News of Note
Failure of the taxpayers to file HST returns did not mean they had “dirty hands” precluding rescission of an HST-inefficient sale
Email this ContentSome B.C. corporations sold land in 2011 to a start-up partnership for development. They did not charge HST because, as everyone knows, there is no HST collectible on sales of commercial real estate (assuming the purchaser is registered).
Due to a mix-up, the partnership had not been registered, and CRA assessed the corporations for their failure to charge HST.
Loo J applied the doctrine of equitable mistake to rescind the transfer, so that the lands could be resold to the partnership, which was now registered. She was not fussed by this doctrine having been judicially reversed in England. There was no adequate legal remedy: BC's abolition of HST before the discovery of the problem in 2013 meant that the "basic tax content" of the lands was reduced from 12% to 5% - so that the partnership would be entitled (assuming no rescission) only to a 5% ITC under ETA s. 171 upon being registered. Finally, the corporations’ failure to file GST/HST returns (so that the problem was not discovered before the adverse B.C. change of law) did not mean they had "dirty hands."
Neal Armstrong. Summaries of 0741508 B.C. Ltd. and 0768723 B.C. Ltd. (Re), 2014 BCSC 1791 under General Concepts – Rectification and Rescission, and ETA, s. 171(1).
CRA rules that passive interest income qualifies under the active trade or business test in Art. XXIX A, para. 3 of the Canada-U.S. Treaty
The active trade or business test in Art. XXIX A, para. 3 of the Canada-U.S. Treaty permits a U.S. resident who derives income from Canada to claim Treaty exemptions with respect to that income if it or a related person is engaged in an active trade or business in the U.S., the income in question is derived in connection with, or is incidental to, that trade or business, and the U.S. active trade or business in the U.S. is substantial relative to the activity in Canada that gave rise to the income in question. CRA ruled that a U.S. C-Corp (ForSub) could access this rule with respect to interest paid to it on a note owing by a Canadian affiliate carrying on (through a partnership) the same business in Canada notwithstanding that the U.S. related business activities were all carried on by LLC sisters of ForSub and there was no indication in the facts that it was anything other than a Finco.
Neal Armstrong. Summary of 2014 Ruling 2013-0511761R3 under Treaties – Art. 29A.
Reversing an earlier position, CRA now acknowledges that s. 95(2)(a)(ii)(D) applies in an indirect use situation
An immediate LLC subsidiary of Canco (NR1) sold a subsidiary engaged in an active business (NR6) to a great-grandchild (NR4) in consideration for Note1 of NR4, and then sold Note1 to its immediate subsidiary (NR2) in consideration for Note2 of NR2.
Applying McCool, CRA found that 95(2)(a)(ii)(D)(I) did not apply to recharacterize the interest on Note2 as active business income as Note2 represented purchase-price indebtedness rather than borrowed money. Furthermore, s. 95(2)(a)(ii)(D)(II) also was not available as "NR2 acquired Note1 in consideration for the issuance of Note2…[so that] the property acquired was not shares of another foreign affiliate." As noted by Barnicke/Huynh, this finding was suspect, as s. 95(2)(a)(ii)(D) "does not require that borrowed money or purchase debt be used directly to acquire property that is shares of another FA that are excluded property... [and] the preamble ... also refers to direct or indirect use."
CRA (without explanation) has now specifically reversed this earlier interpretation, stating that s. 95(2)(a)(ii)(D)(II) "applies in the circumstances," so that "the interest received on Note 2 should [not] be included in the FAPI of NR1."
Neal Armstrong. Summary of 21 October 2013 Memorandum 2013-0496841I7, as reversed by 16 September 2014 Memo 2014-0519801I7 under s. 95(2)(a)(ii)(D).
Income Tax Severed Letters 1 October 2014
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Immunovaccine – Federal Court of Appeal finds that government loans made in a non-commercial capacity are "government assistance"
Under a federal program for fostering Maritimes development, the taxpayer received interest-free advances, which were not characterized as forgivable loans - but were repayable only out of a percentage of future revenues.
The advances were "government assistance" which reduced the taxpayer's SR&ED credits. Although they were not subsidies or forgivable loans, they were "any other form of assistance," which Nadon JA found should be considered to be the case unless "the public authority in question is acting in a business rather than a governance capacity."
