News of Note
Income Tax Severed Letters 12 February 2014
Email this ContentThis morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA may be amenable to late eligible dividend designations where GRIP arises on audit
If a CCPC were determined on audit to have been carrying on a personal services business, so that it was assessed to deny the small business deduction and retroactively acquired a "GRIP," CRA typically would be amenable to a late eligible dividend designation respecting dividends that would have gone out of such high-rate income pool, provided that the taxpayer had been careful in its reporting position that it had been eligible for the small business deduction.
Neal Armstrong. Summary of 11 October 2013 APFF Roundtable Q.14, 2013-0495771C6 F under s. 89(14.1).
Ben Nevis – English Court of Appeal found that a new collection assistance Treaty article applied to old tax debts
Last year, the English Court of Appeal found that a collection assistance Article which had been newly-added to the U.K./South Africa Income Tax Convention should be interpreted as permitting the South African Revenue Service to secure the assistance of its U.K. counterpart in collecting tax debts of a South African which arose prior to the coming into force of that Convention. This is a reminder that foreign tax debts which are not currently collectible in Canada by a foreign tax authority by virtue of the common law revenue rule and limitations in (or the absence of) any collection assistance provision in the applicable treaty, could subsequently become collectible through a new Treaty protocol (and conversely for Canadian tax debts).
Neal Armstrong. Summary of Ben Nevis (Holdings) Ltd. v. Revenue and Customs Commissioners, [2013] BTC 485, [2013] EWCA Civ 578 under Treaties – Art. 26A, Treaties – General, and Statutory Interpretation – Retroactivity/Restrospectivity and Revenue Rule.
CRA claims that there is an obligation to file amended T4As for subsequently discovered errors
Reg. 200 simply requires the filing of prescribed forms, such as a T4A, for listed types of payments. CRA infers that the Regulation creates a continuing obligation to report the correct amount, so that if an error is discovered, a corrected T4A must be issued.
Such an obligation cannot arise in the absence of clear language, and instead there is none.
Neal Armstrong. Summary of 18 October 2013 T.I. 2013-0494441E5 under Reg. 200.
CRA announces that it will no longer “tolerate” nominees as joint venture operators for HST/GST purposes after December 2014
Nominee corporations for real estate joint ventures frequently have filed the HST/GST returns for the joint venture and remitted the applicable tax. CRA considers this practice to be improper if (as is normally the case) the nominee does not have "the managerial or operational control" of the joint venture. However, CRA administratively has refrained from assessing the co-owners for their failure to report the applicable JV transactions on their own returns and remit the tax, provided that the right amount of tax has been reported and remitted under the nominee returns (although Revenu Québec on occasion has been more active on this front).
CRA has now announced that "this administrative tolerance is available [only] for reporting periods ending before January 1, 2015," presumably meaning that those who do not regularize their JV arrangements by then will start getting assessed.
Neal Armstrong. Summaries of GST/HST Notice 284 "Bare Trusts, Nominee Corporations and Joint Ventures" under ETA – ss. 273(1), 240(3)(a), 169(1), 177(1.1).
The Primero acquisition of Brigus Gold is designed to avoid a s. 85.1 rollover and achieve Code s. 368(a) treatment
It is proposed that Brigus Gold will spin-off a small exploration subsidiary ("Fortune") under a s. 86 reorg, with all the Brigus shares then being transferred to Primero Mining Corp. for Primero shares. To bust a s. 85.1 rollover and force s. 85 elections, the Brigus shareholders also will receive very nominal cash consideration (of $0.000001 per share) from Primero – but with the aggregate cash consideration received by each shareholder rounded up to the nearest nickel. Unlike Mitel/Aastra, the Brigus option exchanges will occur strictly on the basis of the (post-spin-off) share exchange ratio rather than being subject to any valuation limitation under s. 7(1.4).
