News of Note
CRA finds that the HST/GST credit note mechanic was not available in a returned goods situation
Email this ContentThe credit note rule in s. 232 provides a mechanism for reducing a Canadian registrant’s GST or HST remittance obligations when it reduces the consideration for a supply. CRA found that this mechanism was not available when a U.S. affiliate to which the registrant shipped crude oil decided before receiving the crude in the U.S. that the crude was excess to its needs, so that the crude was effectively returned. CRA construed this as instead being a sale of the crude back to the Canadian registrant, so that the U.S. affiliate (which also was registered) was required to charge GST to the Canadian registrant if the crude that was to be returned was still in Canada.
The distinction between this scenario and a conventional returned goods situation seems quite subtle, so that there may be uncertainty as to the availability of the s. 232 mechanism in the latter scenario.
Neal Armstrong. Summaries of 5 February 2013 Ruling Case No. 141852 under ETA ss. 232(2) and 153(3), and Sched. VI – Part V – s. 15.2.
CRA considers that the s. 44.1 rollover is not available to shares issued to a discretionary trust, distributed to a beneficiary and then sold
An individual "other than a trust" who disposes of shares which qualified as eligible small business corporation shares "of" the individual at the time of their issuance will be eligible for rollover treatment if replacement shares are acquired and a host of other conditions are satisfied.
CRA considers that shares which were issued to a family trust and later distributed to a beneficiary will not qualify for the rollover treatment on a subsequent sale of those shares by the beneficiary. This is a reasonable interpretation: the beneficial interest of the individual in a trust (at least provided that it is not vested in possession) likely falls short of those shares qualifying as shares "of" the individual when they are issued to the trust.
Neal Armstrong. Summary of 27 November 2012 T.I. 2012-0445941E5 F under s. 44.1(1) - qualifying disposition.
CRA loss-shifting ruling contemplates a limited-recourse loan to Profitco
A triangular intercorporate loss-shifting transaction (under which Profitco borrows on an interest-bearing basis from Lossco, subscribes for pref of a Newco subsidiary of Lossco, and Newco lends the money back on a non-interest-bearing basis to Lossco) contemplates that the only recourse under the loan of Lossco to Profitco will be to the pref of Newco, and that Profitco may satisfy the loan to it by delivering the Newco pref (irrespective of their value).
Neal Armstrong. Summary of 2012 Ruling 2012-0439191R3 under s. 111(1)(a).
Bakorp - Tax Court finds that a "180 degree turn" in the relief requested by a large corporation at the appeal stage was not "a mere change in quantum"
The taxpayer's Notice of Objection indicated that the Minister had erred in reducing the amount of a deemed dividend from $53 million to $28 million for its 1995 taxation year, but its Notice of Appeal stated that the deemed dividend for 1995 should have been nil instead (so that such amount instead should have been included in a prior year's return).
The taxpayer, as a large corporation, was subject to the requirement in s. 169(2.1) that it could only appeal on an issue raised in its Notice of Objection. It argued that, at both the Notice of Objection and Appeal stages, it was raising the same issue, namely, the quantum of the deemed dividend for that year. After stating that "there may be situations where change in quantum may not involve Large Corporation Rules," C Miller J stated that "I cannot imagine a fuller reconstruction than making a 180 degree turn in what is to be included in income." The taxpayer's appeal for 1995 was invalidated.
Scott Armstrong. Summary of Bakorp Management Ltd. v. The Queen, 2013 TCC 94 under s. 169(2.1).
CRA considers that provincial ministries must comply with CRA information requirements
The Directorate considers that as Her Majesty in right of a province is a "person," a provincial ministry is bound by an information requirement under s. 231.2. No constitutional discussion.
Neal Armstrong. Summary of 19 December 2012 Memorandum 2012-0472761I7 under s. 231.2(1).
CRA accepts that dividends paid to a U.S. parent in Chapter 11 are beneficially owned by it rather than the creditors
A Canadian subsidiary which may have ceased operations but continued to earn income from securitization trusts including deferred purchase price, will pay cash dividends to its U.S. parent in the same (former) business, which is now managed by the Plan Administrator under a Chapter 11 Plan. The shareholder of the parent is an offshore fund whose members are unknown, so that it cannot be said that it is a qualifying person under Art. XXIX-A of the Treaty.
CRA ruled that the dividends will benefit from the Treaty-reduced withholding rate of 5% on the basis that the parent is the beneficial owner of the dividends (notwithstanding that in economic substance the dividends will be beneficially owned by the creditors) and that the rule in para. 3 of Art. XXIX-A is applicable, as the dividends will be derived by the parent "in connection with an active trade or business carried on in the United States that is substantial in relation to the activity in Canada that gave rise to the income." In addition to reflecting a look-through approach to characterizing the dividend as being business income, this approach is also consistent with domestic jurisprudence indicating that a virtual cessation of activity is required before a business can be considered to have ceased.
Neal Armstrong. Summary of 2012 Ruling 2012-0435211R3 under Treaties - Art. 29A.
Income Tax Severed Letters 10 April 2013
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Franchise Services braves Canadian exit tax in continuing to Delaware
Franchise Services of North America (FSNA) is merging with a private Delaware company (Adreca) in the same car rental business by continuing to Delaware, and then engaging in a triangular Delaware merger whereby the Adreca shareholder (Macquarie) receives 49.8% of its shares.
The disclosure does not make a huge deal out of the deemed disposition of FSNA's properties under s. 128.1(4)(b) or the potential withholding tax of sorts imposed under s. 219.1 (a.k.a., the emigration tax), so that it may be that no material exit tax is anticipated as a result of FSNA's substantial losses and what appears to be a relatively high paid-up capital for its shares. The Canadian tax disclosure also repeats, without further guidance, the anti-avoidance language in s. 219.3 indicating that the emigration tax of 25% will not be reduced to the Treaty rate of 5% if "it can reasonably be concluded that one of the main reasons that FSNA became resident in the U.S. was to reduce the emigration tax or Canadian withholding tax payable by FSNA."
Neal Armstrong. Summary of Franchise Services of North America Circular under Cross-Border Mergers - Outbound - Continuance and Merger.
CRA provides additional guidance on the foreign tax credit rules
The draft CRA folio on foreign tax credits incorporates most of the material in IT-270R3, but also adds some discussion. For example, it provides guidance on how the taxpayer is permitted to allocate allowable capital losses amongst different countries where the taxpayer’s global capital losses exceed its global capital gains for a year, and also notes, with respect to the "economic profit" rule (in s. 126(4.1)), that the rule is not applied independently to a related transaction involving another property acquisition.
Neal Armstrong. Summaries of S5-F2-C1: "Foreign Tax Credit" 27 March 2013 under ss. 126(1), 126(2), 126(4.1), 126(7) – business-income tax, 126(7) – non-business-income tax, 4(3), 110.5, 115(1)(a)(i) and 115(1)(a)(ii), and under General Concepts - Agency.
CRA finds that shares with a formula entitlement to corporate profits are taxable preferred shares.
CRA concluded that shares which were entitled to 75% of the profit resulting from an adventure in the nature of trade were taxable preferred shares on the basis that there was thus a limitation (to a maximum) of the amount of dividends to which they were entitled. This conclusion, although consistent with prior positions, is questionable, as such shares obviously were participating shares from any realistic perspective.
Neal Armstrong. Summary of 15 March 2012 T.I. 2012-0443471E5 under s. 248(1) – taxable preferred share.