News of Note

The determination of what otherwise would be a corporation’s “specified corporate income” for small business deduction purposes is deemed by para. (b) of the s. 125(7) definition to be such lesser “amount that the Minister determines to be reasonable in the circumstances.” When invited to articulate when it might apply para. (b), CRA stated:

What is reasonable or not in the circumstances remains a question of fact… . The CRA will only be able to provide specific examples once it has had the opportunity to fully consider specific fact situations involving a taxpayer’s computation of income otherwise determined under subpara. (a)(i) of the definition of “specified corporate income.”

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.1 under s. 125(7) - specified corporate income – (b).

A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.

What CRA likely had in mind was that the court order would simply change the effective dates of the dividend payable dates. As it happened, only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to fix the problem was to get the court order to declare the payable date for most of the dividend to be on or after January 1, 2009.

What the corporation instead sought and obtained was a court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did, and with a fresh capital dividend then being declared and paid. The corporation’s counsel sought this nullification order notwithstanding that CRA, on being apprised of this nullification plan, had a number of months previously assessed the individual under s. 15(2).

Favreau J upheld the s. 15(2) assessment. Although he did not consider that the court-declared obligation of the individual to effect restitution to the corporation of the dividend amounts had retroactive effect so as to give rise to indebtedness at the time of the s. 15(2) assessment, he considered that the dividend payments gave rise to indebtedness of the individual to the corporation under the unjust enrichment principle.

Neal Armstrong Summaries of St-Pierre v. The Queen, 2017 CCI 69 under s. 15(2) and General Concepts - Estoppel.

CRA provided a ruling (albeit, guarded in its wording), that a phantom stock plan provided by a wholly-owned sub of an non-resident SA to five of its key employees would not be treated as a salary deferral arrangement. Speaking generally, the plan provided that on the occurrence of a “Triggering Event” an employee would receive a cash payment equal to the excess of the “Market Value” of the employer’s shares on the Triggering Event over their Market Value on grant. Except where the Triggering Event was one which disclosed a value (namely, an acquisition of control, amalgamation, business sale or IPO), the “Market Value” was computed as nine times the average adjusted EBITDA for the previous two fiscal years plus working capital, as adjusted, and minus long-term debt. In addition to the “Material Change” Triggering Events referenced above, a Triggering Event included the employee’s death, departure or retirement, and termination of employment for any reason other than for things like theft.

Neal Armstrong. Summary of 2015 Ruling 2014-0546131R3 F under s. 248(1) - salary deferral arrangement.

CRA found that a purported deferred share unit plan did not come within the Reg. 6801(d) safe harbour, and was a salary deferral arrangement, since the terms of the plan provided for the potential redemption of units in the event of a change of control of the corporate employer (which would not necessarily result in the employee’s termination) or, in the case of U.S. participants, on the occurrence of a retirement as contemplated under Code s. 409A. 2015-0610801C6 would have grandfathered units that were credited to a participant's account after November 24, 2015 if the plan were offside by virtue only of its having the Code 409A triggering event. However, here the participants were required to recognize income on a current basis under ss. 6(11) and (12) because the plan also was offside due to the potential change-of-control triggering event.

For example, if an advance election has been made by a participant in the 2014 taxation year to have the plan apply to a bonus earned and payable in 2015 and deferred units were thereby credited to his or her account in 2015, the participant would then include in 2015 income the value of units received in respect of the deferred bonus and any dividend equivalents to which the participant was entitled at the end of 2015. If an earlier year was involved that was statute-barred, CRA would assess the s. 6(11) and (12) amounts for the first year that was not statute-barred.

Neal Armstrong. Summaries of 21 November 2016 Internal T.I. 2016-0641961I7 Tr under Reg. 6801(d) and s. 6(11).