News of Note
Whitehorse - Tax Court finds that allowances for recreational travel did not qualify for a GST rebate
Email this ContentThe City of Whitehorse gave certain employees travel allowances to pay for return flights to Edmonton or Vancouver, which the employees used for personal purposes. These expenses were not sufficiently connected with the taxpayer's activities to qualify for a GST rebate under ss. 174(a)(iv) and 259(4) of the ETA, notwithstanding that they helped Whitehorse attract and retain employees who otherwise might not work in a remote community.
Scott Armstrong. Summary of City of Whitehorse v. The Queen, 2012 TCC 298, under ETA s. 174.
CRA reconfirms that "directly or indirectly" wording in s. 95(2)(a) covers back-to-back loans
CRA has reconfirmed (referring to a published statement of Wally Conway at the Department of Finance) that "the words "directly or indirectly" in subparagraph 95(2)(a)(ii) are meant to deal with back-to-back loan arrangments," so that, for example, interest paid by a CFA (which is engaged in an active business) indirectly "through" an intermediate non-resident company under such a back-to back loan arrangment to a CFA Finco may be recharacterized as active business income to Finco. However, that policy was not applicable here to an interest-bearing loan made by Finco to the intermediate company (the non-resident parent of Canco) because the loan, in turn, made by the parent to the CFA carrying on an active business was non-interest bearing.
Neal Armstrong. Summary of 29 June 2012 Memorandum 2012-0441601I7 under s. 95(2)(a)(ii)(B).
Dundee Industrial REIT IPO will use a trust-on-partnership structure
Another Dundee REIT (Dundee Industrial REIT) is proposed. It will hold a portfolio of Canadian light industrial rental properties through a subsidiary LP (Industrial Partnership). Exchangeable Class B units of Industrial Partnership will be held by a subsidiary LP of Dundee REIT, which will have previously transferred properties into Industrial Partnership on a rollover basis in exchange for both Class A and Class B units, then will have sold the Class A units to the REIT. (This ordering appears to have Ontario land transfer tax benefits.)
This is a departure from quite a number of other REITs which use a trust-on-trust rather than trust-on-LP structure.
Neal Armstrong. Summary of preliminary prospectus for IPO by Dundee Industrial REIT under REIT and LP offerings.
Mertrux - UK Upper Tribunal reverses a broad interpretation given to "goodwill"
The additional amount received by a Mercedes dealer for the early termination of its dealership was found to be consideration for the surrender of a contractual right (giving rise to capital gains treatment) rather than for goodwill (for which rollover treatment was available) - notwithstanding that Daimler-Chrysler (UK) Ltd. arranged for this additional amount to be paid directly to the dealer by the third party purchaser of the dealership.
This case could be relevant to the interpretation of s. 167.1 of the Excise Tax Act (no GST on the consideration for the purchase of a business or business division that is attributable to goodwill) and also to the Canadian income tax distinction between a capital gain and an eligible capital amount - although it is hard to be sure about the latter point because following some amendments to get rid of the "mirror image rule" (see Toronto Refiners) that distinction now is utterly circular: under ss. 14(1) and 14(5) - CEC-(E), an eligible capital amount is 1/2 of an amount receivable on capital account in respect of a business that is not included in computing a capital gain; and under s. 39(1)(a)(i), a capital gain does not include gain from the disposition of an eligible capital property!
Neal Armstrong. Summaries of R & C Commrs v. Mertrux, [2012] UKUT 274 (Tax and Chancery Chamber) under s. 14(5) - CEC (E) and ETA, s. 167.1.
CRA considers GAAR to be applicable where a holding partnership is used to avoid s. 84.1
CRA has indicated that it has previously concluded that there is an abusive avoidance of s. 84.1 resulting in the application of the anti-avoidance rule where all the shares of a family farm corporation are rolled into a family partnership whose only asset is those shares, and the family partnership is subsequently sold (utilizing the capital gains exemption) to a family Newco for notes of the Newco. In situations where the partnership has other (farming) assets as well (as posited in this technical interpretation), then "in order to determine if there is an abuse having regard to section 84.1, the CRA would need in particular to consider the source of funds used to pay off the consideration for the disposition of the partnership interests, as well as the value attributable to the shares of the corporation held by the partnership relative to the total value of the interests in the partnership" [TaxInterpretations transalation].
The hypothetical facts also posited a five-year gap between the roll-in of the family farm corporation shares into the partnership, and the sale of the partnership interests for the Newco notes. In this regard, CRA noted the broad meaning accorded to "series of transactions" by Canada Trustco and Copthorne in light of s. 248(10) - i.e., the subsequent sale presumably would be considered by CRA to have been made "in contemplation of" the previous roll-in transaction.
