News of Note
US taxes for an LLC are not FAT even if the LLC actually pays the tax
Email this ContentCRA’s policy that US tax paid by the Canadian shareholder on the income (which also is foreign accrual property income) of an LLC does not qualify as foreign accrual tax, applies even where it is arranged for the LLC to actually makes those tax payments to the IRS. However, where the Canadian shareholder was a corporation, a deduction under s. 113(1)(c) would be available to it in respect of the US tax paid by it where a dividend distribution out of taxable surplus was received by it.
Neal Armstrong. Summary of 2013 STEP Round Table, Q. 6, 2013-0480321C6 under s. 95(1) – FAT.
Income Tax Severed Letters 16 October 2013
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Loans by Canco to a wholly-owned CFA might result in Part XIII tax
Ss. 15(2) and 214(3)(a) on a literal reading can deem there to be a dividend that is subject to Part XIII tax where a Canadian corporation (Canco) lends money to a non-resident subsidiary that happens to be the shareholder of another non-resident subsidiary.
Although CRA has considered (in 2004-0064811E5) that s. 15(2.3) only exempts a loan from the application of s. 15(2) where it was "made in the ordinary course of the lender’s ordinary business of lending money," the loan nonetheless might be exempted (under the other branch of s. 15(2.3)) as "a debt that arose in the ordinary course of [Canco’s] business" if it is customary for Canco to finance its foreign subsidiaries.
Neal Armstrong. Summary of Randy S. Morphy, "The Modern Approach to Statutory Interpretation, Applied to the Section 15 Anomaly in Foreign Affiliate Financing", Canadian Tax Journal, (2013) 61:2, 367-85, under s. 15(2.3).
Lecavalier – Tax Court of Canada finds that GAAR applied to a debt conversion using cash-circling, as an abusive avoidance of the debt forgiveness rules
In an arm’s length sale of a Canadian subsidiary (Greenleaf) of Ford U.S. to a Canadian purchaser for a purchase price ($10M) which thus was less than the $25M debt owing by Greenleaf to Ford U.S., $15M of the debt was first converted into common shares through a cash subscription by Ford U.S. for Greenleaf common shares, and a debt repayment – so that the debt-parking rules did not apply on the subsequent sale of the debt and shares of Greenleaf.
The general anti-avoidance rule applied to include debt forgiveness income in the hands of Greenleaf. The conversion of the debt to shares through a circling of cash rather than a direct conversion represented an abusive circumvention of s. 80(2)(g); and it did not matter that this was implemented by Ford U.S. rather than the purchaser.
A subtlety not captured in the above round numbers is that the confirmed GAAR assessment treated the debt forgiveness as the amount of the debt repayment, which was $100,000 higher than the cash subscription amount due to the application of excess Greenleaf cash. Implicitly applying GAAR on the basis that it was abusive to use cash already on hand to pay down debt, thereby potentially reducing any impact of the debt-parking rules, was inconsistent with the reasons of Bédard J.
Neal Armstrong. Summaries of Pièces Automobiles Lecavalier Inc. v. The Queen, 2013 TCC 310 under ss. 245(4), 248(10), 245(3) and General Concepts – Evidence.
A partner loan works in Alberta
CRA has partially acknowledged common law that a partner cannot receive payments from the partnership qua contractor rather than partner (ITTN 30, citing Crestglen), although it also is prepared to recognize that this can be overriden by applicable provincial statutes (see 2001-0103605 F, 2001-0095675 (re s. 12(2) of Ontario LPA), and ITTN 30, fn. 9 (citing inter alia s. 60 of Alberta and Saskatchewan Partnership Acts).
Skingle and Jankovic suggest that s. 10(1) of the Law of Property Act (Alberta) overrides this common law where there is a partner loan (or other property transfer such as a lease).
Similar statutes in other provinces may be less helpful. In Rye, the House of Lords found that a provision essentially the same as s. 41 of the Conveyancing and Law of Property Act (Ontario) did not validate a purported lease of property by partners to their partnership.
Neal Armstrong. Summary of Ken S. Skingle and V. Daniel Jankovic, "Can a Partner Enter into a Contract with a Partnership of Which the Partner Is a Member?", Tax for the Owner-Manager, Volume 13, Number 4, October 2013, p. 8 under s. 96(1)(g).
CRA considers that an employer “Buyco,” intended to give employees capital gains treatment for their shares, is not at arm’s length
An employer (Opco) incorporates a special-purpose corporation (Buyco) in order to provide capital gains treatment on the purchase of shares previously issued to employees under an employee share ownership plan. CRA (citing RMM and Petro-Canada) considers Buyco to not be dealing at arm’s length with the employees: CRA characterizes Buyco as an accommodation party not acting in its own separate economic interest.
Accordingly, in 2012 CRA declined to give rulings that s. 84.1 would not apply to generate a deemed dividend on the cash sale price.
Neal Armstrong. Summary of November 2012 CRA Panel discussion, 2013-0479402C6, under s. 251(1)(c).
Income Tax Severed Letters 9 October 2013
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Congiu – Tax Court of Canada defers to the Cour du Québec
The taxpayer was assessed under the equivalent GST and QST provisions of s. 159 for distributing property without a clearance certificate. The Quebec assessment was judicially reviewed first, and while this decision was under appeal by her to the Quebec Court of Appeal, her federal appeal came before Angers J on the basis of an agreed statement of facts reflecting the findings in the Quebec action.
Although the federal action was not res judicata (there were different taxing statutes and governments involved), Angers J found that it would be an abuse of process to consider essentially the same dispute, as there was a need to maintain "coherence" in judicial dispositions of the same question.
Neal Armstrong. Summary of Congiu v. The Queen, 2013 CCI 271, under General Concepts – Res Judicata.
CRA confirms that the salary imputation rule in Reg. 402(7) is narrow (and may be impracticable)
Reg. 402(7) provides that where a corporation pays a fee to a third party for services which would "normally" be performed by its employees, the part of the fee that may reasonably be regarded as a payment in respect of services rendered at a particular permanent establishment of the corporation shall be deemed to be salary paid to an employee of the corporation at that permanent establishment for purposes of the Part IV provincial income allocation rules. Reg. 402(6) effectively treats partnerships as transparent under these rules.
CRA dealt with the application of Reg. 402(7) in a two-tier partnership structure, where a "bottom" partnership paid fees to a 3rd party manager. The "normally" test required that: the third party service previously had been provided by employees of the recipient partnership; the partnership had employees; and the manager’s assignment was a short-term one.
CRA considered that any profit element in an otherwise-qualifying management fee should be backed-out; and had no words of wisdom as to how the partners of the top-tier partnership would be able to figure this out.
Neal Armstrong. Summary of 25 September 2013 T.I. 2013-0477571E5 F under Reg. 402(7).
CRA states that GAAR reassessments of statute-barred years should be "rare"
CRA considers that "the reassessment of statute-barred years where GAAR is the assessing authority should be rare."
The correct word is "impossible." Taxpayers have no discretion under s. 245(2) to alter the application of the Act to their transactions in accordance with their personal views of its policy. As decided in Copthorne, "there is nothing in the GAAR provisions that would allow a taxpayer to self assess on the basis that GAAR applies." If taxpayers have no authority to self-assess themselves under GAAR (or obligation to report under s. 237.3), how can failure to do so be careless or negligent?
Neal Armstrong. Summary of 9 November 2012 CTF Atlantic Roundtable Q. 5, 2012-0465921C6 ("Statute Barred Years") under s. 152(4)(a)(i).