News of Note
CRA has expanded its GST/HST Memorandum on zero-rated goods
Email this ContentCRA has revised its GST/HST Memorandum on zero-rating for goods and cognate matters. Added points include:
- The barter rule (deeming nil consideration) in ETA s. 153(6) for provision of "make-up" gas in exchange for natural gas liquids which are consumed at a natural gas straddle plant can apply more than once in the same transaction, for example, where the natural gas owner provides rights to the natural gas to a third party who is obligated to return make-up gas, and the third party is supplied the make-up gas by the straddle plant operator for on-supply to the owner.
- The (not so new) rule in Sched. VI, Pt. V, s. 15.1 permits zero-rating where an unregistered non-resident purchaser in Canada of a "continuous transmission commodity" (e.g., crude oil transported by pipeline) does not actually export the oil but instead delivers it in Canada to a registered Canadian in exchange for the delivery to it of equivalent crude outside Canada.
- Where a Canadian registrant does not charge GST or HST on the supply of a continuous transmission commodity to a registrant who certifies that the commodity will be promptly exported, and that purchaser does not do so (or do a swap as described immediately above), the vendor generally will have no liability – and the purchaser instead will be subject to an imputed interest charge under s. 236.1 "which reflects the cash flow benefit obtained by [it]" (plus the avoided GST or HST itself if it did not acquire the commodity exclusively in the course of commercial activities).
Neal Armstrong. Summaries of GST/HST Memorandum 4.5.2 "Exports – Tangible Personal Property" under ETA s. 153(6), s. 236.1, and Sched. VI, Pt. V, s. 15.1, s. 15.2, s. 1, s. 2, and s. 6.1.
CRA accepts that shares can be disposed of on liquidation rather than dissolution
If an individual disposes of his shares of Opco at a loss to his personal Holdco and Opco then is wound-up into Holdco within 30 days (but articles of dissolution are not filed until beyond the 30-day period), will his capital loss be denied under the superficial loss rule?
CRA indicated that first one must assess whether his shares of Holdco are substituted property for (i.e., identical property to) his shares of Opco, and quoted IT-387R2 to the effect that this would be the case if a prospective purchaser would be equally happy with either. (The Bulletin deserves its archiving. Securities of different persons are not identical.)
If the Holdco shares were not substituted property, then the Opco shares would be considered to be disposed of within the 30-day period if the IT-126R2 criteria were satisfied (e.g., "there is substantial evidence that the corporation will be dissolved within a short period of time.")
There was insufficient information for a GAAR analysis. (CRA would not like the recognition of the loss notwithstanding that Opco effectively continued as Holdco.)
Neal Armstrong. Summary of 7 July 2014 T.I. 2014-0518561E5 F under s. 54 – superficial loss.
Bekesinski – Tax Court of Canada finds that a director who likely backdated his resignation should prevail – in part, because the Crown did not plead the backdating
Campbell J granted the taxpayer’s appeal from a director’s liability assessment under s. 227.1 on the basis that he had resigned more than two years previously, notwithstanding that, "in all likelihood, the Appellant backdated the Resignation." Part of the Crown’s problem was that its pleadings had only alleged that the appellant had continued as a director rather than that the resignation had been backdated. Accordingly, mildly plausible oral explanations of the appellant were sufficient to "demolish" this diffuse assumption. It also did not help that the Crown’s forensic evidence of backdating was disallowed for technical reasons.
Neal Armstrong. Summary of Bekesinski v. The Queen, 2014 TCC 245 under General Concepts – Onus and s. 227.1(4).
Canadian REIT income distributions to an IRA are subject to 15% withholding
CRA has confirmed that income distributions by a Canadian REIT to an IRA of a U.S.-resident are subject to 15% withholding (unless the REIT does not qualify under the Canadian REIT rules, in which case the distributions would benefit from the Treaty rules applicable to dividends).
Neal Armstrong. Summary of 11 July 2014 T.I. 2013-0497381E5 under Treaties – Art. 22.
Income Tax Severed Letters 20 August 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA accepts that public trading in the shares of a dividend recipient is not part of the same series
In connection with a group reorganization to consolidate income and deductions, Pubco will acquire a royalty interest from a general partnership (Partnership D) which is mostly owned by it and a wholly-owned subsidiary (Subco), with Pubco’s cumulative Canadian development expense account being boosted by the fair market value of the royalty, and with the fair market value proceeds proportionately reducing the CCDE of the partners (mostly it and Subco).
