News of Note
CRA generally will accept a late eligible dividend designation for an excess capital dividend amount election made within three years
Email this ContentS. 89(14.1) gives CRA the discretion to accept an eligible dividend designation that is up to three years late. CRA generally will accept a late designation if the reason for the lateness was an honest and non-negligent mistake in calculating the capital dividend account at the time of making a capital dividend election, so that the taxable dividend arises as a result of a s. 184(3) election to deem the excess portion the capital dividend to be a separate taxable dividend.
Neal Armstrong. Summary of 2 August 2013 T.I. 2013-0475261E5 ("Eligible Dividend - Late Filing 89(14.1) & 184(3)") under s. 89(14.1).
The Rulings Directorate leaves it for the TSOs to figure out who pays the Part IV tax on a RDTOH circularity problem
A Canadian-controlled private corporation (ACo) held a minority interest in another corporation (BCo) in the form of two classes of shares, one of which had been held on V-day (December 31, 1971), so that the accrued capital gain on the V-day shares represented potential pre-1972 CSOH which could be distributed under s. 88(2) as a capital distribution on the winding-up of ACo. CRA ruled, based on previous GAAR committee deliberations, that it was acceptable for ACo to distribute this incipient surplus to its individual shareholders without itself being wound-up. This was to be accomplished by ACo spinning-off the V-day shares to a Newco held by its shareholders, with BCo then being wound up in the hands of its shareholders including Newco and ACo (which until then continued to hold the post-72 shares of BCo), and with Newco itself then being wound up (so that the Newco shareholders accessed 100% of the pre-1972 CSOH under s. 88(2).)
The spin-off mechanics entailed ACo and Newco receiving equal deemed dividends from each other. This gave rise to a RDTOH circularity problem, as ACo had a RTOH balance. The Rulings Directorate stated that the district CRA offices "will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b)."
Neal Armstrong. Summary of 2013 Ruling 2012-0443081R3 ("Distribution of pre-72 Capital Surplus on Hand") under s. 186(1).
CRA permits a Canadian public company to effect a separate s. 84(2) distribution of non-sale cash
Most or all s. 84(2) rulings for paid-up capital distributions by a public company have described a distribution of the shares of one or more subsidiaries of the public company, or the distribution of proceeds of the sale of such shares or of the assets of a business carried on directly.
CRA has issued a ruling letter that permits a public corporation, engaged in a refocusing of its business, to make two separate PUC distributions of both the proceeds of sale of a business and of surplus cash on hand.
Neal Armstrong. Summary of 2013 Ruling 2012-0470281R3 ("Reduction of paid-up capital") under s. 84(2).
Brent Kern Trust – Sommerer robs humankind of an interesting surplus-stripping Tax Court case under GAAR
Some surplus-stripping transactions involved a company (Opco) paying a dividend to Trust 1, which distributed the dividend to a related corporation (Holdco) qua beneficiary which, in turn, paid the same dividend amount to Trust 2 (the taxpayer). The "trick" was that Holdco had previously undergone an estate-freeze style of reorg so that Trust 2 had been able to purchase all of Holdco’s common shares from Opco for their nominal fair market value. Therefore (the taxpayer argued), s. 75(2) applied to deem the dividend received by it from Holdco to instead be dividend income of Opco, which was eligible for the s. 112 intercorporate dividend deduction.
However, Sommerer was decided before judgment – so that Bocock J found that s. 75(2) did not apply to the dividend income on the Holdco common shares, as they had been sold, rather than contributed, to the taxpayer. Hence, GAAR was moot.
He did not comment on new (draft) s. 75(2).
Neal Armstrong. Summary of Brent Kern Family Trust v. The Queen, 2013 TCC 327, under s. 75(2).
JP Morgan - Federal Court of Appeal provides a primer on administrative law remedies (which are a "last resort")
"Armed with sophisticated wordsmithing tools and cunnng minds, skilful pleaders can make Tax Court matters sound like administrative law matters..." (para. 49).
Stratas JA wasn't fooled. The taxpayer was unsuccessful, in its application for judicial review, to have some Part XIII tax assessments set aside on the basis that they were contrary to the Minister's policy to not go back more than two years on audit.
