News of Note
CRA rules that custom software distribution fees in substance were for right to "reproduce" copyright
Email this ContentLicence fees paid by a Canadian non-share corporation to its non-resident sole member (Forco), a U.S. tax-exempt organization, for the right to distribute Forco custom software and related documentation to Canadian sub-licensees, were ruled to be exempt from Part XIII tax. "Payment for distribution rights in this case are considered copyright royalties as the right to distribute is viewed as a component of the right to reproduce the software or is ancillary to such a right."
Not a slam dunk (the application was received in 2012) - perhaps because Canco will not really reproduce the software in the normal sense of the word, and instead will on-deliver copies of the software received from Forco.
Neal Armstrong. Summary of 2014 Ruling 2012-0462801R3 under s. 212(1)(d)(vi).
CRA rules that a four-day loan made by Canco to its non-resident parent at each quarter end for financial statement manipulation purposes is not part of a series of loans and repayments
In order that their indirect non-resident public company parent can prepare its quarterly and annual consolidated financial statements on a basis that nets the positive bank account balances of some group members (including Canco) against the bank overdraft positions of other group members including the non-resident parent of Canco (Parentco): at the end of each quarter, Canco will make an advance (to be repaid several days later) of its excess cash balance to Parentco; and Parentco at the same time will receive (or make) similar loans from (or to) its other subsidiaries (all non-resident) based on their excess (or deficit) balances.
CRA ruled that these regularly re-occurring Canco loans and repayments do not represent a "series of loans ... and repayments" under s. 15(2.6) so that no withholding tax will arise under s. 214(3)(a), given that s. 15(2.6) "is intended to prevent, by temporary repayment, a deferral of the recognition as income of amounts that are advanced as loans… [and] the four 4-day loans made in this case are not for the purpose of deferring the recognition of the loaned amounts as income, and the repayment of each loan in this case is not temporary."
Neal Armstrong. Summary of 2014 Ruling 2013-0505181R3 under s. 15(2.6).
A loss was realized on a convertible note by converting it otherwise than pursuant to its terms
A ULC, which held non-interest-bearing convertible notes of its wholly-owned LLC subsidiary, was able to realize a loss by converting the notes into "shares" of the LLC otherwise than under the terms of the notes, so that s. 51 did not deny the loss. This was accomplished by agreeing to convert the notes into a different number of shares than those into which they were convertible under their terms.
Following Byram, the fact that the notes were non-interest-bearing did not cause s. 40(2)(g)(ii) to deny the loss. (CRA is no longer applying the statement in cancelled IT-239R2 that to get a loss on such a loan, the debtor must be a Canadian subsidiary.)
Finally, CRA referred to a 1989 interpretation for the proposition that s. 51(1) applied "to a conversion made pursuant to the holder's right to convert even if the issuer had the option to repurchase the shares in the meantime" (see, for example, Canexus).
Neal Armstrong. Summaries of 6 May 2014 Memo 2014-0524651I7 under s. 51(1) and s. 40(2)(g)(ii).
CRA apparently finds that exercising a right to pay interest with common share issuances does not render the interest non-deductible
In the context of foreign affiliate dumping transactions which occurred before the introduction of the new FAD rules, a Canadian subsidiary issued debentures to its U.S. parent which provided that the interest coupons could be satisfied with the issuance of common shares, which in fact occurred. Head Office opined that this feature by itself would not cause the interest to be non-deductible.
It also implicitly took a Backman (and Memec) approach to applying U.S. commercial law in that, although the debentures were governed by U.S. law, it treated the question of whether they were a debt obligation as an issue to be addressed under Canadian jurisprudential principles.
Neal Armstrong. Summary of 12 February 2014 Memo 2012-0443391I7 under s. 20(1)(c).
CRA confirms that “cost” in the branch thin cap rules means original cost
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 this means original acquisition cost, i.e., without deductions for depreciation or other amortization.
The same point would arise in relation to the gross REIT revenue definition, which provides for the deduction of the "cost" of property which has been disposed of.
Neal Armstrong. Summary of 4 June 2014 T.I. 2013-0513761E5 under s. 18(5) – equity amount.
Ontario College of Teachers – Tax Court of Canada finds that a GST/HST exemption for providing certificates does not cover an evaluation service culminating in the certificate
Sched. V, Pt. VI, s. 20(d) (which was similar to the current version of the provision) would have provided an HST exemption for the supply by the Ontario College of Teachers of "a service of providing information in respect of, or any certificate…evidencing…any status of any person." Jorré J found that the charges of the College in examining the training and credentials of prospective Ontario teachers were essentially for an evaluation service rather than a service of issuing a certificate, even though a successful candidate received a certificate at the end of the process. Accordingly, those charges were not exempt.
