Words and Phrases - "derived"
Exxonmobil Canada Ltd. v. The Queen, 2019 TCC 108
Crude pumped from an undersea oil reservoir of the Hibernia joint venture up to the “Hibernia Platform” above the ocean surface was temporarily stored there (in the “GBS”) and then pumped from there, through two underwater flow lines, to an “offshore loading system” (“OLS”) two kilometers away (consisting of a north and south base). The OLS was used to load the crude onto tankers for sale and shipment to refineries.
CRA took the position that the production activity referenced in Reg. 1204(1)(b) “ceased at the wellhead” – and it reassessed to the taxpayer (a participant in the joint venture) to reduce the amount of the taxpayer’s production profits by the expenses of the OLS (effectively treating them as equalling the income from transporting the crude, and then deducting the same amounts as an expense applicable to the transportation profits). CRA in particular relied on the exclusion in Reg. 1204(3)(a) for “income … derived from transporting … petroleum”.
In rejecting this adjustment, Owen J stated (at paras. 49, 54-55):
[T]he word “derived” means that the income or loss must exist not because the transporting/transmitting of the petroleum from a natural accumulation of petroleum was necessary in order to sell the petroleum but because the transporting/transmitting of the petroleum in and of itself generated income or a loss. …
[T]he OLS allowed the joint venture owners of the crude to ship that crude to market so that income could be realized from the sale of the crude. However, the income realized by the joint venture owners from the sale of the crude was derived solely from the market value of the crude. The OLS had no impact one way or the other on the amount of income realized by the joint venture owners from the sale of the Hibernia crude and did not in and of itself generate any income or loss for the joint venture owners. …
…[P]aragraph 1204(3)(a) was intended to ensure that additional income derived from transporting/transmitting crude does not attract the resource allowance. It was not intended to reduce a taxpayer’s income from the production of crude when that income reflects solely the market value of the crude.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development | initial well placed in order to validate improved reservoir analysis was not SR&ED | 326 |
Apex City Homes Limited Partnership v. The Queen, 2018 TCC 247 (Informal Procedure)
The appellant (Apex) was a limited partnership that developed and sold the residential condominiums in a particular Calgary condominium project, consistent with its parent’s practice of forming a separate LP for each of its condo projects. Apex hired a general contractor to construct the condo units who, in turn, engaged the trades.
In finding that Apex was required to file T5018 Summaries pursuant to Reg. 238, MacPhee J noted (at para. 18) Apex’s submission that “they are not in the business of constructing condos; they are in the business of selling condos after they are constructed,” noted (at para. 21) that in Garcia, “derived” was interpreted “to mean something akin to ‘having its source’,” and then stated (at para. 22):
[T]he source of the Appellant’s business income comes from two integral phases of their business operations; 1) the construction of condos, and 2) the sale of the condos. … To ignore the construction component of the Appellant’s business would be an incorrect interpretation of the phrase “derived primarily from”.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 162 - Subsection 162(7) | due diligence defence was not available where the taxpayer incorrectly disagreed with a CRA position | 175 |
Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia), rev'd on various grounds [2019] FCAFC 51
Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The significant gains realized by RCF IV and RCF V in disposing of these investments consistently with their modus operandi which was (per the oral evidence) to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit” (para. 32) were realized on income account. In further finding that such gains were income derived from an Australian source, Pagone J first noted (at para. 52) the RCF LPs’ submissions that significant decisions were made outside Australia by the general partner’s investment committee and that the manager was outside Australia, and then stated (at para. 53):
The fact that the business and assets were in Australia might not of itself be sufficient to make Australia the ultimate source of the gain derived upon the disposal of the shares, but the location in Australia of the business and assets, and the nature and extent of the business and assets, occasioned substantial activities in Australia that were an integral part of the investment, its management, and its ultimate profitable disposal. …
An element of the investment strategy of the RCF IV and RCF V partnerships was for members of the RCF Management team to occupy positions on boards of the companies in which RCF invested to guide management and to contribute to an increase in the value of the investments which were intended to be sold at a profit. That function was performed by employees in the Perth office … .
