News of Note
Igloo Vikski – Supreme Court of Canada finds that an “includes” definition could reasonably be viewed as being limited by the listed items
Email this ContentA decision of the Supreme Court dealt with characterizing the precise nature of the hierarchy of Rule 1 of the General Rules for the Interpretation of the Harmonized System (scheduled to the Customs Tariff Act) over Rule 2(b). Rule 1 indicates that goods shall be classified by the terms of the “headings” (i.e., descriptions) in the Customs Tariff Schedule for the competing tariff items. Rule 2(b) provides that where a good contains a mixture of more than one material, a reference to goods in a heading includes goods that consist partly of the material (provided that the other materials have not transformed the goods’ ability to generally answer the heading’s description).
In her dissenting reasons, Côté J pointed out that the approach of the CITT – that resort can only be made to Rule 2(b) if the goods in question (here, goalie gloves) could first be considered to be described in more than one heading – did not work because (for reasons relating the World Harmonized System Explanatory Notes) they fell within neither mooted heading (gloves, mittens or mitts – or other articles of plastics) – whereas this problem did not arise if the two Rules were applied in a somewhat more integrated manner. Brown J tried, with mixed results, to present a good case in favour of the CITT’s logic, but indicated in any event that substantial deference should be given to their specialized expertise (whereas Côté J, after noting that the Customs Schedule precisely implemented an international Convention, stated: “Given the Convention parties’ intention of creating a uniform classification scheme, I find that the range of reasonable statutory interpretations in this context is narrow.”)
Of perhaps broader interest was their debate about the interpretation of “includes.” The Explanatory Note for the other plastics heading said this heading included various listed categories of items, the first of which was was articles of apparel and clothing, whose description did not encompass the goalie gloves. Côté J essentially stated (citing the usual authority) that “includes” merely expands and does not limit. Brown J essentially stated that it was reasonable for the CITT to consider that if the gloves were not covered by the specific paragraph dealing with clothing items, they should not be considered to be intended to be included in that heading.
Neal Armstrong. Summary of Canada (A. G.) v. Igloo Vikski Inc., 2016 SCC 38 under Customs Tariff Act - General Rules for the Interpretation of the Harmonized System – Rule 2(b), and Statutory Interpretation – Interpretation/Definition Provisions.
Our severed letter translations go back to December 23, 2015
We continue to move backwards in providing full-text translations of severed letters. The table below lists translations of the French technical interpretations released on December 23, 2015.
Meilleur – Tax Court of Canada finds that high-risk and high-yield loans were not made in the course of a money-lending business
Bocock J found that a retired husband and wife, who used their own retirement funds and their line of credit in 2006 and 2007 to make five loans to two real estate developers at interest rates ranging from 15% to 24%, were not thereby engaged in a money-lending business given inter alia that they made the loans on a pooled basis along with other investors rather than being involved in negotiating and managing the loans. (Somewhat oddly, he also referenced in this regard that they “advance[d] funds solely for the purpose of earning interest, rather than turning the loans over for a profit in the nature of a business.”)
Consequently, the almost complete loss of their investments was a capital loss.
Neal Armstrong. Summary of Meilleur v. The Queen, 2016 TCC 287 under s. 20(1)(p)(ii).
Veracity - B.C. Court of Appeal finds that a “Quebec year-end shuffle” avoiding provincial capital gains tax was not GAARable in B.C. as there was no abuse of the B.C. Act itself
In order to avoid most of the B.C. capital gains tax otherwise applicable to a share sale which closed in July 2002, the B.C. shareholders rolled their shares into a Newco (“Veracity”), which had a taxation year ending on August 31, 2002 for Quebec taxation purposes, and ending on June 30, 2003 for federal and B.C. purposes. In order that 100% of the taxable capital gain would be allocated to B.C. for Quebec purposes, small fees were paid to B.C. directors in July 2002 (i.e., before the August 31, 2002 Quebec year end). In order that 90% of the taxable capital gain would be allocated to Quebec for B.C. purposes, Veracity purchased units of a listed limited partnership with a September 30 year end, so that as at September 30, 2002 (i.e., after the Quebec year end) a pro rata portion of the gross revenues and salary expense of the LP would be allocated to Veracity qua unitholder.
