News of Note
The deeming by s. 212(3.1) of Part XIII tax on a back-to-back loan to be payable by the lender to the intermediary rather than by the intermediary may result in loss of a FAT deduction where the loan from the intermediary generates FAPI
Email this ContentWhere a subsidiary of CanCo in a Treaty-country (Treaty Co) makes an interest-bearing loan to CanCo that is funded by a non-interest-bearing loan from a subsidiary of Treaty Co in a non-Treaty country (Non-Treaty Co), s. 212(3.1)(d) deems the interest on the loan to CanCo from Treaty Co (which generally will be foreign accrual property income) to be subject to 25% withholding. There is a concern that CanCo will not receive a "FAT" deduction for this Part XIII tax under s. 91(4) given inter alia that s. 212(3.1) may deem this income tax to be payable by an entity (Non-Treaty Co) which did not earn the FAPI.
Neal Armstrong. Summaries of Mark Coleman, "Treaty Shopping and Back-to-Back Loan Rules," Power Point Presentation for 28 May 2015 IFA Conference in Calgary under s. 95(1) – foreign accrual tax, s. 212(3.1)(d) and s. 212(3.1)(c).
Superior Plus – Tax Court of Canada finds that a taxpayer which was assessed under GAAR for a loss shifting transaction was entitled to see the correspondence between CRA and Finance on the subsequently-introduced s. 256(7)(c.1)
When the Superior Plus Income Fund was converted into a public corporation, the chosen corporate vehicle was a public corporation ("Old Ballard") with substantial losses. The transactions were engineered so that there was no acquisition of control of Old Ballard by a group of persons (unless the former income fund unitholders were factually regarded as a group) and so that the former Ballard shareholders and the old assets were removed from Old Ballard.
CRA assessed inter alia under GAAR. Hogan J has found that the taxpayer (whose position includes that s. 256(7)(c.1) was originally considered as an "extension" rather than a "clarification" of the loss-streaming rules) is entitled to disclosure of a wide range of documents (and answers to questions) relating to the policy deliberations (not just the final recommendations of the GAAR Committee) that preceded the GAAR assessment of the taxpayer, and respecting CRA cajoling Finance into introducing s. 256(7)(c.1) in response to this transaction. As established in Birchcliff, the taxpayer is entitled to know the specific policies which the Minister considers to have been abused, and all these materials bore on that question.
Neal Armstrong. Summaries of Superior Plus Corp. v. The Queen, 2015 TCC 132 under s. 245(4) and s. 232 – solicitor-client privilege.
CRA administratively will permit specified foreign property acquired post-emigration to be ignored in completing a T1135 for that year
Although the "Act technically allows for the CRA to require information on specified foreign property for the entire calendar year," where a resident individual has emigrated in the year, "CRA will only require information relating to the period during which [the] individual was resident in Canada," so that "the individual can complete the Form T1135 as if the taxation year ended on the date of emigration."
Neal Armstrong. Summary of 17 March 2015 T.I. 2014-0529371E5 under s. 233.3(3).
Income Tax Severed Letters 3 June 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kruger – Tax Court of Canada decision calls into question the use of mark-to-market accounting by financial institutions for derivatives
Kruger engaged in extensive trading of FX options, mostly writing European style puts and calls, although it also purchased FX options. It was not a financial institution or subject to oversight of a financial regulator, so that CRA’s policy of letting those entities use mark-to-market a tax accounting for derivatives (which are not covered by s. 142.2) did not apply. Rip J held that "the realization principle is basic to Canadian tax law," so that’s what Kruger was required to follow. An exception was made in the case of purchased FX options, which qualified as inventory, so that accrued losses could be recognized under s. 10. However, as noted, most of the options were ones where Kruger was the writer, which Rip J viewed as liabilities rather than inventory. Rip J also was troubled that because these were European-style options, which were difficult to value, they essentially were being "marked to model" rather than marked to (any) market – although it is not clear if he would have come to any different conclusion if the options were more liquid.
