration does not exceed Cdn.$10,000. CRA considers that this safe harbour is applied on a calendar year basis so that if a Canadian resident becomes a U.S. resident on, say, December 1, but has income from the exercise of employment with his Canadian employer in December of under $10,000, he will be unable to access the safe harbour.
Given that it would be unusual for such an employee to continue performing his duties of employment in Canada for the same legal entity, this position may mostly be relevant where the individual receives some post-departure employment benefits from Canada.
Neal Armstrong. Summary of 10 February 2015 T.I. 2013-0484501E5 under Treaties – Art. 15.
CRA confirms that unpurchased goodwill must be valued as an asset used by an FA for purposes of determining if its shares are excluded property
The definition of "excluded property" of a foreign affiliate (FA1) includes shares of a foreign affiliate (FA2) of the taxpayer held by FA1 where all or substantially all of the fair market value of the property of FA2 is excluded property, such as property used or held by FA2 principally for the purpose of gaining or producing income from an active business carried on by it.
In this context (as well as in others such as the "small business corporation" definition), CRA considers that in this context goodwill which has been internally generated rather than purchased by a corporation qualifies as property that used by it – so that in the case of FA2, that goodwill should be taken into account in determining whether the shares of FA2 are "excluded property" of FA1. However, the requirement to determine whether such goodwill is satisfies the "principally" test may "require an apportionment of such use as between the active business of FA2 and the other activities of FA2."
Neal Armstrong. Summary of 6 March 2015 Memo 2014-0549761I7 under s. 95(1) – excluded property.
Income Tax Severed Letters 25 March 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Majority shareholders of Wheels Group agree to bear the full brunt of any proration required to constrain the overall mix of cash and share consideration paid under a Radian Logistics acquisition
Radian Logistics, a listed Delaware corporation, is proposing that its new ULC subsidiary acquire all of the shares of Wheels Group for cash or Radian Logistics shares under a Plan of Arrangement.
No rollover treatment is offered, i.e., the ULC will not issue exchangeable preferred shares. However, the Wheels majority shareholders (i.e., shareholders, including some of the individual company founders, holding 78% of the Wheels shares, who entered into a lock-up agreement with Radian) will agree to be subject to whatever proration will be necessary to ensure that those minority Wheels shareholders who validly elect for cash or Radian shares will not have their choice subject to proration. The absence of rollover treatment should be acceptable to the minority shareholders given this right to elect for full cash.
Neal Armstrong. Summary of Wheels Group Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
CRA finds that Part XIII tax withheld on a capital dividend paid to a s. 94 trust is not recoverable otherwise than through a s. 227(6) refund claim
Although a Canadian corporation is required under s. 94(4)(c) to withhold on a dividend paid by it to a non-resident trust which is deemed to be resident in Canada for various purposes by s. 94(3)(a), s. 94(3)(g) permits the trust to treat the withholding tax effectively as a Part I tax instalment if "the particular amount has been included in the trust’s income." This means that if the dividend subject to the withholding was a capital dividend, s. 94(3)(g) will not work. However, resort may instead be made to s. 94(3)(a)(viii), which provides that the Trust is recognized as Canadian-resident for purposes of "determining the liability of the trust…under Part XIII on amounts paid or credited…to the trust" – so that "an application for a refund of taxes withheld under subsection 227(6) may be appropriate."
On the other hand, s. 94(3)(g) will work to treat the Part XIII tax withheld on an ordinary dividend paid to the trust as effectively a Part I instalment payment even if the Trust is not subject to tax on this dividend as a result of distributing it and taking a s. 104(6) deduction – as the dividend amount is considered to have been included in its income.
Neal Armstrong. Summary of 25 February 2015 T.I. 2014-0517511E5 under s. 94(3)(g).