News of Note
CRA requires filing of articles of dissolution before applying s. 88 to a wind-up
Email this ContentA lossco parent could not transfer losses to a profitco subsidiary under typical triangular loss-shifting techniques because profitco (which likely is a financial institution) is precluded from receiving a loan from lossco. Accordingly, lossco will engage in such techniques to transfer losses to a newco subsidiary (Aco), and then transfer Aco to profitco to be wound-up under s. 88(1.1) (see also 2013-0496351R3). Bizarrely, a representation was given that the interest-bearing loan by lossco to Aco (which has no assets) "will not exceed the amount that ACo could reasonably be expected to borrow from an arm’s-length financial institution."
Notwithstanding the favourable comments in IT-126R2, para. 5 on when a corporation is considered to have been wound-up, CRA ruled that s. 88(1.1) would not apply to the winding-up of Aco until articles of dissolution were filed. 2013-0496351R3 is similar.
Similarly to 2013-0504301R3, a provincial GAAR ruling was given.
Neal Armstrong. Summary of 2014 Ruling 2013-0511991R3 under s. 111(1)(a).
Avoiding a services PE by seconding employees to the source jurisdiction affiliate is very difficult to achieve
In a 25 February 2014 Head Office memo (2013-0475161I7), CRA indicated that if employees of a US company (USco) have been seconded to Canadian affiliates, their services are not counted in determining whether USco has either a construction site permanent establishment (Art. V, para. 3) or a services PE under para. 9 (since their activities now are those of the Canadian affiliates). In this regard, Nitikman notes, after discussing some Indian cases including Morgan Stanley, Centrica and Bamford, that "the case law suggests that a true secondment is difficult to achieve," as the employees invariably will want to maintain their benefits qua employee with USco (e.g., pension plan or insurance).
Nitikman disagrees with a statement in the memo that "if USCo does not have a [construction site] PE under paragraph 3 of Article V, then all of the services rendered in Canada, including those rendered at the construction site, can be considered when making a determination under paragraph 9" respecting a services PE, as this contradicts a statement of the US Senate Joint Committee staff (as well as other commentary) to the effect that "paragraph 9 does not apply to construction services that do not meet the requirements of paragraph 3 for permanent establishment."
Neal Armstrong. Summary of Joel A. Nitikman, "More on Services PEs – What is a Connected Project?," Canadian Tax Journal, (2014) 62:2, 317-82 under Treaties – Art. 5.
CRA rules that distributions made by a cross-border mutual fund trust to U.S. residents are exempt from withholding
All the distributions made by a listed Canadian mutual fund trust to its unitholders who are qualifying persons under the Canada-U.S. Treaty will not be subject to Part XIII tax. The distributions will be funded out of interest received by it on cross-border notes owing to it by the "US Opco" holding all its U.S. real estate assets and out of ROC payments made by US Opco to its Canadian holding company, which will be distributed as ROC payments by that Canadian holdco to the fund. The U.S.-source interest income will be exempted under Art. XXII, para. 2 of the Canada- U.S. Convention, which applies to income paid by a resident Canadian trust to a resident of the U.S. to the extent such income is "distributed out of income arising outside [Canada]."
Neal Armstrong. Summary of 2014 Ruling 2013-0509431R3 under Treaties – Art. 22.
CRA confirms that the “cost” of eligible capital property for thin cap purposes means its original cost rather than cost amount
Under the expanded thin cap rules, Canadian branches of non-resident corporations or trusts are limited to debt of 60% of the "cost" of assets used or held in the Canadian activities. CRA has confirmed that the "cost" of eligible capital property means its "original acquisition cost" rather than (amortized) "cost amount." It made essentially the same finding in 2013-0513761E5 respecting depreciable property.
A similar point arises under the gross REIT revenue definition, which provides for the deduction of the cost rather than cost amount of property which has been disposed of.
Neal Armstrong. Summary of 22 July 2014 T.I. 2014-0526631E5 under s. 18(5) – equity amount.
Income Tax Severed Letters 6 August 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Individual taxpayers can destroy all written copies of their records
It is acceptable to CRA for you or other taxpayers to destroy all your receipts or other records provided that you take readable electronic copies and make appropriate backup copies.
Neal Armstrong. Summary of 17 July 2014 T.I. 2014-0526121E5 under s. 230(4.1).
CRA confirms that a group Finco is a listed financial institution for GST/HST purposes
CRA has revised and expanded its Memorandum on what is a listed financial institution for GST/HST purposes. New points include:
- The "insurer" branch of LFI also includes non-provincially licensed insurers such as accident and sickness insurers.
- The "money-lender" branch includes in-house Fincos (so that, for example, a group with a Finco could make s. 150 elections to eliminate HST/GST on intercompany lease or services charges).
- A person who is deemed by s. 149(3) to be an FI by virtue of an acquisition from an FI of what will be continued as its principal business is not thereby also deemed to be an LFI (unless it satisfies the specific criteria).
Neal Armstrong. Summaries of Memorandum 17-6 "Definition of ‘Listed Financial Institution’" July 2014 under ETA s. 149(1)(a) and s. 149(3).
CRA provides checklist on determining SLFI status for HST purposes
CRA has published a memorandum on the meaning for HST purposes of a "selected listed financial institution" – e.g., a mutual fund which is required to pay HST based on the provincial distribution of its unitholders rather than on the HST which is charged to it by suppliers.
Although mostly a paraphrase of the relevant provisions, the memo has an Appendix setting out a "series of tips" i.e., a checklist, to assist in determining SLFI status.
Neal Armstrong. Summary of Memorandum 17.6.1 "Definition of ‘Selected Listed Financial Institution’" July 2014 under ETA s. 225.2(1) – selected listed financial institution.
Beaudet and Saucier – Tax Court of Canada finds that the FMV of a newly-constructed apartment building is its direct and indirect cost
An apartment building which is constructed for rental by the builder generally is subject to GST on its fair market value when the first tenant moves in. Since this GST cost is non-creditable (subject to a new accommodation rebate), there is an additional GST cost to the extent that such FMV is higher than the costs of the new apartment property. Lamarre J found that because there was no evidence of some specific market anomaly such as a zoning restriction which would cause the FMV of the new apartment properties to be higher than their cost, their FMV was equal to the determined costs. Such costs included an estimated financing cost and imputed management fee of 1.5% and 5% of total costs, as well as advertising expenses, and excluded some cost overruns, e.g., because of substandard ground conditions.
Neal Armstrong. Summary of Beaudet and Saucier v. The Queen, 2014 TCC 52 under General Concepts – fair market value – real estate.
CRA finds that active business assets distributed on a non-QLAD liquidation of FA do not generate FAPI
On the liquidation of a foreign affiliate which is not a qualifying liquidation and dissolution, there is a deemed disposition on the liquidating distribution (i) under s. 88(3)(a) of shares which are excluded property for their relevant cost base and (ii) under s. 88(3)(b) of other property for its fair market value. Can the second category include property which is excluded property by virtue of being used in an active business given that such use arguably has ceased at the very moment of its distribution?
Yes. CRA indicated that it can qualify as excluded property if it was used in the active business immediately before its distribution, in which case gains from its deemed disposition at fair market value will not give rise to foreign accrual property income.
Neal Armstrong. Summary of 17 July 2014 T.I. 2014-0536331E5 under s. 88(3).