News of Note
Pallen - B.C. Supreme Court rescinds dividends which no longer worked for surplus-stripping following Sommerer
Email this ContentA plan (similar to Brent Kern) was designed to permit a family trust to extract corporate dividends free of tax by engaging s. 75(2) to attribute those dividends to a personal holding company (a trust beneficiary), which would enjoy the s. 112(1) deduction. This plan did not work given the subsequent finding in Sommerer that s. 75(2) did not apply to fair market value sales to a trust.
The Court applied Pitt to find that it generally will be appropriate to rescind a "voluntary disposition" (such as a gift, trust settlement or dividend) for a mistake of fact or law (including a mistake as to tax consequences) where the consequences of that mistake are sufficiently grave. The dividends were rescinded.
Neal Armstrong. Summary of Re: Pallen Trust, 2014 BCSC 305 under General Concepts – Rectification.
Smaller isn’t simpler: TitanStar Properties proposes simultaneous public offering, REIT conversion and s. 86 spin-off
TitanStar Properties Inc. simultaneously issued a preliminary short form prospectus for an offering of subscription receipts and a circular for its subsequent conversion to a cross-border REIT. It also is spinning off a BC company that indirectly holds a Nevada property (the Deer Springs property) which is not a rental property. The plumbing entails using a s. 86 reorg to distribute the Deer Springs holding company (which will not be listed) as well as the REIT, which will hold the balance of its properties. The resulting REIT structure will be conventional: REIT, on top of Canadian holdco, on top of leveraged US holdco (which is not a US private REIT), on top of Nevada or Delaware LPs earning FAPI (net of the interest expense, depreciation and any foreign accrual tax deduction). Although the REIT relies on holding only portfolio investment entities, it might also be a Canadian REIT, given that it will have gotten rid of its questionable property.
Even with some bulking up under its subscription receipt offering, the REIT will still be quite small. This sort of approach likely represents a more cost effective approach for creating (initially small) public vehicles to hold U.S. real estate than trying to do a U.S. IPO.
Neal Armstrong. Summary of TitanStar Properties Inc. Circular and Preliminary Short Form Prospectus under Offerings – REIT and LP Offerings – Cross-Border REITs.
CRA will not open up statute-barred years to apply a subsequent favourable judicial development
CRA will not accede to a request to open up a statute-barred year to reassess based on a favourable decision involving another taxpayer (here, apparently, Craig on farming losses). This accords with Abraham.
Neal Armstrong. Summary of 10 January 2014 Correspondence 2013-0513401M4 F under s. 152(4.2).
CRA continues to consider that form largely governs the sale/lease distinction
Although ITTN, No. 21 has been cancelled, last month CRA quoted approvingly a statement therein that "in the absence of sham, it is our view that a lease is a lease and a sale is a sale."
Neal Armstrong. Summary of ITTN, No. 21: cancelled, but confirmed in 2014-0516921E5 F, under s. 13(21) – depreciable property.
Barnicke/Huynh disagree with CRA that a contribution of capital to a sub is not a qualifying use under s. 95(2)(a)(ii)(D)(II).
There is a subtle difference in the wordings of s. 20(1)(c)(ii) and ss. 95(2)(a)(ii)(D)(II) and (II): the former refers to "an amount payable for property acquired for the purpose of ... producing income from the property;" the latter, to "an amount payable for property acquired for the purpose of ... producing income from property [not "the" property] where ... the property is excluded property [foreign affiliate shares of the payor]."
Barnicke and Huynh think that 2013-0496841I7 is wrong. Where NR2 issues Note2 in consideration for its acquisition of Note1, which it then promptly contributes to its wholly-owned sub, NR3, it is appropriate to consider that it issued Note2 for the purpose of earning income from its shares of NR3: if it had exchanged Note1 for the issuance of shares of NR3, those NR3 shares clearly would represent the current use of the financing represented by Note2; and it should not make any difference that it instead contributed Note1 to NR3 (per IT-533, para. 25).
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "TI Denies Cap D Rule", Canadian Tax Highlights, February 2014, p. 12 under s. 95(2)(a)(ii)(D).
