News of Note
CRA finds, despite daily interest accrual requirement, that bonuses paid to depositors were interest
Email this ContentCRA found that "promotional bonuses" paid by a credit union to depositors, calculated as a percentage of the deposit balances at specified anniversaries provided that a deposit had been in place for a stipulated period, constituted interest to the depositors. Although CRA professed a requirement that an amount "must be calculated on a day-to-day accrual basis" to qualify as interest, in context it did not treat this as entailing any requirement that the accrued interest must be capable of being calculated at the end of each day during the term of the debt – so that the daily accrual requirement may be largely vacuous. See s. 12(1)(c) commentary - Daily accrual of interest.
Neal Armstrong. Summary of 22 January 2014 T.I. 2014-0517121E5 under s. 12(1)(c).
CRA requires dual T4A issuances for fees to paid to an artist’s corporation and dues paid to her union
Where a producer pays fees under a contract of service with the corporation of an incorporated performing artist and also is obligated to pay additional dues directly to the artists’ union, CRA considers that the producer is required to issue two T4As for the respective amounts to the corporation (to be included in its business income) and to the artist (to be included in her employment income).
Neal Armstrong. Summary of 7 March 2014 Memo 2013-0507171I7 F under Reg. 200(1).
CRA does not accommodate pad sales by real estate pension corps
A s. 149(1)(o.2)(ii) pension corporation is required to limit its real estate activities to "acquiring, holding, maintaining, improving, leasing or managing capital property that is real property" of the corporation.
Where the pension corporation acquires a single parcel to develop as a shopping centre but severs and sells off a small portion that represents excess land, CRA quite predictably considers that it would be a question of fact whether the excess land was acquired as capital property. (The problem is that appreciation by the time the severance is obtained may be anticipated.) Finance accommodated the similar issue of pad sales by REIT subsidiaries by providing the new rules on "eligible resale properties."
Neal Armstrong. Summary of 5 March 2014 T.I. 2013-0490641E5 under s. 149(1)(o.2).
Income Tax Severed Letters 9 April 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The typical structuring of old-for-new option exchanges generally will not satisfy the accommodation of option exchanges in the revised bump denial rules
Comments of Carr and Colden on the recent bump denial amendments include:
- Although specified property has been expanded by deeming shares to include options on shares (which sounds good), this provides no relief if a stock option exchange is structured in the usual manner: to benefit from the amendment, the parent must acquire the old target options in exchange for new parent options, so that the old options cannot simply be cancelled first.
- The inclusion in specified property of debt which was issued solely for money should extend to convertible debt. However, the convertible debt might be determinable property (described in s. 88(1)(c.3)(ii)), given that specified property is not excluded from determinable property.
- In the context of the new rule which is intended to provide relief by permitting a person to be a specified person before the incorporation of the bump parent, such person should be considered (as an interpretative matter) to satisfy the proposed requirement of being related to the bump parent at the very moment of the incorporation of the bump parent notwithstanding that the bump parent would not yet have issued any shares.
Neal Armstrong. Summaries of Brian R. Carr and Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99 under ss. 88(1)(c.9), 88(1)(c.4)(ii) and 88(1)(c.2)(i).
CRA rules on deductibility of interest on money lent by TC to DC immediately after the butterfly
For redacted reasons, a public company (Old Pubco) wishes to interpose a new holding company (New Pubco) between it and its shareholders under a s. 85.1 exchange, and spin-off most of its non-resident subsidiaries to a new sister Canadian corporation (Newco) which also will be a wholly-owned subsidiary of New Pubco.
Since this reorganization does not satisfy the s. 55(3)(a)(ii) test (as the public increases their direct interest in New Pubco), this reorganization must qualify as a butterfly, and CRA so ruled (on the basis that it is a no type-of property butterfly under s. 55(3.02)).
Interest on money borrowed by Old Pubco from New Pubco to pay down debt will be deductible (subject to the more usual limitations) provided that this borrowing does not exceed the paid-up capital of the Old Pubco shares which are redeemed by Newco. CRA has taken a similar approach to the deductibility of interest on debt of a distributing corporation which was not assumed by the transferee corporation on a butterfly (2012 Ruling 2011-0431101R3).
