News of Note
U.S. citizens living in Canada generally should not have to pay any NIIT
Email this ContentTo help fund "Obamacare," the U.S. is imposing the Net Investment Income Tax on 3.8% of a U.S. person's net investment income in excess of specified thresholds. However, U.S. citizens living in Canada generally should not be subject to the NIIT on the basis that (in Nightingale’s view) it should qualify as a social security tax.
If the NIIT is not a social security tax, there nonetheless is a good argument that the U.S. should allow a foreign tax credit to such individuals under the Canada- U.S. Treaty, as there is no evident intent for the NIIT legislation to override the Treaty.
Neal Armstrong. Summary of Kevyn Nightingale, "The Net Investment Income Tax: How it applies to U.S. Citizens Abroad", International Tax, No. 73, December 2013, p. 9 under Treaties – Art. 24.
CRA now is willing to accept conditional s. 184(3) elections
If a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), a dilemma arises: if a timely election under s. 184(3) is made to convert the dividend into a taxable dividend so as to eliminate the Part III tax, then that dividend cannot be converted back into a capital dividend if the objection to the Part III tax assessment ultimately is successful. Contrary to an earlier position, CRA now is prepared to hold the processing of the s. 184(3) election in abeyance, so that it will be treated as void if the taxpayer’s objection is successful, and treated as timely filed if the objection (or subsequent appeal) is dismissed.
Neal Armstrong. Summary of 4 December 2013 T.I. 2013-0504951E5 under s. 184(3).
CRA acknowledges that its T2 Guide is wrong
S. 88(2)(a)(iv) indicates that on a Canadian corporate winding-up (otherwise than under s. 88(1)) the year end of the corporation is deemed to end immediately before the distribution time for the purposes (only) of computing specified tax accounts – e.g., the capital dividend account or pre-1972 CSOH. The T2 Guide states that a tax return should be prepared for the taxation year that ends with the distribution and that a new year end can be chosen for the taxation year that commences immediately thereafter.
In response to an earnest inquiry, CRA acknowledged that these statements (and a corresponding line in the T2 return) are wrong, and will be corrected in the next edition.
Neal Armstrong. Summary of 10 December 2013 T.I. 2013-0480771E5 F under s. 88(2).
CRA rules on the set-off of an upstream loan against a dividend
A non-resident subsidiary (ForeignHoldco) of Canco will eliminate a non-interest-bearing loan previously made by it to Canco by declaring a dividend, paying the dividend by issuing a demand promissory note and then receiving the note from Canco in payment of the loan. The only requested ruling was to the effect that dividends (including a liquidating dividend) previously received by ForeignHoldco from a Malaysian-resident subsidiary - whose income had been subject to Malaysian income tax at a rate of, at most, 3% on the basis that it was carrying on an offshore business activity in Labuan (an island which was a Malaysian federal territory) - qualified as an addition to ForeignHoldco’s exempt surplus in respect of that Labuan subsidiary.
Neal Armstrong. Summary of 2013 Ruling 2013-0477871R3 under Reg. 5907(11.2).
Income Tax Severed Letters 8 January 2014
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Revett Minerals is taking advantage of a business reversal to continue to Delaware
Revett is CBCA corporation holding, through US subsidiaries, a U.S. mine at which production has been temporarily suspended as well as a US deposit in development. It is proposing to continue out of Canada and be "domesticated" as a Delaware corporation. Although this will result in a deemed disposition of all its property (s. 128.1(4)(b)) and an exit tax calculated at 5% of NAV minus PUC (s. 219.1), management does not anticipate any material Canadian income tax under these rules provided that the share price is below $2.25 per share – which generally has been the case since the U.S. mining operations were suspended.
As discussed in a previous post on another transaction, the continuance of Gastar Exploration (with a U.S. natural gas business) from Alberta to Delaware was regarded from a U.S. tax perspective as entailing a transfer by Gastar of all its assets to the new Delaware corporation (Gastar Delaware), followed by a distribution by Gastar of Gastar Delaware to its shareholders. This distribution step was problematic as Gastar Delaware was a United States real property holding company for FIRPTA purposes.
Notwithstanding that US mines are FIRPTA assets, Revett management does not anticipate that the domesticated Revett will be a USRPHC. The disclosure does not describe the analysis in support of this view.
