News of Note
Dixie Energy Trust asset sale and winding-up is structured to preclude any push-out to the unitholders of gain
Email this ContentDixie Energy Trust, which is a listed Alberta unit trust holding U.S. oil and gas assets through U.S. subsidiaries, will close a sale of all its assets on December 29, 2014 and distribute all the net cash proceeds in the following year. It appears to be contemplated that not much will be payable in the way of Canadian taxes by the Trust as a result of the sale as it appears to be occurring as an asset sale by corporate subsidiaries. Although there is paltry disclosure on this point, the Canadian unitholders appear to be taking no direct risk on the Canadian tax consequences to them of the distributions as they will occur in 2015, i.e., after the 2014 disposition of the assets.
Neal Armstrong. Summary of Dixie Energy Trust Circular under Spin-offs and Distributions – Liquidations – Trust Liquidations.
There is no rollover where a 2nd tier partnership acquires all the other partnership interests in the 1st tier partnership
The rollover in s. 98(3) (and s. 98(5)) is not available where a partnership is wound up by virtue of a partner, which is itself a partnership, acquiring all the partnership interests of the other members of the first partnership.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 23, 2014-0538171C6 F under s. 98(3).
In a transfer-pricing context, the arm’s length transfer price trumps FMV
CRA noted that where, on a non-arm’s length transfer of capital property by a non-resident in favour of a resident Canadian, the fair market value of the property differs from the arm’s length transfer price, resort should be had to the latter. CRA did not give any examples of when the two values would differ – although it did note that FMV "generally represents the highest price obtainable for a property on a sale in a free and open market between two willing, informed and prudent persons acting independently" (emphasis added).
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 26, 2014-0538201C6 F under s. 247(2).
CRA considers that two trusts can be affiliated on the basis of a deceased mutual contributor
Two trusts can be affiliated if a contributor to one trust is affiliated with a contributor to the other, for example, if the two trusts also have affiliated majority-interest beneficiaries. CRA generally considers that for these purposes a decedent can be considered to still be the contributor to a trust (based, e.g., on a bequest or an inter vivos transfer followed by her death) even though (unlike the s. 94(1) definition), the s. 251.1(3) definition does not specify that a contributor includes a decedent.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 5, 2014-0534851C6 F under s. 251.1(3) - contributor.
McKesson – Federal Court of Appeal grants amendment to McKesson appeal alleging that it was compromised by Boyle’s J’s comments thereon
Stratas JA found that, although there was no authority directly on point, the considerations respecting whether an amendment to a Notice of Appeal to the Federal Appeal could be made were similar to amendments at the trial level: is the amendment relevant to the determination of the case, would granting the amendment be prejudicial, has the appellant been dilatory and can the new ground of appeal possibly succeed?
Accordingly, he granted a requested amendment to argue that the detailed reasons of Boyle J. for recusing himself from McKesson compromised the integrity of the appeal. However, the draft memorandum submitted on this ground (which he arguably implied was "an unpacked, fluffy snowball") was too long (29 pages) to be good advocacy and was ordered to be pared back.
Neal Armstrong. Summaries of McKesson Canada Corporation v. The Queen under Rule 75, Rule 346.
McGillivray Restaurant – Tax Court of Canada finds that the narrow Silicon Graphics approach to de facto control has been expanded
Silicon Graphics states that, to have de facto control of a corporation, a person or persons must have the clear ability to effect a significant change in the board or directly influence the shareholders. Boyle J confirmed that more recently (e.g., Mimetix) it has been appropriate to rely on "who controlled day‑to‑day operations, who made all the decisions, who signed all the business agreements, invoices and cheques, and who was in a position to exert economic pressure in order to have its will prevail with respect to the business and… the corporation." This might indicate that if (as in this case) the shareholder of one corporation is the dominant executive for both his corporation and his wife’s, the two corporations will be under common de facto control even if it is not clear that the above Silicon Graphics criteria are satisfied.
Neal Armstrong. Summary of McGillivray Restaurant Ltd. v. The Queen, 2014 TCC 357 under s. 256(5.1).
Wickham Estate – Tax Court of Canada denies pro rata portion of an investment management fee based on the portfolio's RRIF portion
Fees awarded by the Public Trustee to a retired investment manager (Sanders), who was the committee of the senile taxpayer (Ms. Wickham), qualified for deduction under s. 20(1)(bb) except for 20% thereof, which was denied under s. 18(1)(u) based on the 20% of her portfolio which was held in her RRIF. Although acting as committee was Sanders’ only relevant activity, it qualified as an investment management business under s. 20(1)(bb).
