News of Note
Upon conversion to a functional currency, the CDA must also be converted irrespective of CDA activity
Email this ContentSince 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.
The Slate U.S. Opportunity (No. 3) Realty Trust offering provides a quarterly redemption right
The Slate U.S. Opportunity (No. 3) Realty Trust offering is virtually identical to that for No. 2.
The Trust proposes to invest in US real estate through an Ontario "holding company" LP and a Delaware "grandchild" subsidiary LP, both of which will elect to be corporations for US purposes. The offered units will not be listed until sometime (potentially up to almost six years) after closing of the offering (or never, if within that period the assets first are sold and the Trust liquidated).
The units can be retracted at any time. If a retraction occurs before a listing, the unitholder receives the redemption proceeds, calculated as 95% of the NAV at the end of the quarter preceding the retraction date, in the form of cash or a vaguely-described in specie distribution, by the end of the month following the quarter in which the retraction occurred. If the retraction occurs after a listing, the redemption proceeds are based on the lesser of the units’ closing market price on the retraction date and 95% of their 10-day VWAP following the retraction date.
Neal Armstrong. Summary of (final) prospectus for Slate U.S. Opportunity (No.3) Realty Trust offering under REIT and LP Offerings - Foreign Asset Income Funds and LPs.
A Guatemalan tax on revenues qualified as an income tax because the taxpayer could elect instead to pay tax on net income
A Guatemalan tax calculated as around 6% of gross revenue qualified as an "income or profits tax" because it was imposed pursuant to an income tax statute which gave the taxpayer an option each year of paying tax instead on its net income – so that effectively the income of the taxpayer placed a cap on how much it could be required to pay as revenue tax.
However, if a foreign affiliate elected to pay tax on the revenue basis, it would be required for surplus purposes to compute its earning for that year under Canadian income tax rules rather than using the Guatemalan income tax law.
Neal Armstrong. Summaries of 5 September 2013 T.I. 2011-0431031E5 under ss. 95(1) - foreign accrual tax, 126(7) – business income tax, and Reg. 5907(1) – earnings.
Envision - Supreme Court of Canada finds that a continuation-style amalgamation will always satisfy the ss. 87(1)(a) and (b) conditions
A B.C. statute (which was interpreted as providing for continuation-style amalgamations notwithstanding somewhat non-standard language) was found to have the effect of deeming all property (and liabilities) of the predecessors to have become property (and liabilities) of Amalco, as required in s. 87(1). Accordingly, an attempt to generate a "bad" (non- s. 87) amalgamation, by purporting to agree that some predecessor property did not become Amalco property, was unsuccessful.
Rather than talking about two rivers flowing together, the favoured metaphor of Rothstein J. was of the two predecessors ceasing to have separate legal personalities, but continuing "inside" Amalco. The judgment appears to accept that the amalgamation agreement can specify the precise effective time of the amalgamation where the corporate statute does not do so.
Neal Armstrong. Summary of Envision Credit Union v. The Queen, 2013 SCC 48, under s. 87(1).
CRA indicates that extracting exempt surplus through cash dividends rather than a s. 93 election in a sale scenario may be GAARable
An arm’s length shareholder (NR1) of a 2nd-tier foreign affiliate of Canco (Cco) purchased an asset from Cco, with Cco then paying a dividend on one of its classes of shares (namely, Class D shares) held by the 1st-tier foreign affiliate of Canco (Bco) and with NR1 waiving its right to the dividend on its Class D shares. Cco then redeemed the Class D shares of Bco at a loss to Bco. There was a further indirect sale transaction that looked even more peculiar.
The Rulings Directorate noted that if (1) Bco was able to access more exempt surplus through the payment of dividends by Cco rather than by selling the shares and using the s. 93(1) election, and (2) its shares of Cco were not excluded property, so that accessing more exempt surplus meant reducing the recognition of foreign accural property income to Canco by reducing a taxable gain which would have been recognized by Bco on the direct sale scenario, then the auditor should consider the application of the general anti-avoidance rule.
Neal Armstrong. Summary of 10 September 2013 Memorandum 2010-0387631I7 under Reg. 5902(1).