News of Note
Suncor – CRA abandons attempt to impute a hedging contract between Petro-Canada and an indirect UK subsidiary
Email this ContentWhen an indirect UK subsidiary of Petro-Canada acquired another UK company with an interest in a North Sea oilfield, Petro-Canada effectively locked in the price of oil in relation to this acquisition by entering into a forward contract with Morgan Stanley and Deutsche Bank respecting a specified quantity of 28,000 barrels of oil per day for a 3.5 year period under which it would be required to make cash payments to the counterparties if the price of oil went up, and conversely if the price of oil went down. The price of oil went up so that it incurred monthly cash payments totaling US$287 million in the first few months of the contract, and closed out all of its post-2007 obligations in November and December 2007 for a settlement payment of US$1.72 billion.
CRA did not deny the resulting 2007 loss to Petro-Canada of Cdn.$2.02 billion, but instead applied s. 247(2)(c) to include Cdn.$2.02 billion in the 2007 income of Petro-Canada as an imputed reimbursement to Petro-Canada by its UK subsidiary of the settlement payments (and assessed a s. 247(3) penalty for failure to prepare contemporaneous documentation in connection with the imputed reimbursement.) This was a difficult assessing position to support because, in fact, there was no hedging contract between Petro-Canada and its UK subsidiary to adjust under s. 247(2)(c).
The case has now been settled on the basis of CRA abandoning its position.
Neal Armstrong. Summary of Suncor Energy Inc. (as successor to Petro-Canada) v. The Queen, 2014-4179(IT)G: Notice of Appeal filed on 21 November 2014; Reply dated 13 April 2015; Answer filed on 10 July 2015; Partial Consent to Judgement dated 21 November 2016; and Judgment dated 5 December 2016; See also Suncor Press Release dated 5 December 2016 “Suncor Energy successfully resolves $1.3 billion tax dispute with Canada Revenue Agency.”
594710 B.C. Ltd. – Tax Court of Canada finds that GAAR did not apply to the sale to a lossco of partner corps with pending condo sale profit allocations
Income account treatment of the profits realized by a condo-project limited partnership was avoided through the corporate partners of the LP paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders, followed by a sale by the Holdcos of the corporate partners to a public company with substantial resource pools. The income of the LP for the year in which the condo sales had occurred was allocated to this public company following the winding up into it of the corporate partners.
Rossiter CJ rejected CRA’s GAAR challenge, which was based on GAAR being applied to the Partnercos' avoidance of an allocation to them of the condo profits, then to the Holdcos' avoidance of the application to them of s. 160 respecting what should have been Partnerco tax liabilities. He found that, at the Partnerco level, there was no abuse of s. 111(5), which dealt with loss trading, not profit trading. Nor was there an abuse of the partnership income allocation provisions of ss. 103 and 96 – it was totally conventional that close to 100% of the income of the LP was allocated to the corporation (the loss pubco) which was the limited partner at the partnership year end.
Turning to the alleged avoidance of s. 160, he acknowledged that the transactions entailed an indirect transfer of property from the LP to the Holdcos from a s. 160 perspective, but did not consider that there had been any receipt of property on other than FMV terms. However, he considered that if he were wrong on this mechanical valuation point, the transactions would have entailed an abuse of s. 160.
Neal Armstrong. Summaries of 594710 B.C. Ltd. v. The Queen, 2016 TCC 288 under s. 245(4), s. 245(2), s. 160.
CRA indicates that draft s. 13(42)(a) operates to avoid double taxation on an arm’s length sale of a Class 14.1 property where a NAL transferor previously claimed a capital gains exemption
Where, prior to 2017, an addition to a taxpayer’s CEC was reduced based on a non-arm’s length transferor realizing a gain for which the capital gains exemption was claimed, there will be an upward adjustment under draft s. 13(42)(a) based on this amount where there is an arm’s length sale after January 1, 2017 of what now is a Class 14.1 property – so that effectively (unlike a previous version of the draft legislation) a double recognition of capital gain would appear to be avoided.
Neal Armstrong. Summary of 9 November 2016 External T.I. 2016-0664451E5 under s. 13(42)(a).
CRA considers that the comparison of the Treaty method for allocating non-resident pilot income to the domestic (s. 115(3)) method should be done on an annual basis
S. 115(3) allocates 100%, 50% or 0% of the employment income of a non-resident pilot from a flight based on whether both, one out of two, or none of the touchpoints were in Canada. CRA, of course recognizes, that a Treaty resident can instead rely on the methodology under Art. 15 of the Treaty if that produces a more favourable result. However, CRA considers that the test of which method is more favourable should be done on a year-by-year basis, i.e., “a non-resident pilot must use either subsection 115(3) of the Act or the treaty methodology to allocate income from all of the flights occurring in a particular taxation year.”
Neal Armstrong. Summary of 7 September 2016 External. T.I. 2014-0559751E5 under s. 115(3).
