Thursday, 12 July 2018

No US Deduction for Related-Party Interest or Royalty Paid Abroad*

Section 267A, added December 2017, denies a deduction to a US-situated payer of interest or a royalty to a related non-US hybrid party or as part of a hybrid transaction. This hybrid mismatch provision was likely influenced by Action 2 – OECD Base Erosion and Profit Shifting Report, which was finalized in 2015.

Section 267A originated in the US Senate Committee on Finance International Tax Reform Staff Discussion Draft, released November 19, 2013. Proposed section 267A prevented related-party payments in a base erosion arrangement, defined as a transaction, series thereof, or other arrangement that (1) reduces foreign income tax paid or accrued and (2) involves a hybrid transaction or instrument, a hybrid entity, an exemption arrangement, or a conduit financing arrangement. The proposal was clearly influenced by the said OECD report, but Congress did not entirely follow the report: final section 267A addresses only a hybrid transaction and a hybrid entity.

A US payer of interest or a royalty is denied a related-party deduction if the amount is not included in or is deductible from the related party’s income. That latter concern was raised in the 2016 Treasury Green Book, released February 2015 (the year the OECD Action 2- BEPS report was released). Treasury expressed concern that “there has been a proliferation of tax avoidance techniques involving a variety of cross-border hybrid arrangements, such as hybrid entities, hybrid instruments, and hybrid transfers” such as sale-repurchase transaction:
"In one such hybrid arrangement, a U.S. person holds an interest in a reverse hybrid, which is an entity that is a corporation for U.S. purposes but is a fiscally transparent entity (such as a partnership) or a branch under the laws of a foreign jurisdiction. Because the United States treats the reverse hybrid as a corporation, income earned by the reverse hybrid generally will not be subject to current U.S. tax. Moreover, even if the reverse hybrid is treated as a CFC, interest and royalty income earned by the reverse hybrid from certain foreign related persons (which otherwise would qualify as subpart F income) may nonetheless not be subject to U.S. taxation as a result of either section 954(c)(3) or section 954(c)(6). Payments to the reverse hybrid, however, generally are also not subject to tax in the foreign jurisdiction in which it is established or organized, because the foreign jurisdiction views reverse hybrid as a fiscally transparent entity and therefore treats that entity’s income as derived by its owners, including its U.S. owners. As a result of this hybrid treatment, income earned by the reverse hybrid generally would not be subject to tax currently in the United States or the foreign jurisdiction".
The 2017 Green Book expresses the ongoing Treasury concern with hybrid entities and transactions.

Section 267A refers to section 954(d)(3) for guidance on the meaning of “related party”: a related person that
Is an individual, corporation, partnership, trust, or estate which controls, or is controlled by the person making the payment from the United States or
Is a corporation, partnership, trust or estate which is controlled by the same person or persons which control the payor.

Section 954(d)(3) defines “control” as the ownership, directly or indirectly, of (1) corporate stock that has more than 50 percent of the total voting power of all classes of stock entitled to vote, or (2) more than 50 percent (by value) of the beneficial interests in a partnership, trust, or estate. Rules similar to those in section 958 also apply.

A US payer of interest or a royalty must determine whether it is related to a non-resident payee; a US fund must ensure that no single non-resident investor may hold 50 percent of the fund’s value. The US payer must also determine whether the payee is a hybrid and whether the payment is taxed where the hybrid entity resides for tax purposes (section 267A)(d)). A “hybrid transaction” means any transaction, series thereof, agreement, or instrument under which one or more payments are treated as interest or royalties and “are not treated for purposes of the tax law of the foreign country of which the recipient of such payment is resident for tax purposes or is subject to tax.”

Needless to say, a Canadian financing structure that uses a hybrid through a jurisdiction such as the Cayman Islands (which hybrid has checked the box and is thus a flowthrough for US purposes) must review its current structure. Also, a US entity with non-resident investors must take a closer look at the recipient of an interest and royalty payment and determine whether at time of payment a non-resident payee might be deemed related and a hybrid.

Given the sparse definition of “a hybrid” or “a hybrid transaction” under section 267A, practitioners await further guidance from section 267A regulations yet to be released.

