News of Note
Income Tax Severed Letters 8 October 2014
Email this ContentThis morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
U.S. Treasury accepts Canadian exclusion of personal investment trusts for FATCA purposes
A U.S. Treasury attorney stated yesterday that the U S. is willing to accept Canada's exclusion of most personal investment companies and trusts from consideration as financial institutions - so that they will not be required to report U.S.-owned accounts to the IRS under FATCA and thus will not face a 30% U.S. withholding tax.
Neal Armstrong. Summary of Alison Bennett, "Treasury OK with Canadian Stance on Listed Financial Institutions Under FATCA," Daily Tax Report (BNA), October 7, 2014 under Canada-U.S. IGA – Art. 5, s. 2.
It is unclear whether Canadian private trusts can opt into FATCA reporting to CRA to avoid potential U.S. withholding
Certain investment vehicles such as private trusts with U.S. beneficiaries are not financial institutions under s. 263 of the Act but are financial institutions under the Intergovernmental Agreement respecting FATCA. Accordingly, they could become subject to FATCA withholding.
It is unclear that they could avoid this result by voluntarily opting into the Canadian domestic FATCA reporting regime. Furthermore, if they did so, it is unclear that they would be protected from liability for breach of privacy as such disclosure of confidential information would not be required by Canadian law.
Henry Chong, "Canada and FATCA", Tax Management International Journal, 2014, p. 527 under Canada-U.S. IGA, Art. 5, s. 2.
CRA is inclined to treat solar leasing revenues of condo corporations as income of their members
Although CRA considers that a not-for-profit organization such as a condominium corporation may earn incidental income from the rental of common areas without jeopardizing its NPO status, it indicated that in provinces such as Ontario where the condo members are co-owners of common areas, it likely would consider revenue from leasing roof space to a solar company to be non-incidental income of the co-owners which they were required to report.
Neal Armstrong. Summary of 18 August 2014 T.I. 2014-0528171E5 under s. 149(1)(l).
Failure of the taxpayers to file HST returns did not mean they had “dirty hands” precluding rescission of an HST-inefficient sale
Some B.C. corporations sold land in 2011 to a start-up partnership for development. They did not charge HST because, as everyone knows, there is no HST collectible on sales of commercial real estate (assuming the purchaser is registered).
Due to a mix-up, the partnership had not been registered, and CRA assessed the corporations for their failure to charge HST.
Loo J applied the doctrine of equitable mistake to rescind the transfer, so that the lands could be resold to the partnership, which was now registered. She was not fussed by this doctrine having been judicially reversed in England. There was no adequate legal remedy: BC's abolition of HST before the discovery of the problem in 2013 meant that the "basic tax content" of the lands was reduced from 12% to 5% - so that the partnership would be entitled (assuming no rescission) only to a 5% ITC under ETA s. 171 upon being registered. Finally, the corporations’ failure to file GST/HST returns (so that the problem was not discovered before the adverse B.C. change of law) did not mean they had "dirty hands."
Neal Armstrong. Summaries of 0741508 B.C. Ltd. and 0768723 B.C. Ltd. (Re), 2014 BCSC 1791 under General Concepts – Rectification and Rescission, and ETA, s. 171(1).
CRA rules that passive interest income qualifies under the active trade or business test in Art. XXIX A, para. 3 of the Canada-U.S. Treaty
The active trade or business test in Art. XXIX A, para. 3 of the Canada-U.S. Treaty permits a U.S. resident who derives income from Canada to claim Treaty exemptions with respect to that income if it or a related person is engaged in an active trade or business in the U.S., the income in question is derived in connection with, or is incidental to, that trade or business, and the U.S. active trade or business in the U.S. is substantial relative to the activity in Canada that gave rise to the income in question. CRA ruled that a U.S. C-Corp (ForSub) could access this rule with respect to interest paid to it on a note owing by a Canadian affiliate carrying on (through a partnership) the same business in Canada notwithstanding that the U.S. related business activities were all carried on by LLC sisters of ForSub and there was no indication in the facts that it was anything other than a Finco.
