News of Note
Health Quest - CRA loses in the Tax Court of Canada because Justice pleaded a legal conclusion
Email this ContentAfter pleading that some of the taxpayer's supplies of footwear were zero-rated as they were specially modified or designed for people with disabilities, the Justice lawyer then simply pleaded an assumption that the sales which CRA had assessed were not zero-rated. As this "assumption" was one of mixed fact and law, its pleading did not shift the burden of proof away from the Crown, so that it lost.
Neal Armstrong. Summaries of Health Quest Inc. v. The Queen, 2014 TCC 211 under General Concepts - Onus and ETA - Sch VI - part II - s. 24.1.
CRA cannot make a consequential reassessment where the Tax Court orders the vacating of an assessment
Following Blackburn Radio, CRA acknowledges that it does not have the authority to issue a reassessment to give effect to a Tax Court order to vacate or vary an assessment.
Neal Armstrong. Summaries of 3 June 2014 Memo 2013-0489471I7 under s. 171(1) and s. 169(1).
CRA state that nominal ($1) consideration taints a non-compete covenant and that a Canadian executor taints purely non-resident trusts receiving estate property
Some highlights from CRA’s responses to Questions 9 to 19 posed at the 16 June 2014 STEP Conference:
- Q. 9 For the time being, CRA is continuing not to charge interest where inter vivos trusts have not made instalments.
- Q. 11 When a non-resident individual becomes resident partway through a year, his or her immigrant trust will retroactively become resident from the beginning of the year (see also Q. 10).
- Q. 12 Where the only beneficiaries of an estate which is administered by a Canadian executor are non-resident trusts with no Canadian beneficiaries or trustees, those trusts will be tainted as s. 94 trusts (presumably during the existence of the estate) on the grounds that they received property from a Canadian trust, namely, the estate.
- Q. 13 CRA now is applying Bozzer (re interest and penalties relief).
- Q. 15 The exemption in s. 56.4(6) or (7) from imputed proceeds for a restrictive covenant – which depends inter alia on no proceeds being received or receivable for the covenant – will not be available where a non-compete agreement provides for the payment of nominal ($1) consideration to the covenanter. (It’s not clear whether CRA understands that the $1 is not actually paid.)
We also have expanded our summaries of CRA’s responses to the first eight questions (especially Q. 3 respecting deemed share classes for an LLC and Q. 5 respecting Brent Kern style trusts) based on a more complete record of what CRA said.
Neal Armstrong. Summaries of 2014 STEP Conference under CRA Roundtables.
Income Tax Severed Letters 9 July 2014
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Debt forgiveness rules did not apply to forgiveness of a guarantee
CRA found that the debt forgiveness rules did not apply to the forgiveness of the obligations of an insolvent corporation (Canco) arising from its guarantee of the obligations of its non-resident subsidiary (Forco). This guarantee obligation was not a "commercial debt obligation" as it (i) was not for borrowed money and (ii) was not payable to acquire property for the purpose of producing income.
Respecting the second point, Canco apparently would not have acquired through subrogation the debt owing by Forco even if it had paid on its guarantee and, in any event, debt owing by an insolvent company might not have satisfied the income-producing purpose test in s. 20(1)(c)(ii) (see Cal-Gas, cf. Lewisport).
Neal Armstrong. Summary of 9 April 2014 Memo 2014-0519231I7 under s. 80(1) – commercial debt obligation.
An LLC manager with a carry holds two classes of shares, coopered-up Brent Kern schemes do not work, and s. 55(5)(f) designations are optional
Stephanie Dewey has summarized the first eight CRA responses at the 2014 STEP CRA Roundtable (with the other 10 still to come). Some highlights:
- Q. 3 Where a subsidiary LLC has a 3rd-party manager whose equity interest has a carry and an entitlement to a 2% "income allocation" amount, with all other distributions being split between Canco and the manager on a pro rata basis, in applying draft s. 93.3 CRA likely would consider that the manager has a special deemed class of shares to which the carry and quasi-fee interest are attached, and that there is a second ordinary deemed class which is held on a pro rata basis by Canco and the manager.
