News of Note
ROI Public Funds terminated forward/mirror fund structure and merged on a taxable basis to create Dream Hard Asset Alternative Trust
DREAM (formerly Dundee) acquired the rights to manage various ROI mutual funds. These Funds held much of their Canadian real estate and fixed income portfolios indirectly through the terms of forward agreements with a Canadian bank, which in turn held those assets in "Reference Funds." They would have ceased to be grandfathered from the character conversion rules at the end of 2014. Their forwards were cash settled and they merged into a new mutual fund trust, Dream Hard Asset Alternative Trust. ("Hard" is an adjective, not an adverb.)
The form of the merger was quite similar to a s. 132.2 merger: after some preliminary transactions to address the mirror "Reference Fund" structure, the Funds sold their assets to the new Trust for units, and then terminated by distributing those Trust units to their unitholders. However, the merger occurred on a taxable basis, which was not a significant issue due to the tax efficiency of the current grandfathered forward sale structure.
The new TSX-listed Trust is subject to potential SIFT tax on most of its assets. However, an estimated 90% of its distributions for 2015 will be capital distributions due to high depreciation.
Neal Armstrong. Summary of Prospectus of Dream Hard Asset Alternative Trust and of Circulars of ROI Public Funds under Mergers & Acquisitions – REIT/Income Fund/LP Acqisitions – Taxable Trust Mergers.
CRA considers that Canadian administration of an estate will taint a non-resident inter vivos trust beneficiary under s. 94(3)
CRA has published an interpretation, which is similar to a response at the 2014 STEP Roundtable, that where the only beneficiary of an estate which is administered by a Canadian executor is a non-resident trust with no Canadian beneficiaries or trustees, that trust will be tainted as a s. 94 trust both on the basis that it received a contribution of property from a resident trust (the estate), and under s. 94(2)(n) (deeming the deceased to have been a contributor to it). (The Roundtable response dealt with a non-resident trust established under the will rather than one previously settled by a non-resident settlor, but that made no difference.)
As in the Roundtable response, CRA did not clarify whether the non-resident trust would continue to be tainted under s. 94(2)(n) by the deemed-zombie deceased after the estate was fully administered.
Neal Armstrong. Summary of 26 June 2014 T.I. 2013-0514771E5 under s. 94(2)(n).
Income Tax Severed Letters 16 July 2014
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that a return with substantial deficiencies has not been validly filed for late penalty and statute-barring purposes
Where a taxpayer files a return that is missing substantial particulars, CRA considers that the return has not been validly filed for late-filing penalty purposes (or, potentially, for purposes of the gross negligence penalty under s. 163(2).) Furthermore, although an initial assessment of such a return would cause the normal reassessment period (of at least three years) to start running, CRA would consider that such deficiencies would permit CRA to reassess that return beyond the normal reassessment period.
Neal Armstrong. Summary of 11 June 2014 Memo 2014-0519701I7 under s. 162(1), s. 163(2) and s. 152(4)(a)(i).
Most Canadian mutual fund trusts are largely off the FATCA hook
CRA has clarified that, under the new Foreign Account Tax Compliance Act rules as they have been legislatively implemented in Canada, a mutual fund trust is not responsible for verifying the FATCA status of its unitholders if the units are held in the name of an investment dealer, so that both the due diligence and CRA reporting responsibilities fall upon the dealer. If the units are registered in the client name (i.e,, the unitholder investor), then generally the dealer has the due diligence responsibilities and reports the results to the mutual fund trust, which sends in the return to CRA – unless the dealer volunteers to do the reporting to CRA even in this situation.
Equity (or debt) interests in a financial institution also are exempted from FATCA reporting if they are "regularly traded on an established securities market," so that (not surprisingly) most exchange-traded funds are exempt. CRA states that an interest is considered "regularly traded" if "there is a meaningful volume of trading on an ongoing basis," and that "further guidance is expected to be provided after the commentary to the Common Reporting Standard is issued by the OECD." The term "established securities market" "includes, but is not limited to, exchanges that are ‘designated stock exchanges’ under the ITA."