Most Canadian citizenship applicants will be required to first establish Canadian tax residency
A Canadian citizenship applicant now will be required to have been physically present for four years in a six-year period and for at least 183 days per year in four of the six years, and to have filed Canadian income tax returns, if required under the Income Tax Act. As noted by Kevyn Nightingale:
Now each applicant has an incentive to file Canadian tax returns. Without them, CIC [Citizenship and Immigration Canada] will have to determine they were not required. As a practical matter, CIC will likely consult with the CRA to make this determination, so anyone applying for citizenship will need to have their tax affairs in order.
Neal Armstrong. Summary of Kevyn Nightingale, "New Canadian Citizenship Rules (Bill C-24) and Tax", CCH Tax Topics, No. 2190, February 27, 2014, p.1 under s. 2(1).
Reg. 105 withholding can apply to cancellation fees
Reg.105 provides for withholding on payments to a non-resident "in respect of services rendered in Canada." Although the analysis is lanky, CRA appears to consider that Reg. 105 withholding would apply where a U.S. artist is paid a cancellation fee after having rehearsed, but not performed, in Canada, unless a Treaty-based waiver is obtained. This is unsurprising, as CRA has found that up-front withholding is required even on deposits (2011-0405561E5 – see also Ogden).
Neal Armstrong. Summary of 12 February 2014 T.I. 2013-0505511E5 under Reg. 105(1).
ACI - Federal Court of Appeal finds that a common question determination under s. 174 should be handled through joinder of the other taxpayer to the existing appeal
CRA reassessed the taxpayer (ACI) on the basis that a payment of $1.95 million, which another company (AFT) had treated as a deductible management fee but which ACI had treated as a capital receipt from the disposition of a joint venture interest, was fee income to ACI. Following ACI’s appeal of the reassessment, the Minister brought an application under s. 174 to determine which of the two characterizations was correct.
S. 174(3)(b) provides that where an appeal has already been launched, the Tax Court "may" make an order joining the other party to the appeal. Pelletier JA found that that was the right thing to do here, rather than having the common question determined in fresh and distinct proceedings. This gave a tactical advantage to ACI, as it had the effect of preserving the current pleadings (and underlying assumptions) of the Minister, which had potential weaknesses.
Neal Armstrong. Summaries of ACI Properties v. The Queen, 2014 FCA 45 under ss. 174(3) and 174(1).
Fio – Tax Court of Canada confirms that information obtained on discovery cannot be used by CRA to make further reassessments
CRA used insights gained from documents provided to the Justice lawyers on discovery to issue further reassessments of the taxpayer. D'Arcy J found that this use of the documents breached the rule in Juman v. Soucette, 2008 SCC 8, that "information obtained on discovery ... is subject to the implied undertaking [that] it is not to be used by the other parties, except for the purpose of that litigation." However, rather than vacating the further reassessments, he ordered that the discovered documents could not be used in connection with the further reassessments (subject to the Crown getting permission, which would only be granted in "exceptional" circumstances), and also awarded $25,000 in costs against the Crown.
He did not discuss whether each further reassessment was a replacement reassessment (in which case it would have vacated the previous reassessment and the related appeal– see Cameco) or whether it was an additional reassessment (a rare creature).
Neal Armstrong. Summaries of Fio Corporation v. The Queen, 2014 TCC 58, under ss. 152(4), 241, and 171(1).
CRA announces transitional relief for T1135 reporting
In June 2013, CRA issued a revised Form T1135, applicable to taxation years ending after June 30, 2013, which requires more detailed foreign asset reporting, including the names of specific foreign institutions and countries where offshore assets are located, the foreign income earned on those assets and the maximum cost amount of those assets during the year.
CRA has now announced that "for the 2013 tax year only" it will permit "streamlined" T1135 reporting, viz: specified foreign property held in an account with a Canadian registered securities dealer may be reported on a combined basis; similarly, unit trusts may report the combined value of all of their specified foreign property in the same manner for their 2013 tax year; and the filing deadline for the forms for the 2013 tax year has been extended to July 31, 2014 for all taxpayers.
Neal Armstrong. Summary of Revised Form T1135, Foreign Income Verification Statement under s. 233.3(3).