News of Note
CRA confirms application of proportionate value approach to taxable Canadian property testing
Email this ContentEquity of a private corporation (or other entities such as a partnership) will be taxable Canadian property if at no time during the preceding 5 years has the equity of the entity derived more than 50% of its fair market value from Canadian real estate, resource or timber properties, timber resource properties or related options. At the recent International Fiscal Association meeting in Ottawa, CRA confirmed (through various examples, which were not provided when this position was previously announced at the Canadian Tax Foundation annual conference in the fall) that it will apply a proportionate value approach for the purposes of applying this test to subsidiaries (whose shares are taxable Canadian property) of the entity being tested - so that in effect mortgage debt is allocated across all classes of assets rather than being netted against the real estate to which it relates. CRA also indicated that the same approach will be applied in the case of subsidiary partnerships.
This contrasts with an earlier approach (based on a somewhat similar treaty test) where taxpayers generally were allowed to apply the netting approach if they so chose (see 5 September 2003 TI 2003-002967).
Neal Armstrong. Summary of 2012 IFA Roundtable Q.5 under s. 248(1) - "taxable Canadian property" [not yet published by CRA].
CRA is willing to prorate in characterizing recapture of depreciation
CRA accepts (with support from Bessemer Trust and Arnos) that recapture of depreciation has the same character (as business or property income) as the income from which the related capital cost allowance was deducted. CRA has now indicated that where in earlier years the CCA claims on a building were deducted in computing active business income (or, in this case, rental income from an associated corporation that was deemed to be active by s. 129(6)), and deducted from property income in later years, subsequent recapture of depreciation will be allocated between active business and property income on the same proportionate basis.
In the context of this example, this position seems to be generous given that when the building is sold it no longer is an active business asset.
Neal Armstrong. Summary of 9 May 2012 T.I. 2012-0440781E5 under s. 129(4).
Ford - English Queen's Bench Division finds that joint interest privilege can be available even if the advising lawyer's retainer was only with the corporation
Suppose that a tax lawyer is retained by a company to provide advice on matters that include the the tax treatment of executives or shareholders, e.g., advising on a stock option plan. Is the advice subject to joint interest privilege - so that the privilege in the legal opinion can be waived only if the corporation and each individual who received the advice agree to waive the privilege?
A UK court has set out a new five-part test for finding joint interest privilege in the situation where the solicitor's retainer was only with the corporation. This test essentially requires that every party involved - the solicitor and each individual recipient of the advice - understands that the advice is being given to the individuals in their own capacity rather than only on behalf of the corporation.
Scott Armstrong. Summary of R (Ford) v. Financial Services Authority, [2012] 1 All ER 1238, [2011] EWHC 2583 (QBD) under s. 232(1) - Solicitor-Client Privilege.
Davies - UK Supreme Court reiterates that Revenue has the power to assess otherwise than in accordance with the law
In the Davies decision discussed in the post below, the UK Supreme Court reiterated its position that the Revenue Commissioners have the authority to agree to not collect taxes which are owing by taxpayers at law, where this is done to further an objective of enhancing overall tax collections (see also Nuttall).
This position is contrary to Cohen, a Federal Court of Appeal decision which has not been considered by the Supreme Court of Canada.
Neal Armstrong. Summary of R (Davies) v. RCC, [2012] 1 All ER 1048, [2011] UKSC 47 under s. 152(1).
Davies - UK Supreme Court indicates that becoming a full-time employee elsewhere generally will result in a change in residence
The UK Supreme Court (formerly the House of Lords) has indicated that whenever an individual has left the UK to pursue full-time employment abroad, it is likely that he will be considered to have made a "distinct break in the pattern of his life in the United Kingdom," and thereby ceased to be ordinarily resident in the UK, notwithstanding that he or she may not have severed his or her family and social ties with the UK.
This position seems to be contrary to quite a number of Canadian lower court decisions respecting Canadian individuals who took a full-time job abroad but did not sever their Canadian personal ties (see, e.g., Glow, Mullen, Johnson, Gaudreau, Snow). The test of individual residency has not been considered by the Supreme Court of Canada since the Thomson case (which is based, in part, on the same English jurisprudence, e.g., Levene, as that underlying this decision in Davies). It is possible that the current Canadian judicial test, indicating that a requirement that an individual sever most of his or her social and family ties with Canada in order to cease to be a resident, is "pitch[ing] the requirement... at too high a level."
Neal Armstrong. Summary of R (Davies) v. RCC, [2012] 1 All ER 1048, [2011] UKSC 47 under s. 2(1).
