News of Note
CRA no longer considers substantially refurbished equipment to be new equipment for the purposes of s. 127(9) - "qualified property"
Email this ContentCRA has previously indicated that it would consider an extensively renovated piece of equipment to be new equipment for the purposes of the definition of "qualified property" in s. 127(9), but this is no longer the case. CRA cited the administrative difficulty in applying that position, as shown in the Pêcheries Yvon Savage decision.
Scott Armstrong. Summary of 11 July 2013 T.I. 2013-0490091I7 under s. 127(9) - "qualified property."
Income Tax Severed Letters 21 August 2013
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The safe harbour rule in the revised FAD rules for toeholds is coupled with a treacherous exclusion
The current foreign affiliate dumping rules can apply to an investment of a corporation resident in Canada (a CRIC) in a non-resident corporation even if control of the CRIC by a non-resident corporation is not acquired until subsequently, albeit, as part of the same series of transactions. The August 16, 2013 draft amendments to the FAD rules now provide a safe harbour where, at the investment time, the non-resident did not have a substantial (25% or greater) equity stake in the CRIC.
This safe harbour is not available inter alia if, in connection with the investment, any person (other than the CRIC or a related person) "has in any material respect the risk of loss or opportunity for gain or profit in respect of a property that can reasonably be considered to relate to the investment." This exclusion is very broad and might apply, for example, if there were a third-party investor in the foreign subsidiary. See Example 1-E. Given the breadth of the series of transactions concept (see Canada Trustco, Copthorne and Groupe Honco), loss of the safe harbour could be problematic. See Example 1-D.
Neal Armstrong. Discussion of draft s. 212.3(1)(b)(iii) under Safe Harbour Rule.
Enervest proposes a DRIP with a 2% cash premium feature
CRA accepts that cash dividends, of public shareholder participants in a dividend reinvestment plan, which are reinvested in treasury shares at a discount to market of up to 5% do not give rise to a shareholder benefit under s. 15(1). In 1999, CRA refused to extend this policy to income funds and REITs, so that distributions reinvested under a distribution reinvestment plan gave rise to a taxable benefit under s. 105(1) to the extent the cost of the acquired units was at a discount to the market price (9911853).
Under the Enervest DRIP, the cash distributions of participants are reinvested in treasury units at a 5% discount to market. Enervest is proposing to amend its DRIP so that participants can elect to have the new units, which are issued under the DRIP, then immediately sold by a broker with the participants receiving cash equal to 102% of their cost.
The effect of this may be to increase the odds of there being a taxable benefit, but to reduce the benefit from 5% to 2%. When the DRIP is adopted, the tax disclosure presumably will be similar to that for Argent Energy, including a statement that the Trust is not required to, and will not, include any taxable s. 105 benefit in its T3 reporting.
Under another type of DRIP which does not have the taxable benefit issue, the distributions are reinvested on a non-discounted basis, and the participant then receive a "bonus" distribution of units from the Trust of, say, 5%. Recent examples include Choice, Inovalis, Dundee Industrial and Dundee International.
Neal Armstrong. Summary of Circular of Enervest Diversified Income Trust under Public Transactions – Other – Distribution Reinvestment Plans – Discounted Unit Plans.
CRA amends T1135 to require more detailed foreign income reporting, to "crack down" on cheating
An amended T1135 form contains more detailed reporting requirements, including:
- the name of the specific foreign institution or other entity holding funds outside Canada;
- the specific country to which the foreign property relates; and
- the income generated from the foreign property.
The new requirements flow from a CRA strategy "to crack down on those who attempt to cheat the system."
Scott Armstrong. Summary of T1135, Foreign Income Verification Statement under s. 233.3(3).
CRA considers that whether there is a gift is a question of contract interpretation?
When asked whether a sale of property in Quebec for consideration of one dollar could qualify as a gift for purposes of s. 69(1)(c), CRA stated that in the absence of sham, this was a function of the legal effect under Quebec law of the governing contract of acquisition. This sounds different than the jurisprudence on what is a gift for donation credit purposes, which seems to focus on whether there has been a gratuitous transfer as a factual matter (see Burns, Slobodrian and Maréchaux), and as well the CRA policy that charities can issue full receipts at fund raising events where complimentary benefits do not exceed the lesser of 10% of the ticket price and $75 (ITTN No. 26), presumably irrespective of what the "donation contract" says or whether it's governed by Quebec law.
