News of Note

S. 95(2)(a)(ii)((D) typically deems interest income on a loan from one foreign affiliate (FA1) to FA2 to be active business income of FA1 where FA2 used the borrowed money for the purpose of earning income from excluded-property shares of FA3.  Shawn Porter (who no longer is at Finance) and David Bunn submit that this use test is unduly restrictive.  For example, it will be problematic if:

• FA2 borrows from FA1 to distribute paid-up capital which is attributable to FA3;
• Moneys borrowed by FA2 from FA1 are used on its merger with the Holdco for FA3 to redeem Holdco shareholders; or
• FA2 borrows money from FA1 to distribute PUC to Canco (viewed as a borrowing which on a "fill the hole" tracing theory relates indirectly to FA2 earning income from FA1 shares).

They suggest streamlining the rule:

[I]ncome of a particular FA would be eligible for ABI characterization in circumstances where the income is derived from amounts that are paid or payable to the particular FA…by another FA of the taxpayer to the extent the amounts are deductible by the other FA in computing income from a property of the other FA that qualifies as an excluded property throughout the particular period.

Neal Armstrong.  Summary of Shawn D. Porter and David Bunn, "Is it Time to Simplify the Holding Company Rule?", International Tax Planning (Federated Press), Volume XIX, No. 2, 2014, p. 1304 under s. 95(2)(a)(ii)(D).

In finding that a chalet which was rented out on a furnished basis was a rental property rather than a source of business income (so that the rental property restriction rule in Reg. 1100(11) applied), Masse J stated that this conclusion will be reached where the taxpayer "cannot demonstrate that the range of services provided by her are such that the [rental] payments can in substantial part ["bonne partie"] be attributed to such services."

Neal Armstrong. Summary of McInnes v. The Queen, 2014 CCI 247 under Reg. 1100(14).

In McKesson, Boyle J found that the taxpayer had been selling its trade receivable to its immediate Luxembourg parent (MIH) at discounts which were excessive from a transfer pricing perspective. In a subsequent decision, he has now recused himself from dealing with residual issues on the basis that taxpayer’s counsel had lied about his trial conduct and reasons for judgment in their Federal Court of Appeal factum - which would reasonably be expected to vex him sufficiently to affect his impartiality.

While accepting Boyle J’s statement that such reasons "are very clear" on important points, his explanations of the "untruths," including quotes from the extensive exchanges from the bench at trial, are illuminating:

• He had expressed concern about the taxpayer, which began with a cost of funds of nearing 5%, quadrupling this cost on the basis of laying off risk to MIH.
• The taxpayer’s approach, that (ignoring MIH’s knowledge and control as parent) MIH was "buying a pig in a poke," so that it was taking on a lot of risk, would mean that "virtually every Canadian subsidiary…[could] be re-pricing to 5 year junk rates."
• However, in his trial reasons, it had not been necessary to rely on the likely law that this parent-sub relationship could be taken into account, as on the face of the receivables purchase agreement, MIH had an out once the collection performance began to deteriorate (i.e, low risk).

Neal Armstrong. Summary of McKesson Canada Corp. v. The Queen, 2014 TCC 266 under s. 247(2).

CRA will not provide a certificate of residency for a Canadian partnership (i.e., with only Canadian-resident partners) even though this can be a significant impediment to carrying on business in some foreign jurisdictions.

Neal Armstrong. Summary of 3 December 2013 TEI Roundtable Q. 9, 2013-0510851C6 under s. 2(1).