News of Note
CRA provides limited comfort on an advance by a pension fund to a pension fund subsidiary
Email this ContentTwo 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).
Income Tax Severed Letters 21 May 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bolton Estate – English Chancery Division grants rectification order to give effect to a specific intent to accomplish a particular transaction at the time of botched drafting
The English Chancery Division has granted an order rectifying an estate Deed of Variation on the basis of the demonstration of a specific intent at the time for the Deed to accomplish a transfer of all of the estate property in question to four charities rather than merely a transfer of the residue of the estate to the charities. Once this was established, it did not matter that the original motivation for the Deed was to save inheritance tax.
Although the application was successful, the tests to be satisfied likely were more rigorous than would apply to an application in a Canadian common law province.
Neal Armstrong. Summary of Giles (as administratrix of Hilda Bolton estate) v. Royal National Institute for the Blind & Ors, [2014] BTC 24, [2014] EWHC 1373 (Ch) under General Concepts – Rectification.
CRA permits multiple access to the small business deduction following the conversion of a professional partnership to a corporation
CRA has ruled on the conversion of a professional partnership into a CCPC (Newco) under ss. 85(2) and (3), following which individual partners will provide their respective services to Newco through their personal corporations. Their corporations are not required to share the small business deduction under the specified partnership income rules provided that they are not considered to be in partnership with each other. CRA accepted a representation that the professional corporations are not partners of each other, including representations that each such corporation is free to compete with Newco. CRA also ruled that the personal corporations did not carry on personal services businesses.
On the partnership-to-Newco conversion, the requirement in s. 85(3) that the partnership property immediately before the winding-up consist exclusively property received as consideration for the drop-down of eligible property to Newco (or money) was satisfied by having Newco acquire any non-eligible property of the partnership as consideration for the assumption of liabilities rather than for issuing promissory notes or preferred shares. Furthermore, the promissory note and preferred share consideration was handled on the basis of issuing one note and one share corresponding to each of the partners, but with a representation that this consideration was beneficially acquired by the partnership rather than by the respective partners – notwithstanding that the partnership was wound up a day later with each partner receiving ‘his or her" preferred share and promissory note on the winding-up. No s. 85(2) or (3) rulings were requested respecting these conversion transactions.
Neal Armstrong. Summaries of 2012 Ruling 2011-0392041R3 under s. 125(7) – specified partnership income and s. 85(3).
Brookfield Property Partners’ second-stage acquisition of Brookfield Office Properties shares includes an exchangeable LP unit option and a deemed dividend option
Brookfield Property Partners ("BPY") is engaging in a second-stage transaction under a Plan of Arrangement to acquire the common shares of Brookfield Office Properties Inc. ("BPO") which were not tendered to an offer made by it in February 2014.
As in the previous offer, the consideration to be provided is cash or BPY units (with the aggregate consideration fixed at approximately 67% units and 33% cash) – except that (again as before) Canadian-resident BPO shareholders can choose to receive exchangeable units of an indirect subsidiary Ontario LP ("Exchange LP") of BPY in order to elect under s. 97(2). Perhaps in order to fit within the exchangeable share structure blessed in the Explanatory Notes on derivative forward agreements, the exchangeable units are only retractable against Exchange LP for BPY units, with no direct exchange right with BPY – although on retraction BPY has an overriding call right to acquire the exchangeable units.
An additional feature not present in the previous Offer is that BPO common shareholders also can elect to have their common shares redeemed by BPO itself for BPY units or cash, giving rise to a deemed dividend of over half the value of the consideration.
Convertible preferred shareholders of BPO generally have the option of exchanging their shares for preferred shares of an indirect BPY subsidiary which is expected to qualify as a mutual fund corporation.
Neal Armstrong. Summary of Circular for Brookfield Property Partners second-stage acquisition of Brookfield Office Properties under Mergers & Acquisitions – Subsequent Acquisition Transactions.