News of Note

JP Morgan - Federal Court of Appeal provides a primer on administrative law remedies (which are a "last resort")

"Armed with sophisticated wordsmithing tools and cunnng minds, skilful pleaders can make Tax Court matters sound like administrative law matters..." (para. 49).

Stratas JA wasn't fooled.  The taxpayer was unsuccessful, in its application for judicial review, to have some Part XIII tax assessments set aside on the basis that they were contrary to the Minister's policy to not go back more than two years on audit.

He thoroughly reviewed administrative law in an income tax context (perhaps to discourage taxpayers from bringing further clear-loser applications).

Neal Armstrong.  Summary of MNR v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250 under Federal Court Act, s. 18.5.

9101-2310 Québec - Court of Appeal finds an accommodation party to not be at arm's length, and that Quebec is different

Several cases (e.g., RMM, see also Livingston) suggest that if a normally independent (and unrelated) person agrees to act as an accommodation party for the taxpayer, then it and the taxpayer are not dealing at arm's length in the resulting transaction.  The most recent example is a friend of the taxpayer who let the taxpayer deposit funds with his corporation to be held by the corporation on behalf of the taxpayer, in order to defeat a bank claim (the friend didn't know about the taxpayer's tax debt).

Noël JA also found that because this arrangement was a "simulation" under the Civil Code (i.e., a contract availed of by third parties notwithstanding that it was contrary to the parties' "secret contract" - i.e., the funds in fact were held on behalf of the taxpayer rather than having been truly divested by him), CRA could treat the funds as if they had been transferred to the corporation for s. 160 purposes.  Although there is no doctrine that CRA can rely on the terms of a purported common law contract which is a sham, a taxpayer in a common law province unsuccessfully argued (in 1524994 - see also Gurd's Products) that a contract should be disregarded for tax purposes because it was "merely" entered into in order to deceive a third party for non-tax reasons.

Neal Armstrong.  Summaries of The Queen v. 9101-2310 Québec Inc., 2013 FCA 241 under ss. 160(1) and 251(1)(c).

Redemption premiums on MRPS are dividends

Luxembourg accommodates the issuance of mandatory redeemable preferred shares ("MRPS"), which are treated as debt for Luxembourg interest-deduction purposes but are shares under the Luxembourg corporate law.  CRA indicated that the premium received on redemption of MRPS is a dividend to the Canadian holder on ordinary principles (i.e., even before applying s. 90(2)).

Neal Armstrong.  Summary of 30 April 2013 Memorandum 2012-0439741I7 ("Hybrid Instruments-MRPS Debt or equity") under s. 90(1).

CRA applies Dudney to an Irish resident contractor

CRA, following Dudney, accepted that an Irish resident who worked as an independent contractor, under a short-term contract, for a provincial authority at its facilities did not have a fixed base or permanent establishment in Canada.

Neal Armstrong.  Summary of 18 June 2013 Memorandum 2011-0393451I7 under Treaties – Art. 14.

Income Tax Severed Letters 23 October 2013

This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA favourably applies the anti-hybrid rule where U.S. individuals lend to a ULC through an S Corp.

Two S Corporations (USCo and USCo2), whose shares are owned by the same U.S.-resident individuals in identical proportions, hold the shares of a Nova Scotia ULC (which is a partnership for Code purposes) and, in the case of USCo, also hold an interest-bearing loan of the ULC.

As a shareholder of USCo, each individual includes a pro rata portion of the interest in income under the Code.  Pro rata portions of that same interest also are deductible by USCo and USCo2 in the computation of their income, with such deductions then flowing through to the individuals qua shareholders of both USCo and USCo2.  Accordingly, there is no net inclusion of the interest in each individual’s income.  On the other hand, if the ULC were not fiscally transparent, the individual would be taxable on the full amount of his or her share of the interest, as the applicable portion of the ULC interest deduction would not flow through to the individual via the S Corps.

CRA ruled that the interest enjoys the Treaty-reduced withholding rate of 0% notwithstanding Art. IV,  subpara. 7(b) requiring that the treatment of the interest under the Code be the same as its treatment were the ULC not fiscally transparent.

CRA also ruled that USCo and USCo2 are eligible for the Treaty-reduced rate (of 5%) for substantial corporate shareholders when the usual 2-step (increase PUC, then distribute it) is used to extract cash profits of the ULC, notwithstanding that Canadian source income of an S Corp. may be considered to be derived instead by its individual shareholders pursuant to Art. IV, para. 6 (see also 2 February 2012 T.I. 2012-0434311E5: CRA considers that there is no need to engage para. 6 as the S Corps. are themselves Treaty residents.)

Neal Armstrong and Abe Leitner.  Summary of 2013 Ruling 2012-0467721R3 under Treaties – Art. 4.

FTC provision in Canada-U.S. Treaty beats the s. 20(11) deduction for U.S. dividend income of U.S. citizens in Canada

The tax rate for U.S. citizens on certain dividends and capital gains increased from 15% to 20% in 2013.  Would a U.S. citizen who was resident in Canada receive only a deduction from Canadian income under s. 20(11) for the additional 5% tax?

CRA indicated that Art, XXIV, para. 5 of the Treaty, is "a complete code in respect of the deductions and credits available to U.S. citizens resident in Canada for the purposes of eliminating double taxation on dividends, interest, and royalties," and that this generally produces a more favourable result than under s. 20(11) (because the deduction is not reduced by any U.S. foreign credit for Canadian taxes allowed in computing the U.S. tax on such item, i.e., it is based on the taxpayer's gross rather than net U.S. tax liability).

Neal Armstrong.  Summary of 11 June 2013 STEP CRA Round Table, Q. 4, 2013-0480301C6 "Foreign Tax Credits for U.S. Citizens under Treaties - Art. 24.

Failure to properly complete a T1135 could extend the normal reassessment period for unrelated matters

Draft s. 152(4)(b.2) (contained most recently in the September 13, 2013 package) extends the normal reassessment period by three years where (a) there has been a failure to file the T1135 as and when required or to provide therein the required information in respect of a specified foreign property, and (b) to report an amount, in respect of a specified foreign property, that is required to be included in the taxpayer's income.  CRA has stated that this extension occurs "for all purposes," suggesting that CRA considers that it could then reassess unrelated matters within the extended period.

Neal Armstrong.  Summary of 11 June 2013 STEP Round Table, Q. 3, 2013-0485761C6 under s. 152(4)(b.2).

Part-year residents can plug the whole year’s income taxes for a foreign country into their FTC formula

CRA implicitly accepts the proposition that "the foreign tax credit which can be claimed in respect of a part-year resident is not limited to the portion of the foreign tax paid while ... resident in Canada [and] the foreign tax for the entire year may be claimed as a foreign tax paid."

Neal Armstrong.  Summary of 2013 STEP Round Table, Q. 5, 2013-0480311C6 ("Foreign Tax Credit/Part Year Resident") under s. 126(1).

CRA confirms that it no longer requires notification of a price adjustment clause

CRA stated that the decision not to carry over paragraph 1(b) of IT-169 into S4-F3-C1 was deliberate - CRA will not require notification of a price adjustment clause in order for the clause to be effective.

Scott Armstrong.  Summary of 10 June 2013 STEP Round Table Q. 7, 2013-0480291C6 ("Price adjustment clause") under General Concepts - Effective Date.

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