News of Note
Finance makes adverse retroactive change to the FAD rules
Email this ContentAn adverse retroactive change in the draft October 20, 2014 foreign affiliate dumping amendments is that a PUC grind, in the situation where there is more than one cross-border class of shares with the same proportionate ownership by the non-resident parent (and non-resident corporations which do not deal with it at arm’s length), must now also occur on a proportionate basis, rather than the Canadian "CRIC" subsidiary getting to choose the class to which the grind occurs. For example, if the parent owned all of a CRIC's common and preferred shares, under the previous August 16, 2013 draft rule the PUC reduction might have been expected to apply only to the common shares. If in the interim the CRIC had, say, redeemed the preferred shares, a deemed dividend could be triggered as a result of this retroactive change.
Neal Armstrong. Summary of Paul Barnicke and Nelson Ong, "FA Dumping: PUC Offset," Canadian Tax Highlights, Vol. 22, No. 10, October 2014, p. 5 under s. 212.3(7).
Vachon – Federal Court of Appeal finds that carelessness to open up a statute-barred year must relate to the return filing
Carelessness which justifies opening up an otherwise statute-barred taxation year must be carelessness at the time of filing the return. Accordingly, Scott JA annulled a decision of Tardif J that opened up a year on the basis of the taxpayer’s failure to follow up when he received demands from CRA relating to already-filed returns (which may have been altered by his accountant without his authorization before filing).
This is consistent with the mooted proposition (see also 2005-011324) that there is no obligation to amend a return when an innocent error is subsequently discovered.
Neal Armstrong. Summary of Vachon v. The Queen, 2014 CAF 224 under s. 152(4)(a)(i).
MacDonald – Tax Court of Canada case suggests that an operating corporation can have no de jure or de facto director
A shareholder of a corporation who had not been appointed as a director and who, unknowingly but in circumstances of extreme carelessness on his part, was named to third parties such as CRA and the corporate bank, as the corporation’s sole director, nonetheless was found not to be a de facto director of the corporation, so that he did not face personal liability for unremitted sources deductions and HST. Rossiter ACJ found that "the concept of de facto director ... should be limited to those who hold themselves out as directors," which did not advertently occur here.
This case indicates that it is possible for an operating corporation to have no director including a de facto director. However, the circumstances where this may have occurred in this case are unusual enough that there may not be broad policy concerns for CRA or Finance.
Neal Armstrong. Summary of MacDonald v. The Queen, 2014 TCC 308 under 227.1(1).
International Hi-Tech – Tax Court of Canada finds that secured creditors of a bankrupt corporation could launch a GST appeal in the name of the corporation
S. 266 of the ETA indicates that a receiver for a secured creditor who has taken control of a debtor’s property under its security interest "shall be deemed to be an agent of the [debtor] and any supply made or received and any act performed by the receiver in respect of [such]… assets… shall be deemed to have been made , received or performed...as agent on behalf of the [debtor]." Bocock J found that, after the receiver for the shareholder (and affiliates) of a bankrupt corporation acquired essentially all its assets out of the bankrupt estate pursuant to their security interest, it could bring an appeal in the name of the corporation to recover denied input tax credit claims, notwithstanding that the trustee in bankruptcy had not authorized such proceeding.
Although startling, this result is not literally inconsistent with the bolded words, i.e., there is nothing stating that the receiver’s agency is restricted to making or receiving supplies on the debtor’s behalf.
He implicitly treated the ITC entitlement as having been assigned to the receiver without discussing the prohibition in the s. 67 of the Financial Administration Act against the assignment of Crown debts. However, this point does not undercut the above branch of his decision and in fact reinforces the approach taken of bringing an action in the name of the corporation to get the cash.
Neal Armstrong. Summary of International Hi-Tech Industries v. The Queen, 2014 TCC 198 under ETA, s. 266(2)(a).
