News of Note
Cash pool utilization fees “may” be fully deductible
Email this ContentAco and Bco have business-related aggregate bank overdrafts of $200,000, their sister, Cco has a cash balance of $50,000 with the same bank, the bank agrees to charge interest at X% only on the net balance of $150,000 owing by the group, and Cco charges a "financial services fee" to Aco and Bco of X% of $50,000 to recapture their interest savings.
CRA stated that there "are arguments" for Aco and Bco deducting the fees in full under s. 20(1)(e.1) – otherwise they should be deductible over five years under s. 20(1)(e). X% was 10%, and CRA emphasized that such deductibility was subject to the reasonableness limitation in s. 67.
Neal Armstrong. Summaries of 9 December 2013 T.I. 2013-0507931E5 F under s. 20(1)(e.1), s. 20(1)(e) and s. 18(1)(b) – capital expenditure v. expense – financing expenditures.
CRA requires the dissolution of a non-existent limited partnership in order to trigger a disposition of the LP units
CRA accepted the questionable assertion of a correspondent that a limited partnership which had ceased all activity and no longer had any assets (and, therefore, no longer represents a business carried on in common with a view to profit) "has not legally ceased to exist." (If it’s still registered, it must still exist, right?) CRA then went on to conclude that as the s. 50(1) rule did not extend to LP units, it would be necessary to "dissolve" the partnership in order to trigger their disposition.
Neal Armstrong. Summary of 3 January 2014 T.I. 2013-0482081E5 under s. 50(1).
A non-standard loss shift includes a payment for the losses
A loss shift from Opco to its sister (Profitco) normally would entail Opco lending at interest to Profitco and Profitco subscribing for Opco prefs. However, Profitco is a regulated financial institution which does not want additional debt on its balance sheet, and Opco is to be paid for its losses. Accordingly, Opco will effect a loss shift to a newco subsidiary (Lossco) and sell Lossco to Profitco for prefs whose redemption amount will reflect some value for the losses and which Profitco will redeem; and Lossco will be wound up into Profitco under s. 88(1.1). The goosed value of the prefs does not give rise to a s. 56(2) benefit to the parent of Profitco and Opco.
Neal Armstrong. Summaries of 2013 Ruling 2013-0496351R3 under s. 111(1)(a) and s. 88(1.1).
The income tax and HST treatments of Bitcoin barters are at odds
CRA considers that in a transaction where a merchant (or other business) sells goods or services for Bitcoins, the profit for income tax purposes is based on the normal selling price of the property or services, whereas the consideration for HST/GST purposes is the value of the Bitcoins. The two values could differ significantly if the vendor is selling on a bargain basis or the Bitcoin values are fluctuating wildly.
When asked about capital gains treatment in the context of the "enormous" recent appreciation of Bitcoins, CRA indicated that Bitcoins are treated the same as other commodities, so that capital gains treatment may be possible in the circumstances.
Neal Armstrong. Summaries of 23 December 2013 Memo 2013-0514701I7 under ETA – s. 153(1), ITA – s. 9 – Computation of profit and s. 9 - Capital gain vs. profit - Commodities, and commodities futures and derivatives.
CRA confirms that the inclusion (or not) of partnership stub period earnings in a company’s retained earnings for thin cap purposes is governed by Canadian GAAP
Given that retained earnings of a Canadian company for thin cap purposes generally is to be determined in accordance with Canadian GAAP, those retained earnings could include the company’s share of stub period earnings of a partnership of which it was a member (if such inclusion occurred under GAAP), even if, under s. 96, income of the partnership for the stub period was not yet includible in the company’s income.
Neal Armstrong. Summary of 24 December 2013 Memo 2013-0512551I7 under s. 18(4).
Income Tax Severed Letters 22 January 2014
This morning's release of 25 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that multiple implementation by arm’s length shareholders of estate freezes generally will preclude subsequently accessing the capital gains exemption
Although s. 110.6(8) completely denies the capital gains deduction if any "significant part" of the individual’s capital gain is attributable to dividends not being paid on shares, Reg. 6205(2) provides an exception for qualifying estate freezes of a corporation (Opco), so that the Parent can take back freeze preferred shares under s. 86 with a non-cumulative dividend which might not be declared, thereby increasing the appreciation in the common shares for which a trust for the Parent’s children had subscribed. However, there is a requirement in Reg. 6205(2) that there not be any beneficiary of the trust who deals at arm’s length with the holder of the preferred shares.
CRA interprets this requirement as effectively indicating that it is not possible for multiple (say, four) individual shareholders of Opco, who deal with each other at arm’s length, to each implement an estate freeze under s. 86, given that beneficiaries of each children’s trust will deal at arm’s length with the other three "freezor" shareholders. However, CRA is somewhat amenable to the notion that it might satisfy Reg. 6205(2) if the four shareholders first transferred their shares of Opco into respective Newcos, and then carried out a s. 86 estate freeze at the Newco level (so that the non-arm’s length test worked at that level) – with the four Newcos then amalgamating with Opco.
Neal Armstrong. Summary of 11 October 2013 APFF Roundtable Q. 5, 2013-0496511C6 F under Reg. 6205(2).
Eclipse Film – Explanatory Notes can be more valuable than white papers
In 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).