Neal Armstrong. Summaries of 2013 Ruling 2013-0490341R3 under s. 20(1)(c) and s. 55(1) - distribution.
Bolton Steel Tube – Tax Court of Canada finds that a reassessment to purportedly implement a legally unsupportable settlement agreement is void
Bolton reported $1.2M of income and was reassessed for $0.6M of unreported income (later conceded by Justice to be only $0.4M). Bolton and CRA settled on the basis that CRA would reassess to "add [$0.4M] to Bolton’s income." CRA interpreted this as reassessing (as it in fact did) to increase Bolton’s previously assessed income (of $1.8M) rather than its previously reported income (of $1.2M) by $0.4M – perhaps on the basis that it regarded adding the fictitious income for this year as a quid pro quo for vacating reassessments of other taxation years.
In addition to finding that an assessment for fictitious income is void under the Galway principle, Campbell J rejected the Crown’s argument that, where a reassessment implements a settlement agreement, there is no prohibition against it being for more tax than a previous reassessment. In any event, CRA’s interpretation of the settlement agreement was ridiculous.
Neal Armstrong. Summaries of Bolton Steel Tube Co. Ltd. v. The Queen, 2014 TCC 94 under s. 152(1), General Concepts - Evidence, and s. 169(3).
Duncan Thompson - SCC grants leave to appeal decision that client names and addresses generally are not privileged
The Supreme Court has given leave to appeal the Federal Court of Appeal's decision in Thompson. This appeal engages the question of what is required before a client's personally identifying information is protected under solicitor-client privilege.
Scott Armstrong. See current summary of Thompson v. MNR, 2013 DTC 5146 [at 6296], 2013 FCA 197, under s. 232(1) - Solicitor-Client Privilege.
Resource Capital – Australian Federal Court of Appeal finds that, in determining whether the principal asset of a mining company is resource property, substantial separate value should not be accorded to the (intangible) mining information
A year ago, the Australian Federal Court found that if a sale of shares by a non-resident vendor (RCF) of an Australian gold mining company had not been Treaty-exempt, the company should not be considered to have more than 50% of its assets as Australian real property (i.e., its mining rights), so that the gain also would not have been taxable under the Australian equivalent of the taxable Canadian property rules.
This had rested on a finding that one of the quite valuable non-real estate assets of the company was its "mining information." The logic was that if a purchaser acquired only the mining rights and not the drilling results and mining model, it would have to spend a huge sum on exploration in order to be able to commence production approximately four years later. Were this logic importable, it would suggest that many Canadian mining company shares may not be taxable Canadian property.
A three-judge panel in the Federal Court has now reversed this decision, stating that it was inappropriate to assume a sale of the mining rights separately from the mining information and that "in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information ... for less than [its] re-creation costs with little or no delay."
RCF was a Caymans LP with US-resident partners, which was treated for Australian purposes as a corporation and for US purposes as fiscally transparent. The Court (contrary to the primary judge below) found that "because RCF was neither a resident of the US nor a resident of Australia" it followed that the Australia-U.S. Treaty "does not apply to the gain in the hands of RCF" to limit Australia’s right to tax it.
Neal Armstrong. Summaries of Commissioner of Taxation v. Resource Capital Fund III LP, [2014] FCAFC 37 (Fed. Ct. of Austr.) under General Concepts – fair market value – other and Treaties – Art 4.
832866 - Tax Court of Canada finds that failure to ask GST questions about a self-supply is neglect
Under the GST self-supply rule, if a newly-constructed home held in inventory commences to be licensed or leased for personal use, GST is triggered on its fair market value. I am explaining this because it may not be well known.
A small company failed to recognize the application of this rule when its shareholders started to use such a house for personal use which it couldn’t sell. Rip CJ found that this constituted neglect which opened up an otherwise statute-barred reporting period: the novelty of this situation should have "disturbed" it sufficiently to ask a chartered accountant about the GST treatment.
Neal Armstrong. Summary of 832866 Ontario Inc. v. The Queen, 2014 TCC 93 (Informal Procedure) under ETA - s. 298(4).