Respecting the statutory reference to income derived “directly or indirectly,” he stated (at para. 51):
The Commissioner submitted that the phrase directs attention “not merely to the proximate origin of the income, but also to those acts or matters which constitute contributory causes to the generation of income”, however, the adverbial phrase quantifies the word “derived” in the section rather than the word “source”. It can be accepted that non-proximate contributory causes may be relevant to ascertain the source of derivation but the adverbial phrase does not lessen or reduce the need to find that that which was derived was from an Australian source.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares | private equity fund LP with 5-year holding objective realized share gain on income account | 175 |
| Tax Topics - Treaties - Income Tax Conventions - Article 3 | each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise” | 234 |
| Tax Topics - Treaties - Income Tax Conventions - Article 13 | exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild | 420 |
| Tax Topics - General Concepts - Stare Decisis | lower court not bound by a point of law that was assumed rather than examined by a higher court | 292 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) | assessment of partnership was assessment of partners | 89 |
| Tax Topics - Treaties - Income Tax Conventions - Article 6 | Art. 6 extends common law meaning of real property | 198 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) | shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property | 514 |
| Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment | shares of Australian mining company were primarily attributable to the processing rather than mining operations | 142 |
| Tax Topics - General Concepts - Fair Market Value - Other | processing assets of mining company were more valuable than its mining assets | 238 |
Jack Silverson, Bill Corcoran, "Issues Affecting Investments by Canadian Pension Plans in Private Equity, Infrastructure and Real Estate in Canada, the USA and Europe", 2016 Conference Report (Canadian Tax Foundation),15:1-40
Interpretation of 10% limit in PBSA Regulations, Sched. III, s. 9(1) (“10% Rule”) (pp. 15:4-6)
The purpose of the 10 percent rule was also considered in R v Christophe, et al. [fn 8: 2009 ONCJ 586 at para 138]. The court stated the purpose as follows:
...[T]he provision targets the overall amount held in any one place, such that there not be any new advances which would result in holdings beyond the quantitative limits. …
An analysis of the legislative intent behind subparagraph 149(1)(o.2)(iii) and the plain wording of the provisions demonstrates that the 10 percent rule for the purposes of the Act should be interpreted to apply at the pension plan level and not at the investment corporation level. Such an interpretation is also consistent with well-established rules of statutory interpretation.
Interpretation of 30% limit in PBSA Regulations, Sched. III, s.11 (“30% Rule”) (p. 15:8)
...Note that the 30 percent rule applies only to securities to which more than 30 percent of the voting rights are attached. It does not prevent a pension plan from holding securities to which more than 30 percent of the value of the corporation are attached. ...
Thin cap and SIFT extension proposals (pp.15:8-17)
In June 2016, the government of Canada released a consultation document…[which] indicated that the government was contemplating two tax proposals to "address tax fairness and efficiency issues associated with pension plan control of Canadian business entities"
1) extending the thin capitalization rules to corporations in which tax-exempt entities invest and
2) extending the specified investment flowthrough (SIFT) rules to apply to partnerships and trusts in which tax-exempt entities invest. ...
...If the thin capitalization extension proposal is implemented, it will apply when the tax-exempt entity holds more than 25% of the votes or value of the corporation... . In these cases, the interest deductions claimed by the operating corporation will be reduced to the extent that the debt-to-equity ratio exceeds 1.5 to 1. This will affect both the tax-exempt investment corporation and the taxable investors in the operating corporation. …
...The consultation document asks whether the SIFT Rules should apply to pension controlled trusts and partnerships, but there is no indication of what is meant by the term "pension controlled"….
...The consultation document…seems to suggest that the SIFT extension proposal could apply at an ownership level of 50 percent or lower. It is not clear whether such a test would be applied on the basis of holdings by a single plan in the trust or partnership (the "single plan specified limit test") or the aggregate holdings of all plans in the trust or partnership (the "aggregate holding specified limit test").
...Subjecting Holdings LP to entity-level taxation will not only adversely affect pension plans that invest in Holdings LP, but would also adversely affect the taxable infrastructure developer. ...
