News of Note
CRA rules on pipeline transactions of an alter ego trust implemented over an extended period
Email this ContentCRA provided the usual pipeline rulings respecting transactions, which contemplated that:
- shares of an investments company (ACo), whose ACB had been stepped up in the hands of an alter ego trust on the death of the settlor (“Father”) are transferred by the trust to a “Newco” in consideration mostly for notes of Newco
- the Newco common and preferred shares and the Newco notes are distributed pro rata to Father’s children on a s. 107(2) rollover basis
- at least one year after step 1, Newco and ACo amalgamate (under a long-form amalgamation, given that the children until then had been minority shareholders of ACo)
- Amalco repays no more than 10% of the initial aggregate principal amount of the notes during the first year following the amalgamation and, absent extraordinary events, repays no more than that sum in each of the subsequent years.
Neal Armstrong. Summary of 2021 Ruling 2021-0906111R3 under s. 84(2).
CRA indicates that agreeing to purchase a new apartment for the purpose of headleasing it renders the purchaser a builder for GST purposes
S. (b)(ii) of the ETA definition of “builder” provides that, in the case of a corporation, that it is a builder of a residential complex where the person acquires an interest in the complex at a time when the complex is under construction or substantial renovation – but para. (h) of the definition excludes from a para. (b) builder a person whose only interest in the residential complex is a right to purchase any interest in the complex from a builder of the complex.
However, a corporation is a builder under para. (f) if inter alia it acquires the complex (before its occupancy by an individual) for the primary purpose of selling the complex (or parts thereof) or leasing the complex (or parts thereof) to persons other than to individuals who will use the complex (or parts thereof) for their personal use.
In response to a query as to the relationship between paras. (b) and (d) where a corporation acquired one or more pre-build residential complexes to be leased it to a person for personal use of individuals, CRA indicated that “a corporation that is a purchaser-landlord who acquires a right to purchase an apartment building that is under construction for the primary purpose of leasing the completed apartment building to another person under a head lease (or for the primary purpose of leasing the completed apartment units to tenants) would not be a paragraph (b) builder because of the exclusion in paragraph (h).” However, it would be a para. (d) builder if it was not acquiring its rights for the primary purpose of leasing the apartment units to tenants for their personal use, for example, if it acquired a right to purchase the apartment building (before any individual occupancy) for the primary purpose of leasing the apartment building to another person under a head lease.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.16 under ETA s. 123(1) – builder – para. (d).
We have translated 8 more CRA interpretations
We have published a further 8 translations of CRA interpretations released in May of 2004. Their descriptors and links appear below.
These are additions to our set of 2,191 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 18 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA addresses further questions on the intractable CEWS dividend-payment rules
CRA confirmed that there is a full denial under s. 125.7(2.01) of the CEWS (wage subsidy) amount where a publicly traded company pays any taxable dividend in a qualifying period to an individual who is a “holder” of its common shares. CRA also indicated that para. (b) of A in the s. 125.7(14.1) formula for computing the amount of the subsidy that must be repaid requires the eligible entity to determine (in addition to determining its “executive compensation repayment amount”) the dividend amounts paid to holders of common shares who are individuals.
Given that most public companies could not enumerate who are the beneficial owners of their shares, this might suggest that “holders” are registered holders. CRA did not discuss this point (nor did Finance, who did not draft this mess) – but thanks to Ian Caines for pointing out that this point among others was discussed in Committee, where MP Sophie Chatel complained:
Who is a holder? I don't know. … This is not serious drafting. I see five problems with this particular definition. … Despite what my colleagues want to achieve, it's not rigorous and it is not the way people do drafting in this country [as to which the rejoinder was that “CRA … will have a significant amount of time to clarify any ambiguity or vagueness.”]
Which brings us to the next query in the same technical interpretation, namely, in what situations does s. 125.7(14.1) apply, given that s. 125.7(2.01) seems to apply in the same circumstances?
CRA indicated that ss. 125.7(2.01) and (14.1) both apply where a publicly traded company pays certain dividends, and that the legislation does not prevent the two subsections from incorporating the same dividends in their respective operations. It did not indicate whether this meant that there could in actual practice be a punitive double application by CRA of the two provisions.
Neal Armstrong. Summaries of 25 July 2022 External T.I. 2021-0922321E5 under s. 125.7(2.01) and s. 125.7(14.1).
CRA applies the CEWS dividend-payment rule on an unconsolidated basis
S. 125.7(2.01) of the CEWS (wage subsidy) rules provides that no CEWS amount arises in the qualifying period respecting “a qualifying entity that is a publicly traded company or a subsidiary of such a company if, in the qualifying period, it paid taxable dividends to an individual who is a holder of common shares of the company or of the subsidiary of the company.”
CRA confirmed that this denial applies only to the dividend payer, so that, for example, the payment of dividends by a public company would not affect any of its subsidiaries’ CEWS entitlements.
Neal Armstrong. Summary of 3 August 2022 External T.I. 2021-0922231E5 under s. 125.7(2.01).