In connection with a subsequent transfer of Subco’s partnership interest in Partnership D to it, it will receive a deemed dividend from Subco. CRA ruled that the exclusion in s. 55(3)(a)(iv) would not apply to taint this deemed dividend notwithstanding that trading will occur in the shares of Pubco (viewed as the dividend recipient), and employees may exercise options. This may reflect the (appropriate) view that irrelevant transactions are not part of the same series. This ruling is more robust than 2013-0501811R3, where representations were given that (to management’s knowledge) the Pubco shareholders did not know about the loss consolidation transactions.
In what hopefully is a trite point, CRA also ruled that s. 97(2) applied to a contribution of property to a partnership (i.e., no equity consideration was given by the partnership).
A s. 88(1) ruling was given respecting the winding-up of a wholly–owned subsidiary without any apparent fussing about articles of dissolution not being filed for XX months.
Neal Armstrong. Summaries of 2014 Ruling 2013-0505431R3 under s. 55(3)(a), s. 66.2(5) – Canadian development expense – (e), s. 97(2) and s. 88(1).
CRA cannot assess statute-barred additional income following a notice of objection
Although s. 165(5) on its face states that the statute-barring rule does not apply to a reassessment made in response to an objection, Hogan J applied Anchor Pointe to find that s. 165(5) cannot be used to add income in a reassessment made beyond the normal reassessment period.
Dual findings - that a transfer of equipment, which the taxpayer previously had been licensing to his corporation free of charge, to the corporation was on capital account, yet was made in the course of commercial activity for GST purposes – may be reconcilable.
Neal Armstrong. Summaries of Klemen v. The Queen, 2014 TCC 244 under s. 165(5), s. 9 – capital gain v. profit – equipment, ETA – s. 123(1) – commercial activity.
The DFA rules might apply to currency forward hedges
Observations of Miller and Milet on the derivative forward agreement (DFA) and synthetic disposition arrangement (SDA) rules include:
- It is unclear whether the safe harbour from the DFA rules (contained in the Explanatory Notes) for an exchangeable share rests on the price of the share corresponding to its inherent value, or on the embedded exchange right not constituting an agreement. (The first rationale is more readily portable to other types of exchangeable securities.)
- Gains on currency forwards to hedge a capital asset or obligation might be deemed by the DFA rules to be on income account, given that their performance depends partly on an implicit interest rate differential.
- The SDA rule is very similar to an early version of the U.S. constructive sale rule, which was not implemented following criticism.
- The safe harbour under the SDA rules for arrangements that do not last at least a year means that at the time of filing its return a taxpayer may not know whether an arrangement is an SDA.
- Both the DFA and SDA arrangements can apply to the same arrangement, e.g., a forward sale of shares eliminating risk (to engage the SDA rules) and containing an embedded interest rate (to which the DFA rules apply).
Neal Armstrong. Summaries of Edward Miller and Matias Milet, "Derivative Forward Agreements and Synthetic Disposition Arrangements," 2013 Conference Report, (Canadian Tax Foundation), pp. 10:1-50 under s. 248(1) - derivative forward agreement, s. 248(1) - synthetic disposition arrangement, s. 80.6(2)(e), s. 112(9) and s. 126(4.5).
CRA considers that the application of s. 55(2) to cross-share redemptions by connected CCPCs gives rise to a Part IV tax circularity problem
If two connected Canadian-controlled private corporations cross-redeem shareholdings in each other with the resulting deemed dividends being subject to capital gains tax under s. 55(2), CRA considers that a circularity problem will arise: the capital gains tax on the deemed dividend received by each corporation will result in an addition to its refundable dividend tax on hand account, which will result in a dividend refund on the deemed dividend paid by it to the other corporation, which will result in Part IV tax to the other corporation, which will result in an addition to that corporation's RDTHOH account, which will generate a dividend refund to it and Part IV tax to the first corporation, and so on.
Furthermore, circularity is a sword and not a shield. In light of 943963, the exclusion from Part I tax under s. 55(2) for dividends subject to Part IV tax applies only to "normal" Part IV tax and not Part IV tax arising from the application of s. 55(2).
Neal Armstrong. Summary of 27 June 2014 T.I. 2013-0498191E5 F under s. 55(2).
CRA confirms that taxpayers may use a specific identification method for purposes of the s. 40(3.4) suspended-loss rule
CRA considers that, for purposes of applying the 30-day loss suspension rule in s. 40(3.4), the taxpayer can designate the order in which identical shares were disposed of by it (2003-0002915 F) and that where the loss suspension rule applies, the taxpayer nonetheless can recognize a pro rata loss if there is a reduction in the number of the shares held by it (or an affiliated person) at the end of the 30-day period (2001-008815). CRA has now published an example showing the combined operation of these two administrative positions.
Neal Armstrong. Summary of 2 July 2014 T.I. 2014-0529731E5 F under s. 40(3.4).