News of Note
OECD proposes that non-compete payments be taxable only in the country of residence of the recipient
Email this ContentAn OECD Working Group has released a draft proposal to add commentary on the treatment of payments received by an employee following cessation of employment. For example, they suggest that severance payments be treated as remuneration derived from the State where the employment was exercised when the employment was terminated, and that non-compete payments generally be treated as taxable only in the State where the recipient resides during the period covered by the payments.
Neal Armstrong. Summary of OECD Discussion Draft, Working Party 1 "OECD Model Tax Convention: Tax Treatment of Termination Payments" under Treaties – Art. 15.
CRA confirms use of s. 214(6) deemed dividend designation as a planning tool
At the IFA Conference in May, CRA addressed the situation where, as a result of the new thin cap rules, interest paid to an affiliated non-resident is deemed to be a dividend, and orally indicated that s. 214(16) designations effectively may be used to determine the timing of such deemed dividend.
In the written response (available on the IFA website but not yet released by CRA), CRA added a simple numerical example, showing that such designations could be made to "back-end" the deemed dividend to the last interest payment(s) of the year, thereby reducing or eliminating interest charges.
Neal Armstrong. Summary of IFA Conference, Q. 7, Written Response under s. 214(6).
CRA permits the consolidation of reclamation trusts
The definition in s. 211.6(1) of a "qualifying environmental trust" refers to a trust that is maintained solely for the purpose of funding the reclamation of "a" qualifying site. CRA has provided favourable rulings respecting the settlement of a single new reclamation trust with respect to multiple mining sites of the taxpayer.
For purposes of the related reclamation obligations of the taxpayer, each mining site will include "any land, water or watercourse used or disturbed by the construction or operation of the site." If the mine happened to be close to a river, this means that the "mining site" could extend for hundreds of miles beyond the mining shaft – see the post below.
Neal Armstrong. Summaries of 2013 Ruling 2012-0463471R3 under s. 211.6(1) - qualifying environmental trust, and Interpretation Act – s. 33(2).
CRA interprets qualifying environmental trust provisions purposively
Paragraph 20(1)(ss) provides a current deduction for a contribution to a "qualifying environmental trust," e.g., a trust to secure reclamation obligations at a mine. The related "qualifying site" definition refers to "a site in Canada that is or has been used primarily for…the operation of a mine…[or] the deposit of waste."
In granting a ruling, CRA stated that to "define the mine site narrowly, such that only the shaft is included, does not support the policy of a QET," so that the whole of the site as defined in the reclamation agreement with the Province qualified. See also the post immediately above.
Neal Armstrong. Summary of 2013 Ruling 2012-0463621R3 under s. 211.6(1) – qualifying site.
Liquidity rights do not cause flow-through shares to be prescribed shares
Individuals subscribing for flow-through shares of a listed resource company will immediately donate a portion of their shares to registered charities and sell the balance. Lining up independent "Liquidity Providers" to purchase such shares for their fair market value from the charities and directly from the individuals will not cause those shares to be prescribed shares (i.e., bad shares for flow-through purposes).
Neal Armstrong. Summary of 2012 Ruling 2012-0466731R3 under Reg. 6202.1.
CRA considers that servers can be permanent establishments for provincial income allocation purposes
CRA considers that servers, that are leased (or owned) by a Canadian corporation to host its websites for its internet business, will be permanent establishments (i.e., fixed places of business) for purposes of the inter-provincial allocation rules.
Neal Armstrong. Summary of 9 May 2013 T.I. 2012-0435401E5 F under Reg. 400(2).
Using an intermediate note transaction does not block a share-substitution finding
The stop-loss rule in s. 93(2.01) reduces a capital loss from the disposition of a foreign affiliate share for exempt dividends received on that share or "a share for which [it] was substituted;" and s. 248(5)(a) indicates that where there are multiple property substitutions "the property acquired by any such transaction shall be deemed to have been substituted for the [original] property."
Where shares of FA1 are disposed of for a note of FA2, and that note is disposed of for shares of FA3, CRA considers the shares of FA3 to be substituted for those of FA1, i.e., the concept of share substitution is not restricted "to a chain of substitutions in which only shares are substituted."
Neal Armstrong. Summary of 10 May 2013 Memorandum 2012-0464901I7 under s. 248(5).
CRA doesn’t like Gwartz
CRA considered an arrangement, in which two personal holding companies of an Opco annually receive share redemption proceeds from the Opco which by design are deemed to be capital gains by s. 55(2), and with the non-taxable half of the capital gains being paid by the Holdcos to the individual shareholders as capital dividends, to be surplus stripping to which the general anti-avoidance rule could apply. After referring to Gwartz, CRA indicated that it intends to demonstrate to the Tax Court "that there is a specific scheme under the Act for taxing the distribution of surplus of a Canadian corporation as a taxable dividend in the hands of individual shareholders."
Neal Armstrong. Summary of 18 June 2013 T.I. 2012-0433261E5 F under s. 84(2).
Income Tax Severed Letters 26 June 2013
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA appears to find that a limited partner’s status as a trader does not affect the capital gains character of its partnership allocations
CRA found that a capital gain realized by a partnership from a real estate sale retained its character as such when allocated to a limited partner, even (it would appear) where the latter was a trader.
This position presumably also would apply to a securities dealer which was a minority limited partner in an investment partnership.
Neal Armstrong. Summary of 25 April 2013 Memorandum 2013-0478511I7 F under s. 96(1)(f).