News of Note
Lockyer (Pawson Estate) - UK Upper Tribunal finds that an active business of renting out a vacation property was an investment business, as the services elements were not predominant
Email this ContentThe UK Upper Tribunal has found that the renting out of a vacation property to a succession of vacationers for a weekend or week at a time constituted a business of holding investments rather than a non-investment business - notwithstanding that the property was actively managed and various ancillary services were provided. The British statutory distinction is similar to that in ss. 95(1) and 125(7) between an investment business (subject to an exclusion for more than five full-time employees), and a business (such as an assisted living facility or health spa) where the level of services is much higher - so that this decision may be relevant in the Canadian context.
Neal Armstrong. Summary of R&C Commrs v. Lockyer & Anor (for Pawson Estate), [2013] UKUT 050 (Tax and Chancery Chamber) under s. 95(1) - investment business.
Anson - English Court of Appeal finds that an entity (here, an LLC) generally will not be fiscally transparent if its members have no proprietary interest in its assets
The English Court of Appeal has found that a U.S. LLC is not fiscally transparent, so that a distribution of its profits to a UK resident represented a source of income which was distinct from the profits when they were earned by the LLC in the first instance. Accordingly, there was no double taxation of the same income when the US taxed the individual's share of the profits of the LLC (which was fiscally transparent for US purposes), and the UK taxed the distribution of those profits: hence, no relief from double taxation under the UK-US Convention.
Although the finding that an LLC is fiscally opaque is not startling from a Canadian perspective (see 25 October 1994 T.I. 941750, and see also TD Securities), the Court's approach may have some bearing in sorting out whether other foreign entities are partnerships (or trusts), or corporations, from a Canadian perspective. Lady Justice Arden emphasized the question as to whether the members of the entity have any proprietary right to its assets; and, on the other hand, she indicated that a separate legal personality for the entity in question (e.g., a Scottish partnership) would not necessarily mean that it was not fiscally transparent.
Neal Armstrong. Summary of HMRC v. Anson, [2013] EWCA Civ 63 under Treaties - Art. 24. See also Memec and Sommerer.
CRA imputes full basis to employee stock options passing to an estate
Although stock options generally are not capital property (see 2001-009124), as their disposition gives rise to employment income rather than capital gains, CRA accepts that unexercised employee stock options which pass to an estate are capital property to the estate. This creates an issue as there is no provision like s. 70(5)(b) that specifically deems the options (viewed as not qualifying to the deceased individual as capital property) as having been acquired by the estate at a cost equal to their fair market value on death.
No problem! CRA generally will apply s. 69(1)(c) to deem the estate to have acquired the options at their fair market value.
However, the deceased employee, who will receive deemed employment income on death equal to the same amount, will not be entitled to a 1/2 deduction (under s. 110(1)(d)) - assuming that no election was made under s. 110(1.1).
Neal Armstrong. Summaries of 21 December 2012 Memorandum 2009-0327221I7 under ss. 110(1)(d) and 69(1)(c).
Spannier - Tax Court clarifies when an employee may deduct an accommodation allowance for a remote work location
Graham J. found that the mischief addressed by s. 6(6) is that taxation on an accommodation allowance "would leave the taxpayer worse off for having traveled for work as they would have to pay for their temporary accommodations with after tax dollars." Accordingly, it was irrelevant that the taxpayer spent 20 out of every 28 days at her temporary accommodations, given that it was clear that she preserved her other home for her use throughout her employment.
Scott Armstrong. Summary of Spannier v. The Queen, 2013 DTC 1062 [at 332], 2013 TCC 40, under s. 6(6).
CRA rules on unwinding of tower structure that had used non-interest bearing loans
In a ruling on the unwinding of a tower structure in which the LLC and ULC had been funded with non-interest bearing U.S. dollar loans rather than share capital, CRA ruled that any capital loss realized on the settlement of these loans would not be denied by s. 40(2)(g)(ii). This is consistent with the Byram line of cases, which indicate that a non-interest-bearing loan is made for an income producing purposes if it is made with a view to generating dividends on the shares held by the lender. As a result there would be off-setting FX gains or losses realized by the borrowing partnership and the ULC in the tower structure, and any FX gain realized by the LLC on settling the loan owing by it to the ULC would be not recognized under s. 95(2)(i) given that it held only excluded property that was deemed to be used in an active business.
