News of Note
Application of draft s. 93.3 is ambiguous where an LLC agreement already provides for “shares”
Email this ContentDraft s. 93.3 deems an LLC "that does not have capital divided into shares" to have one or more classes of shares, and 2014-0522971C6 sets out a methodology for determining the number and attributes of the deemed classes of shares. Barnicke and Huynh suggest that where the LLC agreement has purported to divide the member interests into shares, it is unclear whether taxpayers are required to go through such methodology to potentially arrive at a deemed share structure which might depart from that set out in the agreement.
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Deemed Shares in a US LLC," Canadian Tax Highlights, Vol. 22, August 2014, p. 8 under s. 93.3.
The Art. IV(7)(b) anti-hybrid rule does not apply to interest paid by a check-the-box Delaware LP on “debt” held by Canadian partners
Reminders and observations of Carderelli and Keenan on the anti-hybrid rules in the Canada-U.S. Treaty include:
- The "two-step" solution to the denial in Art. IV(7)(b) of reduced dividend withholding by a ULC (increase PUC and then distribute it IV(7)(b)) is not recognized by CRA as being effective where the sole shareholder of the ULC is an LLC.
- The accepted solutions to the application of Art. IV(7)(b) to the payment of interest by a ULC on a loan from its U.S. corporate shareholder (USCo) are for: say, 10% of the shares of ULC to be held instead by a U.S. subsidiary of USCo (USSub) with which it files a consolidated return; USCo to hold all of the shares of ULC through USSub but hold the loan to ULC directly; and for the loan to be made by USSub to ULC which is held 100% by USCo.
- The Art. IV(7)(a) rules produces a harsh result for a Canadian pension plan investing in an LLC portfolio investment company given that dividends and interest on a directly held portfolio would have been exempt.
- The uncertainty as to whether the Art. IV(7)(a) rule applies to effectively impose U.S. branch profits tax at a 30% rather than 5% rate on the business profits of an LLC has had a "chilling effect" on Canadian corporations investing in U.S. businesses through an LLC.
- It would appear that Art. IV(7)(b) does not apply to interest paid by a check-the-box Delaware LP on "debt" held by Canadian partners.
Neal Armstrong. Summaries of Corrado Cardarelli and Peter Keenan, "Planning around the Anti-Hybrid Rules in the Canada-US Tax Treaty," draft paper for the 2013 Conference Report (CTF annual conference) under Treaties –Art. 4.
CRA has expanded its GST/HST Memorandum on zero-rated goods
CRA has revised its GST/HST Memorandum on zero-rating for goods and cognate matters. Added points include:
- The barter rule (deeming nil consideration) in ETA s. 153(6) for provision of "make-up" gas in exchange for natural gas liquids which are consumed at a natural gas straddle plant can apply more than once in the same transaction, for example, where the natural gas owner provides rights to the natural gas to a third party who is obligated to return make-up gas, and the third party is supplied the make-up gas by the straddle plant operator for on-supply to the owner.
- The (not so new) rule in Sched. VI, Pt. V, s. 15.1 permits zero-rating where an unregistered non-resident purchaser in Canada of a "continuous transmission commodity" (e.g., crude oil transported by pipeline) does not actually export the oil but instead delivers it in Canada to a registered Canadian in exchange for the delivery to it of equivalent crude outside Canada.
- Where a Canadian registrant does not charge GST or HST on the supply of a continuous transmission commodity to a registrant who certifies that the commodity will be promptly exported, and that purchaser does not do so (or do a swap as described immediately above), the vendor generally will have no liability – and the purchaser instead will be subject to an imputed interest charge under s. 236.1 "which reflects the cash flow benefit obtained by [it]" (plus the avoided GST or HST itself if it did not acquire the commodity exclusively in the course of commercial activities).
Neal Armstrong. Summaries of GST/HST Memorandum 4.5.2 "Exports – Tangible Personal Property" under ETA s. 153(6), s. 236.1, and Sched. VI, Pt. V, s. 15.1, s. 15.2, s. 1, s. 2, and s. 6.1.
CRA accepts that shares can be disposed of on liquidation rather than dissolution
If an individual disposes of his shares of Opco at a loss to his personal Holdco and Opco then is wound-up into Holdco within 30 days (but articles of dissolution are not filed until beyond the 30-day period), will his capital loss be denied under the superficial loss rule?
CRA indicated that first one must assess whether his shares of Holdco are substituted property for (i.e., identical property to) his shares of Opco, and quoted IT-387R2 to the effect that this would be the case if a prospective purchaser would be equally happy with either. (The Bulletin deserves its archiving. Securities of different persons are not identical.)
If the Holdco shares were not substituted property, then the Opco shares would be considered to be disposed of within the 30-day period if the IT-126R2 criteria were satisfied (e.g., "there is substantial evidence that the corporation will be dissolved within a short period of time.")
There was insufficient information for a GAAR analysis. (CRA would not like the recognition of the loss notwithstanding that Opco effectively continued as Holdco.)
