News of Note

CRA finds that an appraisal increment increased a corporation’s retained earnings for Part I.3 purposes

S. 181.2(3)(a) provides that a corporation’s capital includes its retained earnings, which s. 181(3)(b)(i) requires, in the case of most corporations, to be determined in accordance with generally-accepted accounting principles.

On the initial application to it of accounting standards for private enterprises ("ASPEs") on January 1, 2011, a corporation revalued its assets (from their book value under “old” Canadian GAAP) to fair value, and increased its retained earnings accordingly. CRA found that since this increase accorded with ASPEs, such increase also increased the corporation’s capital under s. 181.2(3)(a).

Neal Armstrong. Summary of 2 May 2017 External T.I. 2016-0663781E5 Tr under s. 181(3)(b)(i).

CRA effectively gives a checklist for determining whether LLLP legislation provides for a corporation

A secondary assessing position of a TSO was that a Delaware LLLP, which had been wound-up, had been a corporation for ITA purposes. In the course of confirming this characterization, the Directorate provided a detailed listing of the relevant provisions of the Delaware legislation (the DRULPA), as well as summarizing the (unexceptional) features of the partnership agreement. This listing might be a useful checklist when confirming the portability of the CRA position respecting Delaware and Florida LLPs and LLLPs to other jurisdictions.

The Directorate went on to note that since it had recently determined to provide grandfathering relief re the application of its position to existing LLPs and LLLPs (see 2017 IFA Roundtable, Q.3), it recommended against treating this LLLP as having been a corporation.

Neal Armstrong. Summary of 13 February 2017 Internal T.I. 2015-0587691I7 under s. 96.

CRA provides illustration of the SBD-denial rule in s. 125(1)(a)(i)(B)

SellCo A and SellCo B sell all of their fishing catch to BuyCo, although BuyCo purchases the majority of its fish from unrelated parties. K owns 65% of BuyCo, K’s brother owns 100% of SellCo A and K’s son owns 100% of SellCo B. CRA confirmed that under the new s. 125(1)(a)(i)(B) rule, the income of the SellCos will not be eligible for the small business deduction, except to the extent that Buyco assigns some of its business limit to them, given that their income is not substantially derived from sales to arm’s length persons or untainted partnerships.

Neal Armstrong. Summary of 20 April 2017 External T.I. 2016-0679721E5 under s. 125(7) – specified corporate income.

Girard – Cour du Québec finds that momentary employment by a new employer was sufficient to render termination damages as a retiring allowance

Robinson found that damages received by an employee, following the amalgamation of the City of Gatineau for whom he worked and the failure of the new City to hire him, were a non-taxable receipt. The same result did not obtain where a taxpayer who had been appointed by a transitional committee to be the chief executive of the new amalgamated city (in this case Saguenay) was fired by the mayor on the second day of existence of the new City (with that decision ratified a week later) – so that his subsequent award of damages was a retiring allowance. Lavoie JCQ stated:

The very short duration of this employment from the beginning of the existence of the new city to his dismissal…does not allow us to discard the notion that he was compensated for losing employment that had been acquired by him.

Neal Armstrong. Summary of Girard v. Agence du revenu du Québec, 2017 QCCQ 3245 under s. 248(1) - retiring allowance.

Income Tax Severed Letters 24 May 2017

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

Vinet – Cour du Québec finds that managerial actions of an individual limited partner were qua officer of the GP, so that he was a limited partner for tax purposes

An individual, who was the sole limited partner of a Quebec limited partnership (“SEC”) that owned and operated multiple farms, and the president of its general partner, argued that he was not a limited partner under the Quebec equivalent of ITA s. 96(2.4)(a), so that he could deduct his share of a substantial loss of the LP. He relied in this regard on s. 2244 of the Civil Code, which provided that a limited partner “may not negotiate any business on behalf of the partnership or act as mandatary or agent for the partnership,” and pointed to his involvement in the business of the LP including negotiating with suppliers and making various purchases.

Breault JCQ found that the individual had failed to establish that such activities were not effected as agent or manager for the general partner. He also quoted with approval an author who opined that “it is only in the common law provinces that the control of the internal management of a limited partnership gives rise to liability of the limited partners.”

Neal Armstrong Summary of Vinet v. Sous-ministre du Revenu du Québec, 2017 QCCQ 3957 under s. 96(2.4)(a).

Eight further full-text translations of CRA severed letters are available

Full-text translations of six French technical interpretations and two 2014 APFF Roundtable items that were released between February 25, 2015 and February 11, 2015 are listed and briefly described in the table below.

