News of Note
Income Tax Severed Letters 19 June 2013
Email this ContentThis morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Oops. I forgot to mention the consideration
Private investors have financed and constructed public projects such as hospitals and contracted for a stream of regular future payments (e.g., management or operating fees) from the government until maturity, when the financing is paid off. Following a favourable ruling, many such projects have been structured on the basis that, in consideration for the agreement of the consortium to construct the facility and operate it during the term to maturity, it is granted a licence to use the property, which qualifies as a Class 14 depreciable property.
When asked what happens when the participants forget to state that the construction costs are incurred in consideration for the grant of the licence, CRA expressed incredulousness that "such an important matter" could be missed; and stated that it was "possible" that some other evidence could be found establishing the cost of the licence.
Neal Armstrong. Summary of 30 May 2013 T.I. 2013-0487301E5 under Sched. II, Class 14.
Lehigh comment: s. 95(6) was intended to deal only with manipulations of CFA/FA status
Nat Boidman suggests that the scope accorded to s. 95(6) by Lehigh is significantly broader than the tax community's understanding of the provision's historical purpose and scope: it was intended only to deal with contrived avoidance of controlled foreign affiliate status or contrived qualification as a foreign affiliate.
Neal Armstrong. Summary of Nathan Boidman, "The Troubling Effects for Canadian MNEs of the Decision in Lehigh," Tax Notes International, 17 June 2013, p. 1211 under s. 95(6).
CRA indicates that the addition by a trustee/beneficiary of a discretionary trust of further beneficiaries can give rise to a taxable disposition by him of part of his beneficial interest
In a 2008 letter addressed to the Aggressive Tax Planning Audit Division which was not released until this week, CRA found that the addition by the sole trustee of a discretionary family trust, who also was one of the beneficiaries, of a group of unrelated persons to the trust beneficiaries, represented a disposition of part of his beneficial interest in the trust for proceeds of disposition that were deemed by s. 69(1)(b)(ii) (respecting "gifts") to be equal to its fair market value.
Given that, as acknowledged by the letter, the property represented by the interest of a beneficiary in a discretionary trust is merely "a right ... to be considered by the trustee as to whether or not any trust property ... should, in the trustee's discretion, be distributed," this advice isn't practical.
Neal Armstrong. Summary of 20 November 2008 Memorandum 2008-0281411I7 under s. 69(1)(b)(ii).
Guindon - Court of Appeal indicates that the Act's administrative penalties are not criminal even when large
The Court of Appeal reversed the Tax Court's decision in Guindon (see previous post) - which vacated a s. 163.2 (professionals') penalty on the basis that the taxpayer had not been given the procedural protections appropriate for the imposition of a criminal penalty. Although the reversal occurred principally on procedural grounds, Stratas JA also indicated that the s. 163.2 penalty (like other such penalties in the Act) was not criminal in nature even though it could be quite large (as happened in this case). Although the penalty was mechanically calculated, the Minister was required on a s. 220(3.1) relief application to take the "fairness purpose" of that provision into account - however here, no timely (within 10 years) application was made.
Scott Armstrong. Summary of Guindon v. The Queen, 2013 FCA 153, under ss. 163.2(5), 220(3.1) and Charter ss. 11 and 12.
Serabai Gold acquisition of Kenai Resources (holding CFAs) will use a Canadian Buyco
Serabi Gold, a UK public company, is proposing to acquire all the shares of Kenai Resources, a BC micro-cap company with a gold property held in a Brazilian subsidiary. The acquisition is proposed to occur under a three-way exchange pursuant to a plan of arrangement under which the Kenai shareholders will transfer their shares to a BC Newco subsidiary of Serabi (Subco), Serabi will issue ordinary shares to them, and Subco (which has one class of shares) will issue common shares with full stated capital to Serabi. Subco and Kenai will then amalgamate.
The normal PUC suppression rule in s. 212.3(7) applies to the PUC of the shares of the CRIC (i.e., Subco) "immediately before" the investment time, whereas here the Subco shares are to be issued immediately afterwards. A dividend substitution election may be planned (see IFA 2013 Round Table, Q. 6(h)), as the same timing rule is not stated to apply in that situation.
As noted in a previous post, CRIC vertical amalgamations are problematic, but presumably Finance will fix that.
Neal Armstrong. Summary of Kenai Resources Circular under Mergers and Acquisitions – Inbound – Other.
CRA extends Norco doctrine
A character preservation rule (s. 129(6)) provides that amounts such as rents and interest which are deducted in computing the Canadian active business income of a Canadian-controlled private corporation are deemed to be Canadian active business income of an asociated corporate recipient for purposes of various rules (in ss. 125 and 129) applicable to CCPCs. In Norco Development, McNair J found (somewhat contrary to the wording of ss. 96(1)(c) and(f)) that interest paid by a partnership to an associated corporation was within the character preservation rule.
CRA considers that the rule also applies in the reverse situation of payment of rent by a CCPC to a partnership to the extent of the percentage member interest therein of an associated CCPC.
Neal Armstrong. Summary of 10 May 2013 T.I. 2012-0442791E5 F under s. 129(6).
CRA confirms that Canadian partnerships generally are transparent for Treaty withholding-rate purposes
CRA considers that a partnership is fiscally transparent for Treaty withholding purposes, so that if a partnership with two Canadian corporate partners is deemed under the s. 15(2) upstairs loan rules to pay a dividend to the direct or indirect parent of the Canadian corporations, the Treaty-reduced rates of withholding for dividends paid to Treaty-resident affiliates satisfying the applicable voting control or share ownership tests generally will be available.
The Netherlands Treaty has a Treaty-reduced rate of 5% inter alia for situations in which the non-resident company "controls directly or indirectly at least 10 per cent of the voting power in" the Canadian payor, so that the 5% rate generally would apply to a deemed dividend received by a Netherlands "grandparent."
Neal Armstrong. Summary of 31 May 2013 T.I. 2013-0486011E5 under Treaties – Art. 10.
Income Tax Severed Letters 12 June 2013
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Tele-Mobile - Federal Court of Appeal finds that the mere "opportunity" of the customer to calculate the GST in a rebate is insufficient for the supplier to claim ITCs
A registrant who pays a rebate in respect of a taxable supply previously made by it in Canada generally is entitled to an input tax credit on the applicable fraction of the rebate provided that it "therewith provides a written indication that a portion of the rebate is an amount on account of tax" (s. 181.1(c)). Mainville JA stated that this requirement is not satisfied if the relevant document merely provides an unambiguous "opportunity" to calculate the GST component of the rebate (as had been suggested obiter by Campbell Miller J). Instead, an "actual written indication" specifying the tax or stating that the rebate includes the tax, is required.
Scott Armstrong. Summary of Tele-Mobile Company Partnership v. The Queen, 2013 FCA 149, under ETA ss. 181.1 and 181(1).