News of Note

CRA finds that a CCPC not entitled to the SBD and with more than 5 employees receives the regular corporate rate on its rental income

Opco, which is a CCPC that has exceeded the $15 million “taxable capital employed in Canada” threshold such that the small business deduction is unavailable, employs more than 5 full-time employees in its sole business (the “Business”), which is the rental in Canada of real property. Rather than ducking the question of whether Opco’s income would be treated as aggregate investment income (AII) rather than active business income, by treating it as a question of fact, CRA stated:

As the Business has more than 5 full-time employees throughout its tax year, it is not a specified investment business and Opco’s income is from an active business.

Accordingly, all of its income would be treated as “full rate taxable income” as defined in s. 123.4(1) that would be subject to federal tax at the 15% rate.

Neal Armstrong. Summary of 2 June 2022 External T.I. 2019-0828381E5 under s. 123.4(1) - full rate taxable income- (b).

CRA treats somewhat-discretionary note interest as being interest for Part XIII exemption purposes

CRA ruled that “interest” paid by a resident corporation (Aco) on subordinated notes would not be subject to Part XIII tax based on the exemption from Part XIII tax for non-participating interest paid to arm’s-length recipients, but with the ruling letter stating under “Additional Information” that the interest would not be deductible under s. 20(1)(c) (or s. 9) in computing Aco’s income. Equity-like features of the notes included that:

  • they were subject to the right of Aco in its discretion, with prior notice to the holders, to cancel any interest that would otherwise be payable on any due date; however, in such event, Aco would be precluded from declaring dividends or repurchasing shares until interest payments resumed;
  • failure to make a payment on the Notes when due (including any interest, whether as a result of cancellation or otherwise) would not trigger an event of default thereunder;
  • they had no scheduled maturity or redemption date, so that ACo was not required to make any repayment of the principal except upon an event of default (principally, bankruptcy or insolvency).

Although the CRA summary is cryptic, the analysis might have been that there was no “legal obligation to pay interest” as required under s. 20(1)(c) in light of the first two points above, but that the interest on the Notes was still “interest” for Part XIII purposes. 2016-0649061R3 and 2017-0732001R3 are similar.

Neal Armstrong. Summary of 2020 Ruling 2020-0854741R3 under s. 212(1)(b).

CRA indicates that it may not apply s. 80 where a trust distributes a debt, owing by a beneficiary, to the beneficiary [correction]

A Canadian resident trust makes a loan to a beneficiary, who uses the loan proceeds for investment purposes. Later, the trust distributes the loan as an in specie capital or income distribution to the beneficiary.

After noting that the extinguishment of the debt by operation of law (i.e., merger of the debtor and creditor) represented its settlement, CRA went on to indicate that since the extinguishment of the loan does not constitute a payment in satisfaction of the principal amount of the obligation, it would not reduce the forgiven amount under para. B(a) of the “forgiven amount” definition (respecting payments) nor would there be a reduction under any of the other paragraphs of the formula. Therefore, as a technical matter, this transaction would result in the debt forgiveness rules applying to the full loan amount.

However, CRA indicated that, in some specific situations, when a commercial obligation is extinguished by merger rather than by payment, it considers that there is not a forgiven amount for purposes of s. 80 and that it was of the view that this position would apply to the loan extinguishment in this example.

This suggests that the common practice of, for example, settling a debt owing by a parent to a subsidiary by distributing that debt to the parent (see, e.g., 2013-0498551R3), rather than making a distribution payable and then employing set-off, may be on somewhat shaky grounds. But what matters in the end is that CRA seems to be exercising its discretion not to apply s. 80.

Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.5 under s. 80(1) – forgiven amount – B(a).

CRA indicates that it does not have rigid guidelines as to what is “acceptable security”

CRA recently amended its Information Circular on its collection policies (IC98-1R8, dated 24 May 2022, replacing IC98-1R7) by inter alia adding the following passage on what is “acceptable security”:

Some types of security we may accept include bank letters of guarantee, standby letters of credit, or mortgages. Bank letters of guarantee or standby letters of credit should be provided by a Schedule I or Schedule II Canadian financial institution as defined in the Bank Act. Other forms of security can be accepted in certain circumstances. Acceptability of other forms of security is determined on a case by case basis, subject to the Minister’s discretion to accept security under subsection 220(4) of the Income Tax Act.