Barrs – Federal Court of Appeal finds that disproportionate interest could be cancelled by CRA to compensate for the s. 220(3.1) 10-year limitation and produce horizontal equity
A group of taxpayers, who were the victims of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014. They sought relief in 2014 (in the case, for example, of Mr. Barrs), or in 2004 (in the case of the other group of taxpayers), for interest cancellation under s. 220(3.1). CRA ultimately cancelled approximately 15 years and 63 months of accrued interest for the 2004 and 2014 applications, respectively. The lower relief for the 2014 application was considered by CRA to reflect the application to those applicants of the prohibition, after a 2005 amendment to s. 220(3.1), to going back more than 10 years with interest relief. However, in their request for interest relief, the 2014 applicants requested the grant of a larger quantum of relief regarding the interest that had accrued within the 10 year period than for the 2004 applicants so as “to ensure equitable treatment with the other taxpayers who made their requests earlier.”
In finding that the relief-request of Mr. Barrs (being a member of the 2014 application group) should be remitted for re-determination by another CRA officer, Gleason JA found that:
- There was no prohibition against granting this request to provide more generous relief to Mr. Barrs regarding the interest that had accrued during the 10-year period than for the 2004 application group in order to, in a sense, make up for the unavailability of interest relief for the prior period to Mr. Barrs’ group.
- Mr. Barrs’ submission that it was equitable to do so was plausible given that both groups had “all invested in the same scheme and had their claims for interest relief examined by the same review officers based on the same facts.”
- Furthermore:
Given that the independent third-level review officer failed to engage with the request for greater relief in the open years to ensure equitable treatment, his decision must be set aside. … Failure to engage with an important argument advanced by a party will generally render an administrative decision unreasonable [citing Vavilov] … .
Neal Armstrong. Summary of Barrs v. Canada, 2022 FCA 147 under s. 220(3.1).
CRA releases the official 2022 IFA Roundtable
CRA has released the final version of the May 17, 2022 IFA Roundtable. We commented in May on most of the oral responses. For your convenience, the table below provides links to the official responses and our summaries thereof.
Income Tax Severed Letters 24 August 2022
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Blackrock Holdco – UK Upper Tribunal completely denies interest deductions under the UK transfer pricing rules because the loan was made without group support covenants
The structure for the acquisition by the BlackRock group of the 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 held directly by LLC4.
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 (the “arm’s length provision”) had been made, instead of the “actual provision” between LLC5 and LLC4. After noting that, like Art. 9 of the OECD Model Convention, such legislation focused on the “two” enterprises to the transaction, rather than third parties, the Tribunal stated:
[T]he main concern of an independent lender of $4 billion to a company like LLC5 would be the risks around the fact that the borrower in the position of LLC5 had no control over the dividend flow to it and so its ability to repay the loan. In the actual transaction, LLC4 through its ownership of the LLC6 Common Shares, controlled LLC6 and so the dividend flow to LLC5. LLC4 did not therefore need covenants from LLC6 or BGI. In the hypothetical transaction however, the dividend flow would need to be secured so far as possible … .
In confirming the denial by HMRC of all of LLC5’s interest deductions 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., it lacked covenants of LLC5 and BGI to ensure the flow of dividends from LLC5 to service the loan), the Tribunal stated:
Third-party covenants that were not given as part of or in support of the actual transaction cannot be considered to be part of the hypothetical transaction as this materially changes the surrounding circumstances and alters the economically relevant characteristics of the transactions in question. …
[A]n independent lender would not have made a $4 billion loan to LLC5 without such covenants being in place and that important finding should itself have determined that there was no comparable arm’s length transaction.
The “two enterprise” problem in this case, resulting in a complete interest denial, might not arise under ITA s. 247(2), which references the terms or conditions “between any of the participants” in the transaction or series.
Neal Armstrong. Summary of Revenue and Customs v Blackrock Holdco 5 LLC, [2022] UKUT 199 (TCC) under s. 247(2)(d).
MRPS found to be equity for Lux tax purposes
The highest Luxembourg tax court concluded that the mandatorily redeemable preferred shares (MRPS) issued by a Luxembourg company to its sole shareholder qualified as equity, rather than the dividends giving rise to interest deductions (based on their alleged economic substance). Although the MRPS had some debt-like features (10-year maturity, no voting rights except as provided under the Luxembourg commercial law, and cumulative and preferred fixed dividends), the court considered that the MRPS involved no evident mismatch between the legal form adopted (share capital) and the underlying economic reality of the provision of funds by a single shareholder to its subsidiary.
The court also emphasized that the preferred dividends depended on there being a net profit after payment of the company’s creditors (thus placing the MRPS holder on a different footing than a creditor) - and furthermore, the company had treated the MRPS as equity in its financial statements.
Neal Armstrong. Summary of Alex Pouchard and Paloma Nunez, “Luxembourg Court Rules on the Tax Treatment of MRPS,” International Tax Highlights (IFA Canada), Vol. 1, No. 2, August 2022, p. 5 under s. 113(1)(a).