News of Note
If your shareholders don’t know about this transaction, then they’re not part of the series?
Email this ContentWhere a grandchild Canadian subsidiary (Cco) of Pubco (a non-resident public corporation deriving more than 10% of its fair market value from Cco) redeems pref shares held by another Canadian subsidiary, on a literal reading of s. 55(3)(a)(iii) the resulting deemed dividend could be converted into a capital gain under s. 55(2) if trading in the shares of Pubco occurred as part of the same series of transactions. In connection with getting a s. 55(3)(a) ruling, representations were made that there is no reason to believe that any Pubco shareholder is aware of these transactions (in addition to the ruling effectively being vitiated by a representation that none of the transactions described in s. 55(3)(a) would occur). Sounds fair: a meaningless ruling is given in exchange for a rep that could never be proven.
Neal Armstrong. Summary of 2013 Ruling 2013-0501811R3 under s. 55(3)(a).
Land and non-depreciable building are one property
Although in common tax parlance one refers to land and building as distinct properties, at common law the improvements to land such as buildings form part of the land. This often is not relevant as Reg. 1102(2) effectively deems depreciable property to be separate property from the land.
One place where this point is relevant is under Art. XIII, para. 9 of the Canada- U.S. Treaty, which potentially exempts part of the gain on the sale of real estate that has been held by a resident of the other country since before September 26, 1980. In the example of recreational land in a common-law province on which a personal-use cottage building is erected after that date, the land and improvements will be considered to be one property, so that the portion of a subsequent gain of the U.S.-resident owner which can be partially exempted can include gain attributable to the building. Also, only one s. 116 certificate would be required.
Neal Armstrong. Summary of 4 December 2013 Memo 2013-0489051I7 under Treaties – Art. 13.
U.S. citizens living in Canada generally should not have to pay any NIIT
To 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).