News of Note
The proposed main purpose test in the anti-Treaty-Shopping rule will not work well
Email this ContentThe Budget 2014 anti-Treaty-shopping proposals include a main purpose test which is similar to the limitations-on-benefits provisions contained in the new Canada-Hong Kong Treaty. As pointed out by Jim Wilson (who was over 30 years with CRA), a literal application of this purpose test would result in all sorts of benign transactions being denied treaty benefits. For example, an LOB provisions would apply where a Caymans company transfers Canco to a Hong Kong holding company in order to access the Treaty-reduced dividend withholding rate, even if the Caymans company is owned by a Hong Kong-resident individual.
Neal Armstrong. Summary of Jim Wilson, "New Limitation on Benefits Provisions in Canada's Tax Treaties – A Step Too Far?", Gowlings Knowledge Centre, July 2013 under Treaties, Art. 29A (see also Steve Suarez, "Canada to Unilaterally Override Tax Treaties with Proposed New Anti-Treaty-Shopping Rule," Tax Notes International, 3 March 2014, 797-806, also under Art. 29A.)
Tax advisers are legally responsible for identifying tax savings
A UK NGO, the Tax Justice Network, published a legal opinion last September of Farrer that UK company directors do not have a fiduciary duty to their shareholders to avoid tax. The opinion notes that this "is in direct contrast to the position of a professional tax adviser who is potentially liable in negligence for such avoidable tax as may arise."
Neal Armstrong. Summary of Thomas E. McDonnell, "Tax Avoidance, Morality, and Professional Responsibility", Tax for the Owner-Manager, Volume 14, Number 1, January 2014, p. 5 under General Concepts - Negligence and Fiduciary Duty.
Secret Hotels2 - U.K Supreme Court finds that a one-sided agency agreement favouring the dominant agent can still represent agency
A company ("Med") was found to provide bookings to its on-line customers at Mediterranean and Caribbean hotels as agent for the hotels (so that there was no U.K. VAT on its revenues) notwithstanding some significant departures from what one normally would expect to see in an agency arrangement – many of which Lord Neuberger attributed to Med’s superior negotiating position. The point may be that if, in broad-brush terms, the arrangement was intended to be and was implemented as an agency arrangement, such departures do not necessarily detract from agency.
Neal Armstrong. Summaries of Commissioners for HM Revenue and Customs v. Secret Hotels2 Ltd., [2014] UKSC 16 under General Concepts – Agency, and – Substance.
CRA presumes tailored benefits to be received qua shareholder
"When a person who is at the same time a shareholder and employee receives a benefit which is not offered to other employees, the CRA presumes that the person has benefited therefrom qua shareholder."
This position (on what is a question of fact) appears to be contrary to Pellizzari and Del Grande, and could be problematic where a key employee who requires special incentives or other accommodation also happens to be a shareholder.
Neal Armstrong. Summary of 4 December 2013 T.I. 2012-0465891E5 F under s. 15(1).
Roszko – Tax Court of Canada finds that “interest” received under a Ponzi scheme was non-taxable
Purported interest payments which the taxpayer received under promissory notes issued to him in a Ponzi scheme were not taxable. C Miller J valiantly distinguished Johnson on the basis of "a distinction between earning income based on a fraudulent act or illegal activity versus a finding that the contract itself is a fraud," stating that in the latter situation there is no source of income.
Neal Armstrong. Summary of Roszko v. The Queen, 2014 TCC 59 under s. 3 – reasonable expectation of profit/business activity.
CRA references constructive receipt doctrine
In the course of a general discussion of the meaning of "received," CRA stated that Innovative Installation, 2009 TCC 580, found that "received" does not require "proceeds to pass directly to the taxpayer. The taxpayer can notionally or constructively receive it."
"Notional" is too broad. The Federal Court of Appeal in the same case (2010 FCA 285) clarified that receipt includes indirect receipt, such as receipt by a mere conduit through which the funds flow.
Neal Armstrong. Summary of 11 December 2013 T.I. 2013-0474161E5 under General Concepts – Payment and Receipt.
S. 107(2) rather than 118.1 potentially can apply to an estate distribution to a charity
Respecting which of s. 118.1(3) and 107(2) should apply on the distribution of capital property of a testatmentary trust to discretionary capital beneficiaries including charities, CRA stated that this determination should be made based on the "specific wording of the trust agreement and ... whether the intention of the trustee was to have the trust make a distribution to the charity as a donation of capital property of the trust, or in settlement of a capital interest which the charity may have in the trust." A similar approach is taken in determining whether s. 104(6) or 118.1 applies to an income distribution.
Summaries of 27 January 2014 Memo 2012-0472161I7 under s. 118.1(1) – total charitable gifts, and s. 107(2).
Income Tax Severed Letters 5 March 2014
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Pallen - B.C. Supreme Court rescinds dividends which no longer worked for surplus-stripping following Sommerer
A plan (similar to Brent Kern) was designed to permit a family trust to extract corporate dividends free of tax by engaging s. 75(2) to attribute those dividends to a personal holding company (a trust beneficiary), which would enjoy the s. 112(1) deduction. This plan did not work given the subsequent finding in Sommerer that s. 75(2) did not apply to fair market value sales to a trust.
The Court applied Pitt to find that it generally will be appropriate to rescind a "voluntary disposition" (such as a gift, trust settlement or dividend) for a mistake of fact or law (including a mistake as to tax consequences) where the consequences of that mistake are sufficiently grave. The dividends were rescinded.
Neal Armstrong. Summary of Re: Pallen Trust, 2014 BCSC 305 under General Concepts – Rectification.
Smaller isn’t simpler: TitanStar Properties proposes simultaneous public offering, REIT conversion and s. 86 spin-off
TitanStar Properties Inc. simultaneously issued a preliminary short form prospectus for an offering of subscription receipts and a circular for its subsequent conversion to a cross-border REIT. It also is spinning off a BC company that indirectly holds a Nevada property (the Deer Springs property) which is not a rental property. The plumbing entails using a s. 86 reorg to distribute the Deer Springs holding company (which will not be listed) as well as the REIT, which will hold the balance of its properties. The resulting REIT structure will be conventional: REIT, on top of Canadian holdco, on top of leveraged US holdco (which is not a US private REIT), on top of Nevada or Delaware LPs earning FAPI (net of the interest expense, depreciation and any foreign accrual tax deduction). Although the REIT relies on holding only portfolio investment entities, it might also be a Canadian REIT, given that it will have gotten rid of its questionable property.
Even with some bulking up under its subscription receipt offering, the REIT will still be quite small. This sort of approach likely represents a more cost effective approach for creating (initially small) public vehicles to hold U.S. real estate than trying to do a U.S. IPO.
Neal Armstrong. Summary of TitanStar Properties Inc. Circular and Preliminary Short Form Prospectus under Offerings – REIT and LP Offerings – Cross-Border REITs.