News of Note
CRA surmounts technical hurdles and provides favourable responses at the 2015 IFA Roundtable
Email this ContentHighlights from the CRA Roundtable held at the 2015 IFA Conference include:
Q.1 CRA accepts that GWL confirms that there can be a hedge of a net investment where a sufficient linkage can be demonstrated with the underlying hedged assets. CRA will defer providing more comprehensive comments until cases in the pipeline are decided.
Q.2 The GAAR Committee recently approved the application of GAAR to some Treaty shopping cases.
Q.3 CRA recently has been considering whether Florida Limited Liability Limited Partnerships and Florida Limited Liability Partnerships are partnerships under its standard two-step approach, given that their limitation of liability goes beyond that available to Canadian limited partners, and they can convert into an LLC without any change in the ownership of their property.
Q.4 In an extension of its favourable approach in 2013-0488881E5, CRA considers that surplus balances can be apportioned between application to notional dividends made for purposes of eliminating income inclusions under s. 90(9) and application to actual dividends (or deemed pre-acq dividends due to s. 5901(2)(b) elections).
Q.5 CRA will be guided by the policy of the back-to-back loan rules in determining whether a particular debt (by Canco to an intermediary) became owing because an intermediary debt (of the intermediary to a suspect non-resident) was entered into or kept outstanding.
Q.6 CRA, in reversing 2013-0496841I7, concluded that an interest-bearing note was acquired for the purpose of earning income from shares, as required by s. 95(2)(a)(ii)(D), as the note was acquired in order to immediately contribute it to a foreign subsidiary, thereby enhancing the dividend-earning potential of the shares held in that subsidiary.
Q.7 CRA is prepared to interpret the combined operation of Regs. 5905(7.2) and (3), in the situation where FA2, with an exempt deficit and holding FA2 with exempt surplus, is merged into FA1, which has exempt surplus and is the survivor of the merger, so that the exempt deficit of FA2 is not deducted twice in computing the exempt surplus of the merged FA.
Q.8 Where Canco makes a functional currency election before 2016 (the expiry of the s. 39(2.1) rule for letting upstream loans be repaid without giving rise to FX gains), CRA considers that FX gains arising under s. 261(10), respecting the portion of an FX gain on the loan that had accrued before the beginning of the first functional currency year, can also be eliminated under the s. 39(2.1) rule provided that the two companies have the same year end.
Q.9 The s. 95(2)(i) rule is not restricted to money borrowed by the foreign affiliate in question, and also can apply to a note that it issued to acquire qualifying property, or to debt assumed by it on such a purchase.
Q.10 CRA considers that when there is an acquisition of control of a CRIC’s non-resident parent, so that the CRIC steps up the cost of its shares of a foreign affiliate under s. 111(4)(e)(ii), this will represent an investment under the foreign affiliate dumping rules – but as no property would thereby be transferred to the FA, the deemed dividend arising under s. 212.3(2) would be nil.
Q.11 Interest on money borrowed by FA1 (whose only activity is an active business) from FA2 in order to distribute accumulated profits will qualify under s. 95(2)(a)(ii)(B).
Q.12 In a situation where the meaning of the English and French versions of the Swiss-Canada Treaty differs, the version which produces the most favourable result to the taxpayer should be applied.
Neal Armstrong. Summaries under 2015 IFA Roundtable.
Former Finance analyst intimates that the Canadian thin cap rules may be expanded in light of the BEPS process
In an IFA-conference presentation this morning on BEPS by Phil Halvorson, who was seconded to Finance until 1 May 2015, but was speaking in a non-representative capacity, he indicated that the topic that the greatest attention should be paid to by the Canadian tax community was that of interest deductibility. Finance has an interest in expanding and modernizing the scope of the Canadian thin cap rules and is "keenly" interested in how this is being addressed under BEPS.
Neal Armstrong. Summary of Halvorson presentation under Roundtables – 2015 IFA Conference.
