News of Note
Twomey - Taxpayer succeeds in self-help rectification before the Tax Court
Email this ContentWhen the taxpayer and the other individual shareholder discovered that the corporate minutes disclosed that, on the organization of their corporation, only one share, rather than 100 shares, had been issued to them, they passed a corporate resolution to correct this error, so that the minute books now conformed with the corporate financial statements. They did not seek a judicial rectification order.
Pizzitelli J. found that the resolution was binding on the Minister for the purpose of determining when the shares had been issued (which was relevant to the requirement under the capital gains exemption rule that the taxpayer have owned his shares for at least two years before disposing of them), as it "resulted in the records being amended to give effect to the true facts."
The decision suggests that a self-help remedy may be adequate (i.e. rectification may be unnecessary) where the remedy is merely to correct the recording of a transaction that in fact has already occurred. Having said that, the taxpayer would have been better off having his shares increased to 100 shares under a stock split once the error was discovered, as this would have avoided such shares being considered by CRA to be newly-acquired by him.
Scott Armstrong. Summary of Twomey v. The Queen, 2012 TCC 310 under s. 110.6(1) - qualified small business corporation share and General Concepts - Effective Date.
CRA reconfirms that the s. 69 rule does not apply to the amount of deemed dividends
CRA has confirmed an earlier position (see 2004 APFF Roundtable Q.15 No. 2004-008682 and 31 December 2004 Memorandum 2004-0091781I7) that where shares of a corporation are purchased for cancellation in a non-arm's length transaction for a purchase price that is less than their fair market value, s. 69 will not apply to increase the deemed dividend to the shareholder (in this case, a Canadian-controlled private corporation). S. 69 instead will apply to increase the capital gain, if any, arising on the purchase for cancellation transaction by the excess of that fair market value over the purchase price.
In this case, the effect of this position appears to be that the shareholder could not utilize additional safe income on hand that would have been available to shelter a larger deemed dividend.
Neal Armstrong. Summary of 3 July 2012 Memorandum 2012-0450821I7 F under s. 84(3).
Timbercreek offers LP unit for a joint investment by Canadian and US investors in US apartment buildings
Under a blind pool offering to Canadian investors in a new Canadian LP, that Canadian LP will make a joint investment with a Delaware LP which is simultaneously funded by US private-placement investors. Their joint investment will be in a subsidiary Delaware LP which will acquire US apartment buildings.
In order to shield the Canadians from US reporting requirements, a "blocker" Ontario general partnership (Holding GP) will be interposed between their LP and the operating Delaware LP. Holding GP will elect to be a corporation for US purposes, but will be a flow-thorough entity for most Canadian purpose. Most distributions from the operating LP to Holding GP, including gains from property sales, will be subject to 35% US withholding tax. This high rate may not be problematic in the case of top-marginal-rate Canadian investors, as Timbercreek expects property gains to be on income account for Canadian purposes - the Fund only has a projected term of about four years, and will renovate and "reposition" the acquired properties.
Neal Armstrong. Summary of Timbercreek U.S. Multi-Residential offering under Foreign asset income funds, REITs and LP offerings.
CRA acknowledges that options on Canadian real estate company shares are exempt under the Canada-US Convention
The capital gains exemption in the Canada-US Income Tax Convention for qualifying US residents does not apply to alienations of shares of Canadian real estate (or resource) companies. The Canada Revenue Agency has acknowledged that this exclusion does not apply to capital gains from alienations of options on such shares - nor are there any rumblings of the general anti-avoidance rule potentially applying where a US resident relies on this exemption (e.g., the US resident structures its investment in a Canadian real estate company as a long-term option on the company's shares with a low strike price).
Neal Armstrong. Summary of 22 June 2012 T.I. 2011-0416521E5 under Treaties - Art. 13.