Neal Armstrong. Summary of 3 July 2012 T.I 2012-0443421E5 F under s. 245(4).
CRA gives s. 84(2) ruling on distribution of share consideration received for sale of a business
CRA ruled that where a Canadian public corporation transfers a Canadian business to a Newco, and sells Newco to a public company purchaser in consideration for equity of the purchaser, it can then distribute that equity to its shareholders, without there being a deemed dividend by virtue of the exemption in s. 84(2) (PUC distribution on the discontinuance or reorganization of a business).
This transaction would also appear to be exempted from deemed dividend treatment under the proposed amendments to s. 84(4.1) (one-time distribution of proceeds of disposition) if it were not already exempted by s. 84(2).
Neal Armstrong. Summary of 2012 Ruling 2012-0435291R3 under s. 84(2).
Michael Durst notes that OECD Working Party No. 6 has corrected a widespread notion on intangibles transfer pricing that has "always has been flatly incorrect."
In an earlier article (see post below), Michael Durst suggests that the recent OECD discussion draft on transfer pricing for intangibles performs a "valuable service" by correcting "the apparently widespread misapprehension" that bearing the financial costs of IP development entitles an affiliate to the profits of the IP's exploitation.
He also suggests that "the best indicator of [the] arm’s-length division of income [between those managing and implementing intangibles creation] normally will be the relative values that the multinational group itself places on the managers and on the implementers — that is, the relative values of their compensation."
Neal Armstrong. Summary of Michael C. Durst, "The OECD Discussion Draft on Transfer Pricing for Intangibles," Tax Notes International, 30 July 2012, p. 447 under Treaties - Art. 9.
Michael Durst endorses draft OECD suggestion of utilizing safe harbour transfer-pricing rules to avoid "donnybrooks of detailed factual analysis"
Michael Durst, a former director of the IRS APA program, has endorsed a suggestion, in a recent discussion draft respecting proposed changes to the OECD Transfer Pricing Guidelines, that countries consider plaicing presumptive weight behind safe harbour ranges of arm’s-length margins and markups for benchmarking the incomes of relatively uncomplicated business operations. He states:
Long-standing experience has now made clear that requiring tax administrations to engage with taxpayers in case-by-case donnybrooks of detailed factual analysis, without the guidance of clear presumptions of some kind, simply is not realistic; requiring this approach has proven to be a recipe for tax anarchy rather than tax enforcement.
Neal Armstrong. Summary of Michael C. Durst, "The OECD Discussion Draft on Safe Harbors – And Next Steps," Tax Notes International, 13 August 2012, p. 647, under Treaties - Art. 9.
Proposed Vector acquisition of 20-20 offers shareholders the option of utilizing safe income
In the proposed Vector acquisition of 20-20 for cash consideration (except for one 22% shareholder who is receiving partial rollover treatment), shareholders are being given the option of first transferring their shares of 20-20 into respective Newcos, having their Newco pay a safe income dividend (which might be a deemed dividend arising from a stated capital increase or a stock dividend) and selling their shares of Newco to Vector.
The intent of these transactions would be for corporate shareholders of 20-20 to utilize "their" share of the safe income of 20-20 to increase the tax basis of their shares in the Newco by the amount of a safe income dividend before selling to Vector.
Neal Armstrong. See summary of 20-20 Circular for Vector acquisition under Merger transactions.
Canadian and US competent authorities agree to adopt the 2010 OECD Report on the Attribution of Profits to Permanent Establishments
CRA announced in late July that the Canadian and US competent authorities had agreed that Article VII of the Canada-US Income Tax Convention would be interpreted consistently with the 2012 OECD 2010 Report on the Attribution of Profits to Permanent Establishments.
In Annex B to the Fifth Protocol to the Convention, they had already agreed that the OECD Transfer Pricing Guidelines would apply for purposes of determining the profits to be attributed to a permanent establishment. However, these guidelines, which apply to separate legal entities (e.g., parent and sub), do not address the issues as to how to allocate assets, and debt and equity capital, to permanent establishments which, in fact, do not legally have assets and capital separate from the rest of the same legal entity.
The 240 page Report addresses these questions among others. It indicates that "economic ownership of an asset...in particular rests upon performance of the significant people functions relevant to ownership of the asset," and that "capital needed to support risks is to be attributed to a PE by reference to the risks attributed to it and not the other way around."
Neal Armstrong Summaries of 2010 Report on the Attribution of Profits to Permanent Establishments and of CRA Notice dated 19 July 2012 under Treaties, Article 7.