News of Note
The DFA rules might apply to currency forward hedges
Email this ContentObservations of Miller and Milet on the derivative forward agreement (DFA) and synthetic disposition arrangement (SDA) rules include:
- It is unclear whether the safe harbour from the DFA rules (contained in the Explanatory Notes) for an exchangeable share rests on the price of the share corresponding to its inherent value, or on the embedded exchange right not constituting an agreement. (The first rationale is more readily portable to other types of exchangeable securities.)
- Gains on currency forwards to hedge a capital asset or obligation might be deemed by the DFA rules to be on income account, given that their performance depends partly on an implicit interest rate differential.
- The SDA rule is very similar to an early version of the U.S. constructive sale rule, which was not implemented following criticism.
- The safe harbour under the SDA rules for arrangements that do not last at least a year means that at the time of filing its return a taxpayer may not know whether an arrangement is an SDA.
- Both the DFA and SDA arrangements can apply to the same arrangement, e.g., a forward sale of shares eliminating risk (to engage the SDA rules) and containing an embedded interest rate (to which the DFA rules apply).
Neal Armstrong. Summaries of Edward Miller and Matias Milet, "Derivative Forward Agreements and Synthetic Disposition Arrangements," 2013 Conference Report, (Canadian Tax Foundation), pp. 10:1-50 under s. 248(1) - derivative forward agreement, s. 248(1) - synthetic disposition arrangement, s. 80.6(2)(e), s. 112(9) and s. 126(4.5).
CRA considers that the application of s. 55(2) to cross-share redemptions by connected CCPCs gives rise to a Part IV tax circularity problem
If two connected Canadian-controlled private corporations cross-redeem shareholdings in each other with the resulting deemed dividends being subject to capital gains tax under s. 55(2), CRA considers that a circularity problem will arise: the capital gains tax on the deemed dividend received by each corporation will result in an addition to its refundable dividend tax on hand account, which will result in a dividend refund on the deemed dividend paid by it to the other corporation, which will result in Part IV tax to the other corporation, which will result in an addition to that corporation's RDTHOH account, which will generate a dividend refund to it and Part IV tax to the first corporation, and so on.
Furthermore, circularity is a sword and not a shield. In light of 943963, the exclusion from Part I tax under s. 55(2) for dividends subject to Part IV tax applies only to "normal" Part IV tax and not Part IV tax arising from the application of s. 55(2).
Neal Armstrong. Summary of 27 June 2014 T.I. 2013-0498191E5 F under s. 55(2).
CRA confirms that taxpayers may use a specific identification method for purposes of the s. 40(3.4) suspended-loss rule
CRA considers that, for purposes of applying the 30-day loss suspension rule in s. 40(3.4), the taxpayer can designate the order in which identical shares were disposed of by it (2003-0002915 F) and that where the loss suspension rule applies, the taxpayer nonetheless can recognize a pro rata loss if there is a reduction in the number of the shares held by it (or an affiliated person) at the end of the 30-day period (2001-008815). CRA has now published an example showing the combined operation of these two administrative positions.
Neal Armstrong. Summary of 2 July 2014 T.I. 2014-0529731E5 F under s. 40(3.4).
Taiga v. Deloitte – BC Supreme Court finds that a contingent tax-savings-based fee agreement with a company’s external auditors did not engage a conflict of interest
The entering into by a company (Taiga) of a contingent fee arrangement with its external auditors (Deloitte) whereby Deloitte would be paid 20% of the tax savings from implementing an Inter-Leasing-style plan to minimize provincial income tax did not give rise to a conflict of interest.
Affleck J also found that an obligation of Deloitte to repay the fees in the event of a "successful challenge" was not triggered on the initial CRA GAAR reassessments, but instead would only be triggered if they were "either unsuccessfully resisted in the courts or...the plaintiffs were professionally advised there was no reasonable prospect of successful resistance in the courts." As the tax dispute instead was settled in "a prudent settlement agreement preserving at least some of the benefits of the … Plan," Deloitte got to keep its fees.
Summary of Taiga Building Products Ltd. v. Deloitte & Touche, LLP, 2014 DTC 5082 [at 7068], 2014 BCSC 1083 under General Concepts – Negligence and Fiduciary Duty.
CRA confirms that a local s. 216 agent can reduce withholding on rent remittances for interest expenses paid directly by the non-resident
CRA has clarified that some statements in Guide T4144 - respecting remittances of Part XIII withholding on rent collections where a s. 216(4) undertaking of the non-resident has been given - mean that once CRA has approved the NR6, it will allow the local agent to withhold and remit based on the non-resident's net rental income after deduction not only of expenses paid by the agent but also of allowable expenses (e.g., interest respecting the property’s financing) paid directly by the non-resident.