Rosenberg – Federal Court rejects a CRA argument that it is not bound by an agreement not to further audit the taxpayer
Following an audit of the taxpayer’s straddle transactions for his 2006 and 2007 taxation years, CRA and the taxpayer agreed that the taxpayer would not engage in further straddle transactions and CRA would not proceed with any reassessment of those taxation years unless a new fact pattern emerged. Three years after this agreement, a different CRA auditor issued a demand for information respecting the straddle transactions in the 2006 and 2007 returns.
Roy J rejected CRA’s argument that the Galway doctrine precluded CRA from tying its hands by entering into the agreement (as “the CRA has already assessed the taxpayer based on the facts as known and the legislation as understood,”) and further added that:
Far from disabling the Minister from fulfilling the primary purpose for which the legislation was created, the exercise of discretion to enter into this type of agreement helps fulfill the administration and enforcement of the ITA. …The agreement between the parties...is binding.
Neal Armstrong. Summary of Rosenberg v. MNR, 2016 FC 1376 under s. 152(1).
CRA would accommodate a s. 20(12) deduction for US operating-income taxes imposed on the Cdn LLC member even where his only Cdn income from the LLC is taxable capital gain
A Canadian-resident individual was subject to U.S. income tax on his share of the U.S.-source business income of the LLC for a particular year (none of which was distributed) and, at the end of the year, realized a substantial capital gain for Canadian purposes on the winding up of the LLC. The individual would be able to claim a foreign tax credit in his Canadian return for that year for the U.S. income taxes, based on the taxable capital gain giving rise to a U.S. source of income for s. 126(1) purposes. More interestingly, CRA also considers that the individual would have the option of treating the LLC as a source of property income in that year (being potential dividend income – and even though no dividend was ever actually received before the winding up), so that the individual would be entitled to instead deduct the U.S. income taxes in computing property income under s. 20(12), even though no deduction under s. 20(12) is permitted respecting a capital gain.
Neal Armstrong. Summaries of 3 February 2016 External T.I. 2014-0548111E5 under s. 20(12), s. 126(1), s. 20(11) and Treaties Art. 24.
Iggillis Holdings – Federal Court finds that there is no common-interest privilege exception to the loss of solicitor-client privilege in providing a legal opinion to another firm
Solicitor-client privilege over a tax-planning memo prepared for Abacus on a tax-structured purchase transaction by a tax lawyer was lost when the tax lawyer provided the memo in draft form to the vendors' tax lawyer, whose comments resulted in memo revisions. Annis J rejected the submissions of the vendor and Abacus that under the common-interest privilege doctrine, which seemingly had been adopted in Pitney Bowes, there was no waiver of privilege in providing the memo in connection with advancing a transaction that was in both parties’ interests, stating:
Advisory CIP significantly expands the quantity of relevant evidence that is denied to the courts. …Furthermore, it provides an increased potential for abuse, while undermining the administration of justice by predominantly enabling transactions that anticipate creating litigation.
Neal Armstrong. Summary of MNR v. Iggillis Holdings Inc., 2016 FC 1352 under s. 232(1) – solicitor-client privilege.
Income Tax Severed Letters 14 December 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that a transitional rule for dispositions of eligible capital property does not extend to internally-generated goodwill
The elective transitional rule in s. 13(8)(d) is applicable if a corporation disposed of eligible capital property in calendar 2016, but the gain is included in a taxation year that straddles January 1, 2017. The taxpayer may elect under s. 13(38)(d)(iii) to maintain the effect of the s. 14(1)(b) inclusion. One of the conditions is that the taxpayer has incurred an eligible capital expenditure respecting a business before January 1, 2017. CRA stated:
Where a taxpayer’s only intangible asset is internally-generated goodwill with no cost, that taxpayer cannot be said to have made or incurred an ECE in respect of the business. As such, the taxpayer would not meet the requirements of the election in subparagraph 13(38)(d)(iii). It is our understanding that this result is consistent with tax policy.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.13 under s. 13(38)(d).
CRA, changing position, now generally requires LLCs to compute their income under ITA rather than Code rules
CRA has changed its view, and now considers that where a foreign affiliate is a disregarded U.S. LLC with a single-member regarded U.S. corp, its earnings should be computed under Canadian income tax law under Reg. 5907(1) – earnings - s. (a)(iii), rather than under the Code under s. (a)(i), effective for taxation years ending after August 19, 2011. The reason for this change of view is the enactment of Reg. 5907(2.03) requiring an affiliate computing its “earnings” in accordance with Canadian tax law to claim maximum discretionary deductions, so that a concern about abuse has fallen away.
However, if the LLC has two or more members and is required for Code purposes to compute its income from a business to determine the partners’ distributive shares, it must compute its “earnings” under Reg. 5907(1) – earnings - s. (a)(i).
Neal Armstrong. Summary of 20 November 2016 CTF Annual Roundtable, Q.11 under Reg. 5907(1) – earnings - s. (a)(iii).