News of Note
The new surplus reclassification rule may not apply to fresh starts
Email this ContentThe fresh start rule (which generally deems a disposition of property of a foreign affiliate (FA) carrying on an active business at fair market value if it commences to carry on an investment business) may significantly boost the exempt surplus balance in respect of FA. Would Reg. 5907(2.02) reclassify this increment as taxable surplus?
The first condition for Reg. 5907(2.02) to apply is that the increment result from a disposition "to" a non-arm’s length person (or other "designated person or partnership"). Instead the fresh start rule provides for a deemed disposition and reacquisition by the same person (FA) – although the Explanatory Notes do not recognize this point.
Respecting the second ("avoidance transaction" as defined in s. 245(1)) condition (which also must be satisfied for the reclassification rule to apply), the business change engaging the fresh start rule often will have occurred for non-tax reasons and will have occurred even more rarely with a view to distributing exempt earnings.
Neal Armstrong. Summary of Jenny Li, "The Interaction of the Fresh Start and Surplus Reclassification Rules", International Tax, Wolters Kluwer CCH, April 2014, No. 75, p. 8 under Reg. 5907(2.02).
CRA issues a pipeline ruling for a portfolio investment company
CRA has provided various rulings that s. 84(2) will not apply to "pipeline" transactions in which an estate holding shares of Opco, with an adjusted cost base which was stepped-up on death, sells those shares to a Newco for a Newco Note, with Newco then amalgamating with Opco one year later so that corporate assets can be used to pay down the Newco Note. In 2011 STEPs Roundtable, Q. 5 2011-0401861C6, CRA stated that the circumstances which "could" lead to the application of s. 84(2) included the company having no business and instead holding mostly cash.
CRA has now issued a ruling for a company whose only activity is investing in marketable securities (whose basis is bumped under s. 88(1)(d)). However, there is a fig leaf: "While Amalco may sell some of the Marketable Securities in order to enable it to make the above-mentioned repayments of the Newco Note, it intends to continue carrying on its investment business with the remaining Marketable Securities left."
Neal Armstrong. Summaries of 2014 Ruling 2013-0503611R3 under s. 84(2) and s. 88(1)(c)(vi).
Canexus convertible debenture offering provides Canexus with cash payment option on conversion
Canexus has issued a convertible debenture which provides that Canexus has the option, upon a holder electing to convert, to pay in cash in lieu of delivering shares. Consistently with some older CRA positions (AC58563 and 91 C.R.-Q.17), the disclosure indicates that the s. 51 non-disposition rule will apply if the holder converts into common shares. Other recent examples include Chesswood and ENTREC.
Neal Armstrong. Summary of Canexus preliminary prospectus for convertible debenture offering under Offerings – Convertible Debentures.
CRA indicates that styling a farm-out agreement as an option is bad form for GST/HST purposes (but potentially retrievable)
ETA s. 162 deems the transfer of mineral, oil or gas rights under a farm-out agreement not to be a supply for GST/HST purposes. What if the form of the agreement is an "option" to acquire such rights?
CRA stated that "strictly speaking" the grant of an option on a resource tenure is not a supply of the resource rights themselves, so that an option grant might be subject to GST/HST. However, in the example before it, CRA characterized an "option" agreement as in fact being analogous to a conditional sale agreement given that "as long as the Optionee meets its obligations, it will automatically acquire the Tenure" – so that there was no GST.
Neal Armstrong. Summaries of 29 August 2013 Interpretation 143128 under ETA s. 162(2) and s. 162(4).
CRA provides limited comfort on an advance by a pension fund to a pension fund subsidiary
Two of the requirements for a pension fund subsidiary to qualify under the s. 149(1)(o.2)(iii) branch are that it make only PBSA-type investments and that it not issue "bonds, debentures, notes or similar obligations." In considering an advance made by a pension fund to a wholly-owned corporation, CRA stated that provided that the advance "is not evidenced by the issuance of a bond, debenture, note or similar obligation" the second test would be satisfied. Although apodictic on its face, this statement likely implies that advances documented only by book entries (or perhaps by certain types of loan agreements) are OK.
CRA gratuitously added that the advance must also be permitted by the PBSA or similar provincial legislation, as required under the first test. The proposition that an amount owing can be a bad investment is startling (see also 9231345 dealing with the application of the more onerous pre-2004 version of the second test regarding a running account with the shareholder).
Neal Armstrong. Summary of 17 April 2014 T.I. 2012-0461151E5 F under s. 149(1)(o.2)(iii).
CRA accepts that the mere right of the beneficiary to replace the trustees does not give her de jure control of a trust subsidiary
CRA accepts that the mere right of a sole beneficiary to replace the (unrelated) trustees does not give her de jure control of a corporation held by the trust. But what if the trust deed also gives her the right to receive advance notice of major decisions (so that she can replace them if she doesn’t like what they are proposing to do)?
