News of Note
van Winkelhof v Clyde: English Court of Appeal confirms that a partner cannot also be an employee
Email this ContentThe English Court of Appeal noted that, at common law, it is not possible for "a partner in a partnership [to] be an employee of the partnership, because it is equally not possible for an individual to be an employee of himself and his co-partners" and that "a partner need not be remunerated by reference to profit ... and that it is no bar to being a partner that he does not make any capital contribution."
The first point is consistent with the CRA position in Income Tax Technical News, No. 30, that remuneration received by a partner for work performed in the course of the partnership business is properly treated as a distribution of income or a draw against capital (given that an agreement between a partnership to employ a partner would be an attempt by the particular partner to enter into a contract of employment with himself or herself) and would not be deductible in computing partnership income.
The second point supports the legal validity of the concept of partners with pre-determined draws.
The third point indicates, for example, that it is not necessary for a general partner of a LP to contribute capital for its GP interest (although most lawyers have this done anyway.)
Neal Armstrong. Summary of Bates van Winkelhof v Clyde & Co LLP, [2012] EWCA Civ 1207 under s. 96.
Swirsky - Tax Court appears to find that if a spouse didn't understand that a borrowing was for an income-producing purpose, the interest is non-deductible
For creditor-proofing reasons, the taxpayer implemented a plan, involving circular transactions utilizing an economically defeased loan from a trust company, which had the effect of converting shareholder loans owing by him to the family corporation into interest-bearing loans owing by his wife (Ms. Swirsky) to the trust company, which she had incurred to acquire shares of the taxpayer in the corporation. The intention of the tax planner may have been that interest on a GIC in the same amount as the loan (which the corporation had acquired under the circular transactions) would be paid (under a payment direction arrangement) to her as dividends on her purchased shares, with such dividends then applied to pay the interest on the trust company loan.
Even though the dividends ultimately paid to Ms. Swirsky on her shares in fact exceeded the interest payable by her, Paris J nonetheless found that the interest was non-deductible because Ms. Swirsky's only understanding of the transactions was a vague one that they were for creditor-proofing purposes, and she had no knowledge of any plan for her to receive dividends. It also did not help that in fact the interest payments were borne by the taxpayer (through charges to his loan account with the corporation) rather than Ms. Swirsky. Consequently, there was no loss on the shares to be attributed to the taxpayer under s. 74.5(1).
This case may suggest that a transaction which, if implemented properly, would be considered by an experienced tax planner to have an income-producing purpose under post-Singleton tracing doctrines, will not satisfy this test if the borrower has no knowledge of an income-producing aspect of the plan.
Neal Armstrong. Summaries of Swirsky v. The Queen, 2013 TCC 73 under ss. 20(1)(c), 74.5(11), 245(3), 245(4) and General Concepts - Onus.
CRA rules that a digital content sales data centre held by a Cansub is not a permanent establishment of the parent
CRA considers that a Canadian server potentially can constitute a permanent establishment of a non-resident: 18 October 2011 T.I. 2010-038195.
A U.S. corporation and its non-resident subsidiary (located in another treaty jurisdiction) together run a digital content sales platform that enables third parties to sell content, and collect a percentage of the sales proceeds (i.e. similar to iTunes). CRA has ruled that the two non-residents will not be considered to carry on business in Canada through a permanent establishment for purposes of the two applicable treaties by virtue of having a Canadian subsidiary (Canco) run a data centre in Canada to mirror the USCo's websites and digital content sales platform - with a "small group" of operational employees of the U.S. corporation coming to Canada "from time to time for the purposes of inspection, maintenance or similar purposes" and with applications and data hosted in the Canadian data centre being managed remotely by employees of the non-resident companies located outside of Canada.
Scott Armstrong. Summary of 2012 Ruling 2012-0432141R3 under Treaties - Article 5.
CRA will apply Canadian GAAP to financial statements prepared under IFRS in determining whether there is contributed surplus for thin cap purposes
CRA states in IT-59R, para. 8, that the determination of the contributed surplus (and retained earnings) of a corporation for thin cap purposes is governed by GAAP.
Where the Canadian corporation prepares its financial statements under IFRS (which do not use the concept of contributed surplus), CRA will recognize an amount reflected in the corporation's "equity reserves" as contributed surplus if it arose on a contribution of capital and it would be categorized as contributed surplus under (private company) Canadian GAAP.
