News of Note
CRA confirms that negative ACB gains of non-residents from Canadian real estate or resource LP interests are exempt from tax
Email this ContentS. 40(3.1) deems the holder of an LP interest to realize a capital gain when the ACB calculation is otherwise about to go negative, but only goes on to deem there to be an associated disposition of property at that time for purposes of the capital gains deduction. CRA has confirmed that this means that a negative ACB gain of a non-resident from holding an LP interest which is taxable Canadian property is exempt from capital gains tax – but has drawn Finance’s attention to this anomaly.
Although not mentioned by CRA, the same result arguably occurs when the non-resident realizes a negative ACB gain on shares which are taxable Canadian property. S. 40(3) deems the non-resident to realize a gain from a disposition of the shares – but only deems the non-resident to have disposed of the shares in the year for limited purposes not including s. 2(3)(c).
Summaries of 18 June 2014 T.I. 2011-0417491E5 and 18 June 2014 T.I. 2011-0421481E5 under s. 40(3.1).
Income Tax Severed Letters 30 July 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A registrant which has been charged GST on a commercial real estate purchase should promptly apply for a rebate
Where a registrant pays GST on a commercial real estate purchase, CRA considers that the correct approach is for the registrant to apply under s. 261 for a rebate for GST paid in error, rather than to purport to offset that tax by claiming an input tax credit. Such ITC instead is an offset to its self-assessment obligation for the GST under s. 228(4).
Requiring the registrant to apply for a rebate is potentially problematic as the time limit for the rebate claim is two years after payment of the GST.
Neal Armstrong. Summary of 25 February 2014 Memo 155876 under ETA s. 221(2).
A services recipient’s contracting address is “most closely connected” with the supply for GST/HST place-of-supply purposes
A supply of services generally is made for HST purposes in the province corresponding to the home or business address of the recipient obtained by the supplier in the ordinary course of business – or, where there is more than one such Canadian address, then the address which "is most closely connected with the supply." CRA has stated, more clearly than in some previous interpretations, that "the business address of the recipient from which the supplier is hired pursuant to the agreement for the supply (the "contracting address") is generally the address that is most closely connected with the supply."
Neal Armstrong. Summary of 3 February 2014 Interpretation 126057 under New Harmonized Value-added Tax System Regulations, s. 13(1).
CRA recharacterizes a Sharia-compliant financing arrangement as a secured loan to the Islamic client
Under a Sharia-compliant real estate financing arrangement that is somewhat analogous to a reverse repo, the Islamic client pays cash for X% of the property, and FinanceCo pays for (100-X)% of the property subject to a secured "repurchase" obligation of the client to buy that interest for cost plus an accruing "profit" amount. In a somewhat apodictic interpretation, CRA stated that provided the client is liable under the arrangement to pay for the property, the applicable GST/HST is its liability rather than FinanceCo’s. By inference, CRA is prepared to treat the client as in substance being the purchaser of the property at the time of its acquisition.
Neal Armstrong. Summary of 18 February 2014 Interpretation 155500 under ETA - s. 228(4).
The 12-month period for an installation PE should stop running when work at the project is suspended for external reasons
The OECD Model Treaty states that "a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months." Hourdin suggests among other things that:
- As Art. 5(3) applies on a project by project basis, "it is therefore possible for an enterprise resident in a state to operate in another country on a significant scale, in terms of cumulative time and total volume of business, without having a PE."
- An example of the application of the OECD commentary statement that "a building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole commercially and geographically," is the installation of a country-wide radar sytem for use by air traffic controllers even where there are "10 separate contracts with 10 airport companies."
- Although the OECD commentary states for purposes of the 12-month test that "a site should not be regarded as ceasing to exist when work is temporarily discontinued," this rule "should allow for a suspension of the 12-month period if the taxpayer provides sufficient evidence of total interruption of work because of external reasons."
Neal Armstrong. Summary of Pierre-Marie Hourdin, "Is the Construction PE Clause in the OECD Model Treaty Satisfactory?", Tax Notes International, July 21, 2014, p. 229 under Treaties – Art. 5.
CRA does not consider the change-of-use rules to apply to conversions of depreciable property to inventory
CRA has published its statement made at the 2013 Annual CTF Conference that it will not follow the statements in C.A.E. that the change of use rules apply to the conversion of inventory to depreciable property or vice-versa, so that CRA will not be changing its general position on the change in use rules in IT-102R2 and IT-218R.
Neal Armstrong. Summary of 26 November 2013 Annual CTF Roundtable, Q.2, 2013-0493811C6 under s. 45(1)(a).
First Quantum acquisition of Lumina uses tainting nominal cash for the share consideration alternative, and provides for cashless option surrenders
Lumina Copper shareholders can elect to receive First Quantum shares or cash for the acquisition of their shares subject to proration to keep the overall cash/share mix essentially fixed. Similarly to the Loblaw acquisition of Shoppers Drug Mart, those who elect solely for First Quantum shares also are required to receive $0.01 per share in cash, so that Canadian taxable shareholders who want rollover treatment must elect under s. 85 with First Quantum. Built into the Plan of Arrangement is a compulsory cashless surrender of Lumina stock options, so that the holders receive Lumina shares equal to the in-the-money value of their options.
Neal Armstrong. Summary of Lumina Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash, or Shares.
Sulliden/Rio Alto merger is structured to qualify as a s. 368(a) reorg
Sulliden Gold, whose principal asset is a Peruvian subsidiary holding a development property, is effecting a s. 86 spin-off to its shareholders of a Quebec exploration subsidiary (SpinCo) before its outstanding shares are transferred to Rio Alto Mining on a s. 85.1 exchange for Rio Alto shares.
In order that this transaction likely can qualify as a s. 368(a) reorganization under the Code, Rio Alto will then transfer the Sulliden shares to a newly-incorporated Rio Alto sub so that they can amalgamate. Although this will occur as a conventional "continuation" style amalgamation, the U.S. disclosure considers that a "substantially all" requirement must be satisfied, which implies that the transaction is viewed as a reverse triangular merger under s. 368(a)(2)(E) rather than as a forward triangular merger governed by s. 368(a)(2)(D). This "substantially all" requirement is expected to be satisfied based in part on the distributed Quebec subsidiary representing less than 10% of Sulliden’s net assets.
A 1992 temporary PFIC regulation indicates that the transaction would not qualify for nonrecognition given that Sulliden is a PFIC and Rio Alto is not. The disclosure suggests that the transaction nonetheless should qualify for nonrecognition if these regulations are not finalized in their current form, notwithstanding that the statute itself (in s. 1291(f)) provides that to the extent provided in regulations a disposition of PFIC shares will be taxable even if it would otherwise qualify for nonrecognition: the disclosure considers that the statute is not self operative.
Neal Armstrong and Abe Leitner. Summary of Rio Alto Circular under Mergers & Acquisitions – Mergers – Share-for-share.
CRA considers that settlement of a withdrawing partner’s interest with partnership property will not scupper the s. 98(6) rollover
The rollover under s. 98(6) for the replacement of a Canadian partnership by another partnership with the same or fewer partners requires that all of the property of the predecessor partnership be transferred to the new partnership. CRA considers that this requirement will be satisfied even though partnership property was paid out to a withdrawing partner whose departure caused the new partnership to arise at law – provided that all of the property of the old partnership was transferred directly by it to the new partnership immediately after the settlement of the withdrawing partner's interest.
Neal Armstrong. Summary of 30 June 2014 T.I. 2014-0522181E5 F under s. 98(6).