News of Note
Most Canadian citizenship applicants will be required to first establish Canadian tax residency
Email this ContentA Canadian citizenship applicant now will be required to have been physically present for four years in a six-year period and for at least 183 days per year in four of the six years, and to have filed Canadian income tax returns, if required under the Income Tax Act. As noted by Kevyn Nightingale:
Now each applicant has an incentive to file Canadian tax returns. Without them, CIC [Citizenship and Immigration Canada] will have to determine they were not required. As a practical matter, CIC will likely consult with the CRA to make this determination, so anyone applying for citizenship will need to have their tax affairs in order.
Neal Armstrong. Summary of Kevyn Nightingale, "New Canadian Citizenship Rules (Bill C-24) and Tax", CCH Tax Topics, No. 2190, February 27, 2014, p.1 under s. 2(1).
Reg. 105 withholding can apply to cancellation fees
Reg.105 provides for withholding on payments to a non-resident "in respect of services rendered in Canada." Although the analysis is lanky, CRA appears to consider that Reg. 105 withholding would apply where a U.S. artist is paid a cancellation fee after having rehearsed, but not performed, in Canada, unless a Treaty-based waiver is obtained. This is unsurprising, as CRA has found that up-front withholding is required even on deposits (2011-0405561E5 – see also Ogden).
Neal Armstrong. Summary of 12 February 2014 T.I. 2013-0505511E5 under Reg. 105(1).
ACI - Federal Court of Appeal finds that a common question determination under s. 174 should be handled through joinder of the other taxpayer to the existing appeal
CRA reassessed the taxpayer (ACI) on the basis that a payment of $1.95 million, which another company (AFT) had treated as a deductible management fee but which ACI had treated as a capital receipt from the disposition of a joint venture interest, was fee income to ACI. Following ACI’s appeal of the reassessment, the Minister brought an application under s. 174 to determine which of the two characterizations was correct.
S. 174(3)(b) provides that where an appeal has already been launched, the Tax Court "may" make an order joining the other party to the appeal. Pelletier JA found that that was the right thing to do here, rather than having the common question determined in fresh and distinct proceedings. This gave a tactical advantage to ACI, as it had the effect of preserving the current pleadings (and underlying assumptions) of the Minister, which had potential weaknesses.
Neal Armstrong. Summaries of ACI Properties v. The Queen, 2014 FCA 45 under ss. 174(3) and 174(1).
Fio – Tax Court of Canada confirms that information obtained on discovery cannot be used by CRA to make further reassessments
CRA used insights gained from documents provided to the Justice lawyers on discovery to issue further reassessments of the taxpayer. D'Arcy J found that this use of the documents breached the rule in Juman v. Soucette, 2008 SCC 8, that "information obtained on discovery ... is subject to the implied undertaking [that] it is not to be used by the other parties, except for the purpose of that litigation." However, rather than vacating the further reassessments, he ordered that the discovered documents could not be used in connection with the further reassessments (subject to the Crown getting permission, which would only be granted in "exceptional" circumstances), and also awarded $25,000 in costs against the Crown.
He did not discuss whether each further reassessment was a replacement reassessment (in which case it would have vacated the previous reassessment and the related appeal– see Cameco) or whether it was an additional reassessment (a rare creature).
Neal Armstrong. Summaries of Fio Corporation v. The Queen, 2014 TCC 58, under ss. 152(4), 241, and 171(1).
CRA announces transitional relief for T1135 reporting
In June 2013, CRA issued a revised Form T1135, applicable to taxation years ending after June 30, 2013, which requires more detailed foreign asset reporting, including the names of specific foreign institutions and countries where offshore assets are located, the foreign income earned on those assets and the maximum cost amount of those assets during the year.
CRA has now announced that "for the 2013 tax year only" it will permit "streamlined" T1135 reporting, viz: specified foreign property held in an account with a Canadian registered securities dealer may be reported on a combined basis; similarly, unit trusts may report the combined value of all of their specified foreign property in the same manner for their 2013 tax year; and the filing deadline for the forms for the 2013 tax year has been extended to July 31, 2014 for all taxpayers.
Neal Armstrong. Summary of Revised Form T1135, Foreign Income Verification Statement under s. 233.3(3).
