News of Note
Eclipse Film – Explanatory Notes can be more valuable than white papers
Email this ContentIn reviewing Explanatory Notes which indicated that the provision under consideration was not intended to change the law, the UK Upper Tribunal quoted approvingly obiter comments in the House of Lords to the effect that Explanatory Notes may be more valuable than "pre-parliamentary aids" such as white papers, as they have a closer connection to the actual legislation.
Neal Armstrong. Summaries of Eclipse Film Partners (No. 35) LLP v Revenue and Customs Commissioners, [2014] BTC 503, [2013] UKUT 0639 (TCC) under Statutory Interpretation – Hansard, etc. and s. 248(1) – business.
A GP can claim ITCs for incestuous HST (on charges made to it by the limited partnership)
S. 272.1(2) generally permits a partner to claim an input tax credit for HST that it pays in acquiring property or services on its own account (rather than as agent for the partnership) for use or supply in commercial activities of the partnership (provided that it claims the ITC before it is reimbursed by the partnership). If you think this provision applies only to third-party charges, you are wrong. CRA has confirmed that it can also apply to internal charges, i.e., to HST charged by the partnership itself to its GP.
The particular situation was that a limited partnership employed executives whose salaries were charged through to the GP on the basis that it was the responsibility of the GP rather than the partnership itself to manage the partnership business.
Neal Armstrong. Summary of 26 June 2013 Opinion Case No. 144410 under ETA, s. 272.1(2).
Garber – per Tax Court of Canada, 600 LP investors incurred non-deductible losses as the underlying business activities were mere window-dressing
Over 600 taxpayers completely lost their substantial investments in limited partnerships that supposedly were to acquire and charter yachts. The GP had marketing and other business activities. However, Rossiter ACJ characterized these as mere "window dressing," and applied Johnson and Hammill to find that because this "was a fraudulent scheme from beginning to end throughout which the investors' contractual rights were not respected," the partnerships had no source of income: their losses were denied.
If the investors had in fact been legally obligated under the interest-bearing notes they issued to the partnerships to pay for most of their units (rather than those notes being unenforceable because of their being issued under a fraud), the interest would have been deductible as the investors had a reasonable expectation of income at the time they issued the notes: it didn’t matter that the partnerships weren't sources of income. This might contradict Hickman (every s. 20 expense must relate to a source).
Furthermore, a limited partnership cannot satisfy the touchstone (for recognition as a partnership) of carrying on business in common with a view to profit if the subjective intent of the GP was to defraud the LPs.
Neal Armstrong. Summaries of Garber v. The Queen, 2014 DTC 1045 [at 2812], 2014 TCC 1 under s. 3 - Reasonable Expectation of Profit/Business Activity, s. 96, s. 18(1)(a) – income-producing purpose, 13(21) – depreciable property, Reg. 1102(1)(c) and s. 20(1)(c).
Black – Tax Court of Canada finds that Treaty residence in the U.K. did not stop CRA from treating Conrad Black as a Canadian resident
In 2002, Conrad Black was resident in Canada under general principles but was resident in the U.K for Treaty purposes under the tie-breaker rules. He made an unsuccessful argument to the effect that s. 250(5) (which was not yet applicable to him) was enacted for greater certainty, so that (it was argued) he was deemed because of his Treaty status not to be resident in Canada. Accordingly, he was subject to Canadian tax on his world-wide income – including $2.9 million of U.S. employment income, and imputed benefits of $1.4 million from free use of a corporate jet.
Neal Armstrong. Summary of Black v. The Queen, 2014 DTC 1046 [at 2882], 2014 TCC 12, briefly aff'd 2014 FCA 275 under Treaties – Art. 4, Art. 29, Stat. Interp. – Other/Conflicting Statutes, and Interp. Act - 45(2).
Multiple operating subsidiaries can preclude electing to avoid income treatment of non-compete proceeds
Mr. X sells Holdco, holding all of Opco 1 and 2, in an arm’s length sale and grants a non-compete covenant respecting the businesses of Opco 1 and 2. The singular-includes-plural rule (I.A., s. 33(2); Rye) could be applied to the French version of s. 56.4 to conclude that Mr. X’s shares of Holdco qualify as deriving 90% or more of their fair market value from "a" corporation carrying on the business to which the non-compete relates – so that an election potentially could be made under s. 56.4(3)(c) to avoid income treatment of the portion of the sales proceeds allocated to the non-compete. However, the English version more emphatically states that Holdco must derive its fmv from "one other corporation." Without even referring to the English version, CRA concluded that the s. 56.4(3)(c) election was not available for this two-Opco reason. No policy discussion – we just read the words.
