News of Note
Kaleidescape – Ontario Superior Court of Justice finds that a USA did not affect de jure control of a mooted CCPC
Email this ContentIn order to try to qualify a Canadian corporation ("K-Can’), which economically was a subsidiary of a U.S. corporation ("K-US"), as a Canadian-controlled private corporation, 100 special voting shares were issued to an employee trust whose settlor was K-Can and whose trustee was Computershare. The Deed of Trust contemplated that Computershare would take its direction, in voting its shares, from the CEO of K-Can, who was a U.S. resident. In response to a CRA position that this established non-resident de jure control of K-Can, K-Can persuaded Carole Brown J to grant a rectification order to "clarify" that this clause was really referring to the settlor (i.e., K-Can) giving voting directions to Computershare.
She rejected a Crown argument that this rectification would do nothing to detract from the de jure control of K-Can by K-US in light inter alia of a unanimous shareholder agreement delegating all the powers of the board to the shareholders (of which only K-US was prepared to make decisions), stating that "the decision-making body is the Board of Directors" (cf. Jaft: "rescission, if granted, would serve to alter the essence of the litigation before the TCC;" and Bagtech: "one must consider ... any specific or unique limitation on… the board's power to manage the business and affairs of the company, as manifested in…any unanimous shareholder agreement." )
Most or all of the Juliar-style rectifications have involved retroactively replacing a bad tax plan with a better plan in order to give effect to an explicit or obvious continuous objective of avoiding a specific bad tax result. This case is different. K-Can got a provincial Supreme Court to rectify the wording of one clause in one of its documents, in order to weaken a CRA argument respecting an aggressive structure, but with no predictable effect on the ultimate resolution of the dispute.
Neal Armstrong. Summary of Kaleidescape Inc. v. MNR, 2014 ONSC 4983 under General Concepts - Rectification and Rescission.
Inventory potentially can be bumped on a partnership winding-up
Unlike s. 98(3), which requires that property to be bumped on the conversion of a partnership into a co-ownership must be non-depreciable capital property of the partnership, s. 98(5) requires that the bumped property be non-depreciable capital property of the "proprietor" (i.e., the former partner distributee).
This suggests that partnership inventory potentially can be bumped on a s. 98(5) partnership winding-up, e.g., real estate inventory that is received by the proprietor for development as a rental property. However, a fly in the ointment is that s. 98(5) requires that the proprietor continue with the partnership business and the use the distributed property therein. In addition to the factual question of whether there is a new business, this potentially engages a minority dictum in Qualico suggesting that unsold inventory of the partnership was not "used" in its business.
If in fact this "use" issue is a problem, no s. 98(5) rollover would be available for a partnership holding any inventory.
Neal Armstrong. Summary of Perry Truster, "Windup-Bump Comparison: Subsections 98(3) and (5)," Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 15, No. 1, January 2015, p. 8 under s. 98(5).
Murphy Estate – Tax Court of Canada recognizes that a disclaimer has retroactive effect
An estate unsuccessfully argued that the effect of the settlement of some estate litigation pursuant to a consent order, which provided for the transfer of RRSP funds to the deceased’s surviving spouse, was to retroactively access the rollover for RRSP refund of premiums paid to a surviving spouse's RRSP. Among other problems, the consent order provided that the children (who otherwise would have been the RRSP beneficiaries) would transfer their interests in the RRSP to the surviving spouse which, of course, indicated that those interests were considered to have been accepted by them in the first instance rather than having been disclaimed. Accordingly, the RRSP proceeds were fully taxable in the deceased’s terminal return.
However, V. Miller J noted that the effect of a disclaimer "is to void the gift as if the disclaiming party never received it," which may imply that with better structuring a better result could have been achieved.
Neal Armstrong. Summary of Murphy Estate v. The Queen, 2015 TCC 8 under s. 146(8.8).
CRA rules that the property of a Canadian company does not for Treaty purposes “consist of” Canadian real estate where the real estate is held through a subsidiary
Art. XIII, para. 3 of the Canada-Israel Treaty permits Canada to tax an Israeli resident on "gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in [Canada]." CRA ruled that any gains of an Israeli company from transferring shares of a Canadian subsidiary which, directly and through a subsidiary LP, held shares of a Canadian real estate company, were exempted from Canadian capital gains tax under the Treaty.
Neal Armstrong. Summary of 2014 Ruling 2014-0527221R3 under Treaties – Art. 13.
