News of Note
CRA continues to consider that costs incurred respecting capital raises to fund an operating subsidiary are not creditable under ETA s. 186(1)
Email this ContentMemorandum 8.6, para. 11, Example 3, indicates that “HoldCo” may not claim input tax credits under ETA s. 186(1) for legal and accounting costs incurred in connection with raising money through issuing shares, even where the issuance proceeds are used to purchase additional shares in “OpCo,” all of whose property is acquired for consumption, use or supply in widget manufacturing - on the basis that the services are acquired for consumption or use in relation to the first order supply (the share issuance) and not in relation to the shares of OpCo. Although this approach was rejected by the Tax Court in Stantec, CRA will not revise this example, stating that the Tax Court decision was an informal procedure case and that its approach on this issue was not dealt with on the appeal to the Federal Court of Appeal.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 17 under ETA s. 186(1).
Income Tax Severed Letters 20 January 2016
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Birch Hill – Ontario Superior Court of Justice refuses to rectify stock option transactions on the basis that the s. 110(1)(d) deduction was peripheral to the larger sale transaction
Ten executives who were denied the ½ s. 110(1)(d) deduction for their $17 million stock option benefit on the basis inter alia that they had sold the shares acquired by them on exercise of their options to a specified person (who on-sold to the arm’s length purchaser of the corporation, namely, Rogers), rather than directly to Rogers, were denied a rectification of the sales agreement to add them as parties to it and to provide for the transfer by them of their optioned shares directly to Rogers. Dunphy J found that there was “insufficient evidence… of an initial mutual ‘mistake’ as to a dominant or even important issue to the [sale] transaction itself,” noting that “I cannot characterize as a mistake a matter which was simply too insignificant to the parties to make its way on to the radar screen when they were negotiating their $425 million transaction.”
Although CRA did not contest the rectification application, it also took the position that the shares were not prescribed shares because the Board on liquidation had the discretion to establish a fixed liquidation amount for the shares, and reserved the right to maintain its denial of the s. 110(1)(d) deduction on this alternative basis . This was a further ground for denying rectification, i.e., the proposed “fix” might not be effective.
Neal Armstrong. Summaries of Birch Hill Equity Partners Management Inc. v Rogers Communications Inc., 2015 ONSC 7189, under General Concepts - Rectification and Reg. 6204(1)(a).
Green – Tax Court of Canada finds that limited partnership losses flow through a 2-tier LP structure
Paris J found that the business losses of a limited partnership allocated to an upper-tier partnership in excess of its at-risk amount continue to be business losses in its hands, so that such losses can, in turn be allocated to the partners in the upper-tier partnership – so that, if the at-risk amount rules apply, it is only to restrict the losses that are allocated to the partners in the upper-tier partnership. This runs contrary to CRA positions (2012-0436521E5, 2004-0107981E5, 2004-0062801E5 and 5-94077) that business losses generated in a lower-tier limited partnership effectively can be extinguished.
Paris J thought that the Crown was reading too much into s. 96(2.1)(c), which provides that a business loss in excess of the at-risk amount “shall not be deducted in computing the taxpayer’s income for the year.” The upper-tier partnership (like other partnerships) only computes income for purposes of allocating it to its partners and is not itself a taxpayer for computing income under s. 3, so that s. 96(2.1)(c) does not apply to deny the recognition of business losses in the hands of the upper tier partnership for such computation purposes. Conversely, s. 96(2.1)(e), which deems the excess business loss to be a limited partnership loss, is intended to operate only at the level of a taxpayer who is required to compute income and taxable income, i.e., only at the level of the partners in the upper-tier partnership.
Neal Armstrong. Summary of Green v. The Queen, 2016 TCC 10, under s. 96(2.1).
Lupien – Tax Court of Canada finds that a distributor earning significant relative profits had no goodwill
Shortly before a corporation (“Antoni”) sold all its assets to a third party, it acquired all the assets of a corporation (“LCR”) owned by its shareholder’s brother, which had been distributing one of its imported product lines in North America. Although LCR earned a significant portion of the combined profits, Lamarre ACJ found that the assets so acquired from LCR did not include any valuable goodwill given inter alia that there was no evidence of a distributorship agreement with LCR that could not be terminated on short notice and that the asset sale agreement between LCR and Antoni had not listed goodwill as a transferred asset. As the consideration paid by Antoni was inflated, s. 160 applied to make LCR liable for Antoni’s unpaid taxes (jointly with LCR’s shareholder given subsequent dividends to him).