From a purely Canadian perspective, there is a seemingly pointless amalgamation of Brigus with a newco subsidiary of Primero at the end of the Plan of Arrangement. However, the transactions are targeted to qualify as a Code s. 368(a) reorganization, so that the gain of a U.S. shareholder will not exceed the value of the Fortune shares which are spun-out to it. The amalgamation (which is conventional rather that "survivor" style - contrast Coeur d'Alene/Orko) may be intended to qualify the transactions as a forward merger under s. 368(a)(2)(D).
Neal Armstrong and Abe Leitner. Summary of Brigus Gold Circular under Mergers & Acquisitions – Mergers – Shares for Shares and Nominal Cash.
Slate Retail REIT adopts new exchangeable unit methodology
The Slate U.S. Opportunity (No. 2) Realty Trust ("SUSO 2"), which is an unlisted mutual fund trust holding US rental properties through an Ontario holding limited partnership (which is a corporation for Code purposes) and subsidiary Delaware LPs of the Ontario holding LP, will be merged into the similar No. 1 Fund ("SUSO 1") under s. 132.2, with SUSO 1 then being listed on the TSX and being renamed Slate Retail REIT (the "REIT").
The REIT will also acquire three partnerships indirectly holding similar US rental properties. The Canadian unitholders of one of these partnerships (GAR B) can seek Canadian rollover treatment by electing to receive exchangeable units. However, rather than selling GAR B to the Ontario holding LP of the REIT in exchange for exchangeable units of that LP, GAR B effectively will be synthetically converted into a subsidiary of an indirect Delaware subsidiary LP of the REIT, and the GAR B units of the Canadian rollover-seeking unitholders will be amended to be exchangeable units rather than being transferred.
Unlike most pre-March 2013 exchangeable structures, these exchangeable units do not have any exchange rights against the REIT. Instead they are only retractable for proceeds paid by GAR B, with a right of the general partner to decide whether such proceeds are paid by GAR B in REIT units or in cash.
Neal Armstrong. Summary of Circular of Slate U.S. Opportunity (No. 2) Realty Trust and the Slate U.S. Opportunity (No. 1) Realty Trust under Mergers -& Acquisitions – Section 132.2 Mergers – REIT Mergers.
CRA considers that income on funds earmarked for new projects at sister FAs is FAPI
Head office considered that income from funds generated from projects of one CFA was not deemed by s. 95(2)(a)(i) to be active business income (so that it was foreign accrual property income) notwithstanding that such funds were earmarked to finance future projects in the same business line at sister CFAs. CRA considered that the test in s. 95(2)(a)(i)(A) – that such investment income was directly related to an active business of the sisters – was not satisfied as such income could have been earned irrespective of whether it was so earmarked.
Furthermore, the test in s. 95(2)(a)(i)(B) was not satisfied: CRA considered such income would not have been active business income to the sister affiliates if it had been earned by them directly, on the basis of its jurisprudential interpretation that income on funds set aside for future expansion of a business is not income from that business.
Neal Armstrong. Summary of 2012-0439661I7 E under s. 95(2)(a)(i).
Income Tax Severed Letters 5 February 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Berg - Federal Court of Appeal finds that a cash-positive transaction is not a gift
The taxpayer issued a bogus promissory note for 90% of the purported value of timeshares units which he purchased and donated to a charity. In finding that the taxpayer was not entitled to a charitable credit for even the modest value of the donated units, Near JA found that the bogus documents provided to the taxpayer represented a substantial benefit to him (as support for his inflated tax credit claim), so that the donation did not qualify as a gift.
Furthermore, the taxpayer's intent was to "enrich himself" (as the targeted credits exceeded his cash cost, and fees to the promoters) rather than to deplete his property. This second "cash positive" point will now represent an exception to the general proposition that an intended tax credit claim does not prevent a donation from being a gift.
Neal Armstrong. Summary of Berg v. The Queen, 2014 FCA 25, under s. 118.1 - total charitable gifts.