News of Note
The description of an intermediary debt has been expanded in the 29 August 2014 back-to-back loan proposals
Email this ContentThe proposed back-to-back loan rule would impose withholding tax where a Canadian borrower (say, "Canco") pays loan interest to an arm’s length "intermediary" if there is an "intermediary debt" with specified attributes owing, in turn, by the intermediary to a person who does not deal at arm’s length with Canco. The scope of what constitutes an intermediary debt has been expanded in the latest (29 August 2014) version of this rule. For instance, the second level of debt will be deemed to be intermediary debt if its existence somehow affected the terms of the debt owing by Canco to the intermediary.
A safe harbour introduced in the same revisions, for situations where intermediary debts represent less than 25% of qualifying categories of loans owing by Canco, is quite narrow: to be a qualifying loan, the creditor must be the intermediary itself, the security interests relating to the different qualifying debts must correspond quite closely, and they must arise under the same or a "connected" agreement.
Neal Armstrong. Summaries of Steve Suarez, "An Analysis of Canada's Latest International Tax Proposals", Tax Notes International, September 29, 2014, p. 1131 under s. 212(3.1)(b), s. 212(3.1)(d) and s. 212.3(9).
Deemed interest may arise on non-interest bearing intercompany term loans
"It is possible" that the fair market value of a non-interest-bearing term loan will be less than the amount advanced, in which case s. 69(1)(a) "could" deem the loan to have a cost equal to that fair market value if it was made to a related person – so that Reg. 7000(2)(a) would then apply to require current accrual of the (deemed) loan discount. This is one reason most domestic non-interest bearing inter-company loans are repayable on demand.
Neal Armstrong. Summary of 28 July 2014 T.I. 2014-0532651E5 under Reg. 7000(2)(a).
CRA implies that complete T1134s must be filed in a voluntary disclosure for failure to report FAPI
A taxpayer had failed to report foreign accrual property income or file T1134s. Headquarters stated that to have a valid voluntary disclosure "the taxpayer must provide complete and exact information and documents for all taxation years" and that, "in the context of a voluntary disclosure respecting the declaration of FAPI, the working papers calculating the surplus accounts of the FA also can be requested for all the affected years." The summary implies that "complete documents" include complete T1134 filings (whose informational requirements are exacting and which generally are exigible after 1995). No problem! All this data doubtless will be at hand.
Headquarters also noted that the penalties under ss. 162(10) or (10.1), or s. 163(2.4), which could be engaged for failure to file T1134s only in circumstances of gross negligence etc., generally could be imposed without time limitation (i.e., in the absence of a valid voluntary disclosure). It did not suggest that failure to file T1134s was presumptively gross negligence.
Neal Armstrong. Summaries of 14 July 2014 Memo 2014-0537701I7 F under s. 220(3.1) and s. 152(4)(a)(i).
CBA/CICA Joint Committee comments on deficiencies in the 2014 Budget trust/estate rules
The CBA/CICA Joint Committee has commented inter alia on deficiencies in the proposed/revised s. 104(13.1) designation rule, s. 104(13.4) deemed income flow-out rule, s. 108 – testamentary trust – (d) - anti-stuffing rule, and s. 164(6) loss carry-back rule.
Neal Armstrong. Captioning of CBA/CICA Joint Committee submissions on 2014 Budget trust/estate rules.
Tacking on an unrelated person to a majority related-person control group can taint the safe harbour in s. 256(7)(a)
Where two children purchase 2/3 of the shares of their father’s holding company from him and the other 1/3 of the shares is purchased by their cousin, s. 256(7)(a)(i)(A) will deem there to be no acquisition of control of the holding company by virtue of their purchase because they acquired the shares from a related person. However, if as a factual matter, the cousin was part of the new control group for the holding company, the s. 256(7)(a)(i) safe harbour would not be available, so that there would be an acquisition of control.
Neal Armstrong. Summary of 22 August 2014 T.I. 2014-0540751E5 F under s. 256(7)(a).
CRA is negative on using novation as the solution for a s. 15(2) loan
CRA considers that where Canco seeks to avoid the application of s. 15(2) to a loan owing to it by a non-resident sister company by assigning that loan to their non-resident parent in repayment of a loan owing by it to the parent, this assignment will not qualify as a repayment of the loan (so that s. 214(3)(a) could then apply to impose Part XIII tax on the loan amount), unless that loan was also novated – and that GAAR might be applied to any such novation.
What if after novating the loan (which arose before March 2012), and rather than assigning the loan, a PLOI election is made on the basis that it now is a "new" post March 2012 loan? Quite oddly, the response of CRA implies that it considers that the novated loan would not be a new loan (and therefore is still not be eligible for the PLOI election) if in the circumstances the novation should be regarded as part of a series of loans or other transactions and repayments described in the IT Bulletin on s. 15(2.6).
Neal Armstrong. Summaries of 8 September 2014 T.I. 2013-0482991E5 under s. 15(2.6), s. 15(2.11) and s. 221.2(1).
Income Tax Severed Letters 24 September 2014
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA expands its discussion of income interest transactions
The CRA Folio on dispositions of income interests in trusts expands significantly on the discussion in IT-385R2, including providing an example illustrating the consequences of the gift by an income beneficiary of a personal trust of his income interest to his son. The previous delineation of the distinction between a disclaimer and a release has been retained.
Neal Armstrong. Summaries of S6-F2-C1: "Disposition of an Income Interest in a Trust" under s. 106(2) and s. 106(1).
CRA Folio on trust residence does not apply a fully corporate model of central management and control
CRA’s Folio on trust residence recognizes that the touchstone for residence of a trust is the place of actual exercise of its central management and control rather than the trustees’ residence. Where trustees in different jurisdictions are involved in trust management, the trust will reside where "the more substantial central management and control actually takes place." After noting that central management and control may rest with the settlor or beneficiaries, CRA states that it will review any decision-making limitations on the trustees and "the ability of a trustee and other persons to select and instruct trust advisors with respect to the overall management of the trust."
Application of the corporate central management and control test often focuses on where board meetings are held. The Folio contains no explicit references to where the trustees meet, which might have been helpful for those addressing issues of income fund or REIT residence.
Neal Armstrong. Summary of S6-F1-C1 under s. 2(1).
Hudbay may settle warrants on its common shares by delivering shares equal to their in-the-money value
In July, Hudbay acquired most of the common shares of Augusta Resources, and issued 0.315 of a Hudbay common share and 0.17 of a warrant to acquire a Hudbay common share in consideration for each Augusta share.
The current second stage squeeze-out transaction was complicated by the need to provide the same warrant consideration. On an amalgamation of Augusta with a Newco grandchild Hudbay subsidiary, the minority Augusta shareholders will receive Hudbay common shares and redeemable preference shares of Amalco (having full stated capital). These prefs will be redeemed immediately by the delivery of Hudbay warrants.
The tax consequences to a warrantholder of Hudbay electing, following exercise by the warrantholder, to settle the warrants by issuing Hudbay common shares equal to the warrants’ in-the-money value, are unclear both in Canada and the U.S.
Neal Armstrong. Summary of Augusta Resource Circular under Mergers & Acquisitions – Subsequent Acquisition Transactions – Amalgamations – Shares and Warrants.