He thoroughly reviewed administrative law in an income tax context (perhaps to discourage taxpayers from bringing further clear-loser applications).
Neal Armstrong. Summary of MNR v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250 under Federal Court Act, s. 18.5.
9101-2310 Québec - Court of Appeal finds an accommodation party to not be at arm's length, and that Quebec is different
Several cases (e.g., RMM, see also Livingston) suggest that if a normally independent (and unrelated) person agrees to act as an accommodation party for the taxpayer, then it and the taxpayer are not dealing at arm's length in the resulting transaction. The most recent example is a friend of the taxpayer who let the taxpayer deposit funds with his corporation to be held by the corporation on behalf of the taxpayer, in order to defeat a bank claim (the friend didn't know about the taxpayer's tax debt).
Noël JA also found that because this arrangement was a "simulation" under the Civil Code (i.e., a contract availed of by third parties notwithstanding that it was contrary to the parties' "secret contract" - i.e., the funds in fact were held on behalf of the taxpayer rather than having been truly divested by him), CRA could treat the funds as if they had been transferred to the corporation for s. 160 purposes. Although there is no doctrine that CRA can rely on the terms of a purported common law contract which is a sham, a taxpayer in a common law province unsuccessfully argued (in 1524994 - see also Gurd's Products) that a contract should be disregarded for tax purposes because it was "merely" entered into in order to deceive a third party for non-tax reasons.
Neal Armstrong. Summaries of The Queen v. 9101-2310 Québec Inc., 2013 FCA 241 under ss. 160(1) and 251(1)(c).
Redemption premiums on MRPS are dividends
Luxembourg accommodates the issuance of mandatory redeemable preferred shares ("MRPS"), which are treated as debt for Luxembourg interest-deduction purposes but are shares under the Luxembourg corporate law. CRA indicated that the premium received on redemption of MRPS is a dividend to the Canadian holder on ordinary principles (i.e., even before applying s. 90(2)).
Neal Armstrong. Summary of 30 April 2013 Memorandum 2012-0439741I7 ("Hybrid Instruments-MRPS Debt or equity") under s. 90(1).
CRA applies Dudney to an Irish resident contractor
CRA, following Dudney, accepted that an Irish resident who worked as an independent contractor, under a short-term contract, for a provincial authority at its facilities did not have a fixed base or permanent establishment in Canada.
Neal Armstrong. Summary of 18 June 2013 Memorandum 2011-0393451I7 under Treaties – Art. 14.
Income Tax Severed Letters 23 October 2013
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA favourably applies the anti-hybrid rule where U.S. individuals lend to a ULC through an S Corp.
Two S Corporations (USCo and USCo2), whose shares are owned by the same U.S.-resident individuals in identical proportions, hold the shares of a Nova Scotia ULC (which is a partnership for Code purposes) and, in the case of USCo, also hold an interest-bearing loan of the ULC.
As a shareholder of USCo, each individual includes a pro rata portion of the interest in income under the Code. Pro rata portions of that same interest also are deductible by USCo and USCo2 in the computation of their income, with such deductions then flowing through to the individuals qua shareholders of both USCo and USCo2. Accordingly, there is no net inclusion of the interest in each individual’s income. On the other hand, if the ULC were not fiscally transparent, the individual would be taxable on the full amount of his or her share of the interest, as the applicable portion of the ULC interest deduction would not flow through to the individual via the S Corps.
CRA ruled that the interest enjoys the Treaty-reduced withholding rate of 0% notwithstanding Art. IV, subpara. 7(b) requiring that the treatment of the interest under the Code be the same as its treatment were the ULC not fiscally transparent.
CRA also ruled that USCo and USCo2 are eligible for the Treaty-reduced rate (of 5%) for substantial corporate shareholders when the usual 2-step (increase PUC, then distribute it) is used to extract cash profits of the ULC, notwithstanding that Canadian source income of an S Corp. may be considered to be derived instead by its individual shareholders pursuant to Art. IV, para. 6 (see also 2 February 2012 T.I. 2012-0434311E5: CRA considers that there is no need to engage para. 6 as the S Corps. are themselves Treaty residents.)
Neal Armstrong and Abe Leitner. Summary of 2013 Ruling 2012-0467721R3 under Treaties – Art. 4.