Sunita Doobay
TaxChambers LLP, Toronto

*First published in the June edition of the Canadian Tax Highlights, a Canadian Tax Foundation newsletter 

Tuesday, 27 February 2018

US Partnership Interest Sale Triggers 10 Percent Withholding

Recently published in Canadian Tax Highlights - a Canadian Tax Foundation newsletter and republished here with permission:

The 600-plus-page GOP tax bill was signed by President Trump on December 22, 2017, becoming Public Law no. 115-97, commonly known as the Tax Cuts and Jobs Act or US tax reform. This tax reform essentially codifies, inter alia, IRS Rev. rul. 91-32 (1991-1 CB 107), which was briefly overturned by the 2017 decision of Grecian Magnesite Mining, Industrial & Shipping Co., SA (149 TC no. 3). The new rule sources to the United States the gain on an asset sale of a US partnership interest, and a 10 percent withholding is imposed on that gain. In other words, it is on the gross 

amount realized, similar to FIRPTA withholding.

Rev. rul. 91-32 says that the rules in section 865(e)(2) apply to a foreign partner that has a fixed place of business in the United States:

Section 865(e)(2) provides, inter alia, that income from the sale of personal property by a nonresident will be sourced in the United States if the nonresident has a fixed place of business in the United States and if the income is attributable to such fixed place of business. A foreign partner of a partnership that is engaged in a trade or business through a fixed place of business in the United States itself has a fixed place of business in the United States, since the foreign partner is considered to be engaged in such trade or business pursuant to section 875(l). Income from the disposition of a partnership interest by the foreign partner will be attributable to the foreign partner's fixed place of business in the United States.
The IRS cited section 865(e)(3) and Unger (TC Memo 1990-15, 58 TCM 1157, at 1159) to support its position that the proceeds or loss received on a disposition of an interest in a US partnership by a non-resident is sourced to the United States. The IRS thus applied an aggregate approach to a partnership, as the Code does for the sale of a FIRPTA interest. Section 897(g) says that on the sale of a partnership interest, the proceeds received that are attributable to a US real property interest are considered to be amounts received in the United States. In Grecian, the US Tax Court distinguished the aggregate and entity approaches: "The aggregate approach arises from the observation that a partnership is an aggregation of individuals, while the entity approach applies where the Code focuses on the distinct legal rights that a partner has in its interest in the partnership entity, distinct from the assets the partnership itself owns. See William S. McKee, et al., Federal Taxation of Partnerships and Partners. . . . Subchapter K adopts the entity or the aggregate approach depending on the context, and '[t]he entity approach . . . predominates in the treatment of transfers of partnership interests as transfers of interests in a separate entity rather than in the assets of the partnership." 

The court also recognized that "the enactment of section 897(g) actually reinforces our conclusion that the entity theory is the general rule for the sale or exchange of an interest in a partnership. Without such a general rule, there would be no need to carve out an exception to prevent U.S. real property interests from being swept into the indivisible capital asset treatment that section 741 otherwise prescribes." 

Section 741 provides that income realized on the sale of a partnership interest shall be considered a gain or loss from the sale or exchange of a capital asset. The court noted that Congress used the singular of "asset" rather than the plural. The court also cited section 731(a) in support of the entity theory that when an interest in a partnership is sold, "[a]ny gain or loss recognized under this subsection shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner." 

The court emphasized that the sourcing rules in sections 861-863 do not specify the source of a foreign partner's income from the sale or liquidation of its partnership interest. 

The Tax Cuts and Jobs Act added to the sourcing rules in section 864(c), effective November 27, 2017. Section 864(c)(8)(A) deems a gain or loss from the sale or exchange, by a non-resident alien or foreign corporation, of an interest in a partnership engaged in a trade or business in the United States to be effectively connected with the conduct of a trade or business in the United States. The Act has also amended the Code's withholding rules: section 1446(f) is effective for sales, exchanges, and dispositions after 2017. Section 1446(f)(1) provides that if any portion of any gain on a disposition of a partnership interest was treated under section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States, the transferee must deduct and withhold a 10 percent tax on the amount realized on the disposition. Two exceptions to the withholding are provided. Under the first, the seller must provide a non-foreign affidavit (section 1446(f)(2)(B)) that (1) includes the transferor's US taxpayer identification number and (2) attests that the transferor is not a foreign person. Under the second exception, similar to FIRPTA, either the seller or the buyer of the partnership interest can apply to the IRS for authority to withhold a reduced amount. Otherwise, if the buyer does not withhold, section 1446(f)(4) provides that the partnership must withhold from distributions to the transferee. 

