News of Note

CRA rules on plan marrying a US beneficiary’s objective of realizing a Code s. 331 capital gain on a redemption of bequeathed Canco shares (coupled with estate loss carried back under ITA s. 164(6)) and Canadian beneficiaries’ objective of a pipeline strip of Canco

CRA has often ruled that s. 84(2) will not apply to "pipeline" transactions in which shares of a private company (say, “A Co”), which have been stepped up on death without using the capital gains exemption, are sold by the estate to a new estate subsidiary (Newco) for a promissory note of Newco, Newco and A Co amalgamate a year later, the promissory note is repaid out of the Amalco assets over the following year and the proceeds thereof distributed by the estate to its resident beneficiaries.

A ruling dealt with the complications arising when one of the beneficiaries (“Child 2”) was a U.S. resident and A Co (a portfolio trading company) was a PFIC. The transactions contemplated that A Co redeems a portion of its shares held by the estate, thereby giving rise to a deemed dividend and to a capital loss which can be carried back under s. 164(6) to partially offset some of the terminal year capital gain on the A Co shares – and that such redemption proceeds are allocated and paid (less Part XIII withholding) by the estate to Child 2 through the issuance of a promissory note. The estate then engages in a conventional pipeline transaction (as described above) for the benefit of its resident beneficiaries.

The ruling letter indicates that an objective of the transactions “is to remove Child 2 as a shareholder of A Co in a manner that will ensure that he can receive any distribution from A Co as a capital gain for United States income tax purposes and avoid the complications and negative tax consequences resulting from being a United States resident shareholder of a PFIC.” (The estate acquired its A Co shares with a stepped up basis and they could then be disposed of with no gain being recognized, provided that dividend treatment was avoided through receiving Code s. 331 liquidation treatment.) Accordingly, all the transactions are being undertaken for Code purposes as a “Plan of Liquidation” of A Co, so that Child 2 can enjoy capital gains treatment under s. 331 on his distributions. Among other things, this is stated to depend on Amalco being “dissolved within a reasonable time” following the share repurchase by A Co – so that the transactions contemplate that Amalco will be dissolved fairly soon after the two-year period mandated by CRA for implementing pipeline transactions.

Rather curiously, the CRA ruling summary indicates that the principal issue is "whether estate can elect under subsection 164(6) where there is a non-resident beneficiary" – but no s. 164(6) ruling was given.

Neal Armstrong and Abe Leitner. Summaries of 2015 Ruling 2015-0569891R3 under s. 84(2) and s. 164(6).

CRA considers that it still is not required to give notice of its determination to register a taxpayer for GST purposes

New ss. 241(1.3) to (1.5) of the ETA contemplate that CRA can register a person whom it suspects of being required to be registered for GST purposes after giving 60 days’ notice, but with the effective date of the registration to be no earlier than 60 days after giving such notice. CRA considers that these provisions do not interfere with its current practice of simply assigning a GST/HST registration number to someone who should have been registered, and then assessing the person under that number for unremitted net tax – and notes that “CRA could still assess that person under paragraph 296(1)(a) of the ETA for unremitted net tax in respect of reporting periods prior to that person’s effective registration date.”

CRA also acknowledges that when the taxpayer is registered, it generally is entitled to claim input tax credits in its first post-registration return for GST that was previously incurred while it was a registrant (i.e., required to be registered.)

Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 23 under ETA s. 241(1.5) and of 26 February 2015 CBA Roundtable, Q. 33 under s. 169(1).

CRA indicates that the interpretation of “closely-related” for GST purposes should be informed by the policy that 90% common ownership is covered

ETA s. 128(1)(a) provides that two corporations are “closely related” if the first corporation owns 90% or more of the value and number of the issued and outstanding shares of the capital stock of the second corporation having full voting rights under all circumstances. Accordingly, it is obvious that if 100% of the voting shares and non-voting shares of Corporation C are held by Corporations A and B, respectively, Corporations B and C are not closely related. When asked about this CRA, rather than conceding the point, stated:

It is important to note that the explanatory notes to section 128… refer to a degree of common ownership of at least 90%. Furthermore, the determination of “closely related” is relevant for purposes of the elections under sections 150 and 156… . The explanatory notes to these provisions refer to wholly-owned corporations. Any application of the provisions of section 128… to a particular fact situation should be consistent with the policy intent of the provision.

This illustrates that on the GST side, CRA is generally more reluctant to concede that the ordinary meaning of the statutory wording, if unambiguous, controls the interpretation (see, e.g., Quinco), than for the Income Tax Rulings Directorate.

Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 20 under ETA s. 128(1)(a).

CRA states that the ETA s. 167 election “could be available” on an ITA s. 98(5) wind-up

CRA has indicated that an ETA s. 167 election is not available where a partnership is wound up under ITA s. 98(3), as each partner receives an undivided interest in the partnership property, so that there is not a supply of the business to one recipient. When asked about a s. 98(5) wind-up, CRA gave a very guarded response (perhaps reflecting diffidence about opining on income tax rollovers), stating:

Where the disposition of 100% of the partnership property from the partnership to the former member constitutes the supply of a business, and where an agreement for a supply of the business from the partnership, as supplier, to the former member exists, an election under subsection 167(1)… could be available, provided the conditions for the election are met.

Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 19 under ETA s. 167(1).

Marra – Tax Court of Canada finds that the two years for a director’s derivative assessment ran from handing a resignation to the company’s lawyer, who did nothing with it

The company (financed by your spouse but which has been run by a questionable character) is on shaky grounds, your spouse has suggested that you resign and the only other directors are the shady character, who is being sued for having misappropriated company funds, and his inactive spouse. What do you do?

Rip J found that in these circumstances it is sufficient to hand a written resignation to the lawyer who has acted for the company, even though he never gets around to filing the resignation in the minute book (or notifying the company's branch of the resignation, as required) – so that from the time of giving him the resignation, the two year period for barring CRA from making a derivative assessment under ITA s. 227.1(4) and ETA s. 323(5) starts running.

Neal Armstrong. Summary of Marra v. The Queen, 2016 TCC 24 under ITA s. 227.1(4).