Requests to CRA for fiscal year end changes must “be prompted solely by sound business reasons”
CRA is now stating that "requests for changes in fiscal periods … [must] be demonstrated to be prompted solely by sound business reasons other than obtaining tax benefits." Accordingly, if the reason for wanting a partnership fiscal year to end immediately before the sale by a partner of his partnership interest is ensuring that he can be allocated his share of a partnership-level loss incurred up to the time of sale (but which might be offset by partnership income realized later in the year), the request likely will be denied.
The presence of lower-tier partnerships would be a further reason for denial, as granting the request would result "in the fiscal period ends of the partnerships becoming misaligned [which] would be contrary to the underlying rationale of paragraph 249.1(1)(c) [respecting multi-tier partnerships]."
Neal Armstrong. Summary of 9 December 2014 T.I. 2014-0529311E5 under s. 249.1(7).
Income Tax Severed Letters 21 January 2015
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The Rulings Directorate pre-rulings consultation program requires a detailed advance written submission
Guidelines provided by the Income Tax Rulings Directorate on the pre-rulings consultation program include:
- there must be an advance written application which includes the taxpayers’ names, "all relevant facts and proposed transactions related to the unique, new technical issue(s)" and "an explanation of the issue(s)"
- the Directorate generally will schedule the teleconference to occur within three weeks of receipt of the application (although on an exceptional basis a meeting may instead be arranged), and it is implied that the Directorate will consider the technical issues in advance of the call
- however, it will not be bound by its comments on the call (which also cannot be recorded), and the overall answer will either be a "no" or an indication that it "would consider the issue further in the context of an advance income tax ruling"
- the Directorate may pass along what it learns to Audit or Finance
Where there is a contemplated transaction, this process in some respects will be more informative (and much more timely) than asking for a technical interpretation, and may result in an increase in the number of transactions which are substantially completed before a ruling application is granted.
Neal Armstrong. Summary of Toronto Centre Canada Revenue Agency & Professionals Group Newsletter, Vol. 13: Issue 4, December 2014 under s. 152(1).
Kennedy – English Chancery Division finds that there can be a partial rescission of a trust appointment on the grounds of equitable mistake
An English family trust would not have included a distribution of shares to the trust settlor (Mr Kennedy) in an "appointment" of trust property in favour of various beneficiaries, if the trust’s advisor had been aware that losses of the trust already had been used up. Following Pitt (also applied in Pallen), Sir Terence Etherton found that the clause of the appointment dealing with the distributions to Mr Kennedy could be rescinded on grounds of equitable mistake. In particular, he found that there could be partial rescission, so that the clauses of the appointment in favour of the other beneficiaries were not rescinded.
On the other hand, given the narrowness of the English doctrine of rectification, the particular clause for the distributions to Mr Kennedy (whose wording referred to the remainder of the trust fund) could not be rectified so as to exclude the shares and refer only to cash, rather than being rescinded in its entirety.
Neal Armstrong. Summary of Kennedy & Ors v. Kennedy & Ors, [2015] BTC 2, [2014] EWHC 4129 under Rectification and Rescission.
CRA considers that a transfer from a deceased annuitant’s RRSP to a surviving non-resident spouse’s RRSP or RRIF is subject to Part XIII tax if she cannot obtain a SIN
S. 212(1)(l) contemplates that a refund of premiums paid out of an RRSP to a surviving non-resident spouse can generally be made free of withholding tax if it is contributed into the surviving spouse's RRSP or RRIF. However, the related required documentation contemplates that the surviving spouse will provide his or her SIN – and someone who is not eligible for government benefits generally cannot obtain one.
Gotcha! CRA considers that:
[I]f a non-resident surviving spouse does not have or cannot obtain a SIN, that person will not be allowed to make a tax-free transfer to an RRSP or a RRIF… . CRA does not intend to provide any administrative relief to the surviving spouse who does not hold or cannot obtain a SIN… .
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 2, 2014-0534821C6 F under s. 212(1)(l).
Gouveia - Federal Court of Appeal treats an individual’s reputation and income-earning capacity as a capital asset
Dawson JA briefly affirmed a finding of Favreau J that $2.1 million in legal fees incurred by a CEO, who also earned consulting fees from his income trust, mostly to defend against OSC charges respecting allegedly misstated financial statements, were non-deductible given that "deduction of legal fees incurred to preserve the [taxpayer’s] reputation and capacity to earn future income is prohibited by paragraph 18(1)(b)."
This is consistent with Cimolai and a judicial pattern of treating expenditures to preserve a capital asset as being capital expenditures.
Neal Armstrong. Summary of Gouveia v. The Queen, 2014 FCA 289 under s. 18(1)(a) – legal and other professional fees.