News of Note
CRA notes that a s. 94 deemed-resident trust can access the general s. 164(6) carry-back rules
Email this ContentAlthough a non-resident estate cannot carry back, to the terminal return of the Canadian deceased, capital losses realized by it on shares of a Canadian corporation which are not taxable Canadian property, this is not a problem where the estate is deemed to be a resident trust under s. 94. Furthermore, the estate can also carry back a capital loss realized on the deceased's principal residence, assuming that it was not personal use property to any beneficiary.
Neal Armstrong. Summary of 12 February 2013 Memorandum 2012-0437211I7 F under s. 94(3)(a).
Aimia Loyalty - UK Supreme Court finds that paying for goods to be provided to a third party can generate VAT credits
The UK operator (LMUK) of a loyalty points programme was compensated by participating retailers for points which it awarded on sales to those retailers' customers, and then compensated other retailers ("redeemers") for goods or services which were acquired from them by the customers when redeeming points.
The UK Supreme Court found that the compensation payments made by LMUK to a redeemer were consideration for a supply of services by the redeemer to LMUK itself, rather than representing third-party consideration for a supply of goods or services by the redeemer to the customer who redeemed points - so that LMUK was entitled to the British equivalent of an input tax credit.
From a GST perspective, the case may be most relevant as an interesting application of the Redrow principle that a "supply of goods or services to the taxpayer...may...consist of the right to have goods delivered or services rendered to a third party." This judicial approach will sometimes supplement the definition of "recipient" in ETA s. 123(1), which provides that he/she who writes the cheque generally is the recipient of the supply.
Neal Armstrong. Summary of HMRC v. Aimia Loyalty UK Ltd, [2013] UKSC 15 under ETA s. 169(1).
CRA (sort of) extends the deadline for making a disproportionate UFT claim by one year
Where a "grandchild" foreign affiliate (FA2) pays a dividend out of taxable surplus to a "child" foreign affiliate (FA1) of Canco, a pro rata portion of the underlying foreign tax of FA2 in respect of Canco is levitated and becomes UFT of FA1. In addition, Canco can make a claim in a letter attached to its return to attach all (or any portion) of the remaining UFT of FA2 to the dividend. This permits Canco to defer tax on any subsequent dividend received by it from FA1 out of taxable surplus.
In 901185, CRA indicated that this disproportionate UFT claim "can" be made by Canco in its return for the year (Year 1) in which the dividend was received by FA1. CRA has now clarified that this disproportionate UFT claim can also be made by Canco in the immediately following year (Year 2) in which FA1 pays a dividend out of taxable surplus to Canco, provided that some additional conditions are satisfied - which typically will not be onerous for wholly-owned FAs having only one class of shares. This interpretation does not discuss the scenario where the subsequent dividend to Canco is not paid until Year 3.
Neal Armstrong. Summary of 3 April 2013 T.I. 2012-0460671E5 under Reg. 5907(1) – Underlying Foreign Tax Applicable.
CRA rules that a s. 87(4) rollover can give rise to a deemed dividend under the CRIC rules
The foreign affiliate dumping rules indicate that the amalgamated corporation resulting from a s. 87 amalgamation of related corporations generally is not considered on the amalgamation to have made an investment in foreign affiliate shares held by a predecessor. However, there is no rule deeming there to be no indirect investment in the shares of the foreign affiliate by a Canadian corporate shareholder as a result of such shareholder being deemed by s. 87(4) to have acquired its shares of the amalgamated corporation at the adjusted cost base of its shareholding of a predecessor. Furthermore, there is no rule to preclude multiple deemed dividends under s. 212.3(2) (or PUC suppressions under s. 212.3(7)) if there is a succession of amalgamations. See Example 18a-C.
CRA has ruled that two amalgamations of a Canadian Target - the first with a Canadian subsidiary of Target, and the second with the Canadian "Bidco" which acquired its shares and which was owned by a non-resident parent through an intermediate Canadian chain - gave rise to two deemed dividends if the foreign affiliates of Target exceeded the 75% valuation threshold set out in the indirect investment rule in s. 212.3(10)(f).
Neal Armstrong. Summaries of 2012 Ruling 2012-0451421R3 under ss. 212.3(18)(a) and 88(1)(d).