However, if there was an agreement with Buyco not to allocate anything to the non-compete, CRA considered that the exemption in s. 56.4(7) potentially would be available – without stipulating that it would be necessary for Holdco (whose goodwill under that provision is required to be preserved by the non-compete) to continue in existence in Buyco’s hands.
Although two relieving provisions in s. 56.4 effectively refer only to non-compete covenants, the giving of a non-solicitation covenant as well would not be problematic if it were sufficiently integrated with the non-compete.
If Holdco sold Opco 1 and 2, with Mr. X still granting the non-compete covenant to Buyco, the election in s. 56.4(3)(c) would not be available as "it is Mr. X, not Holdco, who provides the restrictive clause to Buyco."
Neal Armstrong. Summaries of 11 October 2013 APFF Roundtable Q.19, 2013-0495691C6 F under s. 56.4(3)(c) and s. 56.4(7)(f).
Goldcorp offer for Osisko does not include a s. 85 rollover alternative
Goldcorp is offering C$2.26 in cash and 0.146 Goldcorp common shares for each common share of Osisko Mining. No s. 85 election is offered.
It is unclear whether the disposition of Osisko shares for Goldcorp shares and cash may be treated as an exchange under a Code s. 368(a) reorganization given uncertainties as to whether any subsequent amalgamation will occur as part of an integrated transaction and the number of shares to be tendered to the offer.
Neal Armstrong. Summary of Goldcorp offer for Osisko under Mergers & Acquisitions – Unsolicted Bids (corporate).
CRA finds that an amalgamated corporation could not make an election to extend its predecessors’ year ends
Where a CCPC grants an option to a non-resident to acquire a controlling interest, so that it ceases to be a CCPC, s. 249(3.1) will deem it to have a year end immediately before that time. However, if this deemed year end occurs within what otherwise would have been the first seven days of its taxation year, it may elect under s. 249(3.1)(c) to extend the previous "normal" taxation year end to coincide with the deemed year end.
Not surprisingly, CRA considers that this election cannot operate where the status-changing event occurs in the first seven days of life of an amalgamated CCPC. Even if CRA had been receptive to the narrow interpretation of the s. 87(2)(a) "new corporation" rule suggested in Guaranty Properties and (to some extent) Pan Ocean, there likely would have been the same result.
Neal Armstrong. Summary of 28 November 2013 T.I. 2013-0504221E5 F under s. 249(3.1).
Income Tax Severed Letters 15 January 2014
This morning's release of 22 letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA will assess returns claiming tax shelter gifting credits without due dispatch
CRA is continuing its policy (first announced for the 2012 taxation year) of not processing returns of individuals claiming credits under gifting tax shelter until that tax shelter is audited - unless the claim is removed.
Neal Armstrong. Summary of 10 January 2014 CRA News Release under s. 237.1(1) - tax shelter.
CRA accommodates the s. 21 capitalization of losses that otherwise would disappear on a s. 107.4 trust merger
A ruling released on Wednesday morning respecting the conversion of a mutual fund corporation (which at one point had been an ordinary taxable Canadian corporation) into a mutual fund trust through the utilization of an in-house s. 132.2 merger, essentially represents an amendment of a previously issued ruling, discussed in a previous post. The amended ruling letter accommodates the elimination (through a further s. 107.4(3) transfer and s. 132.2 in-house merger) of a further subsidiary trust (Target) which had been acquired in the interim – as well as the elimination through the same techniques of a subtrust, in turn, of Target.
One point not mentioned in the previous post: a subsidiary LP of one of the subtrusts was to generate a loss which otherwise would have been extinguished, following its allocation to the subtrust, as a result of that subtrust being eliminated. The ruling letter accommodates the capitalization of that loss through a s. 21 election, so that there is a stepped-up cost amount in the buildings received by the new public mutual fund trust.
Neal Armstrong. Summaries of 2013 Ruling 2013-0488351R3 under s. 132.2 – qualifying merger and s. 21.