The codification of Rev. rul. 91-32 has brought complexity to the world of funds. Private equity is often structured as a limited partnership in the United States: foreign investors, including Canadian pension funds, often participate in a US fund as limited partners. Canadians must now revisit their exit strategy, which typically involved a sale of their US partnership interests. IRS guidance has not yet been provided to determine the portion of a gain from the sale of a US partnership attributable to a US trade or business. Furthermore, it is not clear how to value a partnership interest: must the entire partnership undertake an asset valuation to accommodate the sale by the 0.1 percent partner? Also, the withholding obligations of the partnership when the buyer partner fails to withhold place pressure on the partnership. 

The new rules are burdensome and will ultimately require a US partnership to track all of its interests held by foreign partners if it is to be cognizant of a foreign partner's sale of an interest to another partner. The new provisions of the Code apply FIRPTA treatment to a partnership interest in the United States that is not tied to real estate. This tracking is onerous for the partnership and impedes a non-US partner from selling a US partnership interest that is not tied to US real estate to another non-US partner. One would expect that this new measure will diminish the commercial appeal of investing in a US partnership. 

The Trump government succeeded in codifying Rev. rul. 91-32; the Obama government sought to do so in the government's 2012 Green Book. At the time of writing, the IRS had not provided relief from withholding on the sale of a private partnership interest as it had for certain public partnerships in IRS Notice 2018-08

Sunita Doobay
TaxChambers LLP, Toronto 

Thursday, 16 November 2017

Dual Resident Estate

Recently published in Canadian Tax Highlights - a Canadian Tax Foundation newsletter and republished here with permission:
For Canadian purposes, an estate is now deemed to be a trust under a 2013 amendment to the subsection 248(1) definition of a trust. My article on Hess (see “Trust or Estate?”, Canadian Tax Highlights, April 2012) is no longer relevant. A distribution from a foreign estate must thus be reported on CRA form 1142 – “Information Return in Respect of Distributions from and indebtedness to a Non-Resident Trust” where a testamentary trust arises out of an estate. This deeming provision may create complications in the case of a trust that is deemed to be a Canadian resident under subsection 94(3). An argument can be made pursuant to subsection 233.6(1) that an estate is not subject to T1142 filing as the language of subsection 233.6(1) excludes an estate that arose as a consequence of the death of an individual .

At the 2017 STEP Canada Round Table, the CRA was asked about the filing position for a US estate with a Canadian trustee. Under Canadian law, a US estate that is managed and controlled by a Canadian trustee is deemed to be a Canadian resident according to the factual test set out in Fundy Settlement (2012 SCC 14). The CRA referred to Income Tax Folio S6-F1-C1, paragraph 1.6, in which the CRA says as follows.
1.6 For example, when making a determination as to the jurisdiction in which the central management and control of a trust is exercised, the CRA will consider any relevant factor, which may include:
·         the factual role of a trustee and other persons with respect to the trust property, including any decision-making limitations imposed thereon, either directly or indirectly, by any beneficiary, settlor or other relevant person; and
·         the ability of a trustee and other persons to select and instruct trust advisors with respect to the overall management of the trust.
For this purpose, the CRA will look to any evidentiary support that demonstrates the exercise of decision-making powers and responsibilities over the trust.
   1.7 After an examination of all factors, it may be determined that a trust is resident in Canada even if another country considers the trust to be resident in that other country.

For US tax purposes, an estate is not a trust. Whether a US estate is a trust for US tax purposes will determine the US tax it will bear. Moreover, a US estate is taxed on its worldwide income, but a non-US estate is taxed only on its US source income and its ECI income. Whether an estate is a US estate is determined by looking at the surrounding facts and circumstances. In Rev. Ruling 81-112, 1981-1 CB, the IRS concluded that the estate was a US estate after considering the following factors: the domicile of the decedent at time of death, the location of the estate fiduciaries, the physical location of the primary beneficiaries, and the physical location of the estate’s major assets.

A non-resident trust is generally deemed to be a Canadian trust if it either had a Canadian resident contributor or has a Canadian resident beneficiary and a connected contributor. A connected contributor is defined as a person who contributed to the trust and within the 5 years before or after was a Canadian resident. The 5-year preceding period is amended to 18 months if the trust arose as a consequence of the person’s death.