Acceptable security must be liquid (easily convertible to cash), equivalent or near equivalent to cash, and realizable on demand without defense or claim from third parties. …

When asked about what security CRA would accept under s. 159(5) (which provides that the tax payable by a deceased individual respecting certain income and gains under s. 70(2), 70(5) or 70(5.2)) may be paid in 10 annual instalments if the executor so elects and furnishes the Minister with security “acceptable to the Minister”), CRA referred to the above passage, and then added that such guidelines are not meant to be exhaustive and that executors will have the opportunity to discuss arrangements or security as part of the process for the election.

Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.4 under s. 159(5).

Income Tax Severed Letters 22 June 2022

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

Levett – Federal Court of Appeal finds that taxpayer stonewalling satisfied the Swiss exchange-of-information requirement that CRA had “pursued all reasonable [domestic] means available”

Resident individuals and a corporation owned by one of them, whose disclosure that they had no foreign assets was doubted by CRA, brought an application to have CRA requests to the Swiss federal tax administration for information pursuant to Art. 25 of the Canada-Swiss Treaty declared invalid - principally on the ground that CRA had violated the requirement under Art. 25, para 1 of the Canada-Switzerland Treaty that “an exchange of information will only be requested once the requesting Contracting State has pursued all reasonable means available under its internal taxation procedure to obtain the information.”

Before confirming the decision below to dismiss the application, LeBlanc JA set the stage by stating that “[t]he true intentions of the parties, as they emerge from extrinsic materials when it comes to Article 25 (namely to promote the exchange of information to the maximum extent possible with a view, notably, of preventing tax evasion and avoidance), are reflected … in the actual language of that provision, coupled with that of the Interpretative Protocol.”

He then found that “it was reasonably open to the CRA … to proceed with the … RFIs at the time it did in view of the fact that [the taxpayers] had, to that point, denied, on more than one occasion, having any such [foreign] assets, revenues or activities in the taxation years at issue.”

Regarding the taxpayers’ submission that the specific listing in the Protocol, of types of information that could be requested, established a “ceiling” for such requests, LeBlanc JA stated that “paragraph 2(b) of the Interpretative Protocol establishes a threshold, not an upper limit” and that “on a reasonableness analysis … there is no issue with the fact that the CRA provided the Swiss Authorities with more information—essentially background information—than what was minimally required by paragraph 2(b) of the Interpretative Protocol.”

Neal Armstrong. Summary of Levett v. Canada (Attorney General), 2022 FCA 117 under Treaties –Income Tax Conventions - Art. 27.

We have translated 10 more CRA severed letters

We have published translations of a CRA ruling and interpretation released last week and a further 8 translations of CRA interpretation released in November and October of 2004. Their descriptors and links appear below.

These are additions to our set of 2,109 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 17 2/3 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
2022-06-15 2021 Ruling 2021-0880641R3 F - Changes to existing monetization arrangements General Concepts - Transitional Provisions and Policies agreement novation likely would lose grandfathering
Income Tax Act - Section 80.6 - Subsection 80.6(1) substituting the index used in a monetization arrangement did not de-grandfather it from the synthetic disposition rules
30 March 2022 External T.I. 2017-0737181E5 F - Right to receive income from a trust Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii) clause suspending the right to income on bankruptcy would not satisfy s. 73(1.01)(c)(ii)
2004-11-12 27 October 2004 External T.I. 2004-0080191E5 F - Paragraphes 6(1) et 6(2) de la Loi Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) annual recognition of s. 6(1)(e) standby charges does not reduce quantum of s. 6(1)(a) benefit where subsequent employee bargain-purchase of automobile
Income Tax Act - Section 15 - Subsection 15(5) benefit from bargain purchase of car from employer not reduced by previous s. 15(5) standby charges
2004-11-05 25 October 2004 External T.I. 2004-0077031E5 F - Application de la division 20(1)e.2)(i)(B) Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) - Subparagraph 20(1)(e.2)(i) - Clause 20(1)(e.2)(i)(B) condition in s. 20(1)(e.2)(i)(B) is satisfied for a year if only a portion of the interest is deductible in that year pursuant to s. 20(1)(c)(iv)
8 October 2004 APFF Roundtable Q. 8, 2004-0090801C6 F - Benefit to Shareholders Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) could apply where corporate funds used to acquire non-participating preferred shares
2004-10-29 25 October 2004 External T.I. 2004-0086261E5 F - Ristournes Income Tax Act - Section 135 - Subsection 135(1.1) patronage dividends paid after March 22, 2004 are non-deductible even if reported before then
15 October 2004 External T.I. 2004-0068421E5 F - Bien de remplacement Income Tax Act - Section 44 - Subsection 44(5) replacement property can be acquired from a related person
Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1) rental use is a similar use even if shift from residential to commercial use
18 October 2004 External T.I. 2004-0077151E5 F - Déduction pour gain en capital Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) no requirement for the combined period of holding to be 24 months
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Small Business Corporation Share - Paragraph (e) para. (e) effectively requires a combined 24-month holding period for s. 110.6(14)(f)(i) or (iii) transactions
8 October 2004 APFF Roundtable Q. 1, 2004-0085551C6 F - Application de la division 20(1)e.2)(i)(B) This repeats 2004-0077031E5 F
8 October 2004 APFF Roundtable Q. 4, 2004-0088411C6 F - Prêt à une société de personnes par une société Income Tax Act - Section 15 - Subsection 15(2) Gillette not followed: s. 15(2) applicable where a corporation makes a loan to a partnership equally owned by its 2 equal shareholders