Neal Armstrong. Summary of 2012 Ruling 2010-0386201R3 under s. 40(2)(g)(ii).
Income Tax Severed Letters 13 February 2013
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA acknowledges partnership interest income anomaly in HST/GST de minimis financial institution rules
CRA has released a Memorandum (17.7) on the de minimis financial institution rules (which, in very broad brush terms, deem an entity to be a financial institution for HST/GST purposes if it had more than $10M in interest or dividend income, other than from related corporations, in the preceding year). One of the additional observations made in this memorandum compared to the memorandum which it replaces (700-4) is that it acknowledges that interest paid by a partnership to a partner (including within a non-arm's length grouping of enterprises) is included in the $10M revenue test for these purposes.
Neal Armstrong. Summary of Memorandum (New Series) 17.7 De Minimis Financial Institutions under ETA - s. 149(1)(b).
FP Newspapers - Tax Court finds that a limited partner could not claim ITCs for costs incurred in respect of its partnership investment
A partner who incurs HST or GST costs out of its own pocket but "as a member of the partnership" potentially can claim input tax credits if the partnership is engaged in commercial activity. A decision of Pizzitelli J. may have established the proposition that it is not possible for a limited partner to rely on this rule - on the basis that, as a limited partner, it is not supposed to be incurring costs in respect of the partnership business.
Neal Armstrong. Summary of FP Newspapers Inc. v. The Queen, 2013 TCC 44 under ETA - s. 272.1(2) and 141(3).
CRA requires a minimum of 50% margin as security for exit tax (and resists partial pledges)
In the situation where an individual leaving Canada wishes to post security with CRA for the exit tax that otherwise would be payable on the deemed disposition of the individual's Class A and B shares of a CCPC, CRA will require that the shares of both classes be posted as security - unless for some reason it is possible to furnish only shares of one of the classes, in which case CRA will accept the shares of the one class if their value is at least twice that of the exit tax.
Neal Armstrong. Summary of 5 October 2012 APFF Round Table, 2012-0454231C6 F under s. 220(4.5).
Brookfield Asset Management is converting synthetically into a Bermuda LP
Brookfield Asset Management is transferring substantially all of its commercial real estate portfolio property to a Bermuda limited partnership (but presumably on a full or partial rollover basis as the GP starts out as an Alberta ULC before becoming a Bermuda company). It will then transfer approximately a 10% interest in that partnership (the Property Partnership) to another Bermuda limited partnership (Brookfield Property Partners L.P., or "BPP LP"), with its approximate 89% non-voting LP interest in the Property Partnership being exchangeable (albeit on non-standard terms) into BPP LP units.
It will then distribute that 10% interest in BPP LP to its shareholders as a special dividend (none of that PUC distribution stuff), and will fund withholding tax applicable to non-resident registered shareholders by purchasing the units withheld by it (valued for these and other purposes based on the 5-day post-closing VWAP). BPP LP and the Property Partnership are not expected to be subject to SIFT taxation based on their targeted non-Canadian residence.
Redeemable preferred shares (with structured voting rights) received by Brookfield Asset Management in an underlying Canadian corporation amount to only $1.25 billion, some of which will be redeemed in short order, so that there is no significant estate freezing-style structuring going on.
The objective may be for the assets of Brookfield Asset Management to now be largely exchangeable into an entity that trades somewhat as a flow-through entity. Over time, the 90% interest of Brookfield Asset Management in the Property Partnership is expected to be diluted.
Neal Armstrong. Summary of Circular for Brookfield Property Partners L.P. under Foreign Asset Funds and LPs (see also earlier June 2012 version).