News of Note
CRA provides provincial GAAR rulings
Email this ContentA public company (Lossco) is transferring losses to a "Profitco" which is a wholly-owned indirect subsidiary of another public company (Bco) which is partially owned by Lossco. Profitco effectively is receiving the losses for free, which means that the minority shareholders of Bco are receiving a free ride.
In addition to customary federal rulings including GAAR, CRA ruled that the provincial GAAR for any province with which there is a tax collection agreement will not be applied to "determine" (i.e., redetermine) tax consequences addressed in the federal rulings.
Neal Armstrong. Summaries of 2013 Ruling 2013-0504301R3 under s. 111(1)(a) and s. 245(4).
A profitco will form an LP in order that a limited recourse loss-transfer loan can be made to the LP
A direct recourse loan by a Lossco to a subsidiary Profitco (Opco) would not have complied with a debt indenture of Opco. Accordingly, the loss shifting transactions will entail Lossco making an interest-bearing loan to a newly-formed subsidiary LP of Opco, with recourse under the loan limited to the pref shares of an affiliated Newco acquired by the LP with the loan proceeds.
Neal Armstrong. Summary of 2013 Ruling 2013-0483491R3 under s. 111(1)(a).
Proftitcos will form an LP to facilitate the transfer of losses from a multitude of sister losscos
In order to facilitate the transfer of losses between a multitude of subsidiary Losscos and three Profitcos (being the parent and two wholly-owned subsidiaries), the Profitcos will form a subsidiary LP which will subscribe for pref of the Losscos and receive interest-bearing loans from the Losscos.
Neal Armstrong. Summary of 2013 Ruling 2012-0458091R3 under s. 111(1)(a).
CRA addresses types of property held by an inactive business in a spit-up butterfly
In a split-up butterfly of a CCPC (DC) that had discontinued farming itself and had rented out its lands to other farmers, the farm land was treated as investment property whereas farming equipment and inventory which it had not yet been sold was classified as business property.
The receipt under the steps of deemed dividends both by DC and the transferee corporations (TCs) for the three family shareholders gives rise to a potential RDTOH circularity problem. The Directorate leaves this problem to the district offices, stating that they "will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b)."
Neal Armstrong. Summaries of 2013 Ruling 2013-0502921R3 under s. 55(1) – distribution and s. 186(1).
CRA accommodates multiplication of small business deduction by professional partners
CRA has provided another ruling permitting incorporated members of a professional partnership to enjoy the small business deduction. CRA accepts a representation that the professional corporations are not partners of each other, including representations that each such corporation is free to compete with the partnership. Accordingly, the corporations are not required to share the small business deduction under the specified partnership income rules.
Neal Armstrong. Summaries of 2013 Ruling 2013-0498961R3 under s. 125(7) – specified partnership income and s. 256(2.1).
A loan extension need not trigger an FX gain
CRA likely considers that the renewal of a foreign currency borrowing by a taxpayer from a related company following its maturity (i.e., an extension of the maturity date) will not give rise to a gain or loss under s. 39(2) unless there was an intention by the parties that the loan be novated.
Neal Armstrong. Summary of 14 March 2014 Memo 2013-0507661I7 under s. 39(2).
Lehigh Cement – Federal Court of Appeal finds that s. 95(6)(b) is restricted to status-manipulation share acquisitions or dispositions
Stratas JA confirmed that CRA could not apply s. 95(6)(b) to deny the s. 113(1)(a) deduction of the taxpayer for exempt dividends in a double-dip structure (where the taxpayer borrowed to contribute to an LLC which was a partnership for US purposes, with the LLC lending to US Opco and distributing the interest income to the taxpayer as exempt dividends on the basis that they were deemed active business income). He found that s. 95(6)(b) was intended only to deal with "the manipulation of share ownership of the non-resident corporation to meet or fail the relevant tests for foreign affiliate, controlled foreign affiliate or related corporation status in subdivision i" through share acquisitions or dispositions (perhaps thinking of the types of transactions described by Nat Boidman). Here, there was no such manipulation of status, and the Tax Court instead had found that the purpose of the LLC was to achieve US tax savings.
Stratas JA also advanced a principle that one should be loath to interpret an avoidance provision broadly so as to effectively give CRA a largely unfettered right to treat similarly-situated taxpayers differently.
Neal Armstrong. Summaries of The Queen v. Lehigh Cement Ltd., 2014 FCA 103 under s. 95(6)(b) and Statutory Interpretation – Certainty.
CRA finds that a transfer-pricing increase to eligible capital property proceeds results in a CDA increase effective to the disposition time
CRA found that where a s. 247(1) transfer pricing adjustment was to be made to increase the proceeds of an inter-affiliate disposition of eligible capital property, the resulting increase in the capital dividend account of the disposing Canadian private corporation was effective to the time of the disposition. This contradicts 2001-0115265 F, which noted that because the amount to be "included in income by virtue of paragraph 14(1)(b)...cannot be determined until the end of the taxation year... a corporation cannot include an amount in its CDA, respecting a disposition of goodwill ... until the end of the taxation year during which such disposition took place," and is incorrect. What CRA meant to say was that the transfer pricing adjustment will have the same effect on the CDA as if it were received at the time of the disposition.
I heard that historically the biggest source of business for the CRA/Justice rectification committee has been CCPCs which immediately pay capital dividends out of the non-taxable portion of gains from eligible capital property rather than waiting until the beginning of the next year.
Neal Armstrong. Summaries of 19 December 2013 T.I. 2013-0490751I7 under s. 89(1) – capital dividend account and s. 247(8).
Lang suggests that the Sommerer Treaty approach is inconsistent with the OECD partnership report
In Sommerer, Sharlow JA found obiter that the gains exemption article in the Canada-Austrian treaty would have precluded the purported application of a Canadian domestic gains attribution rule (s. 75(2)) to the Canadian taxpayer in that case even though the person invoking the exemption was that Canadian resident rather than the Austrian alienator (i.e., an Austrian foundation) of the Canadian shares giving rise to the attributed gain. She found that preventing such "economic" double taxation was within the intended general purview of the treaty.
Michael Lang suggests that the "allocation conflict" arising on the Sommerer facts (i.e., Austria treating the Austrian foundation as the taxpayer, but with Canada attempting to treat the foundation as transparent) is analogous to Case study 16 of the OECD partnership report respecting a partnership with Partner A resident in State P and Partner B resident in state R. The partnership has a permanent establishment in State P and is treated as a taxable entity by State P while State R treats it as transparent and seeks to tax partner B on royalty income derived by the partnership.
Lang notes that the majority opinion in the partnership Report was that State R is able to tax partner B on his share of the royalty income. Under the same approach, Canada would be able to tax the Canadian taxpayer on gain of the foundation that under Canadian principles was allocated to the Canadian resident (if CRA had successfully established that s. 75(2) applied under Canadian domestic law).
Neal Armstrong. Summary of Michael Lang, "Income Allocation Issues Under Tax Treaties," Tax Notes International, April 21, 2014, p. 285 under Treaties - Article 13 and Treaties - General and summaries of Sommerer v. The Queen, 2012 FCA 207 under Treaties - Article 13, Treaties- General and ITA 75(2).
Franchise renewal fees are subject to Part XIII tax
Franchise renewal fees paid on a cross-border basis are considered by CRA to be "rents, royalties or similar payments" and, therefore, are subject to Part XIII tax under s. 212(1)(d) on general principles.
Neal Armstrong. Summary of 27 March 2014 T.I. 2013-0512921E5 under s. 212(1)(d).