- Q. 5 CRA does not consider that a Brent Kern (or Pallen) style scheme to strip corporate surplus by exploiting the s. 75(2) attribution rule will work even if the Sommerer problem with the scheme is fixed.
- Q. 7 In light inter alia of Nassau Walnut, CRA’s practice is to only apply s. 55(2) to the excess of a dividend over safe income on hand, so that a s. 55(5)(f) designation appears to be optional.
Summaries of Stephanie Dewey, "2014 STEP Canada Roundtable – Part 1," Tax Topics (Wolters Kluwer CCH), No. 2208, July 3, 2014, pp. 1-6 under 2014 STEP Conference.
CRA finds that a non-resident airline with no Canadian PE is required to withhold from the remuneration of its non-resident employees unless a Reg. 102 waiver is obtained
The exemption under s. 81(1)(c) for income of a non-resident (here, a U.K. resident) from income earned in Canada from the operation of an aircraft in international traffic is available (assuming its home jurisdiction provides reciprocal relief) even if it is earning that income by lending out its aircraft and crew to a Canadian airline (so that it does not receive ticket revenues from the passengers.) Its U.K. employees generally would be Treaty-exempt on their remuneration (as they would not be present in Canada for more than 183 days in any 12-month period and their U.K. employer would not have a Canadian permanent establishment) - but according to CRA, this would not eliminate the requirement for Reg. 102 withholding from their remuneration unless a waiver is obtained.
This is starting to engage the Exida.com principle ("the obligation to file could only extend to those that had some connection with Canada,") and the presumption against extra-territoriality (Society of Composers).
Neal Armstrong. Summaries of 16 June 2014 T.I. 2013-0515431E5 under s. 81(1)(c), s. 115(3), Treaties – Art. 15, and Reg. 102.
CRA confirms its position that the lossco in a loss shift should have an independent source of income
CRA has quoted with approval its statement in Income Tax Technical News No. 30 dated May 21, 2004 that in a transaction to shift losses from a parent company to its subsidiary, the parent should have "other assets … that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary."
Neal Armstrong. Summary of 16 June 2014 T.I. 2013-0515431E5 under s. 111(1)(a).
CRA confirms that use of the Canada-Brazil Treaty FTC provisions is not limited by the federal s. 126 strictures (but also does not generate an Ontario FTC for tax spared amounts)
The Ontario Taxation Act incorporates by reference the foreign tax credit rules in the federal Act (i.e., s. 126) together with any other federal statutory (including Treaty) provisions which affect the application of those rules. However, a Canadian taxpayer who wishes to rely on the FTC provisions of the Canada-Brazil Treaty including a tax sparing provision (i.e., a provision that deems Brazilian withholding tax to have been levied even if it has not) applies those provisions independently of s. 126, so that it is not entitled to an Ontario FTC for the tax sparing amount.
Before so concluding, CRA noted in passing that where the Treaty FTC provisions are applied federally, "none of the provisions of section 126 of the Act, including subsections 126(4.1) and (4.2) can be applied to deny such a Federal FTC claim."
Neal Armstrong. Summaries of 16 June 2014 Memo 2014-0525961I7 under Taxation Act, s. 34(1) and Treaties - Art. 24.
A s. 90(2) distribution is made at the time of payment
Subject to exceptions, s. 90(2) deems a pro rata "distribution made" by a foreign affiliate to be a dividend. CRA considers that a distribution is not made until it is paid (including payment by note issued in satisfaction of the distribution), so that there is no distribution at the time of declaration of the distribution. This aligns deemed dividend recognition under s. 90(2), with that under s. 90(1) respecting the payment of what is a dividend under general corporate principles (see Banner Pharmacaps).
Neal Armstrong. Summaries of 17 June 2014 T.I. 2013-0506731E5 under s. 90(2) and s. 128.1(1).