For a non-subsection 94(3) trust, the competent authorities for Canada and for the United States consider all the facts surrounding the estate to determine whether the estate is a Canadian or US estate. However, for a subsection 94(3) trust, the CRA says that “It is generally the Canadian competent authority’s position that it would not be appropriate to cede Canadian residence of trusts subject to section 94 of the Act in the course of negotiations with the competent authority of the other Contracting State”. The CRA stands by this position as if it were somewhat like a treaty override. Section 4.3 of the Income Tax Conventions Interpretation Act - in force March 5, 2010 - clarifies that under Canadian law, a trust that is deemed to be resident in Canada by subsection 94(3) is a Canadian resident trust for the application of a tax convention. 

The CRA says that
Furthermore, given that section 94 of the Act anticipates full relief for the foreign taxes paid by the trust, if any, we understand the legislation does not contemplate the other country giving up its right to tax the trust’s income from non-Canadian sources. Accordingly, it is the Canadian competent authority’s expectation that the negotiation of these cases with a view to settle the question of dual residence will generally not be possible or advisable, particularly where both competent authorities are known, more broadly, to be at an impasse on the matter.
The combination of the characterization of an estate as a trust and subsection 94(3) can pose issues. Thus a US estate created by a US-resident decedent may be a deemed Canadian trust if the decedent died within 18 months of a move to the United States even if the person was US domiciled because he or she had expressed an intent to live there permanently. Can and should Canada lay a taxation claim to the estate of that former Canadian resident?

Sunita Doobay
TaxChambers LLP, Toronto

Wednesday, 27 September 2017

Tax Proposals - US and Canada

President Trump released his tax proposals today while in Canada the Morneau proposals consultation period will be ending soon on October 2nd, 2017. The Morneau proposals have caused many of us tax practitioners sleepless nights given how far reaching the proposals are. As I have stated in a presentation - the Morneau proposals discourage Canadians from operating their businesses through a corporation. A corporation is a necessary shield for liability purposes Canadians. Americans are often puzzled as to why Canadians operate through a corporation. We do because of the liability shield and  the preferential tax rate on the first $500,000 of active business income earned annually by a Canadian Controlled Private Corporation. The combined Ontario Federal rate for the first $500,000 is 15%. Aside from the tax rate and liability shield - a corporation is a necessity to access the R&D credit regime (SRED) of the Income Tax Act.

The sleepless nights caused by these proposals is that Canada does not have a limited liability company regime. Limited liability company (LLC) provide the same liability shield that a corporation would provide. The LLC is a structure adopted by the Americans from the Mexicans. It is a flow through similar to a partnership but at the same time provides liability coverage similar to that provided by a corporation. A Canadian limited partnership does not provide that level of coverage.

The proposals in essence leave us in a limbo in Canada.

The Trump Tax proposals focus, unlike the Morneau proposals, on economic growth. It allows for businesses who have made investments into capital assets prior to the 27th of September, 2017 to immediately write off the cost of such assets. The US which had the highest corporate tax rates of all OECD members is proposed to have a tax rate of 20%. And the proposals appear to copy Canada's exempt surplus regime making inversions into Canada not desirable anymore. The Code has implemented provisions to discourage inversions into Canada but who can forget the Burger King inversion in 2015.

The proposals also speak to the repatriation of funds held by US businesses outside of the US and to implement a regime making it less attractive for US companies to shelter their non-US profits in jurisdictions such as Ireland.

Last but not least - the Trump proposals speak to the repealing the U.S. estate tax.

Monday, 28 August 2017

Tax Implications of Cryptocurrency

Virtual currency or cryptocurrency has become popular in today’s financial markets and may be here for some time. Investors increasingly turn to virtual currency to fund transactions and provide portfolio diversity. The rising popularity of virtual currency has created some significant tax issues.

On November 30, 2016, the IRS was successful in its petition pursuant to Codesection 7609(f) in obtaining a John Doe summons to be served on Coinbase, Inc. The IRS is seeking information regarding all US persons who conducted virtual currency transactions on Bitcoin during the period January 1, 2013 to December 31, 2015, reminiscent of the 2008 John Doe summons granted to the IRS for information on US persons with accounts at UBS Switzerland. The July 2008 John Doe Summons resulted in the release by UBS to the IRS of about 4,500 names of US persons who held Swiss bank accounts. The issuance of the John Doe Summons against UBS severely compromised the offshore tax world and led to the implementation of FATCA and the CRS. The effect of the John Doe summons issued to Coinbase, Inc. will be watched closely.
Unlike other IRS summonses, a John Doe Summons does not list the name of the taxpayer under investigation because the taxpayer is unknown to the IRS. A John Doe Summons allows the IRS to obtain the names of all taxpayers within a certain group.

