News of Note
CRA indicate that dispositions by oil and gas corporations of properties generally do not give rise to terminal losses
Although CRA noted that the determination of whether a person is carrying on a single business or multiple separate businesses is a question of fact, it indicated that in the context of Reg. 1101(1):
We do acknowledge that, in the oil and gas industry, it is common for businesses to acquire properties and dispose of non-core properties on a continual basis. Generally, the acquisitions and dispositions during the normal course of business would not be considered acquisitions or dispositions of separate businesses.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.5 under Reg. 1101(1).
CRA appears to be prepared to accept that natural gas and oil are similar properties for s. 111(5)(a)(ii) purposes
When commenting on how it has applied the “sale, leasing, rental or development…of similar properties” test in s. 111(5)(a)(ii), CRA noted that it still considers the “similar properties” term to reference a narrower meaning than “having characteristics in common” and that it instead references properties “of the same general nature or character.”
In discussing how it has applied this test, CRA noted that 9234795 stated that oil or gas from wells located in different provinces would be considered to be a “similar property,” and that although CRA has not taken a position on whether the different types of hydrocarbons are similar to each other, in 9314945 it “opined that where a corporation carries on the business of mining and selling metallurgical coal as well as the business of mining and selling other minerals, income therefrom will be considered to be derived by those businesses from the “sale, leasing, rental or development…of similar properties” for the purposes of subparagraph 111(5)(a)(ii) provided that the other conditions in paragraph (a) are met.” This appears to suggest that natural gas and oil would be accepted as similar properties.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.4 under s. 111(5)(a)(ii).
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in April 2012. Their descriptors and links appear below.
These are additions to our set of 819 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for April.
While normally the Canada child tax benefit (CCTB) and the GST/HST credits (the “Benefits”) can at most be claimed by only one parent, individuals who are a child’s “shared‑custody parent” are each entitled to ½ of the Benefits. One of the requirements in order to be a “shared‑custody parent” is that the parent reside with the child “on an equal or near equal basis.”
In Lavrinenko, Webb JA has concluded that the “near equal” concept is to be handled by rounding relative residing-with-the-child percentages to the nearest multiple of 10% - so that if, as in the case before him, this percentage was (at most) 41%, it was to be rounded down to 40% (test failed). If it were 47%, it would be rounded up to 50% (test passed).
A second FCA decision by a different panel agreed with the Webb JA approach and, in that case (Morrissey), rounded a percentage that might have been 43% down to 40% - so that, again, the Benefits were not available.
Neal Armstrong. Summary of Lavrinenko v. Canada, 2019 FCA 51 under s. 122.6 – shared-custody parent – para. (b) and summary of Morrissey v. Canada, 2019 FCA 56 under s. 122.6 – shared-custody parent – para. (b).
CRA finds that the Canada-U.K. Treaty does not exempt shares deriving their value from Canadian oil and gas licences – even where the Canadian business is carried on “in” them
Para. 5(a) of the Canada-U.K. Treaty provides that shares may be taxed in Canada if they derive the greater part of their value from immovable property situated in Canada, or Canadian oil and gas licences. Para. 7 provides that for these purposes, immovable property does not include “any property (other than rental property) in which the business of the company was carried on.”
In an interpretation provided prior to the Alta Energy decision, CRA took the view that where a UK resident disposed of its shares of a Canadian subsidiary deriving most of their value from Canadian oil and gas licences, the gain was not exempted by para 7 having regard to the ‘or” which we bolded above.
Alta Energy appears to have effectively treated Canadian oil and gas licences as immovable property, so that the somewhat comparable exclusion under the Canada-Luxembourg Treaty for immovable property in which the company’s business was carried on was available. It is not at all clear that the specific dealing by the Canada-U.K. Treaty with oil and gas licences effectively deems them not to be immovable property. Accordingly, this interpretation is debatable.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.3 under Treaties – Income Tax Conventions – Art. 13.
Para. (d) of the definition of a Canadian resource property (CRP) includes:
any right to a rental or royalty computed by reference to the amount or value of production from an oil or a gas well in Canada, or from a natural accumulation of petroleum, natural gas or a related hydrocarbon in Canada, if the payer of the rental or royalty has an interest in … the well or accumulation …. and 90% or more of the rental or royalty is payable out of, or from the proceeds of, the production from the well or accumulation.
When asked whether the above reference to the royalty payer thereof having an "interest in" the well or accumulation requires a real property interest rather than a mere contractual interest, or is a contractual interest sufficient? CRA responded that “an ‘interest’ in the well or accumulation … requires that the payer must have a right to take production from the well or accumulation” – which sounds like a real property interest, although CRA evidently considered it to be otiose to comment directly on this point.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.2 under s. 66(15) – para. (d).
Plains Midstream – Federal Court of Appeal finds that s. 16(1) can only apply to a debtor if it equally applies to the creditor
As part of a complex set of transactions, a predecessor of the taxpayer agreed to assume a $225M loan that was due in perhaps 43-years’ time and that was non-interest-bearing (except in the remote event of oil production from the Beaufort Sea) in consideration inter alia for the payment to it of $17.5 million by the debtor. The predecessor treated the $207.5M difference between these two amounts as an amount which, although conceded not to be interest in form, was interest in substance and therefore could be treated as being recharacterized as interest under s. 16(1): the economic substance of the situation, was that it received $17.5 million as the present value of $225 million.
Nadon JA confirmed the rejection by Hogan J of this argument given that it was clear that the $207.5M difference could not be reasonably regarded as interest to the creditor, stating:
[I]it is because interest is, by its nature, symmetrical that the Judge was correct in interpreting subsection 16(1) in the way that he did. In other words, an amount is not interest if it does not have the character of interest to both the recipient and the payor.
CRA will only extend Daishowa beyond reforestation and reclamation obligations on a case-by-case basis
Daishowa found that reforestation obligations were an intrinsic factor that reduced the purchase value of the timber tenures rather than a "distinct existing liability" that was assumed by the purchaser as additional consideration for the purchase. CRA warned that this approach was portable to resource sector reclamation obligations, but not necessarily beyond that, stating:
… It is CRA’s position that reforestation obligations in the forest industry and reclamation obligations in the mining and oil and gas industries are generally embedded in the related tenures or rights, as they cannot usually be severed and would therefore depress the value. Furthermore, the CRA’s position does not generally extend to sales transactions outside the resource industries but we are willing to consider fact situations on a case by case basis. It remains our position that the Daishowa case does not apply where there is a distinct, existing liability, as opposed to an embedded obligation.
Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.1 under s. 13(21) - proceeds of disposition.
Villa Ste-Rose – Tax Court of Canada finds that interest and penalties on a late-filed GST return should be computed after netting rebate claims against the gross GST payable
A company that was not registered for GST purposes was required to self-assess itself under ETA s. 191(3) for GST on the fair market value of an assisted-living facility constructed on its behalf. It filed the required return in this regard 9 months’ late. With that return it also included rebate claims which were higher than the s. 191(3) tax. CRA accepted the GST payable and rebate amounts, but assessed interest and penalties under ss. 280 and 280.1, calculated on the gross GST amount, which it effectively treated as having been owing for the full 9-month period.
D’Auray J considered this approach to be unfair and anomalous, since if the company had instead lain in the grass and been assessed by CRA for the unreported GST, CRA would have been required under s. 296(2.1) to allow the (more than) offsetting unclaimed rebate amounts, so that no interest or late-fiing penalties could have been assessed by it. Furthermore, on her reading of s. 228(6), she considered that the same result obtained, i.e., under this rule as well, CRA was required net the rebate claims against the gross GST payable for interest and penalty purposes.