CRA indicates that GAAR applies to an avoidance of the debt forgiveness rules
In the same ruling referred to below, CRA indicated that the general anti-avoidance rule applied where a purchase by "ProfitCo" of the equity of "LossCo" from an arm's length vendor was structured so as to avoid the application of the debt forgiveness rules to some subordinated debt owing by LossCo to an affiliate of the vendor. Before the sale, ProfitCo lent money to the vendor who invested that money in shares of LossCo, which then paid off the the sub debt. The loan by ProfitCo to the vendor was then repaid by way of set-off against the purchase price for the vendor's shares of LossCo. The effect of the transactions was that the vendor group received the sale proceeds mostly in the form of repayament of the sub debt (so that there was no debt forgiveness) rather than as equity sale proceeds.
CRA stated that these "transactions are essentially the same as transactions that the GAAR committee previously determined resulted in an abuse of section 80."
Neal Armstrong. Summary of 2011 Ruling 2011-0392171R3 under s. 245(4).
CRA finds that two deposit-taking businesses satisfied the similar business test in the loss-streaming rule
CRA ruled that a deposit-taking business of a financial institution that was acquired by and amalgamated with another financial institution would satisfy the similar business test in the loss-streaming rule in s. 111(5)(a), so that its non-capital losses could be utilized. This ruling likely turns on the proposition that the profitable Amalco financial "services" business would entail the "rendering of similar services" to those for the acquired business.
Neal Armstrong. Summary of 2011 Ruling 2011-0392171R3 under s. 111(5)(a).
CRA rules that group homes are not health care facilities for GST purposes
A registrant operated "group homes" whose main function was to give on-going life skills training and life-long learning and support in developmental skills to people with significant developmental disabilities (provided principally by psychologists and social workers). CRA ruled that, unlike nursing homes, which provide 24-hour nursing support, the group homes did not meet the definition of "health care facility" for GST purposes.
Scott Armstrong. Summaries of 13 September 2011 Ruling Case No. 102589 under ETA Sched. V, Part 2, s. 1 and s. 259(1).
CRA finds that a supply of a service may be made for GST/HST purposes by other than the service provider
A recent ruling illustrates an interpretive approach of CRA under which it can consider X to be the supplier of a service for GST and HST purposes even though none of the service actually is performed by X.
A for-profit corporation which charges the families of non-resident minor children a fee for arranging for them to study at a Canadian school district and to be billeted at Canadian families, and pays tuition directly to the school district, was found to be earning its fees (through non-resident agents) from the non-resident families as consideration for an exempt educational service.
Neal Armstrong. Summary of 22 September 2011 Ruling 129475 under ETA, Sched. V, Part III, s. 9.
CRA confirms that the employer GST or HST liability for provision of administrative services to a pension plan potentially can be avoided through using a third-party servicer
CRA considers that an employer is required to self-assess itself for GST or HST under s. 172.1 on the "fair market value" of administrative services it provides to a pension plan for its employees, even if those services all are quite minor (e.g., handling contributions out of payroll), without giving guidance as to how such fair market value is to be determined. On the other hand, there generally will be no GST/HST liability under s. 172.1 where the employer receives a single supply of payroll processing services from a third party notwithstanding that the provision of administrative services to the pension plan is included.
Neal Armstrong Summaries of 19 October 2011 Interpretation 133414 and 19 October 2011 Interpretation 130384 under ETA, .s 172.1(1) - pension activity and summary of 19 October 2011 Interpretation 130384 under ETA, s. 172.1(5).
CRA no longer is scuppering supplier GST/HST rebate applications through automatic assessments
CRA has confirmed that since April 2011 it no longer has been following a practice (prevailing during the previous four years) of assessing GST or HST returns even where there was no adjustment and there was payment with the return of the net tax shown as owing. As also noted by CRA, the effect of assessing a return is that the registrant is precluded from filing for a rebate of tax remitted in error in that month (e.g., where more tax was remitted than charge to its customers) - and the registrant must instead file a timely notice of objection or apply for a reassessment under s. 296(1).
Neal Armstrong. Summary of 2 September 2011 Interpretation 137200 under ETA s. 261(2).