Without answering specifically, CRA indicated that a beneficiary with the removal right potentially has de jure control if her rights under the trust deed also accord her "an influence over the decisions of the trustees."
Neal Armstrong. Summary of 1 March 2014 T.I. 2013-0494981E5 F under s. 251(2)(b)(i).
McCormick v. Fasken Martineau – Supreme Court of Canada finds that an equity partner is not an employee for human rights purposes under the control and dependency test
The question of whether an equity partner at a large law firm could bring an age discrimination complaint respecting its mandatory retirement policy turned on whether he was an "employee" for Human Rights Code purposes, which under the jurisprudence turned on whether he was "subject and subordinate to [the firm’s] decision-making over working conditions and remuneration." As he instead was found to be "part of the group that controlled the partnership, not a person vulnerable to its control," he was not an employee.
As the the human rights control and dependency test is similar to the superintendance and control test which is an important element in determining whether an individual is a common law employee (see Sagaz), this case is supportive of partners, who have the normal rights of participation in partnership voting and information sharing, not being recharacterized as employees for income tax purposes. However, Abella J went on to find that someone styled as a partner could be found to be an employee under the control and dependency test "where the powers, rights and protections normally associated with a partnership were greatly diminished."
Neal Armstrong. Summary of McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39 under s. 5(1).
CRA responds at the 2014 IFA Roundtable
Here are the principal responses of the Directorate at yesterday’s IFA Roundtable:
- Q.1 - A failure to charge a fee for the provision by Canco of a guarantee of debt of a foreign subsidiary will give rise to an investment by it in the subsidiary under the foreign affiliate dumping rules – but with some (vaguely described) potential for any resulting grind in the paid-up capital of its shares to be reinstated if there is a subsequent distribution of the shares of the subsidiary.
- Q.2 - Where the shares of Can Sub, which carries on a Canadian business, are held by U.S. Parent (which is not a qualifying person but which carries on a connected business) "through" U.S. Holdco, a gain on the sale of the U.S. Holdco shares (which are taxable Canadian property) would be considered to be derived from Canada for purposes of Art. XXIX-A, para. 3 of the Treaty, so that such gain generally would be Treaty-exempt.
- Q.3 - The 90-day rule does not permit accessing current year’s exempt earning under s. 90(9)(a)(i) for an upstream loan. Also, accrued interest is indebtedness for purposes of the upstream loan rules.
- Q.4 - CRA generally will accept that the unavoidable and brief holding of deposits between a borrowing and its application to acquire excluded property, or a sale of excluded property and the application of the proceeds to repay debt, will not "taint" the foreign affiliate in question under s. 95(2)(i). Furthermore, the holding by a foreign affiliate of non-excluded property at the time of its purchase will not taint it in the hands of the purchaser for s. 95(2)(i) purposes if (but only if) such "bad" property is sold later on the day of closing.
- Q. 5 - There is no administrative relief for the triggering of gain under s. 92(4) or (5) of capital gain where there is a s. 85(1) roll by Canco of an interest in a partnership which had received pre-acquisition dividends on the shares of its foreign subsidiary – or a s. 85.1(3) roll of the shares of such foreign subsidiary by the partnership to another foreign affiliate.
Neal Armstrong and K.A. Siobhan Monaghan. Notes on CRA Roundtable under 2014 IFA Conference.
CRA no longer permits public service bodies to carry forward HST rebate claims
Most public service bodies (i.e., NPOs, charities, municipalities, universities, schools, and hospitals) have simply been claiming a rebate for the HST on an invoice in a subsequent return if they have not processed the invoice in time to claim it in the current return. CRA no longer accepts this and is requiring that the PSB instead go back and adjust the previous return, thereby creating an additional administrative burden on the PSB as well as on itself.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 89 and Michael Matthews, "Claim Your Public Service body Rebates on Time – or Amend," Canadian GST/HST Monitor (CCH), May 2014, No. 308, p. 1, under ETA – S. 259(3).
CRA confirms its interpretation of the 60-day rule in IT-378R
In response to a description of some addled transactions, CRA confirmed:
- although a partnership (in this case, a Quebec partnership) "would generally cease to exist if there are no longer at least two partners carrying on the business," s. 98(1) would deem the partnership to have not ceased to exist until all partnership property had been distributed; and
- it still stands by the statement in IT-378R (Archived), para. 7, respecting the requirement that "the affairs of the partnership were wound up within 60 days after the disposition" of its property to the corporation, that it will consider "the affairs of a partnership to have been wound up when all the property of the partnership…has been distributed to the members in satisfaction of their interests in the partnership" – so that it shouldn’t matter if formal dissolution of the partnership occurs beyond the 60-day period.
Neal Armstrong. Summaries of 8 May 2014 T.I. 2014-0522771E5 under s. 85(3) and s. 98(1).