Joint Committee makes submissions on proposed s. 55 amendments
In a further comment on the 2015 Budget proposals, the Joint Committee has submitted that the proposed s. 55(2.1)(b)(ii) will create significant uncertainty respecting routine cash movements within Canadian corporate groups, a concern which has been magnified by the narrowing of the s. 55(3)(a) safe harbour to cover only s. 84(3) deemed dividends. Leaving aside suggestions to change the rules’ broader thrust, they recommend that s. 55(2.1)(b)(ii) apply only to "loss shares" (consistently with the primary motivation to override D&D planning), that the amendments clarify that routine intra-group cash transfers are not subject to the proposals, and that s. 55(3)(a) revert to covering all dividends. A detailed suggested redraft is appended.
The proposed removal of s. 55(2)(b) could result in over-inclusions in income or double taxation. For example, if a share with and FMV, ACB and PUC of $100, $60 and $10 is redeemed, under the proposals it would have a capital gain of $90 rather than $40. Other recommendations in the excellent submission include that the stock dividend proposals not apply to a stock dividend paid in shares of the same class (which would avoid brain damage in normal public company stock dividends).
Neal Armstrong. Summary of 2015 Budget s. 55 rules under Joint Committee Submissions.
The UnitedHealth Group acquisition of Catamaran will partially side-step Canada by investing up to U.S.$5B of the purchase price in a Catamaran LLC subsidiary, with that cash being indirectly distributed to the Catamaran shareholders as share redemption proceeds
It is proposed that Catamaran, a Canadian public company with a U.S.-focused pharmacy claims management business, will be acquired under a Yukon Plan of Arrangement by a B.C. ULC subsidiary of UnitedHealth Group, a public Minnesota corporation. Each Catamaran shareholder will receive $61.50 per common share in cash. However, in order to accomplish a partial "de-sandwiching" of the resulting structure, the cash proceeds will be bifurcated. Approximately $18 to $24 per share (or $3.7B to $5B in total) will be received as a result of a (presumably non-Canadian) subsidiary of UnitedHealth Group lending to an indirect LLC subsidiary of Catamaran, with those funds being indirectly distributed to Catamaran which, in turn, will distribute those funds to its shareholders as redemption proceeds for preferred shares which were issued to them under a s. 86 reorg.
The balance of the cash will be paid by the (B.C. ULC) purchaser for the "Class X" common shares of Catamaran (also issued under the s. 86 reorg.) Catamaran apparently is a "10(f) corp" for purposes of the foreign affiliate dumping rules.
For U.S. purposes, this bifurcated transaction likely will be viewed as an integrated transaction, i.e.., the preferred share redemption proceeds will be treated as part of the sales proceeds, rather than as a dividend (to the extent of current or accumulated E&P) – and the Plan of Arrangement requires the parties to follow this treatment for U.S. purposes.
Neal Armstrong. Summary of Catamaran Proxy Statement under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Income Tax Severed Letters 27 May 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee releases its submissions on synthetic equity arrangements and Reg. 102 withholding
Two Joint Committee submissions on 2015 Budget proposals have been released.
- The synthetic equity arrangement rules may capture dividends (e.g., safe income dividends) paid to a vendor during the period between the date of agreeing to sell shares and the closing
- Issues respecting the proposed relief from source deductions for non-resident employees working for non-resident employers relate inter alia to gaps between the Reg. 400 definition of a permanent establishment (used in the proposals) and the different Treaty definitions (e.g., the services PE in the Canada-US Treaty), how to apply a rule that presence in Canada must be less than 90 days in any 12 month period, vagueness respecting employer "certification" and application of the rule to LLCs.
Neal Armstrong. 26 May 2015 submissions under Joint Committee Submissions.
CRA finds that the “extension” of an agreement one day after its expiry could result in a new agreement
The phase-out rules for the overseas employment tax credit provide limited relief for a contract "committed to in writing before March 29, 2012." CRA was asked if this relief would apply if an agreement to extend a grandfathered agreement was entered into on January 1, 2013, being one day after the original term of that agreement expired. CRA stated:
Where the extension of a contract is agreed to on a date that occurs after the original contract has already expired…we would generally be of the view that the parties have entered into a new contract rather than merely extending the old contract unless the taxpayer can demonstrate otherwise under the governing private law.