Requirement in s. 149(1)(o.2)(iii)(A) for an “investment” (pp. 15:11-10)
...A common issue that arises with respect to infrastructure investments is whether a limited partnership interest is an "investment" for the purposes of clauses 149(1)(o.2)(iii)(A) and (C). …
...[T]he technical notes to section 253.1 implicitly contemplate that a partnership interest would be an investment for the purposes of paragraph 149 (1)(o.2) and it would be illogical if this conclusion did not apply to the investment tests in subparagraph 149(1)(o.2)(iii). The foregoing is consistent with the CRA's position, based on the technical notes to section 253.1, that a limited partnership interest can be an investment for the purposes of subparagraph 149(1)(o.2)(iii). [fn 25: …2000-0055463, 2005-0151691E5 and 2005-0126841R3.]
Requirement in s. 149(1)(o.2)(iii)(C) for income to be derived from an “investment” (pp. 15:12-13)
...[C]lause 149(1)(o.2)(iii)(C) requires that the investment corporation derive at least 98 percent of its income from its investments or from dispositions of its investments. ….
...[T]he courts have taken the view that "derived" refers to source or origin. [fn 28: …Gilhooly v. M.N.R., [1945] CTC 203 (EC), Westar Mining Ltd. v. R., 92 DTC 6358 (FCA), M.N.R. v. Hollinger, [1963] CTC 51 (SCC), M.N.R. v. Bessemer Trust Co., [1972] CTC, 473 (FCTD) and Kemp v. M.N.R., [1947] CTC 343(Ex. Ct.). See also…9636045] It is clear that the income allocated to an investment corporation by a limited partnership only arises (in other words, has its origin or source) as a result of the investment corporation's investment in the limited partnership. ...
Requirement in s. 149(1)(o.2)(iii)(B) not to issue debt securities (pp. 15:14-16)
...[U]nder Canadian provincial partnership law it is generally considered that partnerships cannot contract independently of their partners, and that when an agent of the partnership (for example, a general partner of a limited partnership) enters into a contract on the partnership's behalf, all of the partners have incurred the obligations which flow from the contract. [fn 31: See, for example, Molson Brewery BC Ltd. v Canada, 2001 CanLii 22132(FCTD) and Klein v. The Queen, 2001 DTC 443, at paragraph 22…] …
...The issuance of debt should be viewed as part of the "business" or "activity" of the partnership that would, as a result of section 253.1, not be considered to be carried on by the investment corporation. ...
This position was also supported by…Consolidated Mogul…:…
...Obviously, the financing function of a mining company is an integral part of its business. …
Additional certainty with respect to the issues discussed above can be achieved by having the investment corporation acquire units of a unit trust which then acquires the interest in the limited partnership. …
...On the basis of trust law principles alone,…an issuance of a debt obligation (or a note, bond, debenture or similar obligation) by the trustee of a unit trust to a third party would not be considered to be the issuance of a debt obligation (or a note, bond, debenture or similar obligation) by the beneficiary of the trust. …
Consistent with the general scheme for the taxation of trusts and their beneficiaries, the CRA has issued a technical interpretation that states that when an investment corporation is a beneficiary of a trust, the investment corporation is not considered to be the issuer of debt obligations issued by the trust. [fn 39: 2006-0195451R3…]
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(o.2) - Subparagraph 149(1)(o.2)(ii) | 433 | |
| Tax Topics - Treaties - Multilateral Instrument - Article 7 | 173 |
Kemp v. MNR, [1947] CTC 343, 3 DTC 1078, [1946-1948] DTC 1078 (Ex Ct)
In the years in question, the only revenues of a testamentary trust were from non-exempt sources. However, the trustees made distributions to the income beneficiary out of undistributed tax-free bond interest that had been received in previous years. In finding that these distributions were exempt in the income beneficiary’s hands as “income derived” from Dominion bonds, Thorson P stated (at p. 1082):
[T]he word ‘derived’…cannot be limited to income from income tax exempt bonds immediately or directly received by the owners thereof as interest thereon, but must include income that has its source in such bonds even although there may be intervening channels through which it flows from such source to its final destination.
