News of Note
CRA finds that “holding” does not include indirect holding
Email this ContentThe definition of a mutual holding corporation in s. 139.1 (a provision which most of us are equally familiar with) requires that the corporation "hold" shares of an insurance corporation. Per CRA, "holding" does not include indirect holding.
This corroborates the proposition that provisions, such as the portfolio investment entity definition in s. 122.1 (now used in the draft s. 251.2 investment fund definition), which refer to holding specified property, do not include property which is beneficially owned by a subsidiary or other investment. In contrast, s. 88(1)(c.2)(iii)(A) refers to a direct "or indirect" interest.
Neal Armstrong. Summary of 25 September 2014 T.I. 2012-0451411E5 F under s. 139.1(1) – mutual holding corporation.
CRA generally requires full source deductions on LTD payments made to a former Canadian (now U.S.-resident) employee notwithstanding 15% Treaty limit
Long-term disability payments made by a Canadian employer to an employee who, after becoming disabled, became a U.S. resident, would be considered by CRA to be remuneration ("because they would be amounts arising out of the employment relationship") and therefore usually would be subject to regular source deductions under Reg. 102.
However, the term the term "pensions" is defined in Art. XVIII of the Treaty to include "an amount paid under a sickness, accident or disability plan." Accordingly, the U.S. resident "could file a Canadian income tax return in order to obtain a refund of any withholdings made in excess of the 15% amount specified in paragraph 2 of Article XVIII."
Neal Armstrong. Summaries of 26 September 2014 T.I. 2014-0531441E5 under s. 115(2)(c) and Treaties – Art. 18.
Income Tax Severed Letters 22 October 2014
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kondor – Tax Court of Canada finds that legal fees incurred in order to preserve an illiquid investment were non-deductible capital expenditures
The taxpayer incurred legal fees in order to protract the settlement of claims of his separated wife. Although this sounds like a personal matter, Graham J found that the fees had been incurred in order to avoid having to liquidate a private company investment on a disadvantageous basis, so that they were incurred for an income-producing purpose. However, as by the same token, the fees were incurred to preserve a capital asset, they were non-deductible capital expenditures.
Thus, two generations later, there is continuing fall-out from the misquoting by Kerwin J in Dominion Natural Gas of the traditional formulation of capital expenditure – which referred to "an expenditure… made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade" (British Insulated and Halsby Cables) – as instead including expenditures made "with a view of preserving an asset or advantage for the enduring benefit of a trade."
Neal Armstrong. Summary of Kondor v. The Queen, 2014 TCC 303 under s. 18(1)(a) – legal fees.
Leroux – B.C. Supreme Court finds that CRA owes a duty of care to taxpayers not to inappropriately assess devastatingly large gross negligence penalties
CRA owes a duty of care to a taxpayer to ensure that it does not exercise its discretion unreasonably so as to have "foreseeably huge and devastating effects" on a taxpayer. Humphries J found that this standard of care had been breached when CRA assessed material gross negligence penalties against a taxpayer for failure to report proceeds of sale from clearing forested land as being on income account when, in fact, the question of how to characterize such proceeds was difficult and the taxpayer’s capital-account treatment ultimately was vindicated in a consent judgment. However, the breach had not caused the taxpayer's loss of his home and business, which had more to do with other financial difficulties rather than interim collection actions of CRA.
Neal Armstrong. Summary of Leroux v. CRA, 2014 DTC 5068, 2014 BCSC 720 under General Concepts – Negligence and fiduciary duty.
North American Financials Capital Securities Trust to eliminate forward structure on taxable basis
The TSX-listed North American Financials Capital Securities Trust achieved indirect exposure to a portfolio of subordinated bank debt instruments by entering into a forward purchase and sale agreement with BMO respecting Canadian securities (which it did not own). The underlying portfolio was managed by its manager. This forward agreement will cease to be grandfathered from the character conversion rules at the end of 2014. Accordingly, it will be terminated, and there will be a special distribution of the resulting net realized capital gain – and the Trust will acquire the portfolio securities directly and start distributing the net interest income to the unitholders rather than making "tax efficient" distributions.
The disclosure seems to contemplate that the cash portion of the special distribution will be equal only to the tax liability of unitholders resulting from the associated allocation of taxable capital gains.
Neal Armstrong. Summary of North American Financials Capital Securities Trust Circular under Public Transactions – Other – Conversions – Forward Fund to Conventional Fund.
CRA confirms that the issuer of registered debentures can satisfy its T5 obligations through its paying agent issuing T5s to the brokers who hold the debentures
If the issuer of debentures which have been registered in the names of brokers pays interest to a paying agent, it does not issue T5s to the paying agent as that agent is paying the interest on the issuer's behalf rather than receiving interest on behalf of beneficial owners of the interest. However, it or the paying agent (but not both) must issue T5s to the brokers who, in turn, issue T5s to their clients.
Neal Armstrong. Summary of 15 August 2014 T.I. 2014-0532941E5 under Reg. 201(1).
CRA confirms that s. 96(1.1) agreements have retroactive effect
CRA considers that an agreement under s. 96(1.1) to allocate income to a retired partner has retroactive effect to the time that she retired. Accordingly, if she retired at January 31, 2014, which was the end of an off-calendar fiscal period previously elected under s. 249.1(4), she will be required to add 11 months’ worth of income pursuant to s. 34.1(1) even if the agreement to allocate income to her is not entered into until January 2015.
Neal Armstrong. Summary of 10 September 2014 T.I. 2014-0522551E5 under s. 96(1.1).
R-Xtra – Tax Court of Canada accepts that a hotel business generates services revenues
C Miller J accepted that the services provided by a motel or hotel to its customers are sufficient to transform the related revenues so that it does not have a business of principally earning property income (i.e., so that there is no "specified investment business"). However, this approach was inapplicable to a storage unit rental business’s revenues notwithstanding potential ancillary services (e.g., moving items into or out of storage), as what was being paid for was the storage.
This affirmation that hotels do not have businesses of earning property income is relevant elsewhere, e.g., the foreign accrual property income rules (see American Hotel offering).
Neal Armstrong. Summaries of 0742443 B.C. Ltd. [R-Xtra] v. The Queen, 2014 TCC 301 under s. 125(7) and General Concepts – Onus.
Garage Gilles Roy – Tax Court of Canada finds that an emailed claim was not an invoice for GST purposes
Rendering an invoice generally triggers an obligation to collect GST. Claims for repair work done by a garage, which it emailed to the servicer of the manufacturer’s warranty, were found by Favreau J to not be invoices. They did not crystallize a liability for the work as there was a real prospect that the charges would be rejected in whole or in part. Instead, GST did not become payable until the claims were approved.
Neal Armstrong. Summary of Garage Gilles Roy (2007) Inc. v. The Queen, 2014 CCI 269 under ETA, s. 152(1).