CRA ruling requires that a mortgage investment corporation, which is carrying on bad activities through a subsidiary LP, not own or direct the LP's general partner
One of the requirements for a corporation to qualify as a mortgage investment corporation is that "its only undertaking was the investing of funds...and it did not manage or develop any real…property." CRA has ruled that it is acceptable for a MIC to transfer a property (which it previously acquired on a mortgage foreclosure) to a newly-formed LP in consideration for LP units (presumably representing 99% or more of the LP equity), with the LP then developing the property – provided that limited liability for the MIC will be maintained as required by s. 253.1.
Consistently with CRA's policy views (2011-0415641E5), the LP would be prohibited from investing in foreign assets.
An oddity: the letter stipulates that "Mr. B," who is a relative of a significant MIC shareholder who has managerial control of it, will at all times be the sole shareholder, director and officer of the general partner of the LP. Someone apparently thought that it would be problematic for the GP to be owned by the MIC and for its officers and directors to be MIC officers or employees. Note that in 2012-0450291E5, CRA indicated that the undertaking test could be satisfied by a MIC whose corporate subsidiary owned and managed real property provided that "there are no facts which would suggest that the MIC is involved in the management or development of any real property held by the corporation." CRA rulings also have stated that a majority of the directors of a subsidiary of a mutual fund trust will not be trustees of the trust (ITTN, No. 34).
It would be quite unusual for REITs and income funds, which carry on non-qualifying activities through subsidiary LPs, to not themselves hold the shares of the general partner.
Neal Armstrong. Summary of 2013 Ruling 2013-0487911R3 under s. 253.1.
A hybrid trust must withhold at non-Treaty rates on its distributions of dividends received from its ULC subsidiary
If a Canadian-resident trust, which is fiscally transparent for U.S. purposes and which is the sole shareholder of a ULC, distributes its dividends from the ULC to its beneficiary, who is a U.S.-resident individual, CRA considers that the anti-hybrid rule in Art. IV, subpara. 7(b) will apply, so that the distribution will be subject to full withholding of 25%. The U.S. treatment (of the U.S. beneficiary as carrying on a Canadian branch business) is quite different from what it would be if the trust were not fiscally transparent (distributions taxed on a cash basis). Furthermore, doing a two-step at the ULC level (i.e., increasing PUC, then distributing it) would make no difference.
CRA did not address the situation where the trust subsidiary is an ordinary business corporation.
Neal Armstrong. Summary of 12 February 2014 T.I. 2013-0486931E5 under Treaties – Art. 4.
Income Tax Severed Letters 26 February 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Horizons Managed Futures Index ETF generally will give individual investors deferred capital gains treatment on commodity futures trading
Horizons Auspice Managed Futures Index ETF (the "ETF"), which trades on the TSX, seeks to replicate the return of a tailored index (the "Managed Futures Index"), which tracks the return resulting from going long or short various different commodity, interest rate and currency futures contracts in accordance with a quantitative trading program. The ETF accomplishes this result by entering into long or short forward contracts with NBC for forward prices which collectively track the Managed Futures Index. The hedging arrangements if any between NBC and the actual fund (also managed by the ETF manager) trading in the linked portfolio are not disclosed.
Although gains or losses of the ETF under the forward contracts would be on income account, the forward contracts have a long term (under five years, but with extension rights). Notwithstanding that they are indirectly engaged in futures trading, individual unitholders generally will be able to defer gains until their units are sold, and realize those gains on capital account – except that if a large gain is realized by the ETF under the forwards, taxable unitholders might have to temporarily dispose of their units surrounding the record date for the gain’s distribution.
Neal Armstrong. Summary of Prospectus for Horizons Auspice Managed Futures Index ETF under Offerings – Forward Sale/TRS Funds.
Yoho Resources spin-off of Storm shares uses change in shareholders’ requisition right to qualify as a s. 86 reorg
Yoho Resources (through a subsidiary partnership) recently sold some of its assets to Storm Resources for cash and shares of Storm. It is proposing to distribute the Storm shares through a s. 86 exchange of old Yoho common shares for new common shares and Storm shares. In order that the "new" Yoho common shares will qualify as being distinct from the old common shares (see 2013-0495821C6), there will be a trivial change in the explicit share terms: a right to requisition a shareholders’ meeting will be deleted, although a similar right will continue under the Alberta Business Corporations Act.
Even without this, the distribution of the Storm shares likely would qualify under s. 84(4.1) as a prompt one-time extraordinary distribution of sales proceeds.
Neal Armstrong. Summary of Circular of Yoho Resources under Spin-offs & Distributions – S. 86 reorganization spin-offs.