In reversing the decision below that the B.C. GAAR was applicable so as to reallocate the 90% of the taxable capital gain back to B.C., MacKenzie JA found that the B.C. GAAR referred only to abuse of the B.C. Act, which did not include ITA s. 85(1), so that the rollover was not an abuse under the B.C. Act – and, in any event, the real complaint of CRA was not that the gain was (temporarily) deferred, but that when the gain was realized, the allocation rules caused that gain to mostly not be taxed, which had nothing to do with the purpose of s. 85(1).
The inter- provincial income allocation rules in Part IV of the ITA Regs. were effectively incorporated by reference into the B.C. Act, so that their abuse could come within the scope of the B.C. Act. However, essentially the same point applied:
The purpose of the Allocation Rules is to allocate the income to the provinces. How the provinces tax that income, if at all, is beyond the purpose, object and spirit of the Allocation Rules.
Tax was avoided because Veracity exploited its ability under the Quebec Act to pick a different year end.
Neal Armstrong. Summaries of Veracity Capital Corp. v. The Queen, 2017 BCCA 3 under s. 245(4) and Statutory Interpretation – Inserting words.
CRA accommodates a pension plan correcting excess borrowing on a going-forward basis through assumption of the debt by a 149(1)(o.2)(ii) sub
The Directorate considered that a pension plan breached Reg. 8502(i) as the amount of borrowing in respect of certain real estate properties of the Plan exceeded their cost. The Directorate thus considered that this excess borrowing limitation applies on a property-by-property basis. (It did not discuss IA s. 33(3): “singular include[s] the plural.”)
The Plan’s advisor proposed that the Plan transfer all real properties for which there were borrowing issues to a newly-formed s. 149(1)(o.2)(ii) subsidiary, which would assume the related debts, with the Plan being released but providing some guarantees. The Directorate stated that this “appears to be a reasonable solution to resolve past non-compliance.” (This appears to accept that a 149(1)(o.2)(ii) corp. can incur purchase price indebtedness on an internal transfer in excess of historic cost and that Reg. 8502(i) does not prohibit guarantees.)
The Directorate went on to state:
If the Plan is a defined benefit plan, there is perhaps less of a concern about leveraged investing as the income tax rules provide for a self-adjusting mechanism. A higher rate of return than appropriate results in lower employer contributions. However, if the Plan is a money purchase plan, the concern about leveraged investing takes on greater importance as the borrowing would have served in effect to circumvent the RPP contribution limits. In this case, consideration should be given to requiring any excess investment earnings to be withdrawn from the Plan.
Neal Armstrong. Summaries of 10 May 2016 Internal T.I. 2016-0644761I7 under Reg. 8502(i) and s. 149(1)(o.2)(ii).
The subscription by Alignvest (a Cdn SPAC) for a majority interest in Trilogy (a holding LLC for New Zealand and Bolivian Opcos) will result in Alignvest being a dual resident
Alignvest, which is a Canadian TSX-listed special purpose acquisition corporation, is coming up to its 24-month deadline for applying its 2015 IPO proceeds (mostly still held in escrow) to a qualifying acquisition. Although the prospectus for its IPO said that it would target Canadian investments, it is now proposing to subscribe for what will be a 56% interest in a Washington State LLC (Trilogy) assuming that none of the shareholders of Alignvest exercise their redemption right to receive back their IPO subscription price. Essentially the only assets of Trilogy are two subsidiaries in New Zealand and Bolivia running wireless networks.
Given that the existing Trilogy shareholders will continue to hold their units in Trilogy, which will now be exchangeable into common shares of Alignvest (to be renamed Trilogy International Partners Inc. on completion of the reorganization under an Ontario Plan of Arrangement), Alignvest will be treated under the inversion rules in Code s. 7874(b) as converting to a U.S. domestic corporation immediately before the Arrangement under an “F” reorg. The results include that Alignvest will be a dual tax resident subject to U.S. tax on its worldwide taxable income (with issues as to whether the IRS would grant foreign tax credits for the Canadian tax on the same income), and that Canadian shareholders will be subject to U.S. withholding tax on their dividends (for which no Canadian foreign tax credit may be available) – and that, conversely, U.S. shareholders will be subject to Canadian withholding tax on their dividends (for which no U.S. foreign tax credit may be available).
