News of Note
Joint Committee Treaty Shopping Submission
Email this ContentThe CBA/CPA Joint Committee made its submissions today to Finance on the February 2014 Budget treaty shopping proposals.
CRA finds that a Canadian equipment installation project which exceeded 12 months, including on-site preparation of plans and final testing, was a permanent establishment
CRA found that a contract of a French company to install specialized equipment at a Canadian factory of an arm’s length Canadian company gave rise to a Canadian permanent establishment of it given its general on-site responsibility for ensuring a successful project and given that the the project lasted more than 12 months including preparing detailed specs on-site and final testing – so that the 12 month safe harbour for installation projects in Art. 5, para. 3 of the Canada-France Convention was not available. The Directorate’s analysis essentially stopped after finding that the project was an installation project that lasted more than 12 months, so this may imply (see also Dudney) a view that installation projects which exceed this limit will invariably be pe’s on general principles.
Neal Armstrong. Summary of 11 April 2014 T.I. 2013-0474851I7 F under Treaties – Art. 5.
Hakki – English Court of Appeal finds that poker winnings of a professional gambler were not from a trade or business
A U.K. poker gambler, who consistently earned around £500 a week by carefully picking tables and refraining from making bets until the situation seemed favourable, was found not to be engaged in a trade or business. This might be more generous than the Canadian authorities, which may suggest that a gambler will become taxable on winnings when "a clear and consistent record of accomplishment in poker" is established: Alarie, see also Balanko, Leblanc, and 3 April 2014 T.I. 2013-0512371E5 F.
Neal Armstrong. Summary of Hakki v. Secretary of State for Work and Pensions & Anor, [2014] BTC 22, [2014] EWCA Civ 530 under s. 3.
CRA finds that a separate copyright royalty paid for the use of music in a film is exempted from withholding
Although copyright royalties for the production or reproduction of musical or artistic works generally are exempted under s. 212(1)(d)(vi), under s. 212(5) this exemption does not apply (in the absence of Treaty relief) where the payments are for the right to use a film in Canada. CRA does not consider that this exclusion will apply where separate copyright royalties are paid to a non-resident for the right to reproduce music which is used in a film.
Neal Armstrong. Summary of 1 March 2014 T.I. 2013-0514291E5 F under s. 212(1)(d)(vi) (see also 2011-0424221I7).
CRA finds that a partnership is transparent for Treaty gains exemption purposes
The gains exemption in the Canada-Singapore Convention does not apply to "gains from the alienation of shares of a company, or of an interest in a partnership or a trust, the property of which consists principally of immovable property… ." Given this "consists of" rather than "derived from" wording, CRA accepts that this provision does not apply to a sale by a Singapore resident of shares of a Canadian company (Canco) which does not directly hold Canadian real estate. However, where the Canco held Quebec immovable property through two partnerships, CRA considered that the partnerships
are not distinct persons for purposes of the Convention and that their respective patrimonies can be assimilated to that of their members [so that] the Canadian immovable properties which are held by means of [them] should be considered as being directly held by Canco to the extent of its interests in them.
Accordingly, the gain on selling Canco shares was not Treaty-exempt. Given that the Treaty wording quoted above treats partnership interests as distinct and that a particular partner does not own partnership property, this interpretation is debatable.
Neal Armstrong. Summary of 14 April 2014 Memo 2013-0516151I7 F under Treaties – Art. 13.
Income Tax Severed Letters 14 May 2014
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Most multi-national employee benefit plans with Canadian employees face intractable issues in applying the NRT rules
The non-resident trust rules in s. 94 are at odds with the realities of global employer benefit plans. Among other issues:
- It may be unclear whether a (usually foreign law) plan is a trust or a custodial arrangement – or it might be both, such as a U.K. sharesave plan.
- The typical non-U.S. multinational EBP will not satisfy the requirement in para. (g) of the "exempt foreign trust" definition that it provide benefits primarily for services rendered in its country of residence – for example, a U.K. retirement plan which is established in Jersey, or a French "trust" where the French employees represent only 49% of the worldwide workforce.