Neal Armstrong. Summary of 2014 Ruling 2013-0511761R3 under Treaties – Art. 29A.
Reversing an earlier position, CRA now acknowledges that s. 95(2)(a)(ii)(D) applies in an indirect use situation
An immediate LLC subsidiary of Canco (NR1) sold a subsidiary engaged in an active business (NR6) to a great-grandchild (NR4) in consideration for Note1 of NR4, and then sold Note1 to its immediate subsidiary (NR2) in consideration for Note2 of NR2.
Applying McCool, CRA found that 95(2)(a)(ii)(D)(I) did not apply to recharacterize the interest on Note2 as active business income as Note2 represented purchase-price indebtedness rather than borrowed money. Furthermore, s. 95(2)(a)(ii)(D)(II) also was not available as "NR2 acquired Note1 in consideration for the issuance of Note2…[so that] the property acquired was not shares of another foreign affiliate." As noted by Barnicke/Huynh, this finding was suspect, as s. 95(2)(a)(ii)(D) "does not require that borrowed money or purchase debt be used directly to acquire property that is shares of another FA that are excluded property... [and] the preamble ... also refers to direct or indirect use."
CRA (without explanation) has now specifically reversed this earlier interpretation, stating that s. 95(2)(a)(ii)(D)(II) "applies in the circumstances," so that "the interest received on Note 2 should [not] be included in the FAPI of NR1."
Neal Armstrong. Summary of 21 October 2013 Memorandum 2013-0496841I7, as reversed by 16 September 2014 Memo 2014-0519801I7 under s. 95(2)(a)(ii)(D).
Income Tax Severed Letters 1 October 2014
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Immunovaccine – Federal Court of Appeal finds that government loans made in a non-commercial capacity are "government assistance"
Under a federal program for fostering Maritimes development, the taxpayer received interest-free advances, which were not characterized as forgivable loans - but were repayable only out of a percentage of future revenues.
The advances were "government assistance" which reduced the taxpayer's SR&ED credits. Although they were not subsidies or forgivable loans, they were "any other form of assistance," which Nadon JA found should be considered to be the case unless "the public authority in question is acting in a business rather than a governance capacity."
Thus, if you have advised that, because forgivable loans are the only type of loans specifically included in the definition of government assistance, a non-forgivable loan is not included, you were wrong.
Neal Armstrong. Summaries of Immunovaccine Technologies Inc. v. The Queen, 2014 DTC 5119 [at 7309], 2014 FCA 196 under s. 127(9) - government assistance and Statutory Interpretation - ejusdem generis.
The description of an intermediary debt has been expanded in the 29 August 2014 back-to-back loan proposals
The proposed back-to-back loan rule would impose withholding tax where a Canadian borrower (say, "Canco") pays loan interest to an arm’s length "intermediary" if there is an "intermediary debt" with specified attributes owing, in turn, by the intermediary to a person who does not deal at arm’s length with Canco. The scope of what constitutes an intermediary debt has been expanded in the latest (29 August 2014) version of this rule. For instance, the second level of debt will be deemed to be intermediary debt if its existence somehow affected the terms of the debt owing by Canco to the intermediary.
A safe harbour introduced in the same revisions, for situations where intermediary debts represent less than 25% of qualifying categories of loans owing by Canco, is quite narrow: to be a qualifying loan, the creditor must be the intermediary itself, the security interests relating to the different qualifying debts must correspond quite closely, and they must arise under the same or a "connected" agreement.
Neal Armstrong. Summaries of Steve Suarez, "An Analysis of Canada's Latest International Tax Proposals", Tax Notes International, September 29, 2014, p. 1131 under s. 212(3.1)(b), s. 212(3.1)(d) and s. 212.3(9).