These (and the other translations covering the last 27 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2015-02-25 9 February 2015 External T.I. 2013-0480881E5 F - Disposition of Eligible Funeral Arrangement Contracts Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital proceeds on disposition of funeral home business
Income Tax Act - Section 148.1 - Subsection 148.1(2) - Paragraph 148.1(2)(b) proceeds on disposition of funeral home business
2 February 2015 External T.I. 2013-0510751E5 F - Cooperatives and Dividend Refund Income Tax Act - Section 129 - Subsection 129(1) entitlement of agricultural cooperative corporations or cooperative corporations to dividend refunds
Income Tax Act - Section 248 - Subsection 248(1) - Share fractions of cooperative capital not shares
2015-02-18 10 October 2014 APFF Roundtable Q. 12, 2014-0538161C6 - APFF Conference, Q. 22 - ACB of interests in a partnership Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) Class A and B tracking units held by partner are single property
10 October 2014 APFF Roundtable Q. 16, 2014-0538031C6 - APFF 2014 Q. 16 - Capital gain Income Tax Act - Section 55 - Subsection 55(3.01) - Paragraph 55(3.01)(g) interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v)
Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(b) - Subparagraph 251(2)(b)(i) incorporator related to corporation
Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v)
2015-02-11 13 November 2014 External T.I. 2014-0535611E5 F - Changement d'usage suivi d'un roulement Income Tax Act - Section 45 - Subsection 45(3) s. 73(1) transfer does not trigger s. 45(3) deferred gain
7 November 2014 External T.I. 2014-0535591E5 F - Revenu travailleur autonome Income Tax Regulations - Regulation 200 - Subsection 200(1) expense reimbursements or allowances were subject to T4A reporting
7 November 2014 External T.I. 2014-0536261E5 F - Bien à usage personnel Income Tax Act - Section 54 - Personal-Use Property property rented to brother at FMV rent could be PUP
19 November 2014 Internal T.I. 2014-0530911I7 F - Transfer pricing secondary adjustments Income Tax Act - Section 247 - New - Subsection 247(12) no secondary adjustment where downward s. 247(2) adjustment to Canadian branch expense

Gagné – Quebec Court of Appeal finds that a promoter could be convicted of evading taxes of others

The taxpayer promoted a scheme, that purportedly permitted RRSP annuitants to extract funds from their RRSPs, that clearly did not work, and pocketed a share of the extracted funds. There was no error in his convictions for tax evasion notwithstanding that there was no evasion of his own taxes. The Quebec Court of Appeal stated:

The Cardoso judgment of this Court…establishes that allowing others, via a stratagem, to evade tax due, constitutes the actus reus of the offence of tax evasion; the offence is not limited to avoiding one’s own tax.

Neal Armstrong. Summary of Gagné v. R., 2017 QCCA 788 under s. 239(1)(d).

Brookfield Canada Office Properties is proposing to redeem all its public units for cash outside a Plan of Arrangement

Brookfield Property Partners LP (BPY) has an 83% economic interest in Brookfield Canada Office Properties (BOX - a Canadian REIT), by virtue of holding 40.3% of the BOX units and holding exchangeable units of a subsidiary LP of BOX (BOPC LP), mostly through a grandchild subsidiary (BOP Split). BOX is proposing to redeem the units of the public in cash.

BOP Split will also exchange all its exchangeable units. The general partner of BPY already controls BOX given that the exchangeable LP units of BOPC LP are coupled with voting units of BOX. However, the exchange will trigger a loss restriction event (whose definition is grounded in the concept of majority interest beneficiary). The resulting year end will provide a convenient cut-off for the results of the public and private trust. However, in any event, it is likely that the regular monthly distributions have been enough to push out all of BOX’s income to date, so that no special distribution will be required, and all of the redemption proceeds will be proceeds of disposition.

In the case of non-residents, these proceeds will be subject to Part XIII.2 withholding of 15%. Brookfield had thought about but rejected structuring the transaction so that the non-residents could sell their units under a Plan of Arrangement, thereby avoiding the Part XIII.2 tax.

Neal Armstrong. Summary of BOX Circular under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Privatizations.

Ferlaino – Federal Court of Appeal confirms that the exercise price of employee stock options should be translated at the exercise-date spot rate

The former Director of Taxes at a large Canadian corporation argued unsuccessfully that the computation of his s. 7(1)(a) benefits on exercising options on the shares of the listed U.S. parent should depart from the norm by translating his exercise price using the much higher exchange rate at the time of option grant, rather than the rate (of around par) at the time of exercise. Scott JA considered this approach to be contrary to s. 261(2)(b).

Neal Armstrong. Summary of Ferlaino v. Canada, 2017 FCA 105 under s. 7(1)(a).