Taxable Canadian Property

Canadian-managed funds purchased from time to time, from non-residents, Canadian-situs solar electric power generating projects (consisting of a leasehold interest, solar panels, steel racks and metal posts, and wires, inverters and transformers, collectively the “Solar Equipment”) and wind electric power generating projects (consisting of a leasehold interest, foundation. and wind turbine including tower).

After indicating that “[w]hether the components of a Wind Project or a Solar Project are fixtures, and therefore are considered “real or immovable” property for the purpose of the definition of TCP, can be informed by the application of the guidance provided in the Maple Ridge case [Royal Bank of Canada v. Maple Ridge Farmers Market Ltd., 1995 CanLII 896 (BC SC)], CRA found that both the wind turbine and Solar Equipment were fixtures and, thus, taxable Canadian property (TCP) under para. (a) of the definition thereof, stating:

Although each component part of a Wind Turbine may be removed without damage to the land upon which the Wind Turbine is located and may have marketable value, all of the component parts are attached and are necessary for the Wind Turbine to function for its intended purpose. Further, a Wind Turbine cannot function for its intended purpose without being attached to the concrete foundation. Consequently, Wind Turbines and their concrete foundations are fixtures … .

[A]ll components of the Solar Equipment would be required to function effectively in order to provide power generation and transmission. As noted in the Maple Ridge case, any item which is attached even minimally (such as with screws or bolts) is a fixture and if a piece of equipment is attached to a structure, a part of which could be removed but which would be useless without the attached part, then the entire piece of equipment is a fixture. Solar panels would not lose their essential character nor be useless without the racking system however, they could not effectively function in the context of utility-scale power generation without the racking, which itself serves no purpose unless used with the attached framed solar panels. As all components of the Solar Equipment are attached to the land on which they are situated, it is our view that the Solar Equipment is described in paragraph (a) … .

CRA further indicated that the above conclusions obtained notwithstanding the requirement to remove the items upon termination of the leases.

CRA declined to comment on whether contracts entitling the project owner to a fixed purchase price for the electrical energy generated by the projects for a fixed number of years (usually 20) were TCP.

In response to a query as to whether precious metal coins stored in Canada on behalf of a non-resident individual would be taxable Canadian property, CRA stated that the question as to whether the non-resident was carrying on business in Canada was one of fact on which it could not comment, and further indicated that if he were carrying on business in Canada, there was a potential exemption under Art. VII of the Canada-U.S. Convention.

Gold bullion situated in Canada owned by a non-resident is not taxable Canadian property provided that it is not part of the inventory of a business carried on in Canada.

A Netherlands company (“BVCo”) wholly-owns:

• All the shares, with a fair market value (“FMV”) of $1M, of a Canadian subsidiary (“TCPCo”), having Canadian real property (in which its business is not carried on) with an FMV $2M and liabilities $1 M; and
• All the shares, with an FMV of $0.5M, of an Australian subsidiary (“AusCo”) having Australian real property with an FMV $10M and liabilities of $9.5M.

Are the BVCo shares taxable Canadian property ("TCP")? CRA responded:

[T]he gross asset value method should be applied first at the TCPCo and AusCo level. The percentage of relevant Canadian property for TCPCo is 100% (equal to $2 M / $2 M x 100). … [T]he percentage of relevant Canadian property for AusCo is 0% (equal to $0 / $10 M x 100).

Next, the gross asset value method should be applied at BVCo’s level making use of the proportionate value approach. The proportionate value approach as described in 2015-0624511I7 can be summarized as follows:

• the percentage of relevant Canadian property of a particular subsidiary entity should be multiplied by the FMV of the shares of that entity; and
• the product resulting from above is the prorated FMV of the shares of the particular subsidiary entity which represents the FMV of a relevant Canadian property asset indirectly held by the parent. …

[T]his would result in BVCo having a percentage of relevant Canadian property of 67% = $1 M / $1.5 M.

Since more than 50% of the FMV of BVCo’s shares is derived from real or immovable property situated in Canada, the shares of BVCo are TCP … .

A non-resident trust (the “Trust”) took the position that its shares of various private non-resident corporations (“NRCos”) were not taxable Canadian property (“TCP”), so that it was deemed under s. 94(3)(c) to have acquired its NRCo shares at a cost equal to their fair market value (“FMV”). The only assets of the NRCos, other than any intercompany receivables, were shares in private operating corporations resident in Canada (“Opcos”). The Opcos held timber resource properties, Canadian real property, other properties not listed in the definition of TCP and, in some cases, shares of lower tier Opcos.

