News of Note
Franchise Services braves Canadian exit tax in continuing to Delaware
Email this ContentFranchise Services of North America (FSNA) is merging with a private Delaware company (Adreca) in the same car rental business by continuing to Delaware, and then engaging in a triangular Delaware merger whereby the Adreca shareholder (Macquarie) receives 49.8% of its shares.
The disclosure does not make a huge deal out of the deemed disposition of FSNA's properties under s. 128.1(4)(b) or the potential withholding tax of sorts imposed under s. 219.1 (a.k.a., the emigration tax), so that it may be that no material exit tax is anticipated as a result of FSNA's substantial losses and what appears to be a relatively high paid-up capital for its shares. The Canadian tax disclosure also repeats, without further guidance, the anti-avoidance language in s. 219.3 indicating that the emigration tax of 25% will not be reduced to the Treaty rate of 5% if "it can reasonably be concluded that one of the main reasons that FSNA became resident in the U.S. was to reduce the emigration tax or Canadian withholding tax payable by FSNA."
Neal Armstrong. Summary of Franchise Services of North America Circular under Cross-Border Mergers - Outbound - Continuance and Merger.
CRA provides additional guidance on the foreign tax credit rules
The draft CRA folio on foreign tax credits incorporates most of the material in IT-270R3, but also adds some discussion. For example, it provides guidance on how the taxpayer is permitted to allocate allowable capital losses amongst different countries where the taxpayer’s global capital losses exceed its global capital gains for a year, and also notes, with respect to the "economic profit" rule (in s. 126(4.1)), that the rule is not applied independently to a related transaction involving another property acquisition.
Neal Armstrong. Summaries of S5-F2-C1: "Foreign Tax Credit" 27 March 2013 under ss. 126(1), 126(2), 126(4.1), 126(7) – business-income tax, 126(7) – non-business-income tax, 4(3), 110.5, 115(1)(a)(i) and 115(1)(a)(ii), and under General Concepts - Agency.
CRA finds that shares with a formula entitlement to corporate profits are taxable preferred shares.
CRA concluded that shares which were entitled to 75% of the profit resulting from an adventure in the nature of trade were taxable preferred shares on the basis that there was thus a limitation (to a maximum) of the amount of dividends to which they were entitled. This conclusion, although consistent with prior positions, is questionable, as such shares obviously were participating shares from any realistic perspective.
Neal Armstrong. Summary of 15 March 2012 T.I. 2012-0443471E5 under s. 248(1) – taxable preferred share.
CRA issues draft folio on price adjustment clauses
CRA’s draft folio on price adjustment clauses has dropped the (dead letter) requirement in IT-169 that the taxpayer notify CRA of the clause in its return.
CRA intimates that clauses adjusting the redemption value of shares avoid "technical difficulties" pertaining to clauses which instead purport to retroactively issue or cancel shares. However, an adjusting payment on a share with the first type of clause which has already been redeemed will result in an income inclusion to the redeemed shareholder under s. 84(3).
Price adjustment clauses "might" not work for butterfly purposes.
Neal Armstrong. Summary of 27 March 2013 S4-F3-C1 under General Concepts – Effective Date.
Income Tax Severed Letters 3 April 2013
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that payment of the Part XIII tax on a phantom s. 15(2) net benefit arising from an FX fluctuation was not taxable under s. 56(2)
A partnership with Canadian members made a foreign-currency loan to a non-resident sister and then, when it was discovered that this gave rise to Part XIII tax under s. 15(2), the loan was repaid - but without there being a full off-setting deduction under s. 227(6.1) because the Canadian dollar had appreciated in the interim.
In these circumstances, CRA found that the payment by the Partnership of the Part XIII tax on the net benefit did not give rise to a taxable benefit (which would have been subject to Part XIII tax under s. 214(3)(a)) to the non-resident sister.
Neal Armstrong. Summary of 20 November 2012 Memorandum 2011-0416761I7 under s. 56(2).
CRA confirms that US taxes paid by a US Holdco on the earnings of its LLC subsidiaries qualified as FAT if those earnings were distributed to it
A decade-old internal interpretation, which was released on Wednesday, dealt with a US subsidiary (US Holdco) of Canco, which paid US taxes on the income (which was FAPI to Canco) of its LLC subsidiaries. CRA confirmed that such US taxes qualified as foreign accrual tax to the extent that US Holdco received a distribution of those earnings from the LLCs , i.e., such US taxes then qualified as being "in respect of a dividend received from the [LLCs]."
The making of tax compensation payments by the LLCs to US Holdco was irrelevant: Reg. 5907(1.3) did not apply.
Neal Armstrong. Summaries of 8 April 2004 Memorandum 2003-0037291I7 under s. 95(1) - foreign accrual tax and Regulation 5907(1.3).
CRA confirms application of draft s. 87(8.2) to downstream merger
CRA found that draft s. 87(8.2) applied to a "downstream merger" of an immediate foreign subsidiary (FA1) of Canco into FA1's subsidiary (FA2), with FA2 as the survivor. CRA characterized the FA2 shares received by Canco on the merger as consideration for Canco's cancelled shares of FA1, so that s. 87(4)(a) deemed Canco to have disposed of its shares of FA1 for their adjusted cost base, rather than draft para. (n) of the definition of "disposition" applying to deem there to have been no disposition of those FA1 shares.
Neal Armstrong. Summary of 4 March 2013 Memorandum 2012-0449371I7 under s. 87(8.2).
Connor Homes - Federal Court of Appeal finds that the intent of the parties is the first issue to address in determining whether there is an employment relationship
In determining whether an individual is an employee or independent contractor, the court must first determine whether the parties in fact intended their relationship to be that of employer-employee, and only then turn to determining whether that intent is sustained by objective reality (e.g., by applying the four Wiebe tests - see IC 75-6R2, para. 66).
Although the Tax Court erroneously went through these two steps in the reverse order, this was not a sufficient basis for reversing its finding that three individuals performing child and youth care, or supervisory, services for operators of foster homes and group homes were employees: notwithstanding that the parties' subjective intent (as stated in their contracts) was to be independent contractors, this was not consistent with the "significant degree of control the [operators] exerted over the three individuals in the execution of their tasks, the limits on their ability to profit, and the absence of any significant financial risks or investments...."
Neal Armstrong. Summary of 1392644 Ontario Inc. (Connor Homes) v. MNR, 2013 FCA 85 under s. 5(1).
Income Tax Severed Letters 27 March 2013
This morning's release of 15 letters from the Income Tax Rulings Directorate is now available for your viewing.