- Respecting the s. 94(2)(k.1) rule deeming there to be a resident contribution when any person has made transfers for the benefit of an employee of a Canadian employer, it may be difficult to determine whether ad hoc contributions to the global EBP by the foreign parent are made in respect of any particular employee - for example, if the parent contributed in 2010, and the first award to an employee of a Canadian entity is made in 2013.
- Application of the exemption for "qualifying services" may require determining when services for a particular award are rendered – for example, if an employee who will become a "bad Canadian" under a 60-month rule is granted a new three-year vesting RSU, when are the services rendered to which this award relates?
- If the trust elects to limit its exposure to Canadian tax on the "resident portion" of the trust, looking at the ratio of the beneficial interests of the Canadian employees versus the others may not reflect the actual contributions which have gone into the trust – nor may it be appropriate to assume that vested beneficial interests are equal to interests with a substantial risk of forfeiture.
Neal Armstrong. Summaries of Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts," Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012 [sic], p. 1583 under s. 94(3), s. 94(1) – exempt trust – (g), s. 94(2)(k.1), s. 94(1) – exempt trust – (f), and s. 94(1) – resident portion.
Hafizy - Federal Court of Appeal observes that appellants must topple the tree rather than tearing off branches
In appeals of Tax Court decisions before the Federa Court of Appeal, the standard of review for conclusions of mixed fact and law is "palpable and overriding error" (see McGoldrick). Gauthier JA has repeated an admonition of Stratas JA that:
When arguing palpable and overriding error, it is not enough to pull at leaves and branches and leave the tree standing. The entire tree must fall.
Neal Armstrong. Summary of Hafizy v. The Queen, 2014 FCA 109 under s. 180(3).
John Doe - Supreme Court of Canada finds that internal Finance policy papers were exempt from Access-to-Information disclosure
Schwartz and Yip have suggested that, in light of the need to ascertain the policy choices underlying provisions in a GAAR analysis of their alleged misuse or abuse, "the taxpayer should be entitled to access information about the tax policy of the specific provisions" through an Access to Information request – and that an exclusion for government documents representing "advice or recommendations" should be construed narrowly.
Although they have a valid point, Rothstein J found that the Ontario Ministry of Finance was entitled to refuse to provide various internal drafts of a policy options paper under the "advice or recommendations" exclusion in the equivalent Ontario provision: the intended effect of the exclusion, which was to encourage public servants to provide candid and complete advice on policy options including, in this case, tax amendments, would be undercut by interpreting the exclusion narrowly. The same logic might apply to preliminary drafts of CRA positions.
Neal Armstrong. Summary of John Doe v. Ontario (Finance), 2014 SCC 36 under Access to Information Act, s. 21.
Gervais – Tax Court of Canada finds that a rollover followed by immediate resale at no commercial gain is an income account transaction
The taxpayer purchased 1.04M preferred shares from her husband at a cost of $1.04M and was gifted a further 1.04M shares on a rollover basis by him under s. 73, so that her cost was $0.04M. The idea was that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there would be a $0.5M capital gain attributed back to her husband on the gifted shares, and that the other $0.5M capital gain would be "hers," so that she could claim the capital gains exemption.
Jorré J accepted that the gifted shares were acquired on capital account (as a gifting transaction is not a trading transaction), and he also accepted that the transactions did not generate a commercial profit to the taxpayer, as the shares did not change in value between their acquisition by her and their sale. However, he found that as the purchased shares were acquired with a view to their immediate resale, they were acquired on income account. (This appears to be inconsistent with the proposition that a transaction which is not intended to give rise to a commercial profit is not a trading transaction - see Continental Bank, Loewen and 2012-0438651E5).
Accordingly, s. 47 did not apply - so that her full $1M gain on resale was a capital gain on the gifted shares, all of that capital gain was attributed to her husband, and it was not necessary to address GAAR.
Summaries of Gervais v. The Queen, 2014 CCI 119 under s. 9 - capital gain v. profit – shares, and s. 47(1).