Neal Armstrong. Summary of Alignvest Acquisition Corporation Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Outbound - Subscription.
CRA indicates that post-2015 principal residence dispositions must be reported on a revised Schedule 3
CRA has revised its Folio on the principal residence exemption to state:
Beginning with the 2016 tax year, taxpayers who sell their principal residence are required to report certain basic information with their tax return. Where the property is designated as a principal residence for all the years it was owned, the designation form for individuals (other than trusts) for the 2016 tax year is Schedule 3 of the T1 income tax and benefit return (which is revised for this purpose). The information required includes the address of the property, the date it was acquired and the amount of the proceeds of disposition. This reporting is necessary in order to claim the full principal residence exemption.
Neal Armstrong. Summaries of S1-F3-C2 under s. 54 – principal residence, Reg. 2301, s. 40(2)(b), s. 45(1)(c), s. 13(7)(b), s. 13(7)(e), s. 40(7) and s. 40(4).
Kirkland Lake was merged on a triangular amalgamation with a Newco subsidiary of Newmarket Gold
Kirkland Lake amalgamated with a wholly-owned subsidiary of Newmarket Gold on a triangular amalgamation occurring as part of a CBCA Plan of Arrangement, so that the shares of the Kirkland shareholders were cancelled in consideration for the receipt by them of shares of Newmarket (to be renamed Kirkland Lake Gold Ltd.) Existing Kirkland and Newmarket shareholders held approximately 57% and 43%, respectively of the post-Arrangement Newmarket – i.e., it had elements of a reverse takeover. The stock options of the Kirkland option holders were exchanged on a s. 7(1.4) non-disposition basis for replacement options on Newmarket shares.
Triangular amalgamations need not be effected under a Plan of Arrangement. They may become more common following the InterOil decision, which implied a rigorous standard in order for a fairness opinion to be accepted for purposes of court approval of a Plan of Arrangement.
Neal Armstrong. Summary of Kirkland Lake and Newmarket Gold Circular under Mergers & Acquisitions – Amalgamations – Triangular Amalgamations.
CRA clarifies how the equity-contribution component of the equity amount of a trust in determined for thin cap purposes
The branch of the calculation of the “equity amount” of a trust for thin cap purposes that relates to equity contributions is ambiguously worded. CRA provided a clarifying example indicating how the average equity contribution is determined:
Using the example of a calendar 2015 taxation year, this means calculating the total contributions for each of the twelve months of 2015 (i.e., the twelve calendar months that end in the year). For each of those months, the total contributions from a specified non-resident beneficiary from the creation of the trust until the end of the calendar month immediately prior to the calendar month in question would be used. Therefore, for January 2015, the total contributions would be calculated from the creation of the trust until the end of December 2014. For February 2015, it would be the contributions from the creation of the trust until the end of January 2015, and so on. The average of the twelve totals would then be calculated.
Neal Armstrong. Summary of 19 August 2016 External T.I. 2015-0585471E5 under s. 18(5) – equity amount – (b).
CRA applies its position on fractional share exchanges under 85.1(1) domestic exchanges to 85.1(5) exchanges
Except for it entailing an exchange of shares of a non-resident corp for (treasury) shares of another non-resident corp, the rollover in s. 85.1(5) is similar to that in s. 85.1(1).
The similarities extend to the CRA treatment of cash consideration. S4-F5-C1 states in the s. 85.1(1) context that cash can also be received – so that the rollover applies only to the exchange of a fraction of each share of the vendor for treasury shares (with the remainder fractions of shares being exchanged for cash on a non-rollover basis) – provided that this is clearly specified in the terms governing the exchange.
This position also extends to s. 85.1(5). However, the foreign merger parties often will be insensitive to Canadian tax considerations, so that the allocation requirement in the Folio will not be satisfied – as appeared to be the case in the example considered by CRA.
Neal Armstrong. Summary of 23 August 2016 External T.I. 2015-0614981E5 under s. 85.1(5).