Neal Armstrong. Summary of 7 July 2014 T.I. 2014-0518561E5 F under s. 54 – superficial loss.
Bekesinski – Tax Court of Canada finds that a director who likely backdated his resignation should prevail – in part, because the Crown did not plead the backdating
Campbell J granted the taxpayer’s appeal from a director’s liability assessment under s. 227.1 on the basis that he had resigned more than two years previously, notwithstanding that, "in all likelihood, the Appellant backdated the Resignation." Part of the Crown’s problem was that its pleadings had only alleged that the appellant had continued as a director rather than that the resignation had been backdated. Accordingly, mildly plausible oral explanations of the appellant were sufficient to "demolish" this diffuse assumption. It also did not help that the Crown’s forensic evidence of backdating was disallowed for technical reasons.
Neal Armstrong. Summary of Bekesinski v. The Queen, 2014 TCC 245 under General Concepts – Onus and s. 227.1(4).
Canadian REIT income distributions to an IRA are subject to 15% withholding
CRA has confirmed that income distributions by a Canadian REIT to an IRA of a U.S.-resident are subject to 15% withholding (unless the REIT does not qualify under the Canadian REIT rules, in which case the distributions would benefit from the Treaty rules applicable to dividends).
Neal Armstrong. Summary of 11 July 2014 T.I. 2013-0497381E5 under Treaties – Art. 22.
Income Tax Severed Letters 20 August 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA accepts that public trading in the shares of a dividend recipient is not part of the same series
In connection with a group reorganization to consolidate income and deductions, Pubco will acquire a royalty interest from a general partnership (Partnership D) which is mostly owned by it and a wholly-owned subsidiary (Subco), with Pubco’s cumulative Canadian development expense account being boosted by the fair market value of the royalty, and with the fair market value proceeds proportionately reducing the CCDE of the partners (mostly it and Subco).
In connection with a subsequent transfer of Subco’s partnership interest in Partnership D to it, it will receive a deemed dividend from Subco. CRA ruled that the exclusion in s. 55(3)(a)(iv) would not apply to taint this deemed dividend notwithstanding that trading will occur in the shares of Pubco (viewed as the dividend recipient), and employees may exercise options. This may reflect the (appropriate) view that irrelevant transactions are not part of the same series. This ruling is more robust than 2013-0501811R3, where representations were given that (to management’s knowledge) the Pubco shareholders did not know about the loss consolidation transactions.
In what hopefully is a trite point, CRA also ruled that s. 97(2) applied to a contribution of property to a partnership (i.e., no equity consideration was given by the partnership).
A s. 88(1) ruling was given respecting the winding-up of a wholly–owned subsidiary without any apparent fussing about articles of dissolution not being filed for XX months.
Neal Armstrong. Summaries of 2014 Ruling 2013-0505431R3 under s. 55(3)(a), s. 66.2(5) – Canadian development expense – (e), s. 97(2) and s. 88(1).
CRA cannot assess statute-barred additional income following a notice of objection
Although s. 165(5) on its face states that the statute-barring rule does not apply to a reassessment made in response to an objection, Hogan J applied Anchor Pointe to find that s. 165(5) cannot be used to add income in a reassessment made beyond the normal reassessment period.
Dual findings - that a transfer of equipment, which the taxpayer previously had been licensing to his corporation free of charge, to the corporation was on capital account, yet was made in the course of commercial activity for GST purposes – may be reconcilable.
Neal Armstrong. Summaries of Klemen v. The Queen, 2014 TCC 244 under s. 165(5), s. 9 – capital gain v. profit – equipment, ETA – s. 123(1) – commercial activity.
The DFA rules might apply to currency forward hedges
Observations of Miller and Milet on the derivative forward agreement (DFA) and synthetic disposition arrangement (SDA) rules include:
- It is unclear whether the safe harbour from the DFA rules (contained in the Explanatory Notes) for an exchangeable share rests on the price of the share corresponding to its inherent value, or on the embedded exchange right not constituting an agreement. (The first rationale is more readily portable to other types of exchangeable securities.)
- Gains on currency forwards to hedge a capital asset or obligation might be deemed by the DFA rules to be on income account, given that their performance depends partly on an implicit interest rate differential.
- The SDA rule is very similar to an early version of the U.S. constructive sale rule, which was not implemented following criticism.
- The safe harbour under the SDA rules for arrangements that do not last at least a year means that at the time of filing its return a taxpayer may not know whether an arrangement is an SDA.
- Both the DFA and SDA arrangements can apply to the same arrangement, e.g., a forward sale of shares eliminating risk (to engage the SDA rules) and containing an embedded interest rate (to which the DFA rules apply).
Neal Armstrong. Summaries of Edward Miller and Matias Milet, "Derivative Forward Agreements and Synthetic Disposition Arrangements," 2013 Conference Report, (Canadian Tax Foundation), pp. 10:1-50 under s. 248(1) - derivative forward agreement, s. 248(1) - synthetic disposition arrangement, s. 80.6(2)(e), s. 112(9) and s. 126(4.5).