News of Note
CRA considers dividends of mortgage investment corporations to be subject to Part XIII tax
Email this ContentDividends paid by a mortgage investment corporation are deemed to be interest paid on a bond. In CRA’s view, such deemed interest is "computed by reference" to income, profit, cash flow or other similar criteria described in the participating debt interest definition, so that such interest is subject to Part XIII tax.
This approach implicitly denigrates the role of the directors, who set dividends in their discretion rather than simply taking out their calculators to multiply the quarterly income by X%.
Neal Armstrong. Summary of 2013 Refusal to Rule 2013-0475701R3 under s. 212(3) – participating debt interest.
Income Tax Severed Letters 13 November 2013
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
90-day rule may not be available for upstream loans
To provide relief from the rule in s. 90(6), which potentially deems an income inclusion to a Canadian-resident taxpayer in respect of an upstream loan made by a foreign affiliate, s. 90(9) potentially allows a deduction under the s. 113 or 91(5) rules that would have been available if the upstream loan had instead been distributed as a dividend or a series of dividends to the taxpayer.
Ken Buttenham points out, among other observations, that it is unclear whether the 90-day look-back rule in Reg. 5901(2) (i.e., for back-dating year-end surplus balances to the time of the dividend) can be used for these purposes.
Neal Armstrong. Summaries of Ken J. Buttenham, "Are you Ready for the Upstream Loan Rules?", Canadian Tax Journal, (2013) 61:3, 747-68, under ss. 90(6), 90(9) and 90(14).
Petrominerales is distributing an exploration sub as a PUC distribution rather than under s. 86
Prior to an acquisition of all its shares for $935M in cash by Pacific Rubiales, Petrominerales is proposing to distribute an Alberta company (ResourceCo), holding a Brazilian exploration subsidiary, to its shareholders as a paid-up capital distribution rather than under a s. 86 reorganization. There is no indication that a ruling was sought.
The U.S. tax disclosure indicates that ResourceCo (which will start out with exploration assets with a book value of $32M and with $100M of cash) is anticipated to be a PFIC for 2013 and 2014 but not thereafter. Although there is no forecast in the Circular, many of our readers might take this as a forecast that ResourceCo will have turned much of its cash into producing assets by 2015!
Neal Armstrong and Abe Leitner. Summary of Petrominerales Circular under Spin-offs – S. 84(2) distributions.
GF Partnership – Federal Court of Appeal confirms that a housing developer did not incur municipal deveopment levies as agent for the home purchasers
A housing developer sought to avoid the requirement to charge GST, on the portion of the home sales prices that represented a recovery of municipal development levies, by inserting a clause in the sales agreements stating that the development levies had been (or would be) paid by it on behalf of the purchasers. The Federal Court of Appeal has affirmed a finding by Woods J. that this did not work. She had found that the clause was defectively drafted, so that the development levy on-charges were taxable. Moreover, even a well drafted clause might not have done the trick given that the development levies often were paid in advance of the sales agreements (i.e., before the supposed principals had even been identified).
Neal Armstrong. Summaries of GF Partnership v. The Queen, 2013 TCC 53, aff’d 2013 FCA 260 under ETA ss. 153(1), 154(1), 254(6) and 296(2).
CRA rules on the internal conversion of a MFC (a former non-MFC) into a MFT, and on ss. 107.4/132.2 eliminations of subtrusts
A mutual fund corporation is proposing to convert into a REIT. First, it will settle a subtrust with modest assets, and distribute the units of the subtrust to its public shareholders, who thus will now hold assets of a "good" mutual fund trust ("REIT #1"), albeit with nominal assets. Next, it will merge into REIT #1 under s. 132.2, so that REIT #1 is now the successor to substantially all its assets. However, it will not be released under its covenant under convertible debentures, which will be assumed by REIT #1 only on an "internal" assumption (respecting which CRA gave a favourable s. 20(1)(c) ruling).
In order to get rid of a subtrust which now is an assets of REIT #1 (and which was the result of an earlier s. 248(1) – disposition, (f) consolidation of four predecessor subtrusts into one), there will be s. 107.4 transfers of all its assets to a new subtrust ("REIT #2"), followed by a distribution of its units by REIT #1 to the REIT #1 unitholders. REIT #2 then will be merged into REIT #1 under s. 132.2. The same steps will then be repeated for a lower-tier subtrust. These steps are analogous to the numerous rulings for "Davis + Henderson"-style conversions of the corporate subsidiary of a REIT or income fund into a mutual fund corporation (essentially all of whose shares were held by the parent fund), with that mutual fund corporation then being merged into the fund under s. 132.2.
Other than a cryptic reference in the summary, the ruling letter is silent on the most interesting point: at some point in its past, the taxpayer was an "ordinary" taxable Canadian corporation rather than a MFC.
Neal Armstrong. Summary of 2013 Ruling 2011-0395091R3 ("MFC to MFT Conversion") under s. 132.2 – qualifying exchange.
CRA considers that an a business which is acquired on an amalgamation cannot be transferred immediately with the benefit of a s. 167 GST election
CRA considers that a s. 167 GST election is not available where an operating company is amalgamated and Amalco immediately sells all of the assets, on the grounds that Amalco is a new corporation that itself did not carry on the business. Similar difficulties arise where a Newco which acquired all of a business is immediately amalgamated before carrying on the business. This is a perennial issue.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 20. ("Reorganizations - Amalgamations") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx), under ETA, s. 167.
CRA considers that a non-resident can be considered to be carrying on business in Canada for GST based on its agreement rather than what it ends up doing
A question posed to CRA highlights an anomaly arising under the rule in ETA s. 133, which deems a supply to be made at the time the agreement for the supply is entered into. What if a non-resident enters into an agreement for the sale and installation of a power plan in Canada (which if implemented would clearly entail carrying on business in Canada) and then, before the installation work occurs, enters (along with its Canadian subsidiary) into an amended agreement under which the subsidiary will do all the Canadian installation work?
CRA stated that "the determination of whether a non-resident is carrying on business in Canada is generally made… at the time the non-resident enters into an agreement to make taxable supplies in Canada and those supplies are deemed to be made."
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 15. ("Carrying on Business") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx), under ETA, s. 133.
A newly-incorporated Subco within a large corporate group generally cannot claim ITCs for GST on pre-incorporation contracts
CRA recognizes that a corporation can generally adopt a pre-incorporation contract for GST purposes. However, this will not entitle it to claim ITCs for the related GST unless (in light of the rule in ETA s. 171) it started off life as a small supplier (which will not work if it is part of a larger commercial group that is over the relevant small-supplier threshold).
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 23 ("Pre-Incorporation Contracts") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx), under ETA, s. 169(1).
A partner cannot claim ITCs for partnership-related expenses incurred before the partnership’s formation
ETA s. 272.1(2) potentially permits a partner to claim input tax credits for expenses incurred by it in the course of partnership activities but not as agent for the partnership. CRA has intimated that this provision will not be available where the expenses in question was incurred by the partner before the formation of the partnership.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 29 ("Real Property Investment") (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx), under ETA, s. 272.1(2).