Neal Armstrong and Abe Leitner. Summary of Revett Minerals Proxy Circular under Public Transactions - Other – Continuances.
CRA generally will not assess interest where a “good” (ETA s. 186(1)-qualified) holding company does not self-assess itself for GST on imported taxable supplies
Although in a broad sense, ETA s. 186(1) treats a Holdco holding an Opco with an exclusive commercial activity the same as if it carried on the commercial activity itself, strictly speaking all that s. 186(1) does is entitle the Holdco to input tax credits on related purchases. Accordingly, s. 186(1) does not apply to relieve Holdco of the obligation to self-assess itself for purchases of imported taxable supplies relating to Opco (and then claim an off-setting ITC).
However, CRA has now indicated that where a registrant fails to account for HST on an imported taxable supply which should have been self-assessed and has not claimed an ITC for those amounts, administrative tolerance generally will be exercised so that no interest is assessed.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 34 (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx) under ETA, s. 217(1) – imported taxable supply.
CRA is prepared to apply s. 248(28) to avoid a double inclusion arising under the upstream loan rules
Barnicke and Huynh have seen an unpublished interpretation. If a grandchild foreign subsidiary (FA 2) of Canco which made a loan to it is wound-up into the immediate subsidiary (FA 1), this will result in a second income inclusion to Canco under the upstream loan rule (s. 90(6)) – yet Canco will only be entitled under s. 90(9) to one deduction for the exempt surplus of FA 2 which moved up to FA 1 on the liquidation. However, CRA will apply s. 248(28)(a) to avoid such double inclusion.
Similar issues can arise if FA 1 and FA 2 merge.
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Upstream Loans: CRA Update," Canadian Tax Highlights, Vol. 21, No. 12, December 2013, p. 3 under s. 90(6).
A. P. Toldo - Tax Court of Canada declines to expand the indirect use doctrine in Penn Ventilator
D'Arcy J recognized the proposition that a taxpayer with a money-lending business potentially "may" be able to deduct interest on general principles rather than under s. 20(1)(c). Furthermore, a taxpayer with sufficient retained earnings or stated capital, and which incurs interest-bearing debt to redeem a shareholder for compelling business reasons, can in this "exceptional fact situation" establish a qualifying indirect use for purposes of interest deductibility under s. 20(1)(c). However, neither proposition was established on the evidence before him.
Neal Armstrong. Summaries of A.P. Toldo Holding Corporation v. The Queen, 2013 TCC 416 under s. 20(1)(c) and s. 18(1)(b) - capital expenditure v. expense - financing expenditures.
McKesson – Tax Court of Canada reduces a cross-border receivables financing rate from 27% to 12.5% p.a.
In order to largely eliminate the Canadian taxpayer's taxable income, its ultimate US parent directed it to sell its receivables as they arose to its immediate Luxembourg parent at a discount of 2.206%, which worked out to an annualized rate of 27% given that the receivables on average were collected in 30 days. Boyle J found, in reviewing CRA’s transfer-pricing adjustment to the taxpayer under ss. 247(2)(a) and (c), that he could adjust the discount rate and, in that connection, tinker with the actual terms of the receivables transfer agreement to change them to the minimum extent necessary to accord with what arm’s length negotiations would have produced. However, he was inclined to think that it was inappropriate to (and he did not) impute changes to the fundamental terms of the deal – for example, by inquiring what the terms would have been if the receivables had been sold on a recourse rather than a non-recourse basis.
In the end, he found that CRA’s assumption that a discount rate corresponding to an annualized rate of around 12.5% (which was within the range he calculated) was arm’s length, had not been demolished by the taxpayer. (It didn’t augur well when, respecting one argument, he stated (para. 246), "Overall I can say that never have I seen so much time and effort by an Appellant to put forward such an untenable position so strongly and seriously.")
An assessment for Part XIII tax under s. 214(3)(a) for a correlative benefit to the Luxembourg parent also was confirmed. As this benefit was distinct from the primary transfer-pricing adjustment to the taxpayer, a five-year assessment limit in the Treaty did not apply.
Neal Armstrong. Summaries of McKesson Canada Corp. v. The Queen, 2013 TCC 404 under s. 247(2), s. 247(4), Treaties – Art. 9, General Concepts – Intention and General Concepts – Evidence.