News of Note
Funeral home business proceeds allocated to prepaid contracts are treated by CRA similarly to goodwill
Email this ContentAmounts received on the sale of a funeral home business which are allocated to prepaid funeral contracts or other "eligible funeral arrangements" are generally considered by CRA to give rise to eligible capital amounts rather than being exempted by s. 148.1(2)(b)(ii).
Neal Armstrong. Summary of 9 February 2015 T.I. 2013-0480881E5 F under s. 148.1(2)(b).
2012 amendment to s. 92(1)(a) means that statute-barring period for FAPI does not start running until it is distributed
The wording of the ACB addition for foreign accrual property income in s. 92(1)(a) was amended effective 2012 to replace "any amount required to be included…by reason of subsection 91(1)…in computing the taxpayer's income", by "any amount included…under subsection 91(1)." The likely effect is that if CRA is statute-barred from assessing Canco for FAPI earned by FA in a year, it can still indirectly assess that FAPI by denying a s. 91(5) deduction to Canco when FA distributes that FAPI as a dividend (and similarly where "Canco" is an individual).
Neal Armstrong. Summary of Allan Lanthier, "FAPI or Taxable Surplus Dividend," Canadian Tax Highlights, Vol. 23, No. 2, February 2015, p. 4 under s. 92(1)(a).
CRA confirms that it will not adjust cross-border amounts within an arm’s length range
In TPM-16, CRA acknowledges in a transfer-pricing context that "an arm’s length range will usually be established by the CRA…[and] the CRA will not make a transfer pricing adjustment if the price or margin of a transaction is within the arm’s length range." This is similar to the comment made in Henco in a domestic context that:
A range of value makes eminent sense. And, where a taxpayer has designated a value that ultimately is found to fall within the range of reasonable fair market value, I see no reason to disturb that figure.
However, if the figure falls outside the arm’s length range, CRA will apply an average or some other technique to pick a figure well within the range.
Neal Armstrong. Summary of TPM-16 "Role of Multiple Year Data in Transfer Pricing Analyses" under s. 247(2).
CRA asserts the ability to potentially bifurcate a cross-border management fee into deductible and non-deductible components
The 19 paragraphs in IC 87-2R on transfer pricing for intra-group services have been expanded into 78 paragraphs in TPM-15. Additional points include:
- It explicitly adopts the OECD Guidelines respecting the use of "indirect charges" (i.e., allocation of centralized service costs), so that this method is acceptable where third-party comparables are "occasional or marginal," the proportionate benefit to each affiliate cannot be "precisely quantified," and record-keeping is onerous.
- Although costs for the benefit of the non-resident parent should not be charged through to Canco, "Sarbanes-Oxley costs…should be reviewed and if the taxpayer can demonstrate that there is a benefit to the taxpayer associated with the charge/expense, it could be allowed as a deduction."
- Where a management fee charged to Canco is pursuant to a contract which "is not usually found in dealings between arm’s length parties, auditors may look through the management fee…[to] identify expenses that are not deductible under specific [ITA] sections…or to which Part XIII withholding tax applies."
- "Stand-by charges for service availability would not be expected in circumstances where… there is little likelihood that the service will be needed."
- In the case of an affiliate performing agency services, such as centralized purchasing, "it will often make more sense to relate the compensation of the purchasing entity to its costs incurred as a facilitator or to the size of the discount it obtains rather than to the value of the goods purchased."
Neal Armstrong. Summary of TPM-15 "Intra-group services and section 247 of the Income Tax Act" under s. 247(2).
Sun Life – Tax Court of Canada finds that the holding of vacant office space by a GST-exempt business for potential future taxable rentals qualified for ITC purposes as commercial activity
Many of the Sun Life sales people were independent contractors, who sublet space in Sun Life office premises. In calculating the portion of its rental costs for which it was entitled to input tax credits, Sun Life included vacant offices which were set aside for potential future rentals to such recruits, and allocated a pro rata portion of common areas, such as meeting rooms (which CRA argued were being used by the sales reps qua promoters of Sun Life exempt financial products rather than qua subtenants.)
Owen J confirmed Sun Life's methodology. Its success on the vacant space point is authority for the first-order supply rule (under which the focus is on the direct rather than indirect purpose for a supply) applying not only to an on-supply but also potentially to property held for a potential future direct use.
Neal Armstrong. Summary of Sun Life Assurance Company of Canada v. The Queen, 2015 TCC 37, under ETA, s. 141.01(5).