After referencing its established position that the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the FMV of the share of a corporation was derived directly or indirectly from relevant Canadian properties (“RCP”), such as real property situated in Canada and that “the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from RCP for the purpose of applying the gross asset value method to the shares of the NRCos in order to determine whether more than 50% of the FMV of the share of an NRCo was derived directly or indirectly from one, or any combination of, RCP,” the Rulings Directorate stated:

[A]ny intercompany receivable balance pertaining to a loan made downstream is not…a distinct asset of the particular parent corporation but, rather, its value increases the relevant FMV of its asset that is shares of a particular wholly-owned subsidiary. …

[I]ncluding the value of an intercompany receivable balance pertaining to a loan made upstream as a distinct asset when determining the FMV of the wholly-owned lending subsidiary’s assets would result in the double counting… because when carrying out the gross asset value test for the parent corporation the value of the related intercompany payable balance is…ignored while the funds the parent received from the upstream loan would be included as a distinct asset of the parent… . Therefore…when applying the proportionate value method to a particular subsidiary corporation, the value of an intercompany receivable balance pertaining to a loan made upstream is not…a distinct asset of the particular subsidiary corporation but, rather, its value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary.

…To the extent a loan made to a sister corporation is similar in nature to a loan made downstream (e.g., the loan is part of a back-to-back loan because the funds are on-loaned by the sister corporation to a subsidiary of the particular lending corporation), the intercompany receivable balance pertaining to the loan made to the sister corporation is not.. a distinct asset of the particular lending corporation but, rather, its value increases the relevant FMV of its asset that is shares of its subsidiary.

Whereas, if a loan made to a sister corporation is not similar in nature to a loan made downstream and the shares of the particular lending corporation would not be TCP had it not made the loan (e.g., if it had kept its internally generated excess funds in a bank account), generally, the value of the intercompany receivable balance should be included as a distinct asset when determining the FMV of the particular lending corporation’s assets.

The question of whether a share or trust interest derives its value from Canadian real property for purposes of the Canada-U.S. Treaty is a point-in-time test so that the sale of such share or interest immediately after the sale of the Canadian real property for cash will be exempt, even though under the 60-month look-back rule, the share or interest may be taxable Canadian property. CRA also stated that in both the Treaty and TCP context,

the phrase “derived principally from real property”… allows one to look through a particular property (which is, for example, a share of a corporation or an interest in a trust) to the real property situated in Canada and held, directly or indirectly, by such corporation or trust

without indicating any exception for where intermediate interests are held as debt.

A Canadian resident individual (the “Taxpayer”) sold a principal residence and invested the proceeds in shares of publicly traded corporations of which the Taxpayer and all non arm’s -length persons owned less than 25% of the shares of any class. Following the Taxpayer’s death, the executor makes a capital distribution to one of the beneficiaries who is a non-resident of Canada in satisfaction of the beneficiary’s capital interest. The distribution results in such non-resident beneficiary being considered to have disposed of all or a portion of the beneficiary’s capital interest in the Estate. In finding that this did not entail a disposition of taxable Canadian property, CRA stated:

Even though the investments in the Estate were originally acquired by the Taxpayer using proceeds from the sale of real property, the phrase “the value is derived from” for the purposes of the definition of TCP only allows one to look at the underlying assets of the Estate at any time during the 60-month period that ends at the particular time.

However, since the Estate itself did not hold real property (either directly or indirectly, subject to the carve-out) at any time during the 60 months preceding the disposition of the interest in the Estate, such 60-month look-back period in the definition of TCP would not extend beyond the creation of the Estate… .

A partnership (Foreign Partnership), whose non-resident members (Investors) are resident in Foreign Countries 1 through 5, uses a portion of its cash from unit and loan subscriptions to subscribe for equity of a Newco resident in Foreign Country 6 (Foreign Parent), and applies the balance of its subscription cash to subscribe for a mixture of profit-participating loans and non-interest-bearing loans of Foreign Parent (the Foreign Parent Loans). Foreign Parent, in turn, uses such cash proceeds to subscribe for shares of another Newco (Foreign Subsidiary), also resident in Foreign Country 6 and to subscribe for interest-bearing loans of Foreign Subsidiary (the Foreign Subsidiary Loans). Foreign Subsidiary, in turn, uses such cash proceeds to acquire partnership interests in a partnership (Canadian Partnership) holding Canadian real property.

Ruling that each Investor's interest in the Foreign Partnership will be taxable Canadian property.

