News of Note
Denial of Canadian dollar FX losses realized by subsidiary using a different functional currency
Email this ContentCRA has confirmed that where a parent with a Canadian dollar functional currency has lent in Canadian dollars to a (Canadian) subsidiary with a different functional currency, a foreign exchange loss realized by the subsidiary on repayment of the loan will be denied.
Presumably the same position would apply if the parent had lent in US dollars to its subsidiary, and it realized an FX loss (in Canadian dollars) on repayment of the loan.
Neal Armstrong. Summary of 2011 TEI Roundtable, Q. 4 2011-0426981C6 under s. 261(20).
Supreme Court agrees that trusts have the same residency test as corporations
The Supreme Court has found that, as with a corporation, the place of residence of a trust is wherever its "central management and control" (respecting important decisions) is exercised, which is not necessarily the jurisdiction of residence of the trustee(s).
The Court also has confirmed British case law that if a shareholder exercises the central management and control of a corporation from another jurisdiction than where the board of directors meets, the corporation is resident in that other jurisdiction.
Scott Armstrong. Summary of Fundy Settlement v. Canada, 2012 SCC 14, under ITA s. 2.
CRA maintains global grasping of employee source deductions
CRA has confirmed that a US (or other non-resident) employer is required to withhold and remit Canadian source deductions from the remuneration paid by it to its Canadian-resident employees, even if it does not carry on business in Canada directly or indirectly, the employees work only in the US and their remuneration is subject to full US source deductions.
Although the literal scope of the Regulations in question is consistent with this position (clarifying an earlier position), it appears to be oblivious to a principle of statutory interpretation (see Territorial Limits) that generally an implication should be read into a taxing provision that it does not apply to a taxpayer (in this case, a US corporation) which has no connection to the jurisdiction imposing the tax (or, in this case, a source deduction obligation.)
Neal Armstrong. A summary of Memorandum 2012-0436311I7 appears under Regulation 102.
BC Supreme Court gives taxpayers a second shot at rectifying a deficient trust deed
The BC Supreme Court granted a rectification order to cleanse a trust deed of deficiencies that had caused CRA to assess on the basis that s. 75(2) applied to attribute a substantial capital gain realized by the trust to the settlor (the father). However, on receiving this rectification order, CRA confirmed its reassessments on the basis that it had discovered further deficiencies in the trust deed that caused s. 75(2) to continue to apply! The solution? The taxpayers went back to Court (in a contested motion) to get a further rectification order to correct the further alleged deficiencies. Dorgan J reasoned that as tax planning (i.e., multiplying the capital gains exemption) was a major purpose of the trust from its inception, rectification relief gave effect the the parties' specific intentions.
Neal Armstrong. Summary of McPeake v. Canada, 2012 BCSC 132, under Rectification.
Tax Court disallows all of the fraudulent loss suffered by a lawyer
A Calgary lawyer suffered a loss of nearly $400,000 in a classic "419 scheme." (i.e., paying "processing" fees to recover large sums on behalf of knaves posing as clients).
Webb J. found that, because it was wholly unreasonable to be duped by the scheme, it was unreasonable to spend any amount to recover the sums - therefore, the entire loss was denied under s. 67.
Scott Armstrong. Summaries of Ruff v. The Queen, 2012 TCC 105, appear under s. 67 and s. 4(1)(a).
CRA rules that movies that are sublicensed through a Canadian distributor for use in Canadian homes are exempt under the US Treaty from Canadian withholding tax
While iTunes and Amazon continue to be the most prominent online content sales platforms, with their direct-to-home-users sales model, other content sellers work through intermediaries. In an advance ruling, CRA considered a situation where a U.S. corporate group focused on the infrastructure side - obtaining permission from copyright holders, and setting up the back-end parts of an online sales platform - billing systems, content servers, etc. The group's Canadian distributors handled the front-end - storefront, branding, and marketing - and sold the content to home users. The relevant group member (a limited liability company with a qualifying US-resident member) received rulings that monthly fees collected through its billing system directly from the Canadian home users were exempt from Part XIII withholding tax by virtue of the exemption for copyright royalties in Article XII of the Canada-US Income Tax Convention.
Two interesting points.
