News of Note

CRA continues to be prepared to issue rulings dealing with the s. 55(2.1)(b) purpose tests

When asked to provide any update on the application of s. 55(2) to ordinary course intra-group dividends, CRA indicated:

  • Consistent with its prior statements, CRA continues to be open to considering a ruling request involving the determination of the purpose where all manifestations of purpose in the circumstances supported the absence of the purposes described in s. 55(2.1)(b) and the taxpayer represents that there is no such purpose.
  • Where a taxpayer request relates to safe income (so that reliance is not being placed on the s. 55(2.1)(b) purpose tests), taxpayers have needed to manage the safe income determination time notion (of a series with respect to the safe income exception in 55(2.1)(c).)

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.2 under s. 55(2.1)(b).

CRA confirms that foreign currency dispositions under s. 39(1.1) include FX bank deposit conversions

CRA confirmed that the phrase “dispositions of currency other than Canadian currency” in s. 39(1.1) was not restricted to dispositions of foreign-currency banknotes and coins, and extended to “dispositions of foreign currency held by an individual in a chequing or current deposit account at a financial institution, to the extent that the individual is entitled to withdraw the currency on deposit at any time, convert it into another currency at any time, or use it to make a purchase or a payment at any time.”

Neal Armstrong. Summary of 19 January 2024 External T.I. 2020-0865921E5 F under s. 39(1.1).

CRA maintains that safe income of pref shares issued on a s. 85 share-for-share exchange matches the exchanged shares’ safe income, with subsequent dividend increases

We have published a webpage providing the questions posed, and summaries of the preliminary oral responses given, at the 2024 CTF CRA Roundtable, held yesterday.

Q.1 was a follow-up to the CRA "Update on Subsection 55(2) ..." (Full paper released on 22 December 2023) which stated that, where a shareholder acquires preferred shares as consideration for the transfer of property on a tax deferred basis, the accrued gain on the property, when subsequently realized by the corporation, would be viewed as contributing to the gain on the preferred shares, and accordingly would be included in the preferred shares’ safe income. In Q.1, CRA indicated that this position would not be extended to where the preferred shares are acquired in exchange for common shares, so that the accrued gains on the underlying property held by the corporation and any of its subsidiaries at the time of the share exchange will not be allocated to the safe income of the preferred shares once realized.

Instead, the allocation of the safe income to the preferred shares would follow CRA’s longstanding position that a portion of the safe income to which the exchanged shares would have been entitled immediately before the exchange simply flows through to the preferred shares. Regarding the safe income realized after the exchange, the preferred shares would generally participate in the safe income of the corporation in accordance with the shares’ dividend entitlement only.

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.1 under s. 55(2.1)(c).

Income Tax Severed Letters 4 December 2024

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA provides an SDA ruling on a SERP

CRA ruled on a supplemental employee retirement plan ("SERP") to provide benefits to senior employees based on the portion of their base salary (up to a cap) in excess of their maximum pensionable earnings for purposes of the company defined benefit registered pension plan (RPP). Each month, 1/12 of this eligible portion of their base salary would be credited to a notional account and, at year end, the notional balance would be adjusted for a notional positive or negative return based on that achieved for the year under the RPP. Upon retirement, a participant could elect to receive their notional account balance as a single lump sum payment, or in annual instalments over a period not exceeding 10 years, with the funding in either case to come only out of the employer’s general revenues.

CRA ruled that the SERP will not be a salary deferral arrangement (SDA) or retirement compensation arrangement, and that the only income inclusions to the participants would be pursuant to s. 56(1)(a)(i) of the payments to them. Regarding the SDA ruling, the CRA summary stated:

The SERP will provide for reasonable pension benefits and therefore none of the main purposes will be to postpone the payment of tax.

Neal Armstrong. Summary of 2021 Ruling 2021-0887611R3 under s. 248(1) – SDA.

GST/HST Severed Letters June 2024

This afternoon's release of 7 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2024 release) is now available for your viewing.

Laprairie – Tax Court of Canada finds that a settlement agreement did not trench on the taxpayer’s right to direct how his non-capital loss should be applied

A group settlement reached in respect of the appeals of a large group of taxpayers including the taxpayer allowed a deduction of losses in a specified amount for their 1995 and 1996 taxation year, allowed interest expense claims for various periods and allowed “any consequential claims by [the taxpayers] for the carryforward or carryback of any losses resulting from the reassessments set forth above.” Without further communication with the taxpayer, the Minister carried back the resulting non-capital loss of the taxpayer to his 1992 and 1993 taxation years. The taxpayer objected on the basis that this carryback was done without giving him a choice as to the application of the loss, and that he wanted the loss applied to years under appeal, i.e., 1997 and 1998.

In allowing the taxpayer’s appeal, Wong J noted that “the starting point is that it is the taxpayer’s choice as to the application of available non-capital losses” and found that there was nothing in the wording of the settlement that took away this right of direction of the taxpayer.

Neal Armstrong. Summary of Laprairie v. The King, 2024 TCC 149 under s. 169(2.2).

We have translated 6 more CRA interpretations

We have translated a further 6 CRA interpretations released in April of 2001. Their descriptors and links appear below.