Sheldon Intewash - A foundation with a sole trustee (which was "not at arm's length from itself") did not qualify as a public foundation
The Federal Court of Appeal found that, although the definition of "public foundation" in s. 149.1(1) does not explicitly require that a charitable foundation have multiple trustees (or directors or officers, as the case may be), this is implied by the wording - for example a single trustee cannot satisfy the requirement in the definition of dealing with the "other" trustees at arm's length (and "[m]oreover, a single trustee is not at arm's length from itself.")
This latter statement skirts a dubious proposition appearing in at least one CRA technical interpretation (see 23 May 1996 T.I. 5-960465) that it is possible for a corporation not to deal at arm's length with itself as a factual matter - so that on a deemed disposition and reacquisition of property by the corporation (in that interpretation, under s. 149(10) on becoming or ceasing to be Crown-exempt), provisions of the Act which apply to transactions between persons not dealing at arm's length, such as the 1/2 step-up rule in s. 13(7)(e), can apply. (S. 13(7)(e.1) implies, and common sense suggests, that this CRA interpretation is incorrect.)
Neal Armstrong. Summaries of Sheldon Intewash and Lynn Factor Charitable Foundation v. The Queen, 2012 FCA 136 under ITA s. 149.1, Interpretation Act s. 33(2), and Statutory Interpretation - Ordinary Meaning.
CRA takes expansive view of when a foreign affiliate in "involved" so as to extend the 4-year limitation period
CRA indicated that where a Canadian parent winds up a Canadian subsidiary and thereby receives that subsidiary's shares of a U.S. subsidiary, the U.S. subsidiary is "involved" in the transaction - so that this winding-up transaction can be reassessed within the extended period in s. 152(4)(b)(iii) (i.e., an extra three years).
CRA cited Shaw-Almex for the proposition that a non-resident affiliate may be "involved" in a transaction to which it is not a party - in that case, the repayment by a Canadian firm of a bank loan owing by a U.S. affiliate to a U.S. bank. However, such U.S. affiliate also was a signatory to the agreement between the Canadian firm and the U.S. bank for the repayment of the loan, and its (insolvent) business was the matrix of the transaction. It is far from clear that s. 152(4)(b)(iii) can be applied to the scenario addressed by CRA, in which the non-resident affiliate's "involvement" in the transaction is entirely passive (or, at most, perfunctory, if it approved the conveyance of the shares in its capital).
Scott Armstrong. Summary of 22 March 2012 Interpretation 2011-0407731E5 under s. 152(4)(b)(iii).
Licensed music incorporated into video is still music
CRA affirmed the principle that the determination of whether a royalty is subject to Part XIII tax is based on the nature of the work being licensed - that is, a musical work is still a musical work even if it is being licensed for the purpose of being integrated into a television ad or other motion picture or video product.
Scott Armstrong. Summary of 14 December 2011 Memorandum 2011-0424221I7 under s. 212(5).
CRA maintains its broad interpretation of the residual conferral-of-benefit provision (s. 246(1))
CRA has indicated that where a subsidiary (a US limited liability company) confers a benefit on the individual Canadian shareholder of its parent corporation (an Alberta unlimited liability company) by paying the US income tax liability of that individual arising as a result of both corporations being fiscally transparent for US purposes, the benefit is includable in the individual's income under s. 246(1). (This is similar to an earlier interpretation: 10 January 2011 Memorandum 2009-034425.)
The judicial authority cited by CRA (Pub Création) might support this approach only if the parent corporation (the Alberta ULC) had approved the conferral of this benefit, and there is no indication in the statement of facts that this was the case. CRA, in effect, may presume such approval. If the transaction occurred after the effective date of draft s. 15(1.4) (October 31, 2011), the benefit also would be included in the income of the Alberta ULC, thereby resulting in double taxation (even if s. 56(2) did not apply).
Neal Armstrong. Summary of 16 April 2012 T.I. 2011-041149 under s. 246(1) and s. 248(1) - dividend.
CRA finds that the statutory amalgamation rules apply to a Canadian absorptive merger
This concerned a merger under a BC plan of arrangement of a BC corporation (Subco) and its wholly-owned BC sub (Target). The plan of arrangement (for US tax reasons) provided that Target survived the merger and that Subco ceased to exist - while at the same time (and perhaps with a view to the requirements of s. 87(1)) stating that Target and Subco continued as one corporation.
CRA found that this merger satisfied the requirement in the definition of amalgamation in s. 87(1) that a corporation be "formed" on the merger - and the requirement, for s. 87(11)(b) to apply, that the "new" corporation "acquire" the property of the subsidiary (Target) on the amalgamation.
Neal Armstrong. Summary of 2012 Ruling 2010-0355941R3 under s. 87(11).