Neal Armstrong. Summaries of Guidance on enhanced financial accounts information reporting under various Part XVIII and IGA headings including s. 263(3) and s. 265(8).
Pike – English Court of Appeal rearticulates the three tests of what is “interest”
Before concluding that a loan premium was interest on general principles, the Court of Appeal of England and Wales adopted the following statement of the characteristics of interest: "First, it is calculated by reference to an underlying debt. Second, it is a payment made according to time, by way of compensation for the use of money. Third, the sum payable accrues from day to day or at other periodic intervals" (but, as was the case here, can all be paid at maturity and is not "denatured" as interest because it is paid in one lump sum along with the principal).
Neal Armstrong. Summary of Pike v. Revenue and Customs Commissioners, [2014] BTC 33, [2014] EWCA Civ 824 under s. 12(1)(c).
McLarty – Tax Court of Canada finds that interest equal to 10-times the income generated is deductible
Consistently with Ludco, Favreau J found that interest was deductible on a limited recourse promissory note in years where the revenue generated from the related purchase (seismic data) was only 10% of the accruing interest.
He also stated obiter that participants who, contrary to joint venture terms which required every party to purchase its interest for its own account, acquired their interests in the seismic joint venture through nominees, were not entitled to deduct their expenditures. This is dubious. If their investment had been profitable, would the income have been exempt?
Neal Armstrong. Summaries of McLarty v. The Queen, 2014 DTC 1162 [at 3556], 2014 TCC 30 under s. 20(1)(c), General Concepts - Illegality, s. 67, and General Concepts – Tax Avoidance.
Health Quest - CRA loses in the Tax Court of Canada because Justice pleaded a legal conclusion
After pleading that some of the taxpayer's supplies of footwear were zero-rated as they were specially modified or designed for people with disabilities, the Justice lawyer then simply pleaded an assumption that the sales which CRA had assessed were not zero-rated. As this "assumption" was one of mixed fact and law, its pleading did not shift the burden of proof away from the Crown, so that it lost.
Neal Armstrong. Summaries of Health Quest Inc. v. The Queen, 2014 TCC 211 under General Concepts - Onus and ETA - Sch VI - part II - s. 24.1.
CRA cannot make a consequential reassessment where the Tax Court orders the vacating of an assessment
Following Blackburn Radio, CRA acknowledges that it does not have the authority to issue a reassessment to give effect to a Tax Court order to vacate or vary an assessment.
Neal Armstrong. Summaries of 3 June 2014 Memo 2013-0489471I7 under s. 171(1) and s. 169(1).
CRA state that nominal ($1) consideration taints a non-compete covenant and that a Canadian executor taints purely non-resident trusts receiving estate property
Some highlights from CRA’s responses to Questions 9 to 19 posed at the 16 June 2014 STEP Conference:
- Q. 9 For the time being, CRA is continuing not to charge interest where inter vivos trusts have not made instalments.
- Q. 11 When a non-resident individual becomes resident partway through a year, his or her immigrant trust will retroactively become resident from the beginning of the year (see also Q. 10).
- Q. 12 Where the only beneficiaries of an estate which is administered by a Canadian executor are non-resident trusts with no Canadian beneficiaries or trustees, those trusts will be tainted as s. 94 trusts (presumably during the existence of the estate) on the grounds that they received property from a Canadian trust, namely, the estate.
- Q. 13 CRA now is applying Bozzer (re interest and penalties relief).
- Q. 15 The exemption in s. 56.4(6) or (7) from imputed proceeds for a restrictive covenant – which depends inter alia on no proceeds being received or receivable for the covenant – will not be available where a non-compete agreement provides for the payment of nominal ($1) consideration to the covenanter. (It’s not clear whether CRA understands that the $1 is not actually paid.)
We also have expanded our summaries of CRA’s responses to the first eight questions (especially Q. 3 respecting deemed share classes for an LLC and Q. 5 respecting Brent Kern style trusts) based on a more complete record of what CRA said.
Neal Armstrong. Summaries of 2014 STEP Conference under CRA Roundtables.