Thus, if you have advised that, because forgivable loans are the only type of loans specifically included in the definition of government assistance, a non-forgivable loan is not included, you were wrong.
Neal Armstrong. Summaries of Immunovaccine Technologies Inc. v. The Queen, 2014 DTC 5119 [at 7309], 2014 FCA 196 under s. 127(9) - government assistance and Statutory Interpretation - ejusdem generis.
The description of an intermediary debt has been expanded in the 29 August 2014 back-to-back loan proposals
The proposed back-to-back loan rule would impose withholding tax where a Canadian borrower (say, "Canco") pays loan interest to an arm’s length "intermediary" if there is an "intermediary debt" with specified attributes owing, in turn, by the intermediary to a person who does not deal at arm’s length with Canco. The scope of what constitutes an intermediary debt has been expanded in the latest (29 August 2014) version of this rule. For instance, the second level of debt will be deemed to be intermediary debt if its existence somehow affected the terms of the debt owing by Canco to the intermediary.
A safe harbour introduced in the same revisions, for situations where intermediary debts represent less than 25% of qualifying categories of loans owing by Canco, is quite narrow: to be a qualifying loan, the creditor must be the intermediary itself, the security interests relating to the different qualifying debts must correspond quite closely, and they must arise under the same or a "connected" agreement.
Neal Armstrong. Summaries of Steve Suarez, "An Analysis of Canada's Latest International Tax Proposals", Tax Notes International, September 29, 2014, p. 1131 under s. 212(3.1)(b), s. 212(3.1)(d) and s. 212.3(9).
Deemed interest may arise on non-interest bearing intercompany term loans
"It is possible" that the fair market value of a non-interest-bearing term loan will be less than the amount advanced, in which case s. 69(1)(a) "could" deem the loan to have a cost equal to that fair market value if it was made to a related person – so that Reg. 7000(2)(a) would then apply to require current accrual of the (deemed) loan discount. This is one reason most domestic non-interest bearing inter-company loans are repayable on demand.
Neal Armstrong. Summary of 28 July 2014 T.I. 2014-0532651E5 under Reg. 7000(2)(a).
CRA implies that complete T1134s must be filed in a voluntary disclosure for failure to report FAPI
A taxpayer had failed to report foreign accrual property income or file T1134s. Headquarters stated that to have a valid voluntary disclosure "the taxpayer must provide complete and exact information and documents for all taxation years" and that, "in the context of a voluntary disclosure respecting the declaration of FAPI, the working papers calculating the surplus accounts of the FA also can be requested for all the affected years." The summary implies that "complete documents" include complete T1134 filings (whose informational requirements are exacting and which generally are exigible after 1995). No problem! All this data doubtless will be at hand.
Headquarters also noted that the penalties under ss. 162(10) or (10.1), or s. 163(2.4), which could be engaged for failure to file T1134s only in circumstances of gross negligence etc., generally could be imposed without time limitation (i.e., in the absence of a valid voluntary disclosure). It did not suggest that failure to file T1134s was presumptively gross negligence.
Neal Armstrong. Summaries of 14 July 2014 Memo 2014-0537701I7 F under s. 220(3.1) and s. 152(4)(a)(i).
CBA/CICA Joint Committee comments on deficiencies in the 2014 Budget trust/estate rules
The CBA/CICA Joint Committee has commented inter alia on deficiencies in the proposed/revised s. 104(13.1) designation rule, s. 104(13.4) deemed income flow-out rule, s. 108 – testamentary trust – (d) - anti-stuffing rule, and s. 164(6) loss carry-back rule.
Neal Armstrong. Captioning of CBA/CICA Joint Committee submissions on 2014 Budget trust/estate rules.
Tacking on an unrelated person to a majority related-person control group can taint the safe harbour in s. 256(7)(a)
Where two children purchase 2/3 of the shares of their father’s holding company from him and the other 1/3 of the shares is purchased by their cousin, s. 256(7)(a)(i)(A) will deem there to be no acquisition of control of the holding company by virtue of their purchase because they acquired the shares from a related person. However, if as a factual matter, the cousin was part of the new control group for the holding company, the s. 256(7)(a)(i) safe harbour would not be available, so that there would be an acquisition of control.
Neal Armstrong. Summary of 22 August 2014 T.I. 2014-0540751E5 F under s. 256(7)(a).