News of Note
The Canadian competent authority generally will grant an S corp agreement
Email this ContentDual resident individual shareholders of an S Corp can apply to the Canadian competent authority under Art. XIX, para. 5 of the Canada-U.S. Treaty for an agreement to have the S Corp treated for Canadian purposes as a controlled foreign affiliate earning foreign accrual property income. This permits the Canadian and US income to be synchronized so as to avoid loss of Canadian foreign tax credits.
By implication, the competent authority generally will grant the request as a matter of course unless "the shareholder does not submit the information requested by a competent authority or the Canadian shareholder is seeking to revise his Canadian tax reporting for past years." It is acceptable (although not encouraged) for the shareholder to request an S Corporation agreement and then file the Canadian returns in the expectation that an S Corporation agreement ultimately will be provided.
Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.4 under Treaties – Art. 29.
CRA maintains its position that redeemable prefs are equity for thin cap purposes
CRA has confirmed its position that (absent something wonky which it has not seen) it will treat redeemable preferred shares as equity rather than debt for thin cap purposes notwithstanding the proposals in the new ASC Exposure Draft.
Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.3 under s. 18(5) – equity amount.
CRA considers that all of a deceased’s property on death after 2015 is initially one graduated rate estate
Notwithstanding what arguably is an implication to the contrary in para. (e) of the definition of graduated rate estate, CRA considers that a deceased has only one estate encompassing all of his or her property wherever it may be situated, and that this is so even if there are multiple wills with different executors.
Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.2(a) and Q.2(b) under s. 248(1) - graduated rate estate.
CRA rules on transactions where a mine which was planned to be restarted was represented to be excluded property
S. 95(2)(e) generally provides a rollover at the relevant cost base where a foreign affiliate is wound up into another, but not for the wind-up of a partnership – even apparently where the wind-up of the partnership occurs by operation of law as a result of its two FA partners being wound up into their FA parent.
In this general situation, CRA gave a ruling that a distribution of the assets of a mine held by the partnership did not give rise to foreign accrual property income provided that the assets were excluded property. The mine in question had been previously shut down, but now further reserves had been identified and there was a plan to resume operations.
Summary of 2015 Ruling 2014-0536661R3 under s. 95(1) – foreign accrual property income.
CRA finds that lease termination damages received by a non-resident lessor were subject to Part XIII tax
In Transocean, the Federal Court of Appeal found that damages received by a non-resident lessor of a boat for repudiation of the lease before its commencement were received by it in lieu of rent, so that the payment was subject to Part XIII tax under s. 212(1)(d). CRA has applied Transocean to find that a lump sum received by a non-resident lessor of property pursuant to a liquidated damages clause for termination of a lease of Canadian property to a Canadian lessee was subject to withholding.
Neal Armstrong. Summary of 10 March 2015 Memo 2015-0574291I7 under s. 212(1).
Fairmont Hotels – Ontario Court of Appeal confirms that rectification can give effect to an original intention to produce a tax-neutral result - but in a different way
As part of a larger intercompany "reciprocal loan arrangement," a Canadian Fairmont company (FHIW Canada) held U.S. dollar denominated prefs of a U.S. subsidiary which had been financed by matching U.S. dollar denominated prefs in its capital. As a result of a subsequent indirect acquisition of control, there was a s. 111(4)(d) write-down in FHIW Canada’s hands of the prefs held by it reflecting the depreciation of the U.S. dollar, without any ability to eliminate the corresponding accrued FX gain on the prefs in its capital. The fact that FHIW Canada was no longer hedged from a Canadian tax perspective was temporarily forgotten when this structure was unwound a year later through inter alia a redemption of the two matching sets of prefs, so that FHIW Canada realized a s. 39(2) gain on redeeming the prefs in its capital.
In rectifying this redemption to treat it instead as a loan by FHIW Canada to its parent, Newbould J found that there had been a continuing intention for the reciprocal loan arrangement to be tax neutral, and that "the purpose of the … unwind of the loans was not to redeem the preference shares of FHIW Canada … but to unwind the loans on a tax free basis."
The Ontario Court of Appeal has dismissed the Crown’s appeal. Simmons JA stated that "Juliar … does not require that the party seeking rectification must have determined the precise mechanics or means by which the party’s settled intention to achieve a specific tax outcome would be realized," so that it was sufficient that Fairmont’s "settled tax plan" at the time was to achieve "tax neutrality in its dealings with Legacy and no redemptions of the preference shares."
This is inconsistent with the approach in Harvest Operations and Graymar (both in Alberta), suggesting that the rectification "fix" should accord with a specific plan that was in place at the closing.
Neal Armstrong. Summary of Fairmont Hotels Inc. v. A.G. Canada, 2015 ONCA 441 under General Concepts – Rectification.
CRA finds that euro and U.S.-dollar-denominated shares of a foreign affiliate are separate classes of shares
S. 90(2) deems a "pro rata" distribution on all the shares of a class of shares of a foreign affiliate (other than on a liquidation, redemption or QROC distribution) to be a dividend. FA’s articles provided that its share capital was divided into euro-denominated and U.S.-dollar-denominated shares and that when a dividend was declared on all its shares, the dividend would be paid in proportion to the paid-in capital of the respective shares expressed in euros or U.S. dollars – so that, for example, where the euro had appreciated relative to the U.S. dollar, the euro-denominated shares would receive more on a per share basis.
CRA ruled that FA would be considered to have two classes of shares, with the distribution on each class satisfying the pro rata test in s. 90(2). This might be regarded as the flip side of a CRA position that shares labelled as two classes of shares will be regarded by CRA as one class if their substantive attributes are the same (see, for example, 2013-0495821C6).
Neal Armstrong. Summary of 2015 Ruling 2014-0527961R3 under s. 90(2).
Income Tax Severed Letters 17 June 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
True North REIT proposes a Deferred Unit Plan that gives the right to receive REIT units before retirement
The safe harbor from the salary deferral arrangement rules provided in Reg. 6801(d) for deferred share unit plans is only available for corporations and not REITs. However, much the same thing can be accomplished by issuing qualifying participants "deferred units," which essentially are options to acquire REIT units at a nil exercise price. In IT-113R4, para. 6, CRA accepts that an option can qualify for treatment under the s. 7 rules (i.e., no recognition of employment income until exercise) even if the option can be exercised without the payment of monetary consideration.
Given that a REIT Deferred Unit Plan need only comply with the s. 7 rules, it can depart from what would be permitted under a DSU. For example, the currently proposed Deferred Unit Plan of True North REIT provides that a participant can redeem 20% of his or her Deferred Units every five years.
Neal Armstrong. Summary of Circular of True North Apartment REIT under Other – Deferred Unit (or RUR) Plans.
Hypercube - software bugs did not constitute technological uncertainty sufficient to qualify a software project as SR&ED
Lamarre ACJ found that the taxpayer's development of code analysis software for websites did not qualify as SR&ED. All problems encountered on the project were "resolved in the end by using recognized programming techniques to modify the program’s code."
Neal Armstrong. Summary of Hypercube Inc. v. The Queen, 2015 TCC 65 under s. 248(1) – scientific research & experimental development.