1 March 2017 External T.I. 2016-0658431E5 - Article XIII of Canada-U.S. Convention
Are shares or trust interests in a resident corporation or trust considered to derive their value principally from real property situated in Canada for purposes of Art. XIII(3)(b) of the Canada–U.S. Treaty where at the time of the disposition the corporation or trust only held cash proceeds from the disposition of Canadian real property?
As a preliminary observation, CRA stated:
In the context of a tax treaty between Canada and another jurisdiction, as well as in the context of the definition of the term “taxable Canadian property” in subsection 248(1) of the Act, the use of the phrase “derived principally from real property” (or a similar expression) 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.
and then responded:
[A]s long as the corporation or the trust do not hold real property situated in Canada (either directly or indirectly) at the relevant time, the value of the shares of the corporation or the interest in the trust cannot be said to be derived from such real property for purposes of Article XIII….
[I]f the real property was disposed of by the corporation or the trust at any time during the 60 months preceding the disposition of the shares of the corporation or the interest in the trust, such shares or the interest, respectively, would still be considered taxable Canadian property….
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) | derived principally test done on look-through basis | 144 |
Jared A. Mackey, "Canada Revenue Agency Views on Taxable Canadian Property Determinations Involving Subsidiaries", Tax Topics (Wolters Kluwer), No. 2315, July 21, 2016 p. 1
Proportionate value approach to determining what portion of equity is Canadian real/resource property (“CRP”) (p. 2)
If a subsidiary's shares are themselves TCP, the CRA has indicated [in 2011-0425901C6] that it will apply a "proportionate value" or "look-through" approach when determining the TCP [taxable Canadian property] status of the parent's equity. Under this approach, it is first necessary to determine the proportion of the subsidiary's total gross assets that constitute CRP. Second, an amount equal to that same proportion multiplied by the fair market value of the shares of the subsidiary held by the parent will be considered CRP for the parent….
Thus, if 60% of the subsidiary's gross assets constitute CRP, 60% of the value of the subsidiary's shares will be considered to be derived from CRP for the parent.
Broad meaning of “derived” (p. 2)
The look-through approach adopted by the CRA is supported by a number of cases that have interpreted the word "derived" to be a "term of wide import". [fn 6: Westar Mining…92 DTC 6358 (FCA) at para. 24.] The courts have interpreted the term broadly to require looking through to an amount's origin or source, even though there may be intervening channels from such origin or source to the final destination. [fn 7: Kemp…3 DTC 1078 (Ex Ct) at paras 12-14; Gilhooly… [1945] CTC 203 (Ex Ct) at paras 22-23; … Hollinger…[1963] S.C.R. 131.] The courts have equated the term "derived" with the phrase "arising from or accruing," which also imports the common idea of origin or source. [fn 9:…Kirk, [1900] AC 588 (PC) at 592; …Hollinger…[1963] S.C.R. 131 at para 12; and Garcia…2007 TCC 548…at paras 28-37.]…
Look-through subsidiary partnership (p. 3)
…CRA stated that it would apply the same look-through approach to investments in partnerships for purposes of determining whether a parent's equity constitutes TCP. [fn 9: …2012-0444091C6…]
Example of look-through approach (p. 3)
[A] parent owns shares of a subsidiary valued at $40 and holds $50 of cash. The subsidiary, in turn, owns CRP of $200, a related mortgage debt of $200, and cash of $40. …
$200/$240 of the subsidiary's gross assets constitute CRP, such that 83% and 17% of the fair market value of the subsidiary's shares would be considered CRP and non-CRP, respectively, for the parent. As a result, the parent's gross assets would consist of 37% CRP and 63% non-CRP. [fn 11: Equal to (17% × $40 (value of subsidiary shares) + $40 (parent cash)) / $90 (total parent assets.]
CRA’s approach re intercompany debt (pp.4-5)
[A]ccording to the CRA [at the 2012 IFA Conference], intercompany debt is to be completely ignored as an asset for the parent and as a liability for the subsidiary…. [In 2012-0444431R3] CRA ignored the intercompany debts in determining whether the equity interest constituted TCP. … CRA’s approach…ignores the intercompany debt as an asset for the parent and as a liability for the subsidiary, but continues to recognize it in the calculation of the fair market value of the subsidiary’s equity… . [This] approach may…produce cases where an equity/debt capital structure of a subsidiary would result in the parent’s equity constituting TCP, where a 100% equity structure would otherwise not, and vice versa.