The income generated by the portfolio substantially exceeded his fees. Before turning to s. 20(1)(bb), Paris J stated: "since the management services provided by Mr. Sanders related to capital assets held by Ms. Wickham, the fees would be non-deductible capital expenditures unless otherwise provided." This is inconsistent with the deductibility of fees incurred in order to earn interest or dividends (Wilson).
The s. 18(1)(u) finding is problematic for any practice of paying investment advisor fees only out of the taxable portion of a portfolio, and deducting them in full rather than pro-rating based on the portfolio's RRSP portion.
Neal Armstrong. Summaries of Wickham Estate v. The Queen, 2014 TCC 352, under s. 20(1)(bb), s. 18(1)(u) and s. 18(1)(b) – capital expenditure v. expense – investment management.
The new back-to-back loan rule is an anti-conduit rule which undercuts legitimate Treaty benefits
The absence of a safe harbour in s. 212(3.1)(b), from the application of the back-to back loan rule for non-resident non-arm’s length intermediaries (who would not enjoy the statutory withholding tax exemption for arm’s length interest anyway), shows that an aspect of this rule is to be an anti-conduit rule that targets situations where that intermediary is fronting for a creditor with an inferior treaty standing. However, the rule operates mechanically.
This produces questionable results. For example, if the identified solution - to the application of the anti-hybrid rule in Art. IV(7)(b) of the Canada-U.S. Treaty to a loan by an LLC (with two "good" U.S. persons as partners) to a ULC subsidiary - is for the two U.S. partners to form a parallel financing LLC through which the debt financing is routed to the ULC, this rule would undermine that solution.
Neal Armstrong. Summary of Michael N. Kandev, "Canadian Interest Anti-Conduit Rule Soon to Be Law," Tax Notes International, December 15, 2014, p. 1027 under s. 212(3.1)(d).
Safe harbours in restrictive covenant rules do not accommodate the giving of a non-compete covenant by a terminated executive to corporate purchasers who are not a related group
The other two equal arm’s length shareholders of a corporation agree to pay $1 million to an executive who holds the other 1/3 of the shares, and who provides a covenant to them not to compete with the corporation and to sell his 1/3 shareholding to them equally. That payment will not be exempted under s. 56.4(6) or (7) from the requirement under s. 68 to allocate a reasonable portion thereof to the non-compete because inter alia he deals at arm’s length with them and the corporation is unrelated to them. The exemption in s. 56(2) will not be available for similar reasons.
Neal Armstrong. Summary of Kenneth Keung and Riaz S. Mohamed, "Restrictive Covenants for Departing Executives," Taxation of Executive Compensation and Retirement, Volume 23 Number 4, November 2012, p. 1604 under s. 56.4(6).
CRA considers that gambling winnings normally are exempt, ponzi scheme winnings generally are taxable and shareholder defalcations normally are non-deductible
Additions or changes in the new Folio on "Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime" include:
- In a substantially expanded section on gambling, CRA shows significant deference to Leblanc, which it quotes for the proposition that gambling "by its nature is not generally regarded as a commercial activity except under very exceptional circumstances," and has dropped the statement in IT-334R2 that "it is clear…that earnings from…illegal gambling…are not exempt from tax."
- Without explicitly acknowledging Stewart, the statement in IT-334R2 that "in order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit" has been dropped – and curiously, the Folio also has dropped completely (rather than amending) the statement that if a "hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit."
- A section on fraudulent investment schemes has been added, in which Johnson is cited for the proposition that "amounts paid to taxpayers that are a return on their investment should be included in…income."
- Crowdfunding receipts are taxable.
It has retained the assertion in IT-185R that losses from defalcations by partners or significant shareholders "are not normally deductible" because "in most cases, such losses…are sustained outside the normal income-earning activities of the business." This is at odds with the discrediting in the Egg Marketing case (65302) of the notion, supposedly based on the old Imperial Oil case, that deductible losses must result from "a normal and ordinary risk of the…operations."
Other retentions: a fraudster generally can reverse an income inclusion when it repays the funds; and, subject to statute-barring, in cases of hardship CRA generally will allow a taxpayer to recognize a loss in the year when its money was stolen rather than the year of discovery of this loss.
Neal Armstrong. Summaries of S3-F9-C1: Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime under s. 3, s. 18(1)(a) income-producing purpose and s. 18(1)(a) – timing.