Neal Armstrong. Summary of 22 July 2014 T.I. 2014-0520701E5 under s. 216(4).
Income Tax Severed Letters 13 August 2014
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hillis v. AG (Cda) – Constitutionality of the Canadian FATCA legislation is challenged
Ginny Hillis, who was born in the U.S. to Canadian-citizen parents and came to Canada when she was five, has launched an action (through Farris, Vaughan) to have the Canadian FATCA legislation declared void as unconstitutional on any one of five alternative grounds. The ground which might have the most legs is that the provision of the stipulated accountholder information about her and other US persons by Canadian financial institutions to the IRS (via CRA) occurs without any judicial authorization or notice to her or opportunity for her to be heard, and therefore violates her reasonable expectations of privacy contrary to her Charter right to be secure against unreasonable search or seizure. See Clayton, Kloster, Norwood and Gernhart.
A potential weak link in an argument that the FATCA legislation is also void for discriminating against residents of Canada who are US Persons is the potential need (see Fannon) to establish that "US Persons living in Canada are subject to prejudicial stereotypes and treatment in Canada and the United States."
Neal Armstrong. Summary of Statement of Claim of Hillis against the Attorney General of Canada under Charter – s. 8.
CRA has been reinvigorated in alleging “sham”
A book was recently published discussing the sham doctrine in the English-speaking world, with a focus on tax. In the chapter written by Loutzenhiser on the Canadian cases, he suggests that Stubart and Faraggi indicate that a "sham" can be created by a taxpayer unilaterally, i.e., without a common intention with another to deceive, and then states that Antle:
appears to be intended to 'lower the bar' and make it easier for a court to find a sham exists, possibly by signalling to judges that they should not be unduly troubled about the level of proof required to establish the necessary deceit. In fact, there is some anecdotal evidence that the CRA has begun to issue more assessments alleging sham since Antle.
Neal Armstrong. Summary of Glen Loutzenhiser, "Sham in the Canadian Courts," Sham Transactions (Edwin Simpson and Miranda Stewart, editors), Oxford University Press, 2014 under General Concepts - Sham.
Inter-Leasing – Ontario Court of Appeal finds no GAAR abuse in structuring to access a property income exemption which reflected a deliberate policy choice
A plan to generate interest deductions in Alberta while enjoying a tax exemption on the corresponding interest income received by an Ontario affiliate (Inter-Leasing) depended on the interest income qualifying as income from property – which it did, given that essentially all Inter-Leasing did was to collect the annual interest coupons. Unlike Marconi, Inter-Leasing did not have specific corporate objects. The fact that earning the interest income came within its general objects was irrelevant.
Ontario's GAAR did not apply, as the exemption reflected a "deliberate decision not to tax corporations incorporated outside Canada on income from property," so that the statement in Copthorne, that "in some cases the underlying rationale of a provision would be no broader than the text itself," was apt.
Ontario corporate minimum tax was avoided by making the debts held by Inter-Leasing specialty debts and holding the deeds outside Canada. Pardu JA rejected a Ministry submission that she should apply the Williams (i.e., Indian Act exemption) "connecting factors" tests rather than the traditional private international law tests, to determine the situs of the debt, as the Williams tests are mushy, whereas the traditional common law situs tests can be clearly applied. (This approach also would "promote certainty" under Income Tax and Excise Tax situs tests, e.g., the situs under ITA s. 122.1(1.3)(b) of debt which is deemed real or immovable property.)
Neal Armstrong. Summaries of Inter-Leasing, Inc. v. Ontario (Revenue), 2014 ONCA 575 under s. 115(1)(a)(ii), s. 245(4) and Ontario Taxation Act - s. 54(2)(b).
CRA will not accept revenue-based methods for calculating ITCs if they do not reflect the relative taxable/exempt use of inputs for GST/HST purposes
In its memo dealing with input tax credit methodologies for registrants (other than financial institutions), CRA has expanded the discussion of the requirement in ETA s. 141.01(5) that the registrant’s method be "fair and reasonable," stating that this requires that the "particular method accurately reflects the purpose for which the property or service was acquired." It gives the example of a public institution which is mostly government-funded and is mostly engaged in making (free) exempt supplies, but makes minor sales which are mostly taxable rather than exempt. CRA considers that it would be unreasonable for the institution to use a revenue-based methodology to claim most of its HST costs as ITCs (i.e., on the basis that most of its sales were taxable.)
There's probably an audit story associated with this example.
Neal Armstrong. Summaries of Memorandum (New Series) 8-3 "Calculating Input Tax Credits" August 2014 under ETA – s. 141.10(5) and ETA – s. 169(1).