Income Tax Severed Letters 25 February 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
AG v. Federation of Law Societies – Supreme Court of Canada reasoning indicates that lawyers’ accounts likely are privileged
In the course of striking down the search-and-seizure provision in the federal anti-money laundering legislation, Cromwell J confirmed the absolute statement in Lavallee that "all information protected by the solicitor-client privilege is out of reach for the state," and also indicated that it was contrary to s. 8 of the Charter to place a blanket obligation on lawyers to provide names and addresses of their clients to the federal authority, in order to be able to claim solicitor–client privilege (as "the name of the client may itself be (although is not always) subject to solicitor-client privilege ... [and] the same ... may be said about the ... address for the client.")
This confirms that lawyers’ statements of account, or at least the portions thereof disclosing the services rendered, and the client name and address, probably are privileged.
Neal Armstrong. Summaries of Attorney General of Canada v. Federation of Law Societies of Canada, 2015 SCC 7 under ITA, s. 232(1) – privilege, and Charter – s. 7.
Bakorp – Tax Court of Canada finds that an overpayment of tax for Year 2 did not cut off interest for underpayment in Year 1 before application of the overpayment by CRA
Bakorp was found by CRA to have underpaid its Part IV tax for 1993, and overpaid for 1995. When CRA reassessed in 2000, it applied the 1995 overpayment to the 1993 year and assessed interest from the 1993 underpayment date up to 2000.
Bakorp unsuccessfully argued that interest should be computed as if the overpayment for its 1995 year had been retroactively applied at that time (i.e., June 1996 rather than February 2000) to the underpayment for its 1993 year. After an inexorable demolition of this argument, Pizzitelli J also noted that a contrary interpretation would clash with s. 221.2, which provides a specific procedure for CRA, on the taxpayer’s application, to transfer a payment on account of one year to another.
Neal Armstrong. Summary of Bakorp Management Ltd. v. The Queen under s. 187(2).
Probe will spin-off exploration assets in a s. 84(2) and (4.1)(a) PUC distribution, and be acquired by Goldcorp for shares and nominal cash in a forward triangular merger
Goldcorp covets Probe's Borden gold project. Probe first will distribute its common shares of a newly-formed Explorationco to its shareholders as a paid-up capital distribution (rather than using the more typical s. 86 reorg), with this step being garnished with wording taken from both the ss. 84(2) and 84(4.1)(a) safe harbours. All the Probe common shares will then be exchanged for Goldcorp common shares (together with nominal cash so as to require a joint s. 85(1) election to achieve Canadian rollover treatment). Goldcorp will drop its Probe shares into a wholly-owned subsidiary (Subco). Subco will be the survivor of its amalgamation with Probe (see 2006-0178571R3). The above and other steps are deemed under the Plan of Arrangement to occur at one minute intervals, including the filing of an election of Probe with CRA to cease to be a public corporation before its amalgamation with Subco.
The share exchange and survivor amalgamation are intended to qualify as a (Code s. 368(a)(2)(D)) forward triangular merger (which may have been preferred given the distribution of the Explorationco and the more stringent boot rules applicable to reverse triangular mergers.) Probe and Goldcorp are believed to be a PFIC and non-PFIC, respectively, so that US shareholders of Probe who do not make a QEF or mark-to-market election would not receive rollover treatment under a proposed retroactive Regulation - and the disclosure indicates that they should assume that Goldcorp will not provide them with the required information to validly access a QEF election. Although, unlike the disclosure for the Sulliden/Rio Alto merger, no statement is made that the transaction should qualify for nonrecognition if the Regulation is not finalized, it nonetheless might be anticipated that at least some U.S. shareholders will take the position that the gain recognition rule in the Code is not self implementing and, in the absence of final regulations, no gain recognition is required.
Neal Armstrong and Abe Leitner. Summary of Probe Mines Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
CRA considers that substantial machinery generally must be used in a province for at least 30 days to be a provincial PE
In the course of an HST ruling, which turned on whether a corporation had a "permanent establishment" in a participating province as defined in ITA Reg. 400(2), CRA indicated that the corporation would be considered to have a "fixed place of business" even if the activities carried on in an "ascertained space in which there is some presence or routine over which [it] has some degree of control and in which some undertaking or operations of [it] occur. …[do]… not… exist for a long time…for instance, a temporary field office." CRA further stated that the substantial machinery test in Reg. 400(2)(e) will be satisfied if the corporation uses the "equipment in a province either for 30 continuous days or for 90 cumulative days in a 12-month period."
Neal Armstrong. Summaries of 12 June 2014 Ruling 133588r under ITA Reg. 400(2) and ETA, s. 259(3).