News of Note
GST/HST Headquarters Letters July 2012
Email this ContentGSH/HST Headquarters letters for July 2012 are now available for your viewing.
CRA finds that a s. 84.1 deemed dividend can be an eligible dividend
CRA accepts that a dividend which is deemed by s. 84.1 to be received by an individual from a corporation with which he does not deal at arm's length is an eligible dividend which the deemed payor of the dividend can designate under s. 89(1) as coming out of its GRIP notwithstanding that the individual does not hold any shares of that corporation.
Neal Armstrong. Summary of 5 October 2012 APFF Roundtable, Q. 11 2012-0454091C6 F under s. 89(14).
CRA finds that grant of power of attorney did not result in an acquisition of control
CRA has stated that the granting of the power of attorney over the shares of a corporation in favour of the shareholder's accountant (an arm's length person), which then took effect on the shareholder's incapacity, did not result in an acquisition of control of the corporation. Under Duha, such an arrangement, which was external to corporation's corporate constitution, did not affect its control.
Neal Armstrong. Summary 5 October 2012 APFF Roundtable, Q 17 2012-0454111C6 F of under s. 249(4).
CRA reaffirms that winding-up an inter vivos trust does not shorten its taxation year
CRA considers that the taxation year end of an inter vivos trust is not shortened as a result of being wound-up in the year, so that the 90-day return filing deadline is still based on the calendar year. This is generally consistent with s. 132(6.2), which can deem a mutual fund trust to exist in the portion of a year in which it did not in fact exist, and also is consistent with earlier positions (28 February 1998 T.I. 9714685 and 17 July 2000 Memorandum 2000-0012557).
Neal Armstrong. Summary of 7 November 2012 T.I. 2012-0468101E5 under s. 249(1).
Income Tax Severed Letters 5 December 2012
This week's release of 13 severed letters from the Income Tax Rulings Directorate is available for your viewing.
Northwest International Healthcare Properties REIT structures its Australasian and German portfolio
As TSXV-listed Northwest International Healthcare Properties REIT is effectively privately-owned as to 96%, a unit offering under a short-form prospectus will effectively take it public. It currently holds Australasian, German and Brazilian properties.
The Australasian properties are held through a 20% interest in a New Zealand REIT, which has been transferred out under a securities lending arrangement, perhaps in order to avoid local withhholding tax. The German assets are held through a complex structure, but without apparently using the co-ownership fund structure used by Dundee International REIT. Rents on the Brazilian property have been securitized.
Neal Armstrong. Summary of Northwest International Healthcare Properties REIT short-form prospectus under Offerings - Cross-Border REITs.
Private company split-up butterfly raises Part IV tax/dividend refund circularity issue
A CCPC (DC) whose only significant asset is a shareholding (not exempt from Part IV tax) in a Canadian public company (Pubco) is butterflying that asset out to its numerous CCPC shareholders (TCs), who are owned by 3rd or 4th generation family members and to which it is not connected for Part IV tax exemption purposes. As both the deemed dividends arising on the redemption of the preferred shares issued by the TCs to DC on the butterfly, and the deemed dividends arising on the winding-up of DC (on which the promissory notes received by DC on the redemption of the TC preferred shares are distributed to the TCs) are subject to Part IV tax and generate a dividend refund, there is a classic circularity problem.
The ruling letter does not address this issue directly, but indicates that the stated capital of the TC preferred shares is nominal, and the stated capital of DC's shares is reduced to a nominal amount before its winding-up, in order "to ensure that each of the TCs and DC’s respective dividend refund ... and respective Part IV tax liabilities ... will approximately be equal to each other."
Neal Armstrong. Summary of 2012 Ruling 2011-0416001R3 under s. 55(1) - distribution.
Berg - Tax Court allows leveraged donation participant to receive credit for his cash outlay
Bocock J. found that, although the documents generated for the taxpayer's leveraged charitable donations were a flagrant attempt to deceive the CRA (the taxpayer was never at risk for the purported leveraged portion), the cash component of the taxpayer's "donation" was nevertheless a valid charitable gift. On reviewing the authorities, he concluded that the receipt of a collateral benefit in the form of a tax credit will not in itself nullify donative intent.
Maréchaux, 2010 FCA 287, was "easily distinguishable" because the transaction documents in Berg were "pretenses and thereby not legally effective documents." This suggests that the effective purchase of "fake" documents, which if successful in fooling CRA will generate a large charitable credit, nonetheless represents a gift for which the taxpayer expects no return.
Scott Armstrong. Summary of Berg v. The Queen, 2012 TCC 406 under s. 118.1 - Total Charitable Gifts.
CRA accepts withholding tax exemption on interest paid on undivided interests in mortgages
In a heavily redacted ruling (20 of the 21 paragraphs describing the proposed transactions were deleted!) CRA indicated that interest paid on instruments representing undivided interests in pools of mortgages (presumably, CMHC-guaranteed) represented "fully exempt interest." This seems to imply that CRA accepts that a co-ownership interest in a mortgage qualifies as a "bond, debenture, note, mortgage, hypothecary claim or similar debt obligation."
Neal Armstrong. Summary of 2012 Ruling 2011-0431891R3 under s. 212(3) - fully exempt interest.
CRA affirms its policy on accepting bilateral adjustments to domestic or cross-border management fees
CRA has affirmed that, where the deduction of part of a management fee or similar charge has been disallowed as a result of differing interpretations of reasonableness, it will allow the recipient of the fee to refund the disallowed amount and accept a written request from the recipient to reduce the recipient's income accordingly. Where in a cross-border context, the finding by CRA that the fee was excessive would otherwise give rise to an assessment of Part XIII tax on a deemed dividend, the non-resident may repatriate the excess amount to avoid the withholding tax assessment.
Scott Armstrong. Summaries of 19 October 2012 T.I. 2012-0440071E5 under s. 67 and s. 214(3)(a).