It is not clear what to make of this response given that CRA stooped to engage with the unsophisticated manner in which the question was formulated. However, whenever an agreement is amended, it would be a good idea for the amending agreement to be dated before the expiry date for the original agreement.
Summary of 30 January 2015 T.I. 2014-0521751E5 under General Concepts – Transitional Provisions.
Vendor partnerships may not be able to access a safe harbour from application of the restrictive covenant rules – but this may not matter as it very well may be reasonable to allocate nil to a restrictive covenant under general principles
A safe harbour from the potential application of s.68 to a non-compete may require that consideration be received by either the "taxpayer" (defined to include a partnership) or an "eligible corporation" of the taxpayer. This requirement will not be satisfied if the taxpayer is a trust and beneficiaries, or the trustees in their personal capacities, are expected to grant the covenant. If partners of a partnership grant the covenant, issues arise under a potential requirement to allocate to each partner that portion of "goodwill amount" proceeds that is consideration for the non-compete covenant granted by that partner. For example, if a $1 million goodwill amount received by a partnership with three equal partners is allocated equally to them, will this requirement be satisfied if 90% of the goodwill amount is actually attributable to only one partner’s non-compete?
A further safe harbour requirement, that no proceeds be received for the non-compete covenant, should not be violated by virtue of a sale agreement reciting that the restrictive covenant is integral to the agreement and was granted to maintain the value of the sold assets. Not allocating any portion of the sales proceeds to the covenant should not detract from its enforceability.
An exclusion from the safe harbour where s. 84(3) "applies" to the transaction can be engaged in a hybrid transaction (including one not giving rise to a deemed dividend) or a safe income strip.
If the safe harbour is not available, "there would appear to be significant support for the position that two reasonable business persons would agree to allocate nil or nominal consideration to a restrictive covenant." The reasonableness of a nil allocation may be buttressed if the parties could (had they made an election) have achieved the same effective result under s. 56.4(3).
Neal Armstrong. Summaries of Michael Coburn, "Practical Strategies for Dealing with the Restrictive Covenant Provisions," draft version of paper for CTF 2014 Conference Report under s. 56.4(7)(b), s. 56.4(7)(d), s. 56.4(7)(e), s. 68(c), s. 56.4(3)(b), s. 56.4(2) and s. 56.4(1) – restrictive covenant.
CRA clarifies the application of the zero-rating and place-of-supply rules to charter flights
Points made by CRA in its new Info Sheet on charter flights include:
- A "stopover," a concept which bears on when flights are zero-rated, e.g., for "continuous journeys" whose origin or termination is outside Canada or the continental U.S., as well as on the place-of-supply rules for provincial HST purposes, is considered by CRA not to include a stop of less than 24 hours between two legs of a journey.
- The concept of a "continuous journey," whose definition requires that all related "tickets or vouchers’’ be issued by one supplier or agent, also is expanded by a CRA view that "a document that contains all the information commonly found on a ticket" should be treated as a ticket.
- CRA considers that most charter flights are supplies of a "passenger transportation service," although a mere leasing or licensing of an aircraft does not so qualify.
- The usual single-supply doctrine applies so that, for example, a charge for ferrying a plane from another city to the embarkation point for the charter flight and various airport charges which the carrier has no choice but to incur will be part of the consideration for the passenger transportation service provided by the carrier.
Summaries of GST/HST Info Sheet GI-170 "Charter Flights Supplied to Third-Party Charterers" under Sched. VI, Pt. VII, s. 1(1) – stopover, s. 1(1) – continuous journey, s. 3 and s. 4.
CRA reiterates that the lease/purchase distinction is based on legal rather than economic substance
Before noting that a lease of a transport truck was not eligible for a s. 16.1 election, CRA stated:
[T]he determination of whether a contract is a lease or a sale for income tax purposes is based on the legal relationships created by the terms of the particular agreement, rather than the underlying economic reality. In the absence of a sham, a lease is a lease and a sale is a sale.
Neal Armstrong. Summary of 28 April 2015 T.I. 2015-0566011E5 under s. 16.1(1).