News of Note
CRA effectively exempts a receipt to which s. 56(2) already has applied
Email this ContentCRA considers that where a real estate agent directs the real estate brokerage to pay a portion of a home-purchase commission to the purchaser, the amount of this "referral fee" will be included in the agent's income under s. 56(2) irrespective of whether it is income to the purchaser. Furthermore, as "it is the practice of [CRA] not to assess the same income twice," the brokerage would not be expected to issue a T4A to the purchaser.
This arguably is a "reverse Winter" situation. That case (as limited by James) may indicate that if an amount is earned as income by the recipient, s. 56(2) does not impute income to a 3rd party who directed that benefit. In any event, CRA presumably was mindful that most purchasers would treat the referral fee as an inducement that was not taxable under s. 12(1)(x).
Neal Armstrong. Summary of 19 August 2013 T.I. 2013-0488011E5 ("Real Estate Referral Fees") under s. 56(2).
Oil and gas coordination centres likely are distinct permanent establishments
Jan de Goede and Ruxandra Vlasceanu suggest under the general OECD commentary principles that unincorporated coordination centres, which provide support to the various oil and gas exploration and production blocks of a joint venture in the same country (such as accounting, administration, finance, human resources, treasury, information and communication, technical support, and supervision activities) (1) are permanent establishments, as their activities are more than preparatory or auxiliary, and (2) are distinct permanent establishments from the exploration and production blocks since such multiple places of business lack geographic and commercial coherence.
Neal Armstrong. Summary of Jan de Goede and Ruxandra Vlasceanu, "Permanent Establishment Implications for Coordination Centres in the Oil and Gas Industry", Bulletin for International Taxation, September 2013, p. 466 under Treaties – Art. 5.
Harvey - Tax Court finds that unauthorized personal use was partly business use
The taxpayer's teenaged daughter and her friends (all without a driving licence) took his Jeep on an unauthorized joyride. It crashed.
Graham J permitted the taxpayer to deduct a portion of the repair expenses based on the percentage of business use of the vehicle prior to the day of the accident.
Neal Armstrong. Summaries of Harvey v. The Queen, 2013 TCC 298 under s. 18(1)(a) - income-producing purpose, and s. 163(2).
CRA confirms the anomalous application of the inter-provincial income allocation rules to SIFT partnerships
Reg. 402(6) provides that a corporate partner picks up its proportionate share of gross revenues and salaries and wages attributable to each of the partnership’s permanent establishments for purposes of the application of the inter-provincial income allocation rules in Part IV of the Regulations.
CRA has confirmed that this rule applies even where the partnership is a SIFT partnership earning taxable non-portfolio earnings, so that the partner is treated under s. 96(1.11) essentially as the common shareholder of a taxable Canadian corporation.
Neal Armstrong. Summary of 7 August 2013 T.I. 2012-0460511E5 under Reg. 402(6).
Upon conversion to a functional currency, the CDA must also be converted irrespective of CDA activity
Since the capital dividend account of a Canadian corporation, which has made a functional currency election, is relevant to its "Canadian tax results" (i.e., whether it is subject to Part III tax), it is required to convert its CDA to the functional currency as at the end of the Canadian currency year preceding its first functional currency year – irrespective of whether it actually paid a capital dividend.
Neal Armstrong. Summary of 20 September 2013 T.I. 2012-0471261E5 under s. 261(7)(h).
Income Tax Severed Letters 2 October 2013
This morning's release of 28 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA permits warehousing of new losses in a thinly-capitalized Newco in a loss-shifting transaction
Losses typically are transferred from a parent (Lossco) to a subsidiary (Profitco) in a no-incest jurisdiction through a triangular circling of funds: Lossco makes an interest-bearing loan to Profitco; Profitco subscribes for pref of a Newco subsidiary of Lossco; Newco makes a non-interest-bearing loan to Lossco; and Newco services the dividends on the pref through capital contributions from Lossco.
Here however, Profitco is itself a public corporation which does not want to show additional debt on its balance sheet. Accordingly, the above triangular transactions will be used to transfer losses to a newly-incorporated special-purpose subsidiary of Lossco ("A Co"), with A Co only being transferred to Profitco and wound-up into it after the loss generation transactions have been unwound.
No representation was given that A Co could borrow even a nickel on its own covenant. Also, CRA was fine with the accumulated dividends and interest under the triangular arrangement not being funded and serviced until immediately before the triangular arrangement is unwound.
Neal Armstrong. Summary of 2013 Ruling 2012-0472291R3 under s. 111(1)(a).
Finance will address application of FAD rules to transfers within Canadian groups of FA debt
A Canadian "Acquire Co" of CRIC (i.e., a Canadian subsidiary of a non-resident parent) purchased the Canadian "Target," and then amalgamated with it. Amalco then distributed shares and debt of "FA" (a U.S. sub previously held by Target) to CRIC.
A comfort letter contemplates unspecified amendments to the foreign affiliate dumping rules to address two problems:
- s. 212.3(18) does not exempt transfers of FA debt between related Canadian corporations
- the exemption in s. 212.3(18)(a) for transfers of FA shares between related Canadian corporations does not apply where the transferor dealt at arm’s length with the transferee at any time during the series of transactions – which is problematic here because Amalco is deemed by s. 212.3(22)(a) to be a continuation of Target
Neal Armstrong. Summary of 9 July 2013 Comfort Letter addressed to Brian Bloom of Davies under s. 212.3(18)(a).
The extent to which CRA can contradict the written terms of a non-sham agreement is still uncertain
A significant number of decisions suggest that the "parol evidence rule" (that "when the parties to an agreement have apparently set down all its terms in a document, extrinsic evidence is not admissible to add to, subtract from, vary or contradict those terms") does not apply to CRA, as (per Urichuk) "the Minister, not being a party to that agreement, is entitled to rely on any available evidence to support his characterization [thereof]." However, recent decisions (e.g., General Motors) may suggest a tendency to find that the terms of written agreements, in the absence of a finding of sham, should not be contradicted by extrinsic evidence. See Contradiction of written contracts or other documents (parol evidence rule).
There also is a U.S. dichotomy. The U.S. Tax Court has stated that it is "is well settled that the parol evidence rule has no application in Federal tax cases where the Government is not a party or privy to a party to the instrument." However, the US Court of Appeals for the Third Circuit established the "Danielson rule," that "a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc."
Neal Armstrong. Summary of Amir Pichhadze, "Can, and Should, the Parol Evidence Rule Be Invoked by or against the Canadian Tax Authorities in Tax Litigation? Lessons from US Jurisprudence", Bulletin for International Taxation, September 2013, p. 474, under General Concepts – Evidence.
CRA publishes granular illustrations of what constitutes SR&ED
Ten draft examples published by CRA on the application of its SR&ED Investment Tax Credits Policy include illustrations of the distinctions between: solving technical problems and resolving technological uncertainty; mere cost-cutting and doing so through resolution of technological uncertainty; trial-and-error techniques and systematic research; and new products and technological innovation.
In addition to the question of what is scientific research and experimental development, the examples address the distinction between eligible support work and excluded work, and carving out SR&ED from a larger company project.
Scott Armstrong. Summary of 18 September 2013 Draft examples to illustrate key concepts in the Eligibility of Work for SR&ED Investment Tax Credits Policy under s. 248(1) - scientific research & experimental development.