News of Note
Charania - Tax Court of Canada applies unintended and unarticulated price adjustment clause
Email this ContentAn individual shareholder of a corporation thought that he was the beneficial owner of his home, but everyone else, including his accountants (and ultimately the Tax Court) considered that it was beneficially owned by the corporation. Immediately before his sale of the home at a gain, it was transferred to him by the corporation, with the excess of its book value over the outstanding mortgage amount being booked as a shareholder advance to him.
In reversing a shareholder benefit assessment of the taxpayer equal to the excess of the property’s fair market value over its book value (and stating an "understanding" that the shareholder loan amount would be increased by this difference), VA Miller J found that the failure to debit the shareholder loan account with the higher FMV-based amount was an obvious error (which the taxpayer did not sanction because he was unaware of it) and that there was no intention to confer a benefit.
This goes beyond CRA’s policies (in S4-F3-C1) on price adjustment clauses given that no agreement to transfer at FMV was documented at the time and, in fact, one of the parties was not even aware that he was purchasing the property from the other.
Neal Armstrong. Summary of Charania v. The Queen, 2015 TCC 80, under s. 15(1).
CRA offers streamlined procedure for validating historical GST/HST s. 156 (nil consideration) elections
Since January 1, 2015, group registrants wishing to make an ETA s. 156 election for qualifying supplies between them to be made at deemed nil consideration have been required to file their elections with CRA rather than merely signing them and keeping them on hand. In the case of elections which were made in the old (unfiled) way before January 1, 2015, there is a requirement to file a new election form (on RC4016) with CRA by January 1, 2016.
In order to permit group members to avoid multiple filings, CRA is offering a streamlined procedure under which group members that have existing elections with differing effective dates now only need to file one Form RC4616 indicating December 31, 2014 as the effective date – with CRA effectively ignoring this date provided that the old election forms showing the actual earlier effective dates are retained on file by them.
CRA also has changed its services standard, from responding to GST/HST ruling or interpretation requests (that are not highly technical or precedent–setting) within 45 days of receipt, to so responding within 45 days of receiving all relevant facts and supporting documentation.
Neal Armstrong. Summary of Excise and GST/HST News - No. 95 under ETA – s. 156(2).
Canadian funds which are hybrid entities for FATCA purposes face a dilemma in completing W-8 forms
There are three approaches for a Canadian fund to deal with the situation where it is a hybrid entity for FATCA purposes (i.e., an entity which is a reporting Canadian financial institution for purposes of the Canada-U.S. inter-governmental agreement but a non-financial foreign entity for ITA purposes):
- be timid: register on the IRS portal as, and state on Forms W-8 that it is, a reporting "Model 1" foreign financial institution - and fully comply with the related reporting requirements;
- be bold: take the view that its IRS status is determined by its ITA status when reporting its status (under penalty of perjury) to U.S. withholding agents; or
- be Canadian: register with the IRS and complete W-8s as described in 1 above - but not comply with its the related reporting requirements (on the basis that it will not be subject to FATCA withholding until the IRS affirmatively declares it to be a nonparticipating financial institution).
Neal Armstrong. Summary of Matias Milet, "FATCA and Canadian Investment Entities," Journal of International Taxation, March 2015, p. 29 under s. 263(1) – listed financial institution – (j).
CRA treats a transfer from one testamentary trust to another pursuant to a will direction as a non-tainting contribution from the deceased
If a testator’s will directs that the residue of a spousal trust created under the will be transferred, on the death of the spouse, to a second trust for their child, also established under his will, would this transfer cause the child trust to cease to be a testamentary trust? The testamentary trust definition in s. 108(1) requires that this transfer to it be considered to be a contribution to it by the deceased as a consequence of his death, and s. 248(8)(a) provides that a transfer of property as a consequence of the terms of the will is deemed to be a transfer as a consequence of the deceased’s death (but doesn’t explicitly deem the transfer of the property from the spousal trust to be a transfer made instead by the deceased).
