News of Note
BlackRock HoldCo 5 – English Court of Appeal imputes 3rd-party covenants in a transfer-pricing comparison of a cross-border inter-affiliate loan without them
Email this ContentThe structure for the acquisition by the BlackRock group of the U.S. target (“BGI”) entailed a BlackRock LLC (“LLC4”) lending US$4 billion to a wholly-owned LLC (“LLC5”) as well as injecting substantial equity into LLC5, with LLC5 using most of those proceeds to subscribe for preferred shares of the transaction Buyco (“LLC6” – which acquired all the shares of BGI). LLC6 was wholly-owned by LLC5 save for the common shares of LLC5 held directly by LLC4. The LLCs (and, thus, the loan) were disregarded for US tax purposes; however, LLC5 was factually a UK resident, so that the loan interest generated losses for UK tax purposes which LLC5 transferred to other UK group members.
The UK transfer-pricing legislation (which was explicitly stipulated “to be read in such manner as best secures consistency” with the OECD’s Transfer Pricing Guidelines) required that the profits and loss of LLC5 be computed as if the transaction which would have been made between two independent enterprises had been made, instead of the actual transaction between LLC5 and LLC4.
In rejecting the HMRC position that the LLC5 interest deductions should be denied under these transfer-pricing rules on the basis that the loan transaction between the two enterprises (LLC4 and LLC5) was not one which would have been made by arm’s-length enterprises (i.e., LLC4 lacked covenants of LLC5 and BGI to ensure the flow of dividends to LLC5 to service the loan), Falk LJ first noted that in the actual transaction, LLC4 had no need of such covenants given its control of LLC6 and its subsidiaries (the “LLC6 sub-group”). She further noted that the OECD guidelines required that, in comparing the actual transaction to the hypothetical transaction between two independent enterprises, “the OECD guidelines contemplate that adjustments may be made to ensure that material differences between ‘economically relevant characteristics’ are eliminated.” She found that in this light:
The appropriate comparison is not between the non-existence of covenants in the actual transaction and the covenants that a third-party lender would require, but between the actual risks in the real world and the risks in the hypothetical transaction. In the hypothetical transaction there are risks that third parties (specifically, the LLC6 sub-group) may take actions that prejudice the performance of the Loans. Those risks do not exist for the parties to the actual transaction. The covenants in the hypothetical transaction effectively bring the risks into line with each other, so that the transactions are comparable.
However, although the interest deduction was not denied for transfer-pricing reasons, it was denied under the UK “unallowable purpose” rule, i.e., in general, the main purpose of the loan was securing a tax advantage.
Neal Armstrong. Summary of BlackRock HoldCo 5, LLC v Commissioners for His Majesty's Revenue and Customs [2024] EWCA Civ 330 under s. 247(2)(b).
Breton - Federal Court finds that failing due to ignorance to transfer funds between the taxpayer’s TFSAs using the qualifying transfer rules, was not a “reasonable error”
The taxpayer accomplished the transfer of the TFSA that he held with Caisse Desjardins to the one held with Banque Nationale by withdrawing the funds from the first TFSA and depositing then to the second TFSA, rather than arranging for Caisse Desjardins to transfer the funds directly as a “qualifying transfer” as defined in s. 207.01(1) (i.e., on a tax-free basis). In finding that the CRA decision to deny his request for relief pursuant to s. 207.06(1) was reasonable, and after having noted that the taxpayer had failed to request a direct transfer “since he was unaware of the obligation to do so,” Régimbald J stated:
The jurisprudence clearly demonstrates that ignorance of the provisions of the ITA and of the obligations of taxpayers in managing their TFSA accounts … do not constitute a "reasonable error" within the meaning of subsection 207.06(1), justifying the exercise of the Minister's discretion … .
Neal Armstrong. Summary of Breton v. Attorney General, 2024 CF 555 under s. 207.06(1).
Income Tax Severed Letters 10 April 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The relaxation of s. 55(5)(e)(i) nonetheless may not accommodate purification butterflies
Although s. 55(5)(e)(i) deems siblings to deal at arm’s length for the purposes of the butterfly rules, on June 29, 2021 it was amended to provide an exception where the butterfly dividend was received or paid by a corporation of which a share of the capital stock “is” a qualified small business corporation share or of a family farm or fishing corporation.
It is suggested that this quoted use of the present tense signifies that the exception is allowed only to companies whose shares are QSBC shares in advance of the butterfly (although see also Interpretation Act, s. 10, and Barker v. Baxendale.) If so, a corporation owned by siblings could not undergo a purification butterfly so as to qualify as a QSBC, as it would not qualify as a QSBC at the precise time of the butterfly.
Neal Armstrong. Summary of David Carolin and Manu Kakkar, “Imperfect Timing: Subparagraph 55(5)(e)(i) Cannot Be Used in Purification Transactions,” Tax for the Owner-Manager, Vol. 24, No. 2, April 2024. p. 7 under s. 55(5)(e)(i).
Joint Committee notes anomalies in the stock buyback rules
Anomalies noted by the Joint Committee respecting the stock buy-back rules in Bill C-59 include:
- Where “Acquisitionco,” after acquiring “Targetco” (whose shares take a while to become delisted), vertically amalgamates with it, the amalgamation will not qualify as a “reorganization transaction” under para. (b) of the definition, because the equity holders of the covered entity (Acquisitionco as the holder of Targetco shares) do not receive equity of Amalco, as such equity is instead cancelled for no consideration.