This approach is similar to the single supply doctrine, under which an ancillary component gets subsumed into what predominantly is supplied (see Calgary, Hidden Valley, OA Brown).
Neal Armstrong. Summary of Ontario College of Teachers v. The Queen, 2014 TCC 130 under ETA - Sched. V, Pt. VI, s. 20(d).
Income Tax Severed Letters 25 June 2014
This morning's release of 24 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Henco – Tax Court of Canada finds that compensation received for a destroyed business was completely tax-free
The Ontario government capitulated to Six Nations protesters, who occupied the subdivision property of the taxpayer (Henco), by passing a by-law prohibiting any use of the property (thereby rendering it valueless and (per C. Miller J) thereby converting it to capital property as it no longer was a trading asset) - and subsequently agreed to pay Henco $15.8M for relinquishing its rights to the property and for a release.
C. Miller J found that as Henco’s business had been destroyed by the time it received the $15.8M, it had no source of income so that the $15.8M was tax-free. There was no eligible capital amount under the now-repealed mirror image rule, and the $15.8M was compensation for Henco’s destroyed goodwill rather than a (now) "useless, worthless piece of land."
An interim compensation payment of $650,000, which Henco received from the government after work had stopped but before Henco’s development business had been conclusively destroyed by the by-law, also was tax free. C. Miller J reasoned that although this amount was received "in the course of business," s. 12 (1)(x) did not apply as the amount was not received in the course of "earning income from" the business as required by s. 12(1)(x)(i)(A).
Finally, he arguably enunciated a principle that if the taxapyer picks a valuation which is within a range of what is reasonable but which is not the best estimate of value under the expert valuation evidence, the figure picked by the taxpayer should prevail over the best-estimate figure.
Neal Armstrong. Summaries of Henco Industries Limited v. The Queen, 2014 DTC 1161 [at 3528], 2014 TCC 192 under s. 9 – compensation payments, s. 12(1)(x), s. 14(5) – cumulative eligible capital, s. 23, General Concepts – fair market value – land, and General Concepts – evidence.
CRA implies that PUC distributions by a CRIC of ordinary-course dividends from the subject corp can reverse a PUC grind from a prior actual or deemed investment in it
After providing preliminary responses at the 2014 IFA Roundtable, CRA did not say, "good enough for private-sector work," but instead refined and expanded its responses. Some additional points, clarifications or responses:
- Q.1(b). On a suggestion that a failure to charge a fee for the provision by Canco of a guarantee of debt of a foreign subsidiary (Forco) will not give rise to an investment by it in the subsidiary under the foreign affiliate dumping rules because "Canco benefits from Forco's access to debt capital," CRA responded that there would be no benefit conferral "if fair market value consideration were… given in exchange for the guarantee and it would be reasonable… to conclude that a party dealing at arm's length would provide the guarantee on the same terms" (which kinda sounds like "no.")
- Q. 1(d). CRA comments imply that grinds to the PUC of cross-border classes of shares of CRIC resulting from investments by it in Forco (or in this case, from imputed investments) can be subsequently reversed through PUC distributions of dividends received in the ordinary course from Forco. See Example 9-D.
- Q. 3(c). CRA has not yet developed any specific positions on the application of the upstream loan rules to cash pooling arrangements.
- Q. 6. Of the 19 cases considered by the s. 95(6) Committee over the 2010-2013 period, it recommended that s. 95(6)(b) be applied in seven cases.
For reasons of completeness (or sloth), we have kept the original questions and notes on responses on our Roundtable page. We have added links to the reformulated questions and responses (and to our summaries).
Neal Armstrong. Summaries of May 2014 IFA Roundtable, Q. 1, 2014-0526691C6 under s. 212.3(9) and 212.3(10)(b), of May 2014 IFA Roundtable, Q. 3(c), 2014-0526741C6 under s. 90(14) and of May 2014 IFA Roundtable, Q.6, 2014-0526761C6 under s. 95(6)(b).
CRA will not apply s. 56(2) so as to result in double taxation
S. 6(1)(a) only requires the inclusion in employment income of a benefit "received or enjoyed." However, where the employee foregoes the benefit and directs that it go to someone else, CRA considers that the employee generally will be taxable on the benefit under s. 56(2) - but if the amount was included in the employee’s income under s. 56(2), it "would not be required to be included" in the income of the recipient of the benefit. (This statement also appears in IT-335R2, para. 13, but with the weasel word "normally" added.)
Neal Armstrong. Summaries of 10 April 2014 T.I. 2013-0514321E5 under s. 56(2) and s. 6(1)(a). See also summary of 13 March 2014 T.I. 2013-0510791E5 under s. 56(2).