Coinbase, Inc. provides bitcoin wallet services and is a virtual currency exchange who assists merchants and consumers to buy, sell, and use bitcoin currency. A consumer converts bitcoin payments to a fiat currency (legal tender backed by the government that issued it) that is then transmitted to the merchant. A virtual currency exchanger resembles a traditional currency exchanger, but it can exchange virtual currency for government-backed currency and vice versa. A virtual currency exchanger is linked to the conventional banking system and money transmitters: it can receive conventional checks, and credit card, debit card, and wire transfer payments in exchange for virtual currency. A virtual currency exchanger is governed by legislation such as FinCen, is deemed to be a money transmitter under the Bank Secrecy Act, and probably falls within the scope of the CRS, which results in the disclosure of information between more than 100 tax authorities. Wallet services allow a user to quickly authorize virtual currency transactions with another user through the use of a traditional money account held at the exchanger.

According to the IRS Notice 2014-21, a virtual currency is not legal tender but it is intangible personal property. The notice gives examples of the tax treatment of various transactions using virtual currency such as:

  • ·       Wages, salaries, and other income paid to an employee with virtual currency must be reported on a form W-2, and is reportable by the employee as ordinary income and subject to employment taxes paid by the employer;

  • ·         Virtual currency received by a self-employed individual in exchange for goods or services is reportable as ordinary income and is subject to self-employment tax.  A payer must issue a form 1099;

  • ·         Virtual currency received in exchange for goods or services by a business is reportable as ordinary income; and

  • ·         A gain on the exchange of virtual currency for other property is generally reportable as a capital gain if the virtual currency was held as a capital asset and as ordinary income if the virtual currency is held for sale to customers in a trade or business.

Reporting is effected in USD: thus whenever virtual currency is used, a barter transaction takes place, and the parties must know the FMV of the virtual currency on that day. A taxpayer must track which virtual currency lot was used for each transaction in order to properly determine the gain or loss for that particular transaction. Given that the valuation of a convertible currency is a peer–to-peer demand, the exact FMV in legal tender of a virtual currency is not always certain.

Shortly before the petition was filed with the US District Court for the Northern District of California to obtain the John Doe summons, on September 21, 2016 a report was issued by the Treasury Inspector General for Tax Administration (TIGTA), entitled “As the use of virtual currencies in taxable transactions become more common, additional actions are needed to ensure taxpayer compliance”.

The TIGTA report highlights that not much was done by the IRS to ensure tax compliance by US persons who use convertible virtual currencies despite the fact that, as of April 21, 2016, one bitcoin was equivalent to about USD$443, and bitcoins had a total FMV of more than USD$6.8 billion. The TIGTA report points out that the reporting requirements set out in IRS Notice 2014-21 are flawed in that the reporting payer and the recipient payee must report the payment and receipt of virtual currency in USD; information forms 1099-MISC, 1099-B, 1099-K, and W-2 do not inform the IRS that the payments were made in virtual currency. As a result, the IRS has one fewer means of tracking a US person with cryptocurrency on hand. Thus even though cryptocurrency is property for US tax purposes, no US mechanism requires a Bitcoin holder to report that holding to the IRS. Because the identity of the parties using virtual currencies is generally anonymous, the inevitable result is tax evasion.

The fear of tax evasion is confirmed by the IRS agent whose affidavit formed the petition for the John Doe summons to Coinbase, Inc. In his affidavit the agent cites two examples - of which he had knowledge - of tax evasion involving convertible virtual currency:
In the first example, Taxpayer I originally worked with a foreign promoter who set up a controlled foreign shell company which diverted his income to a foreign brokerage account, then to a foreign bank account and lastly back to Taxpayer I through the use of an ATM. Once Taxpayer I abandoned the use of his offshore structure in favor of using virtual currency, the steps described above were the same until his income reached his foreign bank account. Once there, instead of repatriating his income from an ATIM in the form of cash, Taxpayer I diverted his income to a bank which works with a virtual currency exchange to convert his income to virtual currency. Once converted to virtual currency, Taxpayer I’s income was placed into a virtual account until Taxpayer I used it to purchase goods and services. Taxpayer I failed to report this income to the IRS.
And in the second example:
Two separate corporate entities with annual revenues of several million dollars traded bitcoins resulting in the under reporting of income. Both taxpayers admitted to disguising the amount they spent purchasing bitcoins as deductions for technology expenses on their tax returns. The bitcoin transactions were discovered after repeated requests for the original documentation necessary to substantiate the technology expense items claimed on the tax returns.  