Applying CRA’s approach to manipulate consequences (p. 5)
To illustrate the shortcoming of the CRA’s approach to intercompany debt relative to a look-through approach, consider a 100% equity structure where a parent's only assets are shares of a subsidiary with fair market value of $100 and cash of $50, while the subsidiary's only asset is CRP of $100. In these circumstances, the parent's equity would 'constitute TCP since the full value of the subsidiary's equity ($100) would be considered derived from CRP, which is greater than 50% of the parent's total gross assets (i.e., $100/$ 150). If the parent had instead financed the subsidiary with $40 of equity and $60 debt, and the intercompany debt were ignored as directed by the CRA, the parent's equity would not constitute TCP. In these circumstances, only $40 of the parent's equity in respect of the subsidiary shares would be considered to be derived from CRP, which is less than 50% of the parent's gross assets ($40 / ($40 + $50)). Under a look-through approach to the intercompany debt, the parent's equity would constitute TCP since $40 of the parent's equity and $60 of the parent's debt would be considered derived from CRP, greater than 50% of the total gross assets.
The opposite result can occur if the subsidiary holds substantial non-CRP.
Garcia v. The Queen, 2007 DTC 1593, 2007 TCC 548 (Informal Procedure)
A bonus received in 2003 by the taxpayer when he was a resident of Canada was taxable in Canada, notwithstanding that the bonus was earned in 2002 when he may have been a resident only of the United States for Treaty purposes. The word "derived" meant "having its source", and the bonus was taxable at the time of receipt, regardless of when or where the employment to which it related was exercised.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Income Tax Conventions - Article 4 | 89 |
Westar Mining Ltd.v. The Queen, 92 DTC 6358, [1992] 2 CTC 11 (FCA)
Before going on to find that business interruption insurance proceeds were "income derived from the operation of a mine" for purposes of ITAR 28(2), Mahoney J.A. stated (p. 6362) that "the authority has established that 'derived from' is a term of wide import".
Commissioners of Taxation v. Kirk, [1900] A.C. 588 (PC)
Two mining companies that mined crude ore in New South Wales and (for the most part) also processed the crude ore there, but made contracts for sale of the product outside the Colony were found to have "incomes ... arising or accruing ... from any ... trade ... carried on in New South Wales", or "derived from lands of the Crown" in the Colony, or "arising or accruing ... from any other source whatsoever in New South Wales". Lord Davey also stated (at p. 592) that "their Lordships attach no special meaning to the word 'derived' which they treat as synonymous with arising or accruing".
MNR v. Hollinger North Shore Exploration Co., 63 DTC 1031 (SCC)
In accepting the taxpayer's submission that royalties (calculated as apercentage of sales proceeds) received by it from the licensee of its interest in an iron ore body qualified as "income derived from the operation of the mine" for purposes of an exemption for such income generated in the first 36 months following commencement of production, Abbott J stated (at p. 1033) that he accepted:
…that the ordinary meaning of the words "derived from the operation of a mine" is broader than that contended for by appellant, that the word "derived" in this context is broader than "received" and is equivalent to "arising or accruing" (vide Commissioner of Taxation v. Kirk, [1900] A.C. 588 at 592) and that the expression is not limited to income arising or accruing from the operation of a mine by a particular taxpayer.
Gilhooly v. MNR, [1945] CTC 203, [1941-1946] DTC 725 (Ex Ct)
An estate received a portion of its income as dividends from a Canadian mining company and paid a portion of its income to the taxpayer, who had a life interest in the property held by the executors. In finding that she was entitled to claim a depletion allowance in respect of her pro rata portion of the dividends received by her (based on s. 5(1)(a), which provided a deduction for “income derived from mining”), Cameron DJ stated (at p. 209) that “the true meaning that would give effect to the [quoted] words” was “’income originating from mining or coming from mining as its source’,” so that the mining dividends were derived from mining. Furthermore, her claim was not affected by the interposition between her and the mining company of the executors.