Neal Armstrong. Summary of 5 December 2012 T.I. 2012-0445891E5 under s. 18(4).
Income Tax Severed Letters 6 March 2013
This morning's release of 11 letters from the Income Tax Rulings Directorate is now available for your viewing.
Kanji - Ontario Superior Court finds that instructions to "minimize tax" did not entail routine tax deferral arrangements
The taxpayer settled a family trust with himself as one of the beneficiaries and trustees, with the result that he would be ineligible pursuant to s. 107(4.1) for s. 107(2) rollover treatment on a transfer of trust property to his children.
Brown J. denied the taxpayer's application for a rectification order. The taxpayer did not meet the burden of proving his alleged intention, when forming the trust, of eventually having the trust's assets transferred to his children on a tax-deferred basis.
Brown J.'s decision, if correct, means that a taxpayer's instructions to a tax or estate lawyer do not implicitly entail instructions to arrange transactions to secure reasonable tax advantages. For example, the taxpayer's general instruction to counsel to "minimize tax" apparently did not include the specific tax deferral that the taxpayer later sought in the rectification order.
Scott Armstrong. Summary of Kanji v. Attorney General of Canada, 2013 ONSC 781 under General Concepts - Rectification.
The Charger, AvenEx and Pace amalgamation will qualify as a tax-deferred exchange under Code s. 368(a).
Three oil and gas companies (Charger, AvenEx and Pace) amalgamated under a plan of arrangement. Rather than this occurring directly, there was an exchange under s. 85.1 of shares of two of the companies (Charger and AvenEx) for shares of the third (Pace), followed by the amalgamation. This qualifies as a tax-deferred exchange under Code s. 368(a).
Avoiding a single amalgamation avoided an acquisition of control of Pace that otherwise would have occurred under s. 256(7)(b) (and s. 256(7)(c) did not apply on the successive share-for-share exchanges).
As the last step, the stated capital of the shares of Amalco was reduced to a nominal amount, with such reduction added to contributed surplus (presumably with a view to the reduction being reversed later under s. 84(1)(c.3) if the occasion should arise.)
Neal Armstrong. Summary of Charger, AvenEx and Pace Circular under Amalgamations.
CRA does not permit cash management and return filing by a nominee to qualify it as a joint venture operator for GST/HST purposes
CRA has a long-standing published position that bare trustees or nominees cannot qualify as operators of joint ventures for purposes of the GST/HST joint venture election, even though it recognizes that it is common in the real estate industry to use nominee corporations in this way. CRA requires the operator to have the authority to manage the day-to-day activities of the joint venture without the input or approval of the joint venture participants, and states that this requirement would not be satisfied even where the nominee "manages the collection and remittance of the GST/HST, maintains the bank accounts in the nominee’s name, and receives all payments and pays all operational expenses on behalf of the joint venture."
Neal Armstrong. Summary of 26 November 2012 Interpretation 148931 under ETA - s. 273(1).
GST/HST Headquarters Letters November and December 2012
This afternoon's release of 15 HST/GST Headquarters Letters for November 2012 and 9 for December 2012 are now available for your viewing.
CRA applies upper tier debt on a pro rata basis for purposes of applying the 10% limitation rule in s. 55(3.1)(b)(i)(A)(II) respecting a cross-border butterfly
Where on a foreign spin-off by a non-resident public company (Foreign Pubco) of its shares of a non-resident subsidiary (Foreign Spinco), there has been a butterfly distribution of one of the two businesses in question by an indirect Canadian subsidiary (Canco) to a transferee corporation (TCo) that will be retained by Foreign Pubco, with Canco indirectly being included in what is spun-off, CRA will require that the 10% limitation in s. 55(3.1)(b)(i)(A)(II) be complied with, so that at all times less than 10% of the fair market value of the shares of Foreign Spinco is derived from the shares of Canco.
CRA has ruled that if Foreign Spinco borrows money from a third party following the butterfly reorganization and before the spin-off, such debt will be considered to reduce the fair market value of the assets of the holding companies for Canco, and the other assets of Foreign Spinco, on a pro rata basis for these purposes, even if there is no logical connection between the use of that borrowing and the shares of Canco.
Neal Armstrong. Summary of 2012 Ruling 2011-0425441R3 under s. 55(3.1)(b)(i) (also discussed below).