First, CRA accepted the taxpayer's representation (in the description of facts) that the LLC was the beneficial owner of the payments received from the Canadian individuals notwithstanding that all the LLC had to license was limited home-use distribution rights that it, in turn, had been licensed by the third-party holders of the copyright. (This is consistent with the Velcro decision, where a licensee of IP from a related party was found to be the beneficial owner of royalties paid to it by a related sub-licensee.) Furthermore, this representation was accepted notwithstanding that the individuals contracted directly with the Canadian distributors rather than with the LLC. (There is no statement to the effect that the distributors contracted with the individual users as agent for the LLC.)
Second, no mention was made of the exclusion, from the exemption in Article XII for copyright royalties, where the royalties are "in respect of motion pictures" (or of the similar exclusion in s. 212(5)(a) of the Act from the copyright royalty exemption in s. 212(1)(d)(vi)), notwithstanding that the licensed "Digital Content" included movies. This likely reflects that CRA accepts that royalties paid for the home use of movies are exempt under the Convention - see 2011-0374421E5. The LLC qualified for this exemption under Art. IV, para. 6 of the Convention because its sole member was a qualifying US resident.
Scott Armstrong. See summaries of Ruling 2011-0416891R3 under Treaties - Article XII and ITA s. 212(4).
Japanese absorptive merger triggered a taxable disposition of shares of Canadian subsidiary
CRA has found that a Japanese absorptive merger - in which only one of the merging corporations survived and the others were considered under the Japanese Commercial Code to have been dissolved - resulted in gain being triggered on the taxable Canadian property held by the dissolved Japanese corporations, in this case, shares of Canadian subsidiaries. This is consistent with previous CRA positions (see, for example, 2000-002395, a ruling respecting a US absorptive merger.)
Foreign mergers of this type can be problematic. The foreign advisors, who know that there is a rollover under the foreign tax law, may not realize that they give rise to a disposition under the Act.
Neal Armstrong. See summary of 8 March 2012 Memorandum 2010-0387961I7 under ITA s. 248(1) - "Disposition".
CRA refuses to condone mark-to-market accounting for trading liabilities of financial institutions
It is understood that many financial institutions such as securities dealers and banks mark-to-market both the assets used in their core businesses and the related liabilities for income tax (as well as accounting) purposes, notwithstanding that the Act only specifically authorizes mark-to-market accounting for qualifying assets. This practice has been called into question by a recent technical interpretation. It indicates that it does not accord with the Act for financial institutions to recognize, on an accrual basis, gains or losses on liabilities due to fluctuations in interest rates, credit ratings or other adjustments. Although the CRA position could be technically correct, the result of applying this policy is that the income for tax purposes of a financial institution may not reflect that it is maintaining a largely hedged book in the sense that decreases in the value of its assets as a result of increasing interest rates will be largely matched by decreases in the value of its liabilities.
Neal Armstrong. Summarized under ITA s. 9 "computation of profit".
CRA finds that s. 98(5) is not available where a landlord partnership is wound-up into the tenant partner
CRA indicated in a French technical interpretation that the s. 98(5) rollover was not available where the wound-up partnership had been renting its sole property (a retirement residence) to the partner into which it was wound-up (because the rental activity ceased on the merger of tenant and landlord). This is another illustration that the s. 98(5) is available in a narrower set of circumstances than under s. 98(3).
Neal Armstrong. Summary under ITA s. 98(5).
Tax Court finds that GAAR did not apply to a surplus strip
McClarty, 2012 TCC 80, concerned transactions that had the effect of distributing assets of a family holding company to a family trust, and permitting that distribution to be realized by the trust as a capital gain rather than as a dividend - so that the property could then be distributed to the minor children without being subject to the "kiddie tax" under s. 120.4. Angers, J. found that none of the transactions were avoidance transactions under the general anti-avoidance rule because they all had a primary purpose of protecting assets from a potential suit. Not surprisingly, Angers J also found that the words "in any manner whatever" in s. 84(3) did not authorize CRA to treat preferred shares that in fact were redeemed in the hands of an affiliated corporation as if they had been redeemed in the hands of the family trust (which had owned those shares earlier in the series of transactions).
Scott Armstrong. Summary under ITA s. 245(3) and ITA s. 84(3).