Words and Phrases - "carry on"
19 October 2023 Internal T.I. 2020-0856851I7 - Ordinary Course of Business
In 2010, a Canadian corporation, which was a specified financial institution by virtue of being controlled by its parent, a Canadian insurance corporation, subscribed for 9,350,000 mandatory redeemable preferred shares of Luxco 1 (“MRPS” – subsequently, “Class A MRPS”) for US$935,000,000. Luxco 1 used those proceeds to make loans to US foreign affiliates for use in the corporate group’s US operations. In 2012, the MRPS and common shares of Luxco 1 were transferred on an s. 85(1) rollover basis to a Canadian subsidiary (XXXXXXXXXX). In 2015, the latter used common share subscription proceeds from its parent to subscribe for 2,000,000 Class B MRPS of Luxco 1 worth US$200,000,000, with the proceeds lent to a US CFA in the group which, in turn, acquired a US property manager.
The MRPS (which were term preferred shares) were fully voting, were redeemable and retractable by the company or the holder, were required to be redeemed at the end of 13 years, and were convertible by the holder at any time into ordinary shares with a value equal to the MRPS par value plus, accrued and unpaid dividends, share premium account and attached reserve account.
The various dividends paid on the MRPS were treated as interest for Luxembourg purposes.
The activities of the Canadian parent of Luxco 1 were limited to providing a guarantee (for guarantee fees) to US Ops Holdco (the parent of a US borrower from Luxco 1) and holding the shares of US Ops Holdco and Luxco 1.
Before finding that it was likely that the MRPS were not acquired in the ordinary course of the business carried on by such Canadian parent, the Directorate stated:
In order to constitute “carrying on” a business, it normally requires some continuity, frequency and regularity of the commercial activities. It is arguable that the acquisition of the Class B MRPS is not considered part of the ordinary course of business carried on by XXXXXXXXXX, but rather the acquisition may be considered an isolated and special transaction that is not part of a course of conduct that involves repeated dealings of a similar nature.
After further referring inter alia to the finding in 2001-0079985, that even though the acquisition of preferred shares is an isolated event, it does not preclude it being “in the course of” and the statement in Citibank Canada that “the question is whether the present arrangement is, at its core, a debt financing arrangement or a capital investment by Citibank in the issuers of the shares,” the Directorate went on to state:
Therefore, it is also important to consider whether the arrangement in the current case, at its core, more closely resembles a debt financing arrangement or a capital investment. …[W]e are more inclined to conclude that the arrangement more closely resembles a capital investment. … XXXXXXXXXX is not in the business of lending money to the general public or to any disinterested third parties and the loans it made were limited to its foreign related corporations. All of the proceeds from the issue of the Class A and Class B MRPS were used by Luxco 1 to make loans to XXXXXXXXXX US foreign affiliates for their US operations. … This supports the view that the share acquisition of the Class B MRPS by XXXXXXXXXX represents a capitalization of a subsidiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 112 - Subsection 112(2.1) | MRPS used to finance US opco or opco acquisition were not acquired in the ordinary course of the business | 360 |
7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 5, 2022-0936301C6 F - Guarantee fee
An individual, a sole shareholder of a corporation, borrows money in order to earn business or property income. To secure his personal loan, his corporation grants a mortgage on a building it owns. The shareholder makes all principal and interest payments on his loan, and also pays his corporation a reasonable fee for the grant of the security (a “guarantee fee”).
Regarding whether the fee would give rise to income from property or a business to the subsidiary, CRA stated that it “generally considers that [a] guarantee fee is received for a service,” that Timmins held that “the provision of services under contract for a fee may be a business within the meaning of subsection 248(1) by virtue of being an undertaking of any kind whatever,” and that whether a business was carried on (i.e., there was an ongoing conduct or carriage of the business) was a question of fact.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.1) | one-time fee to subsidiary for mortgaging its property as security for a bank loan to the shareholder would not qualify under s. 20(1)(e.1) | 139 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) | one-time fee to subsidiary for mortgaging its property as security for a bank loan to the shareholder could qualify under s. 20(1)(e) | 175 |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | no shareholder benefit where corporation receives a reasonable pledge (or “guarantee”) fee from its shareholder | 124 |
5 October 2018 APFF Roundtable Q. 17, 2018-0768881C6 F - entreprise exploitée activement – revenu de location
Realtyco is a CCPC holding in Canada six buildings each containing 50 residential units, which it rents out. The sole services provided by it to the tenants are maintenance of the common areas and snow removal. There is a full-time caretaker at each building (for six in total).
In order to determine that there is an “active business carried on by a corporation” it is not sufficient for Realtyco to satisfy the more than 5 full-time employee test. It first must be considered to be carrying on a business. Would the income generated by Realtyco from the six buildings qualify as “income of the corporation for the year from an active business” for purposes of s. 125(1)(a)?
CRA indicated that in order for there to be an "active business carried on by a corporation" as defined in s. 125(7), it was necessary to first consider that Realtyco’s activities constituted a "business.” Before indicating that this was a question of fact, CRA stated:
The concept of "business" is accorded an expanded meaning by subsection 248(1) by being defined in particular as including an undertaking of any kind whatever:
CRA also noted that the concept of “carrying on” a business was broadly defined in Timmins.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business | principal purpose means main or chief objective | 143 |
Thiel v. Federal Commissioner of Taxation, 90 A.TC 4717 (HC of A.)
In January and May 1984 the taxpayer, who was a resident of Switzerland, paid $150,000 to acquire six units in the Energy Research Group Unit Trust, in November 1984 he sold his six units to Energy Research Group Australia Ltd. for $300,000 to be satisfied by the issuance to him of 600,000 ordinary shares of that company, and in 1985, following a listing of the shares on the Australian Stock Exchange, he sold 252,000 of his shares for $566,307. The majority found that the taxpayer's activities constituted an "enterprise" for purposes of Article 7 of the Australia-Switzerland Convention regardless whether they constitued an isolated adventure or the recurring conduct of a business. Accordingly, the profits of this enterprise were exempt from taxation under the Income Tax Assessment Act 1936 (Australia).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Income Tax Conventions | 83 |