News of Note
Income Tax Severed Letters 2 July 2014
Email this ContentThis morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Graymar – Alberta Court of Queen’s Bench suggests that the Juliar rectification line of cases incorrectly imputes a tax avoidance purpose in transactions where specific tax consequences were not addressed at the time
Brown J found that transactions which were carried out for debt restructuring reasons could not be rectified to avoid a s. 15(2) inclusion, as this tax issue was not identified until later. He stated:
Juliar sits uneasily with Supreme Court’s direction in Performance Industries and Shafron that rectification is granted to restore a transaction to its original purpose, and not to avoid an unintended effect. While, therefore, rectification is available in order to avoid a tax disadvantage which the parties had originally transacted to avoid, it is not available to avoid an unintended tax disadvantage which the parties had not anticipated at the time of transacting.
Comments like this increase the odds that at some point the Supreme Court will review the correctness of the Juliar line of cases.
Neal Armstrong. Summary of Graymar Equipment (2008) Inc v Canada (Attorney General), 2014 ABQB 154 under General Concepts – Rectification.
Joint venture participants include their pro rata shares of JV payroll for provincial income allocation purposes
The general inter-provincial income allocation formula in Reg. 402(3) gives equal weighting to the relative payroll and gross revenues attributable to permanent establishments in the respective provinces. CRA considers that where there is a joint venture carried on by the participants through an operator, for purposes of this formula each JV participant will include the share of the JV payroll incurred by the operator for which it has "legal responsibility."
Neal Armstrong. Summary of 19 February 2014 Memo 2013-0508121I7 under Reg. 402(3).
Transfer to a new family trust was not a disposition
CRA has ruled that s. (f) of "disposition" in s. 248(1) applied (i.e., no disposition) to the transfer of the property of one family trust to a new family trust with a different division date, pursuant to a term of the deed of trust for the old trust that permitted such a transfer. A paragraph (f) of "disposition" transfer, or a s. 107.4 transfer, is something to consider as an alternative to amending or varying a trust.
Neal Armstrong. Summary of 2013 Ruling 2013-0492831R3 under s. 248(1) - "disposition" – (f).
CRA rules that custom software distribution fees in substance were for right to "reproduce" copyright
Licence 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).