These are additions to our set of 3,017 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2001-04-27 10 April 2001 External T.I. 2001-0078035 F - RAP PERSONNE DIVROCEE Income Tax Act - Section 146.01 - Subsection 146.01(1) - Regular Eligible Amount - Paragraph (f) divorced individual was eligible notwithstanding ownership during their marriage of home by ex-spouse
12 April 2001 External T.I. 2000-0050655 F - ASSURANCE MUTILATION/INVALIDITE Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (h) disability benefits under a policy providing life and accidental death and dismemberment insurance could be non-taxable
Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account personal injury amounts received pursuant to life insurance policy not added to CDA
23 March 2001 Internal T.I. 2000-0056097 F - Roulement interne Income Tax Act - Section 84 - Subsection 84(1) s. 84(1) deemed dividend where individual’s low-PUC common shares are exchanged with the corporation for high-PUC preferred shares and there is an s. 85(1) agreed amount at FMV
17 April 2001 External T.I. 2000-0056455 F - AVANTAGE IMPOSABLE-EMPLOYE Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) the distribution of employer shares to employees as beneficiaries of a discretionary trust is a s. 6(1)(a) benefit if it has the slightest connection to their employment
2 February 2001 Internal T.I. 2000-0058127 F - Convention d'émission d'actions
follow-up in 2001-007939 F

Income Tax Act - Section 7 - Subsection 7(2) s. 7(2) could apply if shares were held by the employer for later acquisition by the employee
19 April 2001 Internal T.I. 2001-0069067 F - PENSION ALIMENTAIRE ACCORD ECRIT Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount submitted documents were not a written agreement

Magren – Federal Court of Appeal finds it an abuse of the capital gains system to recognize a capital gain increment to a CDA account when there was no net change in economic position

The taxpayers were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (CDAs), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.

In very general terms, the following steps were significant elements of the series of transactions:

  1. Grenon’s RRSP transferred its units of FMO to a newly-formed unit trust (“TOM”) in exchange for units of TOM representing close to 100% of the issued and outstanding TOM units.
  2. The taxpayers acquired such FMO units from TOM in consideration for issuing $161M in promissory notes.
  3. The public transferred their units of FMO (the “public FMO units”) to a new unit trust (“FIF”), that was intended to be the replacement public vehicle for FMO, in exchange for units of New FIF.
  4. The taxpayers acquired the public FMO units for $115M in promissory notes.
  5. FMO realizing $226M in capital gains on one of the internal steps.
  6. After various steps to clean up the structure, FMO distributed essentially all its assets (being some FIF units and promissory notes) to the taxpayers, and treating this as a distribution of the capital gains realized by it in 5 above.
  7. The units of FMO were repurchased by FMO for nominal consideration. The appellants had full (FMV) cost for their FMO units when acquired in steps 2 and 4, and the capital gains distribution in step 6 did not reduce the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)(I). Accordingly, such repurchases resulted in the realization of largely offsetting capital losses (and, in light of the distribution of the increase to their CDAs arising in step 6, also resulted in negative CDAs.)

Monaghan JA found that the transactions could have accomplished their professed commercial objectives without the taxpayers’ involvement. In particular, their involvement entailed acquiring the FMO units at a high cost in steps 2 and 4, being allocated a capital gain by FMO in step 6 so as to generate a CDA increase which could then be distributed, and having their high cost FMO units redeemed in Step 7 so as to generate an offsetting capital loss - so that their only purpose was to generate a CDA account that could be distributed to their parents.

After noting that Triad Gestco had found that “the capital gain system … [is] aimed at taxing increases in ‘economic power’” rather than only “an arithmetic difference”, Monaghan JA stated that “[t]he appellants had neither an economic gain nor an economic loss; there was absolutely no change in their economic power as a result of their participation in the FMO reorganization” and “[a]s in Triad Gestco … avoidance transactions frustrated the object, spirit and purpose of the capital gain and capital loss provisions in the Income Tax Act.”

Neal Armstrong. Summaries of Magren Holdings Ltd v. Canada, 2024 FCA 202 under s. 245(1) – benefit, s. 245(4), s. 245(2), s. 104(6), General Concepts – Ownership, Sham.

CRA indicates that more than one parking space potentially may be part of a condo “housing unit”

A taxpayer acquired a condominium unit and one parking space in 2017 for personal use, then acquired a second parking space on separate title in 2020 in the same building complex for personal use. The first parking space was sold along with the condo and subsequently the second parking space was sold separately. In finding that a portion of, or all of, the gain realized on the disposition of the parking spaces may be exempt pursuant to s. 40(2)(b), CRA indicated:

  • the first parking space was a component of the housing unit (i.e., the condo).
  • the holding of the second space on separate title and its sale to a different purchaser did not preclude it from being part of the housing unit.

CRA did not address the question of how to apply the s. 40(2)(b) formula to a sale of the second parking space, e.g., the formula was applied in the individual’s 2023 return to a sale of the condo and first parking space, then the second space was sold in 2024.

Neal Armstrong. Summary of 15 July 2024 External T.I. 2023-0990221E5 under s. 54 – principal residence.