News of Note
CRA announces that it will put on hold any individual returns claiming gifting tax shelter credits
CRA has announced that any 2012 returns claiming credits from a gifting tax shelter will not be assessed until the shelter's audit is complete - which likely will not go well as "all gifting tax shelter schemes are audited and CRA has not found any that comply with Canadian tax laws."
Scott Armstrong. Summary of "The Canada Revenue Agency: protecting Canadians from gifting tax shelter schemes" CRA News Release, 30 October 2012 under s. 237.1(1) - tax shelter.
CRA finds that pre-acquisition-of-control net capital losses of a CCPC continue to grind its CDA
CRA has confirmed that net capital losses of a CCPC, which are extinguished for most purposes upon an acquisition of its control, nonetheless will continue to be deducted in computing its capital dividend account: the worst of both worlds.
Neal Armstrong. Summaries of 5 October 2012 APFF Roundtable, Q. 8, 2012-0454161C6 F under s. 89(1) - CDA, and s. 245(4).
CRA requires that a mortgage investment corporation not be involved in management activities of a subsidiary.
One of the requirements for a corporation to qualify as a mortgage investment corporation (MIC) is that its only undertaking be the investing of its funds and that it not manage or develop real property. CRA considers that this requirement will not be breached if the mooted MIC has a subsidiary which manages or develops real property, provided that the MIC is not involved in those activities of its subsidiary.
A similar issue which arise in the income fund world is often addressed in part by ensuring that there is no overlap between the trustees of the income fund and the directors of any subsidiary with an operating business.
Neal Armstrong. Summary of 12 October 2012 T.I. 2012-0450291E5 under s. 130.1(6).
CRA rules that Canadian Finco loans qualify as ordinary-course loans of a money-lending business
A grandchild Canadian subsidiary of a non-resident multinational will issue commercial paper and notes in the Canadian public markets and on-lend at a positive spread to non-resident affiliates which are not its foreign affiliates. CRA ruled that this "Canco" will qualify for the exception in s. 15(2.3) from the shareholder loan benefit rule, on the basis that these loans will be made in the ordinary course of Canco's (intra-group) money-lending business.
This is a better result than avoiding the shareholder loan rules by electing under the draft October 15, 2012 draft rules to have the inter-company loans be "pertinent loans or indebtedness." The required interest accrual on "PLOIs" is quite high (currently 5%) whereas the ruling refers to the interest rates charged by Canco being no less than the "ordinary" prescribed interest rate of 1%, which is not likely to be a constraint.
Neal Armstrong. Summaries of 2012 Ruling 2011-0417711R3 under s. 15(2.3) and s. 17(5) - Exempt loan or transfer.
CRA indicates that capital dividend elections must be made in any applicable elected functional currency
CRA is of the view that making a functional currency election does not preclude the electing Canadian corporation from using Canadian dollars (or some other currency which is not the elected functional currency) in its "shareholders'" resolutions (including, presumably, directors' resolutions). However, capital dividend elections (as well as the capital dividend account itself) must be maintained in the functional currency.
Neal Armstrong. Summary of 20 September 2012 Memorandum 2012-0453071I7 under s. 261(5)(a).
CRA switches to OECD method for apportioning employee stock option benefits
CRA has announced a change to its policy for determining what portion of a stock option benefit is attributable to Canada where the employee in question has worked both in Canada and abroad. Rather than apportioning on the basis of the relative days of Canadian employment in the year of grant, CRA will use the methodology in the OECD Commentary, which typically refers instead to the relative days of Canadian employment in the vesting period. This policy change is effective for stock options exercised after 2012.
However, any specific Treaty provisions to the contrary will prevail. For example, there is a somewhat different methodology under Annex B to the 5th Protocol to the Canada-U.S. Treaty, which is based on the relative employment days between grant and exercise, rather than just the vesting period (see 6 July 2012 Memorandum 2012-0440741I7 summarized under Treaties - Article 15).
Neal Armstrong. Summary of 25 September 2012 B.C. Canadian Tax Foundation Conference, Q. 17, 2012-0459411C6 under s. 115(1)(a)(i).
Income Tax Severed Letters 14 November 2012
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is available for your viewing.
CRA issues butterfly ruling letter respecting a foreign spin-off transaction
CRA has issued another ruling letter on a cross-border butterfly, in which a spin-off business is transferred from DC, which is a Canadian sub of a foreign public company (Foreign Pubco), to TC, which is a subsidiary of a non-resident subsidiary (Foreign Spinco Parent) of Foreign Pubco. Foreign Spinco Parent is then distributed as a dividend-in-kind to the public shareholders of Foreign Pubco.
Similarly to the ruling described in an October 28th post, there was a requirement that the equity of TC not represent 10% or more of the equity of ForeignSpinco Parent in order to stay on-side with s. 55(3.1)(b)(i).
Neal Armstrong. Summary of 2012 Ruling 2012-0439381R3 under s. 55(1) - distribution.
CRA provides questionable ruling that fees generated by non-Interac-member provider of point-of-sale terminals are not exempt from GST/HST
CRA has ruled (in 17 May 2012: 62492, with a similar interpretation provided in 5 June 2012: 127795) that "independent sales organizations" or ISOs (i.e., organizations which are not Interac Association Members) which sell point-of-sale terminals to merchants and engage an Interac member to provide payment processing services to the merchants are not providing (GST/HST exempt) financial services as the service provided by them is predominantly the transfer, collection or processing of information and/or an administrative service performed by it without being financially at risk - and therefore is deemed to be a taxable service under the Financial Services (GST/HST) Regulations.
This ruling is questionable given that the Interac member is engaged as a subcontracter of the ISO, so that insofar as the merchant is concerned, what it is getting from the ISO is predominantly a payment service. However, a crucial feature of the structure is that, when the merchant contracts with the ISO, it agrees to pay the fees of the Interac processer out of the per-transaction fees generated from the merchant's customers - so that, arguably, there is a direct supply being made by the Interac processer to the merchant. Having said that, the ruling is internally inconsistent as it also indicates that the ISO is providing a single supply including [Interac] processing services to the merchant.
Neal Armstrong. Summaries of 17 May 2012 Ruling 62492 under Financial Services (GST/HST) Regulations and ETA - s. 123(1) - Financial Service and summary of 5 June 2012 Interpretation 127795 under ETA - s. 123(1) - Financial Service.
CRA rules on joint employment arrangement for avoiding GST/HST on intra-group charges
If a management company is reimbursed for its payroll costs by other group companies, those reimbursement charges generally will be subject to GST or HST except in the limited circumstances where s. 150 or 156 elections are available.
A group company (Company A) was represented to CRA as employing management and IT individuals partly for its own account and partly as agent for two other group companies. CRA ruled that payroll reimbursement payments which Company A will receive from the other two companies wil not be consideration for taxable supplies - notwithstanding that the individuals will be managed by Company A and will be treated only as its employees for source deduction and income tax reporting (T4) purposes.
Neal Armstrong. Summary of 15 May 2012 Ruling Case No. 142436 under ETA - S. 123(1) - Business.