At para. 115 of his reasons there appears to be an implied criticism of CRA for not applying the law (i.e., realization principle) to the banks and other financially regulated enterprises. In 2012, CRA indicated (in 2008-0289021E5) that it may no longer accommodate non-statutory mark-to-market accounting, and this case will not help.
Neal Armstrong. Summaries of Kruger Inc. v. The Queen, 2015 TCC 119, under s. 9 – timing, s. 10(1) and s. 4(1)(a).
CRA’s view of the acting-in-concert doctrine may be overly broad
CRA’s statement in Folio S1-F5-C1 that "Even when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert and therefore are not dealing with each other at arm's length" may very well be an overly expansive reading of the acting-in-concert jurisprudence. The Joint Committee expressed scepticism as well.
Neal Armstrong. Summary of Sandra Mah and Mark Meredith, "Factual Non-Arm's Length Relationships," draft version of paper for CTF 2014 Conference Report, under s. 251(1)(c).
CRA rules on a pipeline transaction for the estate of a minority shareholder of a portfolio investment company
CRA has also issued a ruling on some more complex pipeline transactions involving a minority shareholding of an estate in a portfolio investment company ("Holdco"). The other shareholders are the three surviving siblings, and trusts for the extended family. In order that the Newco used to extract the estate’s share of corporate surplus will be connected to Holdco for Part IV tax purposes, the trust which controls Holdco will acquire the voting common shares of Newco.
Neal Armstrong. Summary of 2015 Ruling 2014-0541261R3 F under s. 84(2).
CRA issues a pipeline ruling providing for the complete extraction of corporate surplus in under two years
CRA has provided a ruling on a "pipeline" transaction in which an estate holding the common shares of a portfolio investment company, whose adjusted cost base had been stepped-up on death, sells those shares to a Newco for a Newco Note, with "Investmentco" then being wound-up into Newco one year later so that the corporate assets of Investmentco can be used to pay down the Newco Note.
In addition to the fact that Investmentco only has liquid assets (which may raise greater surplus-stripping issues – see 2011 STEPs Roundtable, Q. 5 2011-0401861C6, although CRA has ruled on portfolio investment companies before – see 2013-0503611R3), what is interesting is that the ruling specifies that the note will be paid off in four quarterly instalments commencing right after the wind-up - whereas most previous rulings as published have been vague or indefinite as to the repayment schedule. (The ruling expressed the times in alphabetic form - "one year" and "each trimester" - rather than in Arabic form, which seems to be automatically redacted.)
Neal Armstrong. Summary of 2015 Ruling 2014-0559481R3 F under s. 84(2).
CRA treats the activities of a corporation as being transparent for Indian Act purposes
CRA found that the portion of capital gains realized by status Indians on their sale of shares of a corporation - whose head office and management were based in a reserve – that was exempt, should be determined by the portion of the management and other income-generating activities located on the reserve.
Neal Armstrong. Summary of 4 February 2015 Memo 2014-0520721I7 under Indian Act, s. 87.
Vine Estate – Federal Court of Appeal leaves open the question whether neglect for statute-barring purposes must be that of the taxpayer itself rather than its accountants
The general sense of a complex reporting and audit history is suggested by indicating that an estate filed what it later alleged was an amended return correcting a previous failure to report recapture of depreciation - but which hid this element of that "amending" return from CRA’s attention (so that it did not reassess for the recapture within the normal reassessment period).
Not a winner case. Webb JA found that even if CRA had been able to discover the correction in the "amended" return, this would not have had the effect of clearing the negligent misrepresentation in the original return – so that the estate could be reassessed for the missing recapture beyond the normal reassessment period. This might be regarded as the flip side of a mooted proposition that if a return is filed without neglect, there is no obligation to file an amended return for a subsequently discovered error.
Webb JA indicated that as the estate should have noticed that the property to which the recapture related was not listed in the original return, it was not necessary for him to decide whether he agreed with Campbell J below (who, in turn, followed Aridi) that neglect etc. (for purposes of opening up statute-barred years) had to be that of the taxpayer (the estate) rather than only of its accountants.
Neal Armstrong. Summaries of Vine Estate v. The Queen, 2015 FCA 125 under s. 152(4)(a)(i) and General Concepts – Onus.