Marino – Federal Court of Appeal confirms the Oceanspan principle that a non-resident who does not compute income from any source for ITA purposes does not have a taxation year

An individual with no connection to Canada paid significant tuition fees while in attendance at U.S. universities prior to 2012 then, on immigrating to Canada, claimed his “unused” tuition tax credits as a deduction from Canadian tax. Those provisions referred to an individual’s “taxation year.” The Tax Court applied the Oceanspan principle that “a non-resident with no source of income in Canada, was not a ‘taxpayer’ and therefore did not have a taxation year” (para. 29). The Tax Court rejected the taxpayer’s position that s. 250.1(a) had the effect of deeming any non-resident to have a taxation year - and instead indicated that this provision only “applies where a non-resident must have a taxation year if a provision of the Act is to operate as it is intended to operate, including in respect of another taxpayer,” for example, respecting a non-resident trust with a resident beneficiary recognizing income under s. 104(13) based on when that trust has a taxation year end.

In the Court of Appeal, Stratas JA stated (at para. 3) that “Oceanspan is … directly on point … [and] binds us, just as it bound the Tax Court,” and further rejected the taxpayer’s argument - that s. 250.1 supersedes Oceanspan and has the effect of deeming every non-resident person to have a taxation year in Canada – and expressed agreement here as well with the Tax Court’s reasons.

Neal Armstrong. Summary of Marino v. Canada, 2022 FCA 115 under s. 248(1) – taxation year, and s. 250.1(a).

CRA indicates that it initially imposes instalment interest on VDP-accepted wash transactions “given … system limitations”

Where CRA accepts a voluntary disclosure for a wash transaction, and grants full relief for penalties and interest on the amounts the supplier otherwise should have collected and remitted, instalment interest nonetheless will be applied respecting the periods covered by the voluntary disclosure given CRA’s “system limitations” – although CRA indicated that such interest likely would then be cancelled, and stated:

Internal discussions are currently underway on the processing and policies on the waiving of instalment interest with the Voluntary Disclosures Program.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.10 under ETA s. 281.1(1).

CRA rules that substituting the index used in a monetization arrangement did not de-grandfather it from the synthetic disposition rules

A monetization arrangement that was grandfathered from application of the synthetic disposition rules for deferring gain on the shareholding of a holding company (“Holdco A”) in a public company entailed a secured loan from a financial institution (“FI”) to Holdco A and a cash-settlement forward agreement between Holdco A and FI. A reference index was used in determining both the interest rate under the loan and the reference price under the Forward Agreement.

As a result of the discontinuance of the reference index, it will be replaced for such purposes by a similar index.

The synthetic disposition rules apply to agreements and arrangements entered into after March 20, 2013, and to earlier agreements or arrangements whose terms are extended after that date. CRA ruled that the index substitution would not result in the application of s. 80.6 (i.e., no loss of the deferral) - and also provided a tentative opinion “that there is a reasonable argument that Holdco A could lose the benefit of the transitional relief to the extent that the assignment of the Monetization Agreement would have the effect of novating it.”

Neal Armstrong. Summary of 2021 Ruling 2021-0880641R3 F under s. 80.6.