Deemed-resident trusts are exempt from Part XIII tax but subject to Part XIII withholding
Although s. 94(3)(a)(viii) deems various non-resident trusts to be resident in Canada for purposes of determining their liability for Part I and XIII tax (i.e., so that they are not subject to Part XIII tax), s. 94(4)(c) provides that they continue to be non-resident for s. 215 purposes so that, for example, a deemed dividend received by such a trust from a Canadian corporation would be subject to Part XIII withholding. The trust should treat such withholding as a payment on account of its Part I tax liability.
Neal Armstrong. Summaries of 25 July 2014 Memo 2013-0513641I7 under s. 94(3)(g) and s. 104(7.01).
Brent Kern – Federal Court of Appeal rejects submission that Sommerer was “manifestly wrong”
The Federal Court of Appeal has affirmed Brent Kern. A family trust received a surplus-stripping dividend which it sought to treat as being eligible in its hands for the intercorporate dividend deduction because the transactions had been engineered to have that dividend attributed to a family corporation. However, Sommerer was decided before judgment – so that Bocock J found that s. 75(2) did not apply to the dividend received by the trust as the related shares had been sold rather than contributed to it, i.e., the engineering did not work.
In the Federal Court of Appeal the trust was unsuccessful with an argument that Sommerer was "manifestly wrong."
As noted by CRA at the 2014 STEP Roundtable, there are variants of the scheme which are not caught by Sommerer but for which CRA considers that there is "a strong GAAR argument" for challenge – so that this may not be the end of the saga.
Neal Armstrong. Summary of Brent Kern Family Trust v. The Queen, 2013 DTC 1249, 2013 TCC 327, aff'd 2014 FCA 230 under s. 75(2).
CRA rules on further cross-border technique for avoiding Canadian withholding (or U.S. tax) on internal leveraging of a subsidiary Canadian business
CRA has now ruled on a 4th technique for a U.S. group to shelter Canadian business income with internal leverage while avoiding U.S. tax on interest income. (For three others, see Cardarelli/Keenan.)
US Parent Co carries on a Canadian active business through a (virtually) wholly-owned Canadian LP which has elected to be a corporation for Code purposes. It will transfer its LP units to a wholly-owned U.S. sub (US Sub) for an interest-bearing promissory note and shares of US Sub.
CRA ruled that the interest on the note (which domestically would be sourced to Canada under s. 212(13.2)) will be Treaty-exempt. Presumably, US Sub will be able to deduct that interest for Canadian purposes subject to the thin cap rules (and not be subject to current U.S. tax on the LP’s earnings), whereas the interest will not be subject to U.S. tax in the hands of US Parent Co as it and US Sub will file a U.S. consolidated return.
Neal Armstrong. Summary of 2014 Ruling 2014-0521831R3 under Treaties, Art. 11.
CRA recognizes non-application of s. 75(2) to LP business income allocated to a trust
Where a trust in which the settlor has a reversionary interest holds an LP, s. 75(2) will attribute to her the trust’s share of property income but not business income of the trust. See also 2013-0508841I7 F.
Neal Armstrong. Summary of 3 October 2014 T.I. 2013-0476871E5 under s. 75(2).
CRA will apply s. 15(2) only to the original loan where it was repaid and relent
Notwithstanding a gap in the wording of s. 15(2.11), CRA considers that where a pre-March 29, 2012 loan is repaid and the same amount is relent as part of the series of transactions that included that repayment, the new loan does not qualify for a "PLOI" election under s. 15(2.11) (see also 2013-0482991E5). However, by the same token, there will be no imputation of interest under s. 17.1 on the new loan, and (to avoid double taxation) s. 15(2) (and thus Part XIII withholding in the case of a non-resident creditor) will only apply to the old loan and not the new loan.
Neal Armstrong. Summary of 2 October 2014 T.I. 2013-0506551E5 under s. 15(2.11).
Income Tax Severed Letters 29 October 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.