CRA acknowledges that partnerships are transparent for s. 116 purposes
CRA has found that where a partnership disposes of shares of a Canadian real estate company, none of the non-resident partners is taxable under the taxable Canadian property rules (and no s. 116 certificate is required). The reason is that s. 96(1), which effectively deems the shareholding to be taxable Canadian property to the partnership, does not apply for the purposes of the potential application of s. 2(3)(c) to its partners. Furthermore, given that CRA acknowledges that no partner (including a 99% partner) owns the partnership property, this result does not appear to rest on the size of the partnership interest of the non-resident.
CRA considers this result to be "unintended" and has advised Finance.
Neal Armstrong. Summary of 19 March 2013 Memorandum 2010-0385931I7 under s. 116(1).
Income Tax Severed Letters 5 June 2013
This morning's release of 22 severed letters from the income tax rulings directorate is now available for your viewing.
Boardwalk - Federal Court of Appeal appears to find that form of invoice drives the substantive GST result
Under an Alberta government program to defray high energy costs, a supplier of natural gas to Boardwalk would charge Boardwalk the full price of, say, $100 plus GST of $7 thereon, and on the same invoice show a credit for the amount of the government grant of, say, $20 that would be received by the supplier from the government on the due date of the invoice.
In these circumstances, Webb JA found that GST was payable by Boardwalk on the full $100. He reasoned that the supplier did not accept the government grant as a partial payment of the consideration until the subsequent due date for the invoice, i.e., after the GST had already been triggered on the invoice date.
This seems to suggest that if the supplier had instead simply charged GST on the ($80) net amount (implying that it was taking on the slight risk of not subsequently receiving the $20 grant), Boardwalk's GST liability would have been reduced to $5.60.
Neal Armstrong. Summary of Boardwalk Equities Inc. v. The Queen, 2013 FCA 140 under ETA - s. 123(1) - consideration.
Lehigh – Tax Court of Canada rejects application of s. 95(6)(b) to double dip structure: there was only U.S. tax avoidance
The use of a double-dip structure (i.e., taxpayer borrows to contribute to an LLC which is a partnership for US purposes, with the LLC lending to US Opco) was unsuccessfully challenged under s. 95(6)(b) as no Canadian tax was avoided: the relevant comparator was for the taxpayer to use the borrowed money to invest directly in U.S. Opco.
This structure no longer "works" under the upstream loan rules as U.S. Opco was a sister of the taxpayer rather than a controlled foreign affiliate.
Neal Armstrong. Summary of Lehigh Cement Ltd. v. The Queen, 2013 TCC 176 under s. 95(6)(b) (with diagram).
Groupe Honco - Federal Court of Appeal finds that a 5-year separation is not enough time to break a series
The taxpayers in a s. 83(2.1) case (respecting the denial of capital dividend treatment where one of the main purposes of a series of transactions including an acquisition of shares was to receive a capital dividend from other than a safe harbor source) were a casualty of the Copthorne doctrine that the "in contemplation of" extension in s. 248(10) of the "series of transactions" concept included backward-looking contemplation.
The taxpayers argued that five years between the share acquisition and the capital dividend was too long for there to be a series. However, applying Copthorne, the Court found that the subsequent capital dividend payment clearly contemplated the previous acquisition of the target corporation’s capital dividend account.
Neal Armstrong. Summaries of Groupe Honco Inc. v. The Queen, 2013 CAF 128 under ss. 248(10) and 83(2.1).
CAE – Federal Court of Appeal, rejecting IT–218R, finds that conversion from rental property to inventory gives rise to a deemed disposition under s. 45(1)
In IT-218R, CRA states that the conversion of property from income-producing capital property to inventory is not governed by the change-of-use rules in ss. 45(1)(a) and 13(7)(a), because the property is used for an income-producing purposes both before and after.
Noël JA disagreed. Where manufactured equipment was used in a leasing activity, so that it was depreciable property, its subsequent offering for sale (or, it would appear, the granting of a contingent option to acquire it) would cause a conversion at that point into inventory, so that there would be a deemed disposition under ss. 45(1)(a) and 13(7)(a).
This finding will be problematic for CRA. For example, in reporting real estate sales, taxpayers on further reflection might conclude that there had been a basis step-up on a change of use in a statute-barred year.
Neal Armstrong. Summaries of CAE Inc. v. The Queen, 2013 FCA 92 under ss. 45(1)(a) and s. 9 – Capital Gain v. Profit – Machinery and Equipment.