Neal Armstrong. Summary of Lupien v. The Queen, 2016 CCI 2, under General Concepts - fair market value – other.
CRA considers that payment by a spousal trust of life insurance premiums on the spouse’s life disqualifies the trust
One of the requirements to have a good spousal trust is that noone other than the spouse obtain the use of trust capital or income before the spouse’s death. CRA considers this requirement to be violated where a purported spousal trust pays insurance premiums on the spouse's life even though the life insurance proceeds will not be paid out until the spouse’s death.
Neal Armstrong. Summary of 16 November 2015 T.I. 2014-0529361E5 under s. 73(1.01)(c).
Leibovich – Tax Court of Canada finds that accommodations at a private school for students with special needs were not major enough to qualify the tuition as a medical expense
The tuition fees for a student who suffered from “Central Auditory Processing Dysfunction” did not qualify as a medical expense under s. 118.2(2)(e) given that major adaptations were not necessary (or recommended in the related clinical report) to accommodate him (and other students with learning disabilities) at the school.
Neal Armstrong. Summary of Leibovich v. The Queen, 2016 TCC 6 under s. 118.2(2)(e).
Big Bird Trucking – Tax Court of Canada finds that drivers regularly hired on a per-load basis were independent contractors
C. Miller J. found that three particular drivers regularly hired by a trucking company, but on a per-load basis, were independent contractors for EI and CPP purposes notwithstanding that the company provided the trucks and insurance, stating:
There is a lack of commitment on either side, a lack of security, a lack of continuity and inherent risk that one seeking employment would find unattractive… .
Neal Armstrong. Summary of Big Bird Trucking Inc. v. M.N.R., 2015 TCC 340, under s. 5(1).
The new form for qualifying non-resident employer certification requires only basic details
On January 12, 2016, CRA released the form for (Treaty-exempt) non-resident employers to apply for certification as "qualifying non-resident employers" so as to be exempt from source deduction requirements on remuneration paid to "qualifying non-resident employees" (broadly, Treaty-exempt non-resident employees who work in Canada for less than 45 days in the calendar year of payment or are present in Canada less than 90 days in any 12-month period that includes the payment time). The RC473 form must be filed by the end of February 1, 2016 in order for certification to be treated as retroactive to January 1, 2016.
The applicant non-resident employer is not required to provide employee details or any travel data, so that the form mainly serves as a notification to CRA that the non-resident employer will have non-resident employees working in Canada during the certified period.
Neal Armstrong. Summaries of RC473 Application for Non-Resident Employer Certification and PWC, “New Non-Resident Employer Certification program: Payroll withholding relief for foreign employers with frequent business travellers to Canada” Tax Insights, Issue 2016-02, 15 January 2016 under s. 153(7).
Lloyds Bank decisions suggest that structured transactions have tax reductions as one of their main objects
In IRC v Brebner (1967), 43 TC 705 (HL), Lord Upjohn stated:
"... when the question of carrying out a genuine commercial transaction ... is considered, the fact that there are two ways of carrying it out—one by paying the maximum amount of tax, the other by paying no, or much less, tax—it would be quite wrong as a necessary consequence to draw the inference that in adopting the latter course one of the main objects is ... avoidance of tax.
Following the Lloyds Bank decisions ([2014] EWCA Civ 1062, remitted to [2015] UKFTT 401) dealing with an anti-avoidance provision which was engaged if the obtaining of a writing-down allowance of 25% was “one of the main objects" of ship-leasing transactions, a U.K. writer has inferred that
the courts have now made it difficult for taxpayers to show that tax is not "a main object/purpose" in any situation where they have taken tax advice, and elected to adopt a more rather than less tax-efficient structure for a commercial transaction.
Neal Armstrong. Summaries of Michael McGowan, "HMRC v Lloyds Bank Leasing (No 1) Ltd: the troublesome increase in the scope of the "sole or main object" test", [2015] British Tax Review (Thomson Reuters (Professional) UK Limited), 2015, No. 5, p. 649 under General Concepts – Intention and s. 83(2.1).