Respecting a question as to whether shares of an unlisted corporation would be taxable Canadian property if during the preceding 60 months "most of the value of the corporation's shares was derived directly from assets consisting of non-defaulted arm's length mortgages secured by real property situated in Canada," CRA stated:

...CRA is of the view that the fact that at some time during the 60-month period that ended at the determination time, most of the value of the shares of a corporation that is not listed on a designated stock exchange was derived directly from assets consisting of non-defaulted arm's length mortgages secured by real property situated in Canada, would not result in a share of that corporation being TCP. However, if the rights of a particular mortgagee were different from those described in subsection 248(4) of the Act, we would need to examine all of the facts and circumstances relating to that particular mortgage before taking a final position....

In determining (when a non-resident disposes of shares of Parent) what portion of the shares of the Subsidiary of Parent represent real or immovable property of Parent, CRA will apply to the fair market of the shares of Subsidiary the proportion which the real or immovable property of Subsidiary represents of its total gross assets – and the same approach is applied respecting a subsidiary partnership. There is an exception where shares of Subsidiary were not themselves taxable Canadian property.

Indebtedness between a Parent and a wholly-owned Subsidiary has no impact on the determination of whether the value of the shares of the Parent was derived directly or indirectly from real or immovable property situated in Canada. If the shares of the Parent would be TCP had the Parent capitalized its wholly-owned Subsidiary with only equity, then such shares will be considered TCP if the Parent capitalizes the Subsidiary in part with equity and in part with debt.

In response to a question as to how the 50%-derived-from-real-property test should be applied where the non-resident disposes of shares of Parent which holds Subsidiary, CRA stated:

a determination will need to be made of the proportion of the total gross assets of the Subsidiary that comprises of real or immovable property situated in Canada (and certain other property....). Under the current wording of the "taxable Canadian property" definition, an amount equal to that same proportion of the FMV of the shares of the Subsidiary will be considered real or immovable property situated in Canada of the Parent in the determination of whether the shares of the Parent derive their value principally from real or immovable property situated in Canada.

CRA then sumarized the 27 August 2010 amendment that would prevent an indirect "look through" approach where shares of Subsidiary were not themselves taxable Canadian property.

A partnership is disposing of its 25% shareholding of a listed public corporation ("Pubco"). Those shares derived more than 50% of their fair market value from Canadian real property and are not treaty-protected property for any of the partners, all of whom are non-resident and deal with each other at arm's length.

In finding that the non-resident partners are not taxable on the disposition under s. 2(3)(c) and that "section 116 has no application," CRA stated:

…subsection 96(1) does not apply for the purposes of paragraph 2(3)(c). Thus, for the purpose of determining whether the non-resident partner is taxable under subsection 2(3)…the partners of the partnership are considered to have disposed of their respective interest in the property of the partnership and paragraph 96(1)(c) does not apply….In other words, the "non-resident person" referred to in subsection 2(3) is the non-resident partner and not the partnership.

…although the partnership realizes a gain from the disposition of a TCP and a portion of the gain is allocated to the non-resident partner and included in computing his taxable income earned in Canada under paragraph 115(1)(a) and paragraph 115(1)(b), the shares are not TCP for the purposes of paragraph 2(3)(c), in respect of each non-resident partner….[U]nder common law... it may not be said that the non-resident partner owned a specific percentage of the underlying property of the partnership. Therefore, ... none of the non-resident partners is taxable in Canada on their portion of the gain realized by the partnership on the disposition of the shares of Pubco.

We believe this result to be unintended and have advised officials at the Department of Finance.

CRA confirmed that:

when determining whether a share listed on a designated stock exchange is TCP at "any particular time" during a 60 month period both of the tests at subparagraphs (e)(i) and (ii) of the definition must be satisfied at the same time.

Would an assignment to a trust by a non-resident person of a right to purchase a Canadian apartment unit be considered a disposition of taxable Canadian property? CRA responded:

According to Black's Law Dictionary 9th Ed, “option” includes the right to buy an asset at a fixed price within a specified time. Based on this definition, the right to purchase an apartment should be considered an option for purposes of the Act.

…“[A]ssignment” is a form of “transfer”, and therefore, provided all other conditions of the definition are met, the assignment of the right to purchase the apartment to a trust would be considered a disposition.

In light of the repeal of s. 115(3), a taxpayer who owns directly 20% of the shares of a listed corporation and has an option to acquire an additional 5% of those shares will not be considered to hold taxable Canadian property. However, where the taxpayer or persons with whom the taxpayer does not deal at arm's length owns 25% or more of any class of the shares of a corporation, both the shares and any options to acquire additional shares will be taxable Canadian property.