News of Note
Income Tax Severed Letters 19 November 2014
Email this ContentThis morning's release of 21 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Vocalspruce – English Court of Appeal broadly interprets a deeming provision
A UK sub (Vocalspruce) acquired zero coupon notes from its UK parent in consideration for its issuance of shares, and credited the discounts on the notes to its share premium account when received, with the targeted result that those discounts were tax-exempt. It unsuccessfully argued that a provision, which provided that loan transactions in which one group company replaced another were to be disregarded, only had the effect of requiring one to ignore that Vocalspruce had replaced its parent as the new owner of the discount notes, and did not require the subsequent realization of the note discounts in its hands as exempt share premium amounts to be ignored.
In rejecting this approach, Lewison LJ stated: "it is a well-known method of interpreting deeming provisions that one must treat as real the inevitable consequences flowing from the deemed state of affairs: DCC Holdings Ltd v HMRC [2010] UKSC 58, [2011] 1 WLR 44 at [38]." (See also La Survivance, East End, Derlago, Terrador.) Arguably, the narrow construction typically given by CRA to deeming provisions does not apply this well-known method.
Neal Armstrong. Summary of Vocalspruce Ltd. v. Revenue and Customs Commissioners, [2014] BTC 50, [2014] EWCA Civ 1302 (English CA) under Statutory Interpretation – Interpretation Provisions.
Dimane Enterprises - Tax Court of Canada finds that Junior did not receive a distribution if father still had control over the funds
After receiving brilliant tax advice, father set up an employee profit sharing plan for the "employees" of his incorporated family business located in his home (i.e., his children, who performed household chores – it was essential to the success of the business that the lawn be mowed), with payments by the corporation to the EPSP then purportedly distributed to them.
Before concluding that the EPSP was a sham, D’Arcy J found that the distributions out of the EPSP were to a bank account controlled by father, so that the children "never had control of these funds,", and so that the "real transactions" were "the payment of amounts by the [corporation] to [father]."
This may be relevant to the question whether a family trust has distributed income to children beneficiaries (see 2013-0475501I7 F, Langer Family Trust, Degrace Family Trust, 2011-0428661E5).
Neal Armstrong. Summary of Dimane Enterprises Ltd. v. The Queen, 2014 TCC 334 under General Concepts – Sham.
Ford - Federal Court of Appeal confirms that a reassessment cannot be vacated if that would increase the taxpayer’s substantive tax liability
In Anonby, the taxpayer, who had not received a T4, inferred from the $29,000 received by him in the year that his gross pay had been $42,000 with source deductions of $13,000. His return was filed and assessed on that basis, but CRA later determined that there had been no source deductions and reassessed on the basis that his gross pay was $29,000. Although his substantive tax liability thus was reduced, he still owed tax because there were no source deduction credits.
Anonby was unsuccessful in getting an order vacating the reassessment and leaving the original assessment (on $42,000) in place on the basis that the employer had deducted but failed to remit the source deductions A year later in the Court of Appeal in another case, Webb JA referred to Anonby for the proposition that "if ... the result of vacating a reassessment would be that a person’s tax liability would be increased (because the previous assessment was for a greater amount), the Tax Court ... could not grant that remedy in any event."
Neal Armstrong. Summary of Ford v. The Queen, 2014 FCA 257 under s. 165(3).
AgraCity – Tax Court of Canada finds that the Minister could not plead for a s. 247(2)(c) transfer pricing adjustment if she also pleaded that the offshore affiliate was an empty shell
The taxpayer apparently shifted most or all of its profits to a Barbados company. The Minister pleaded that the Barbados company did nothing and that the transactions between it and the taxpayer were not on arm’s length terms. C Miller struck the second pleading as it was logically inconsistent with the first, so that allegations relevant to the application of s. 247(a) and (c) were removed from the Minister’s Reply. However, he did not strike the Minister’s pleadings directed at ss. 247(2)(b) and (d), as these are much broader provisions.
Neal Armstrong. Summaries of AgraCity Ltd. v. The Queen, Docket: 2014-1537(IT)G under s. 247(2) and s. 163(2).
CRA finds that the fresh start rule generated deemed ECE for licensed IP of an acquired FA
Canco acquired a non-resident corporation (FA2) which was engaged in a non-Canadian business of licensing intellectual property to third parties and also to a subsidiary (FA3) for use in its active business. FA2's business was deemed to be a separate non-active business under s. 95(2)(a.3), as the IP came within the extended definition of "lease obligations."
Headquarters concluded that there was a deemed eligible capital expenditure on the IP under the fresh start rule notwithstanding a number of ambiguities, including the fact that the ECE definition requires that there be an "outlay or expense ... as a result of a transaction," which did not "mesh well" with the deemed acquisition of the IP at FMV under the fresh start rule.
Although the fresh start rule would not have applied if FA2 instead had been merely earning income from property, Headquarters noted that "the threshold amount of activity that is required to cause any corporation (including a FA) to be considered to be carrying on business is extremely low."
Neal Armstrong. Summary of 31 July 2014 Memo 2014-0536581I7 under s. 95(2)(k).
Income Tax Severed Letters 12 November 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Shares underlying flow-through warrants need not qualify as flow-through shares
Although junior issuers commonly "sweeten" flow-through offerings with warrants with a view to the total proceeds, including those allocated to the warrants, qualifying for renunciation, it is rare for the issuer to covenant that the common shares to be issued on exercise of the warrants will also qualify as flow-through shares (as this effectively could amount in a commitment to engage in Canadian exploration in, say, four years’ time).
CRA agrees that this is unnecessary to qualify the warrants for flow-through treatment. This is obvious on the statutory wording. However, a badly-expressed earlier CRA position (2010-0384341C6) seemed to say the opposite.
Neal Armstrong. Summary of 5 September 2014 T.I. 2014-0534941E5 under s. 66(15) – flow-through share.
CRA finds that GST applies to the provision by a charity, hospital or university of naming rights to a sponsor
ETA s. 135 deems a supply of a service, or a licensing of copyright, trademarks, trade names or similar IP, by a public sector body (e.g., a charity, NPO, hospital or university) to promote a sponsor’s business to not be a supply, so that no GST or HST is payable.
The provision of naming rights is not considered by CRA to be a supply of a service or licensing of IP, so that it is taxable.
CRA notes that where s. 135 does apply, this does not adversely affect the PSB’s ability to claim an input tax credit.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 93 under ETA s. 135 and s. 141.01(7).
Vitaliy Anissimmov of Rulings speaks at the 2014 TTPG Q&A
Highlights of CRA responses at the Toronto Tax Professionals Group Seminar held today include:
- Q.1. Swirsky has not changed the IT-533, para. 31 policy re interest on common share financings.
- Q.4. A reverse earn-out obligation of Newco, to fund its acquisition of Target, which is extinguished after Newco’s investment in Target disappears on the post-acquisition amalgamation, will be an "excluded obligation" for debt forgiveness purposes, as s. 143.4 would have operated immediately to grind the cost of the Newco shares.
- Q.5. CRA likely will apply GAAR to any future D & D Livestock situations and, more broadly, considers that GAAR generally applies to duplication of tax attributes (sounds a bit like Copthorne).
- Q.7. The 92 CMTC guidelines on choice of reporting currency still stand notwithstanding an amendment to Reg. 5907(6).
Mickey Sarazin thinks the Directorate has been giving too high a priority to technical interpretations. The pre-rulings consultation process is starting to take off.
Neal Armstrong. Summaries of 6 November 2014 TTPG Q&A and Presentation of Mickey Sarazin.