- Where Targetco instead is wound-up into Acquisitionco, this may not satisfy the requirement under para. (c) of the "reorganization transaction" definition that all or substantially all of the property of Targetco be distributed to Acquisitionco, where more than 10% of Targetco's assets are debt or equity of Acquisitionco (which could have been held prior to the acquisition), since such shares or debt will be extinguished by operation of law on the wind-up rather than being "distributed" to Acquisitionco.
- Where the shareholders of Targetco are to receive a combination of cash and shares of Acquisitionco, the cash component is included in Variable B of the formula in proposed s. 183.3(2) (so that it is subject to the tax) because equity of a covered entity (Targetco) is acquired in the taxation year pursuant to a reorganization transaction described in para. (a) of that definition and a portion of the consideration received by a holder for the Targetco shares is not equity consideration described in para. (a) or (b) of the definition of reorganization transaction.
Neal Armstrong. Summaries of Joint Committee, “Subject: Proposed Part II.2 Tax – Tax on Repurchases of Equity – ‘Reorganization Transaction,’ 26 March 2024 Joint Committee Submission under s. 183.3(1) – reorganization – (b), (c), s. 183.3(2), s. 183.3(2) – B.
We have translated 8 more CRA interpretations
We have translated 2 CRA interpretations released last week and a further 6 CRA interpretations released in February of 2002. Their descriptors and links appear below.
These are additions to our set of 2,800 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Sodecia – Tax Court of Canada finds that the taxpayer had failed to establish that a notice of assessment had been mailed after its stated date
The taxpayer argued that an assessment of it dated June 8, 2017 was only mailed, at the request of its agent, about three years later, so that its Notice of Objection thereto was timely. The taxpayer’s appeal was dismissed. Affidavits (coming within s. 244(10)) of CRA employees indicated that there were no abnormalities appearing in the CRA records regarding the preparation and sending of the related batch of assessments. This established a rebuttable presumption that the assessment had been mailed on June 8, 2017. Furthermore, the taxpayer had not rebutted this presumption in light of some gaps in its evidence, including one arising out of an office move that “raise[d] the possibility that the envelope containing the Assessment was simply put aside to be dealt with at a point in time and possibly misplaced or forgotten.”
Neal Armstrong. Summary of Sodecia Canada Investments Inc. v. The King, 2024 TCC 40 under s. 244(14).
St-Joseph – Court of Quebec finds that the transformation of 2 floors of commercial building to residential use did not qualify as a “cessation” of commercial activity for QST purposes
Starting in 2002, St-Joseph incurred costs in converting the 1st and 2nd floors of a 12-storey mixed-use tower from commercial rental use into residences for rental to seniors.
St-Joseph argued based on the QSTA equivalent of ETA s. 141.1(3)(a) that it had incurred the costs “in connection with the … termination of a commercial activity” of it, so that such costs were deemed to have been incurred in the course of its commercial activity. In rejecting this submission, and in confirming the denial of input tax refunds, Lachapelle JCQ stated (at paras. 93, 103, TaxInterpretations translation):
[T]he intention of St-Joseph was that the work carried out on the first and second floors of the Building was to adapt the building for residential or lodging use of individuals. …
The Court concludes that the concept of the cessation of an activity does not include the transformation of the activity.
Neal Armstrong. Summary of St-Joseph Immobilier Inc. v. Agence du revenu du Québec, 2024 QCCQ 766 under ETA s. 141.1(3)(a).
CRA indicates that CPP and OAS payments are treated as pensions and social security payments under the Canada-Italy Treaty
Regarding the receipt by an individual resident in Italy of periodic CPP and OAS benefit payments, CRA found that:
- Art. 18(2) of the Canada-Italy Treaty limits the tax on Canadian-source pension income (including CPP) to the lesser of 15% of the total such income exceeding $12,000 and the amount of tax (referred to as the “as-if-resident” or “AIR” amount) that a resident of Canada would pay on that income.
- Art. 18(3) of the Treaty limits the tax on OAS income to the AIR amount (with the result that “[i]n most cases, that rate of tax is 25% in accordance with subsection 212(1).”)
Neal Armstrong. Summary of 6 April 2023 Internal T.I. 2022-0929731I7 under Treaties – Income Tax Conventions – Art. 18.
CRA finds that an information exchange agreement between one of Canada’s treaty partner’s and its overseas territory did not render the latter a “designated treaty country”
The territorial scope of the income tax Treaty between Country A and Canada specified that the term “Country A” did not encompass its overseas territory (“Sub-jurisdiction A”). However, Country A then entered into a bilateral agreement with Sub-jurisdiction A for the exchange of information between their competent authorities for the carrying out of Country A’s obligations under its tax treaties or comprehensive tax information exchange agreements (“TIEAs”).
In finding that Sub-jurisdiction A would not be considered a “designated treaty country” under Reg. 5907(11), CRA first noted that such provision clearly provides that a designated treaty country does not include any territory to which the relevant tax treaty or TIEA does not apply, and then stated:
[S]uch [subsequent] agreement will not, by itself, extend the territorial scope of the Canada - Country A tax treaty to Sub-jurisdiction A. The territorial scope of a tax treaty must be determined in accordance with the terms of the treaty and international law.
Neal Armstrong. Summary of 1 March 2023 External T.I. 2023-0990821E5 under Reg. 5907(11).