Neal Armstrong. Summary of 6 June 2013 T.I. 2013-0490711E5 F under s. 69(1)(c).
River Hills Ranch - Tax Court considers the "factual matrix" surrounding a termination contract to recharacterize an apparent business receipt as a capital receipt
A pharmaceutical company agreed to pay a number of farming corporations in order to cancel contracts for the collection of pregnant mare urine ("PMU"). The agreements characterized 80% of the payments as being for "feed and herd health expenses," which the Minister took to mean payments to cover operating expenses.
Hogan J found that the parol evidence rule did not prevent him from finding that the payments were really to compensate the taxpayers for the destruction of their PMU businesses, and hence capital receipts, and had been dressed up as "feed and herd health expenses" because of pressure from animal rights groups. A contract must be interpreted "with regard to the objective evidence of the factual matrix underlying the negotiation of the contract."
He did not discuss how the capital receipts should be treated. Although Pe Ben suggests the proceeds might receive capital gains treatment, this was before the eligible capital amount definition was amended to make it completely circular, as discussed in a previous post on Mertrux.
Scott Armstrong. Summary of River Hills Ranch Ltd v. The Queen, 2013 TCC 248, under s. 9 - Compensation Payments and General Concepts - Evidence.
Income Tax Severed Letters 14 August 2013
This morning's release of 17 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Maplewood International REIT is launching as a cross-border income fund through converting a CPC
REITs increasingly have become listed through backdoor IPOs under which a TSXV-listed capital pool company with nominal capitalization is launched, then effectively converted to a listed micro-cap REIT under a Plan of Arrangement (see BLF REIT), with a view to bulking up later through subsequent acquisitions and unit issuances (see Northwest International REIT).
The proposed conversion of Holland Global Capital into Maplewood International REIT, whose first (indirectly held) property will be in the Netherlands, demonstrates that essentially the same backdoor technique can be used to create a cross-border income fund from the very first property acquisition.
Maplewood International REIT will not be a REIT for Canadian tax purposes but, rather, an income fund which holds no Canadian real estate or other non-portfolio properties. Because of this non-Canadian structure, it is possible for the subsidiary Ontario LP of the REIT to offer to acquire the shares of individual Holland Global shareholders in consideration for exchangeable units under s. 97(2), without the need to worry that it thereby would not qualify as an excluded subsidiary entity. However, as in previous exchangeable structures which have been launched subsequently to the budget announcement of the character conversion rules, no tax opinion is provided to those who wish to exchange their shares of Holland Global for exchangeable units of the LP rather than on a taxable basis for units of the REIT.
Neal Armstrong. Summary of Circular for Conversion of Holland Global Capital into Maplewood International REIT under Mergers & Acquisitions - REIT and Income Fund Acquisitions - CPC Conversions.
Finance is considering a domestic anti-treaty shopping rule which overrides treaty benefits
Although it has issued a "consultation" paper, so that all reasonable alternatives are open for consideration, it is quite clear that Finance is contemplating adopting a domestic treaty override provision (i.e., an amendment to or under the Income Tax Act that in specified circumstances would override otherwise-effective treaty shopping). Finance considers that this could be done consistently with the OECD Commentaries, which indicate that countries do not have to grant treaty benefits for treaty abuses (i.e., Finance considers this would not be an "override" rule in the sense of blithely breaching Canada’s treaty obligations in the U.S. fashion).
Finance discusses various forms that the anti-treaty shopping rule could take. It seems to be somewhat partial to a rule which could (based on some CRA discretion) deny treaty benefits where the entity claiming the benefits is owned or controlled by 3rd county residents not all of whom are resident in treaty countries with equivalent relief, and the entity pays little or no tax and has no substantive business operations (other than managing investment income).
Neal Armstrong. Summary of 12 August 2013 Department of Finance Consultation Paper on Treaty Shopping – The Problem and Possible Solutions under Treaties – Art. 29A.