Income Tax Severed Letters - 2008-04-11

Principal Issues: a) Before the acquisition of control of a target corporation ("Targetco"), a specified shareholder of Targetco acquires a property from Targetco for cash consideration. Whether the property would be considered to be substituted property for the purposes of subparagraph 88(1)(c)(vi). b) In the past, CRA has determined that, an earn-out clause in a purchase and sale agreement would not be property described in subparagraph 88(1)(c.3)(i) or (ii), provided that the sole purpose is to establish the fair market value of the shares of the subsidiary on closing, and not a mechanism to distribute additional amounts based on the future sale or value of some particular property. Whether the same reasoning is applicable to other types of clause or agreement which is used, directly or indirectly, to establish the FMV of the shares of the subsidiary. c) Whether pre-change-of-control dividends in multitier corporate structures grind the amount of the bump pursuant to paragraph 88(1)(d)(i.1) and subsection 88(1.7), where a new company is inserted between the parent and the subsidiary after its acquisition of control.

Position: a) No. b) Recently, the CRA has determined that certain price adjustment clauses, that allowed the seller to receive an amount equal to the fair market value of the shares of the capital stock of the subsidiary on closing, as that amount is finally determined, would not be property described in subparagraph 88(1)(c.3)(i) or (ii). c) Yes.

Reasons: Wording of the Act and previous positions.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE
APFF - CONGRÈS 2007

Principal Issues: 1) Whether the taxable income of a corporation may be less than nil. 2) What is the impact of the carry-forward of a loss on the GRIP? 3) What is the impact of the carry-back of a loss sustained in the 2006 taxation year or afterwards on the GRIP? 4) Whether the carry-back of a loss sustained in 2001, 2002, 2003, 2004 or 2005 in the taxation year 2001, 2002, 2003 or 2004, reduces the GRIP addition for 2006 under subsection 89(7). 5) What is the meaning of "specified future tax consequences"?

Position: 1) Pursuant to subsection 248(1), "taxable income" has the meaning assigned by subsection 2(2), except that in no case may a taxpayer's taxable income be less than nil. 2) Generally, the carry-forward of a loss will reduce the amount of the GRIP in the year the loss is deducted. In that respect, see variable D of the definition of GRIP in subsection 89(1) which refers to the corporation's taxable income. For the purpose of computing such taxable income, the amount of the loss carried-forward will be deducted pursuant to subsection 111(1). 3) The carry-back of a loss sustained in the 2006 taxation year or afterwards will reduce the amount of the GRIP in the year the loss is incurred. This is due to variable B of the definition of GRIP. Subsection 89(7) does not contain a mechanism similar to variable B of the definition of GRIP. 4) No. 5) The notion of "specified future tax consequence" is defined in subsection 248(1).

Reasons: Wording of the Act.

Principal Issues: What is the CRA's position with respect to the notion of "avoidance transaction" in light of the recent GAAR cases.

Position: CRA's position is that a series of transactions can contain an "avoidance transaction" as defined in subsection 245(3), even if it is determined that the series of transactions has an overall bona fide non-tax purpose. Consequently and subject to subsection 245(4), CRA's position is that subsection 245(2) may apply to deny a tax benefit resulting from a series of transactions, unless it can be established that each transaction in the series was carried out primarily for bona fide non-tax purposes. This position is in accordance with the wording of subsections 245(2) and (3). It is also supported by the Canada Trustco decision rendered by the Supreme Court of Canada and by the Department of Finances's Technical Notes relating to paragraph 245(3)(b). In the Desmarais case, the Court indicated that it had to determine if at least one transaction in the series was an avoidance transaction, and then went on to deal with subsection 245(4). This approach is in accordance with CRA's position. In the Lipson case, the transactions involved were admitted to be avoidance transactions within the meaning of subsection 245(3). Finally, in the Overs decision, the Court found that none of the transactions analyzed constituted an avoidance transaction.

Reasons: Wording of the Act and previous positions.

Principal Issues: a) Where a corporation is a member of a partnership, whether the computation of the safe income on hand of such corporation would include any accrued income or loss of the partnership referable to the stub period that is not otherwise included in the safe income on hand of the corporation. b) In a particular taxation year, a corporation incurs borrowing expenses described in subparagraph 20(1)(e)(ii). Whether the corporation's safe income on hand for such particular taxation year should be reduced to reflect the portion of the borrowing expenses that will be deductible only in future taxation years. c) In a particular taxation year, a corporation incurs SR&ED expenses. However, the corporation will only claim as a deduction the said expenses in taxation years subsequent to the particular taxation year in which the expenses were incurred, pursuant to subsection 37(1). Whether the corporation's safe income on hand for such particular taxation year should be reduced to reflect the SR&ED expenses that will be deducted only in future taxation years.

Position: a) Yes. The holding period of a particular share of a particular corporation for the purposes of subsection 55(2) generally contains "stub periods." CRA's long-standing position is that the computation of safe income on hand of a corporation during the holding period would include safe income on hand in these stub periods and, if the corporation is a member of a partnership, would also include any accrued income or loss of the partnership referable to the stub period that is not otherwise included in the safe income on hand of the corporation. Both the Tax Court of Canada and the Federal Court of Appeal have stated in VIH Logging Ltd. (these decisions having been rendered after the Federal Court of Appeal's decision in Kruco Inc.) that the computation of safe income on hand of a corporation during the holding period must include the safe income on hand generated in the stub periods. This interpretation was found to be not only consistent with the language of subsection 55(2), but also with its purpose. b) Yes. In Kruco Inc., the FCA recognized that the calculation of safe income is only the first step and that a second step, the determination of the safe income on hand, is required by the Act. In CRA's view, safe income on hand reductions made to reflect the impact of cash outflows (such as non-deductible expenses or expenses that are not yet deductible in the year they are incurred), which are not deducted in the computation of the corporation's net income for tax purposes but still have the effect of reducing the amount of disposable after-tax income by an equivalent amount, are in line with the general principles set out by the FCA in Kruco Inc. with respect to the calculation of safe income c) The corporation's safe income on hand for the particular taxation year should be reduced to reflect the SR&ED expenditures of a current nature that will be deducted only in future taxation years. The SR&ED expenditures of a capital nature generally relate to the acquisition of property by the corporation. Consequently, CRA's position is that a corporation's safe income on hand will not be reduced by the amount of capital SR&ED expenses until the year that such amount are claimed as a deduction in computing the corporation's net income for tax purposes.

Reasons: Wording of the Act and previous positions.