News of Note
GAAR was applied by CRA to the avoidance of s. 93(2) through continuing an LLC previously used in a tower structure into Canada
Email this ContentAn LLC had been used in a classic tower structure that then was unwound. The Rulings Directorate noted that CRA had applied the general anti-avoidance rule to transactions which had sought to avoid the application of the stop-loss rule in s. 93(2) to a capital loss realized on the winding-up of the LLC (as part of the dismantling of the tower structure) by first continuing the LLC under the CBCA.
Turning to the transactions now in issue, the Directorate indicated that "subsection 248(5) contemplates rules of interpretation which establish the scope of the concept of substituted property for purposes of the Act" – i.e., rather than merely being a deeming provision, s. 248(5) codifies the concept of substituted property for purposes of the Act?
Neal Armstrong. Summary of 25 September 2013 Memorandum 2013-0476311I7 F ("93(2), 93(2.01) - Share substituted") under s. 93(2.01).
Calloway REIT will eliminate its subtrust under a s. 132.2 merger without a unitholder vote
Calloway REIT will be eliminating its subtrust on a rollover basis. First, the subtrust will transfer its assets under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of Calloway, with 3% of MFT's units then being distributed to the Calloway unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into Calloway under s. 132.2. These same general mechanics have been ruled on (see s. 132.2 – qualifying exchange).
The transaction does not require unitholder approval (so that there will be no circular) and is being implemented without a plan of arrangement (e.g., the second stage of the s. 132.2 merger is to be implemented through a unilateral redemption of units).
Neal Armstrong. Summary of 1 November 2013 OSC Order for Exemptive Relief respecting Calloway REIT under Other - Subsidiary S. 132.2 Mergers.
Reg. 5907(2.03) is a problem for offshore metal streams transactions
Where the earnings of a foreign affiliate are computed for surplus purposes on Canadian principles, new Reg. 5907(2.03) now requires that all available deductions be claimed. This is a problem for offshore metal streams transactions. In order to avoid local taxation on a deposit received under a long-term contract for the sale of the metal to be produced at a mine, a foreign affiliate in, say, the Caymans would be interposed, so that it rather than the local mining foreign affiliate receives the deposit. The Caymans affiliate now is required to claim the s. 20(1)(m) reserve respecting the deposit, so that it does not have exempt earnings to be distributed to Canco to be reinvested in the local mining project.
Neal Armstrong. Summary of Michael W. Colborne, "Regulation 5907(2.03) and Offshore Metal Streams", Resource Sector Taxation, Volume IX, No. 2, 2013, p. 647 under Reg. 5907(2.03).
CRA confirms that s. 256(9) only gives two time choices
After asserting that "it is generally accepted that the ‘particular time on a day’ at which control of a corporation is acquired is the hour at which the transaction documents are signed" rather than when they are released from escrow by agreement or on the satisfaction of agreed conditions, the questioner postulated that control of ABC is acquired at 1:30 in the afternoon of Day 1 on this basis, but the purchase agreement stipulates that "for purposes of subsection 256(9)" control of ABC will be acquired at the very beginning of Day 2. CRA confirmed that control was acquired at 1:30 of Day 1 if the s. 256(9) election was made, or otherwise at the beginning of Day 1.
Neal Armstrong. Summary of 11 October 2013 APFF Roundtable Q. 12, 2013-0495751C6 F ("Time of an Acquisition of Control") under s. 256(9).
CRA confirms and extends its administrative tolerance for failures to report HST on real estate purchases
CRA has a policy of administrative tolerance to not assess interest and penalties where an HST registrant which is exclusively engaged in commercial activities neglects to self-assess itself for HST on a real estate purchase and claim the off-setting input tax credit. CRA has now confirmed that it generally will follow the same approach where the ITC claim has become statute-barred.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 31. (available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx) under ETA – s. 228(4).
CRA will not respect the Quebec corporate law labeling of Class A and B common shares (with the same rights) as being distinct
In 2004-0092561E5, CRA indicated that where Mr. X transfers common shares under s. 85 to the corporation in exchange for common and preferred shares of the corporation (in order to shift cost base over to the prefs), he will not have disposed of all of his common shares as he continues to have the same bundle of rights respecting common shares after this transaction.
CRA has now indicated that this position is not affected by the stipulation in the new Quebec Business Corporations Act that different classes of shares may have identical share provisions. Accordingly, exchanging Class A common shares for Class B shares will not be considered to be a disposition if they have identical rights.
In light of the long-standing CRA position, it is common in s. 86 reorganization spin-off transactions for the "new" common shares issued on the s. 86 reorganization to have two votes per share. See, for example, Fission and IMZ.
Neal Armstrong. Summary of 11 October 2013 APFF Round Table Q. 13, 2013-0495821C6 F ("Subsection 85(1) and cost base isolation transactions") under s. 85(1).
CRA finds that s. 95(2)(a)(ii)(D)(I) does not apply to purchase-price indebtedness
An immediate LLC subsidiary of Canco (NR1) sold a subsidiary engaged in an active business (NR6) to a great-grandchild (NR4) in consideration for Note1 of NR4, and then sold Note1 to its immediate subsidiary (NR2) in consideration for Note2 of NR2.
Applying McCool, CRA found that 95(2)(a)(ii)(D)(I) did not apply to recharacterize the interest on Note2 as active business income as Note2 represented purchase-price indebtedness rather than borrowed money.
Neal Armstrong. Summary of 21 October 2013 Memorandum 2013-0496841I7 under s. 95(2)(a)(ii)(D).
CRA considers dividends of mortgage investment corporations to be subject to Part XIII tax
Dividends paid by a mortgage investment corporation are deemed to be interest paid on a bond. In CRA’s view, such deemed interest is "computed by reference" to income, profit, cash flow or other similar criteria described in the participating debt interest definition, so that such interest is subject to Part XIII tax.
This approach implicitly denigrates the role of the directors, who set dividends in their discretion rather than simply taking out their calculators to multiply the quarterly income by X%.
Neal Armstrong. Summary of 2013 Refusal to Rule 2013-0475701R3 under s. 212(3) – participating debt interest.
Income Tax Severed Letters 13 November 2013
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
90-day rule may not be available for upstream loans
To provide relief from the rule in s. 90(6), which potentially deems an income inclusion to a Canadian-resident taxpayer in respect of an upstream loan made by a foreign affiliate, s. 90(9) potentially allows a deduction under the s. 113 or 91(5) rules that would have been available if the upstream loan had instead been distributed as a dividend or a series of dividends to the taxpayer.
Ken Buttenham points out, among other observations, that it is unclear whether the 90-day look-back rule in Reg. 5901(2) (i.e., for back-dating year-end surplus balances to the time of the dividend) can be used for these purposes.
Neal Armstrong. Summaries of Ken J. Buttenham, "Are you Ready for the Upstream Loan Rules?", Canadian Tax Journal, (2013) 61:3, 747-68, under ss. 90(6), 90(9) and 90(14).