US persons who reside in Canada and convert virtual currencies on exchanges other than in the United States, should be advised that their FBAR filings should disclose all of their holdings of convertible virtual currencies.

reprinted with permission from the Canadian Tax Highlights, a Canadian Tax Foundation Newsletter.

Wednesday, 31 May 2017

Two‐Year Holding of CCPC Options

Montminy (2016 TCC 110) is the first case to consider the interaction between regulations 6204(1)(b) and 6204(2) (c). The TCC concluded that the latter does not apply to negate the two-year
reasonable holding period in the former.

Were the taxpayers in Montminy entitled to a deduction whereby a CCPC employee defers the recognition of employment income to the year when he or she disposes of the CCPC's shares (paragraph 110(1)(d.1))? In conjunction with section 7, only half of the taxable benefit (simulating a capital gain) is taxed (paragraphs 110(1)(d) and 110(1)(d.1)). The 50 percent deduction is allowed if the shares are prescribed under regulation 6204.

The taxpayers were employed at Cybectec, a tech company in the competitive IT industry, which established a stock option plan in 2001 to retain employees. In 2007, Cybectec received an unsolicited offer from Cooper Industrial Electrical Inc. to purchase all of its shares; Cooper changed the offer to an offer to purchase all of Cybectec's assets. The founders of Cybectec sought to honour its employees' options by allowing the employees to exercise the options and immediately thereafter to sell the shares to a company related to Cybectec. The employees exercised their options in Cybectec and sold the shares the same day to the related company.

The taxpayers relied on paragraph 110(1)(d): paragraph 110(1)(d.1) requires that the shares be prescribed. The minister argued successfully that under regulation 6204(1)(b), the shares were not prescribed because once the options were exercised by the taxpayers, the shares were to be immediately purchased by the related company. Regulation 6204(1)(b) provides that a share is prescribed if the issuing corporation or "a specified person in relation to the corporation cannot reasonably be expected to, within two years after the time the share is sold or issued, as the case may be, redeem, acquire or cancel the share in whole or in part." The taxpayers acknowledged that the two-year holding period in regulation 6204(1)(b) was not met, but they said that regulation 6204(2)(c) allowed an exception to that requirement.

The TCC applied the SCC's guidance in Canada Trustco (2005 SCC 54), according to which an interpretation of a statutory provision must accord with a textual, contextual, and purposive analysis. The TCC concluded that regulation 6204(2)(c) does not disregard regulation 6204(1)(b): the former does not apply to the latter. Regulation 6204(1)(b) "raises a factual question," and the sole object of regulation 6204(2)(c) was, according to the TCC, "to disregard certain rights and obligations, notably to redeem, acquire or cancel the share, if all conditions of paragraph 6204(2)(c) are met." The TCC continued:

My conclusion that paragraph 6204(2)(c) of the Regulations does not disregard paragraph 6204(1)(b) is confirmed by the fact that paragraph 6204(1)(b) is applicable in cases where there is no right or obligation to redeem, acquire or cancel the shares at the time of their issue. For example, if, at the time of issue, a share is a common share without conditions, then the share is a prescribed share. However, if the facts show that the corporation knew that it would be redeeming its employees' shares within two years following the issue of the shares, then the share is not a prescribed share, since the expectation that the share will be redeemed is what triggers paragraph 6204(1)(b) regardless of whether the share has rights or obligations attached thereto. This shows that paragraph 6204(2)(c), used to eliminate from consideration certain rights or obligations, is not relevant to paragraph 6204(1)(b).
Moreover, contrary to situations in which there is a logical connection between the application of subsection 6204(2) of the Regulations and certain subparagraphs of paragraph 6204(1)(a), it is difficult to find a logical connection between the factual issue in paragraph 6204(1)(b), the two-year reasonable expectation, and paragraph 6204(2)(c), the purpose of which is to disregard the right or obligation to redeem, acquire or cancel the share or to cause the share to be redeemed, acquired or cancelled.

The TCC acknowledged that the two-year holding criteria did not apply to employees of public companies: tax policy dictates a different treatment for shares of public companies as opposed to those of private companies. The TCC noted the technical complexity of subsections 6204(1) and 6204(2) and said that "surely the time has come for a reform of these subsections."

The case is under appeal to the FCA.

Sunita Doobay, TaxChambers LLP, Toronto, Canadian Tax Highlights. Volume 25, Number 5, May 2017 ©2017, Canadian Tax Foundation.