CRA likely will treat the transfer to the child trust as a transfer made to it by the deceased, notwithstanding that this transfer occurred subsequently to his death and in fact was made by the spousal trust – so that the child trust likely will continue to qualify as a testamentary trust.
Neal Armstrong. Summary of 16 December 2014 T.I. 2014-0539841E5 F under s. 108(1) – testamentary trust.
6379249 Canada Inc. – Tax Court of Canada states that even a “slight” product improvement can qualify as SR&ED
The taxpayer suspended its sales of a new product (a miniature portable printer) when it realized there were problems with curling paper and battery life. Its remedial efforts qualified (per D'Auray J) as experimental development given that the technical solutions were quite unclear, "work will qualify for SR&ED ITC purposes if there is a slight improvement to…products, or processes," and "the filing of…documents proving a systematic investigation is not a requirement."
Neal Armstrong. Summary of 6379249 Canada Inc. v. The Queen, 2015 DTC 1109 [at 638], 2015 TCC 77, under s. 248(1) – SR&ED.
CRA rules that interest on NVCC sub debt is not participating debt interest for withholding purposes
Canadian banks such as Royal Bank and BMO have issued Basle III-compliant "non-viable contingent capital" sub debt, which looks like conventional debt except that it will be automatically converted into common shares, at the point of any "non-viability" as defined by OSFI (subject to regulatory discretion), based on a predetermined conversion formula which caps the number of common shares that may be issued, so that the holder potentially could suffer a loss.
CRA has ruled that this automatic conversion feature does not detract from current interest deductibility, or cause the interest to be participating debt interest for withholding tax purposes.
Neal Armstrong. Summary of 2014 Ruling 2014-0523691R3 under s. 212(3) – participating debt interest.
CRA confirms that the FAT reinstatement rule applies on a year-by-year basis
Reg. 5907(1.4) provides that a payment made by one foreign affiliate (earning foreign accrual property income) within a consolidated group to another in respect of the foreign income taxes it has saved through in effect accessing a group company's active business loss will not be deemed to be foreign accrual tax because that loss was not a foreign accrual property loss. Regs. 5907(1.5) and (1.6) typically allow for reinstatement of the denied FAT deduction when in a subsequent year the active business loss is applied against active business income of that year.
Not surprisingly, CRA has confirmed that when this occurs, the Canadian taxpayer in question will get a FAT deduction (under s. 91(4)) in that subsequent year rather than in the original year.
Neal Armstrong. Summary of 6 February 2015 T.I. 2014-0542281E5 under Reg. 5907(1.5).
Income Tax Severed Letters 8 April 2015
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that rodents are best eaten
CRA now construes "livestock" more narrowly than as stated in IT-427R, so that it considers that raising rodents qualifies as farming only if they are sold as food rather than as pets.
Neal Armstrong. Summary of 13 March 2015 T.I. 2015-0564611E5 under s. 248(1) – farming.
CRA rules on CCPC split-up which was structured to avoid Part IV tax circularity
Where the distributing corporation (DC) in a butterfly is a Canadian-controlled private corporation with refundable dividend tax on hand, a circular computation of Part IV tax under s. 186(1)(b) arises if the butterfly mechanics entail it both paying and receiving a deemed dividend from the transferee corporation (TC), as the resulting generation of a dividend refund to it will trigger Part IV tax and an RDTOH addition to TC which, in turn, will trigger Part IV tax and a dividend refund on the deemed dividend going the other way, and so on.
In a butterfly reorganization for the split-up of DC into three TCs, this circularity problem was solved by having DC transfer its properties to respective new Subcos of each TC, so that no s. 186(1)(b) Part IV tax was generated on the redemption of the prefs received by DC as consideration on this transfer. The Subcos then were wound-up into the respective TCs, and DC was wound-up under s. 88(2) into the TCs, with s. 186(1)(b) applying non-circularly to the resulting s. 88(2)(b)(iii) deemed dividends.
Neal Armstrong. Summary of 2014 Ruling 2013-0513211R3 under s. 55(1) – distribution.