News of Note
Aridi - Tax Court of Canada finds that bad advice could be relied upon for statute-barring purposes
Email this ContentIn a recently-noticed case, the taxpayer was reassessed outside the normal reassessment period for a capital gain he had realized on disposing of ½ of his interest in a rental property. He had been told by his accountant that recognition of this gain could be deferred until the other ½ interest was disposed of.
Notwithstanding that essentially all the somewhat unfavourable cases in this area were cited to him (e.g., Snowball, College Park and Gebhart) and virtually none of the favourable ones (e.g., Reilly, Chaumont, Envision, Gauthier and Petric), Hogan J found that there was no "neglect" in the taxpayer’s reliance on this incorrect advice (which the taxpayer had probed before accepting), so that the reassessment was statute-barred.
This suggests that you generally are off the hook for the all bad advice you have given once the applicable reassessment periods have passed.
Neal Armstrong. Summary of Aridi v. The Queen, 2013 DTC 1189, 2013 TCC 74 under s. 152(4)(a)(i).
The base erosion test in the LOB Article of the Canada-U.S. Treaty may be inadequate
The OECD commentary distinguishes between the situation where a third-state resident (who would not be entitled to good Treaty benefits if it invested directly in the source company) uses a "direct conduit" (i.e., it is the majority owner of a "Recipient" company resident in a country with a good Treaty with the source country) and where it uses a "steppingstone conduit" (i.e., it holds debt claims on the revenue streams received by the Recipient company.)
Yoshimura explains in detail that the Limitations on Benefits Article of the Japan-U.S. Treaty (which is similar to that in the Canada-U.S. Treaty) "can handle typical direct conduits while it cannot deal with typical steppingstone conduits."
Neal Armstrong. Summary of Koichiro Yoshimura, "Clarifying the Meaning of 'Beneficial Owner' in Tax Treaties", Tax Notes International, November 25, 2013, p. 761 under Treaties – Art. 29A.
Devon – Tax Court of Canada finds that a partnership property drop-down to a 2nd-tier partnership did not preclude continued successored expense deductions
CRA unsuccessfully took the position before Hogan J that when, following an acquisition of control of a corporation holding an oil and gas partnership, the partnership properties were dropped down to a 2nd tier partnership, the benefit of the look-through rule in s. 66.7(10)(j) was lost, so that the corporation could no longer claim successor deductions in respect of those properties.
In addition to this successoring point, Devon stands for the proposition that "in a tiered partnership, the source and location of income is preserved through each level of partnership."
Neal Armstrong. Summaries of Devon Canada Corp. v. The Queen, 2013 TCC 415 under s. 66.7(10)(j) and s. 102(2).
Coventry Resources proposes to sells its major assets for shares, to be distributed under the s. 84(4) sales proceeds rule
Chalice Gold (an Australian public company) is interested in the principal (Ontario) assets of Coventry Resources (a micro-cap BC public company) but not in its Alaskan project. A proposed B.C. plan of arrangement contemplates that Coventry will sell its Ontario subsidiaries to a subsidiary of Chalice in consideration for Chalice shares, and then effect a stated capital distribution of the Chalice shares to the Coventry shareholders. Coventry will be left with Alaska.
This PUC distribution clearly fits within ss. 84(4)(a) and (b), so that there would be no question of needing a ruling. It is interesting to see a Canadian plan of arrangement governing what effectively is a cross-border merger with a Canadian target.
Neal Armstrong. Summary of Circular for Chalice Gold acquisition of Coventry Resources assets for shares under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Asset sale/share distribution.
Employee stock option shares do not qualify as flow-through shares
A share issued on exercise of an employee stock option does not qualify as a flow-through share because the below-market exercise price constitutes a form of assistance that renders it a prescribed share.
Neal Armstrong. Summary of 21 November 2013 T.I. 2013-0497641E5 under Reg. 6202.1(2)(b).
Income Tax Severed Letters 30 December 2013
This morning's release of 10 letters from the Income Tax Rulings Directorate is now available for your viewing.
Wednesday releases will resume next week.
NPO members can receive a taxable “shareholder” benefit
Responding to a spirited submission to the contrary, CRA maintained its position "that members of a non-profit corporation without share capital will be considered shareholders thereof for purposes of subsection 15(1)… notwithstanding that they are not entitled to receive dividends."
Neal Armstrong. Summary of 7 November 2013 T.I. 2013-0473771E5 under s. 15(1).
The post-March 2010 narrowing of “taxable Canadian property” may scupper the s. 128.1(8) carry-back election
When an emigrating individual has elected under s. 220(4.5) to defer the payment of the tax resulting from the deemed disposition under s. 128.1(4)(b) of taxable Canadian property for its fair market value, he generally can elect under s. 128.1(8) to reduce the exit tax if he subsequently sells the property for proceeds lower than the deemed s. 128.1(4)(b) proceeds.
However, there’s a catch. If, at the time of the subsequent sale, the property has ceased to be "taxable Canadian property" (as a result of the narrowing of this concept in the March 2010 budget), the s. 128.1(8) carry-back election will not be available.
Neal Armstrong. Summary of 24 October 2013 T.I. 2013-0486321E5 under s. 128.1(8).
On a spin-off through a dividend-in-kind, Spinco will take responsibility for Parent’s Part XIII remittance obligation
A Canadian public company with non-capital losses (Pubco) will be spinning off a Newco (holding non-strategic assets) to its shareholders. To avoid a shareholders' meeting, this will be accomplished through a dividend-in-kind.
In order to eliminate the Part XIII remittance obligation of Pubco, it "will cause Newco" to repurchase the requisite portion of the shares distributed by Pubco to non-resident shareholders, with the repurchase proceeds then appropriated by Newco for remittance to the Receiver General. This is magical as neither s. 215(6) nor a plan of arrangement would give Newco the authority to expropriate the non-residents' shares or the proceeds thereof. (Although Newco is relieving Pubco’s Part XIII obligation, there likely is no shareholder benefit as in theory Part XIII tax is an obligation of the non-resident dividend recipients rather than the payer – although no ruling was requested on this point.)
It gets odder. In the preliminary transactions to pre-package Newco for distribution, Pubco will subscribe nominal cash for common shares of Newco, and then drop down the non-strategic assets for interest-bearing notes and for Newco preferred shares whose redemption amount is nominal but would increase on any application of a price adjustment clause. The amount of the taxable dividend to the shareholders is minimized by only the Newco common shares being distributed. Thus, a new enterprise (Newco) could face massive dilution of its common shareholders on application of a price adjustment clause.
Neal Armstrong. Summaries of 2013 Ruling 2013-0488291R3 under s. 52(2) and General Concepts - Effective Date.
CRA rules on Canco/US Pubco RSU recharge agreement
An indirect Canadian subsidiary (Canco) of a US public company (Parent) is proposing to start reimbursing Parent for the value of shares issued by Parent to Canco employees when RSUs issued to them vest. Such reimbursements would not give rise to a taxable benefit for the reimbursements of RSUs awarded after the effective date of the new "recharge agreement." However, in the case of RSUs which had not yet vested by such effective date, CRA would only rule that there was no benefit respecting reimbursements for increases in the value of such RSUs after the effective date.
This is similar to some earlier interpretations (e.g., 990259 and 2000-003491), and contrasts with some more recent interpretations (2009-0321721I7 and 2010-0356401E5) respecting reimbursement by the subsidiary for the Black-Scholes value of options at the time of grant.
Neal Armstrong. Summary of 2012 Ruling 2010-0391281R3 under s. 15(1).