The T1134 instructions indicate that to access the relief for related reporting entities, they should be related as per s. 251(4). How is it determined whether a partnership is part of a related group for purposes of this relief?

After noting that a “partnership described in paragraph 233.4(1)(c) is a reporting entity for the purposes of section 233.4 as soon as a partner who is resident in Canada and who is not exempt from Part I tax has an interest of at least 10% in the income or losses of the partnership for the fiscal period,” CRA stated:

If a partnership is a reporting entity in respect of a foreign affiliate, the administrative relief for related reporting groups extends to the partnership if at least one of its members (or if another partnership is a member, one of its members) is related to each of the other reporting entities forming a related group in respect of that same foreign affiliate.

Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.5 under s. 233.4(4).

Regarding the situation where Canco transferred all the shares of USco (which, in turn, wholly-owned a US LLC) to a newly-incorporated Canadian holding company (Holdco) on a s. 85 rollover basis; and then USco was wound up into Holdco before the end of the same taxation year (a June 30, 2023 year end for both Canco and Holdco), CRA indicated that since Canco and Holdco each held the USco shares directly for a portion of their 2023 taxation year, each would be a reporting entity that was required to file a T1134 for their 2023 taxation year. However, as a related group with the same year end, and using the same functional currency, they could designate one of them as their representative to file a single T1134 information return with the required information for both.

Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.4 under s. 233.4(4).

A parent wishes to access the s. 84.1(2.31) or (2.32) rules regarding a transfer of the shares of Parent Inc. (which are qualified small business corporation shares) to a holding company controlled and owned by the parent’s adult children, who have been actively engaged in the business of Parent Inc. As a result of an estate freeze, the parent now held voting preferred shares (the “Control Shares”) according voting control, as well as retractable preferred shares (the “Freeze Shares”) of Parent Inc.; and Parent’s adult children hold its voting common shares.

CRA indicated that there is no requirement in the intergenerational transfer rules that shares sold by a parent to a corporation controlled by one or more children be common shares or voting shares, so that preferred shares (such as the Freeze Shares) would not per se be excluded from the s. 84.1(2)(e) exception to the application of s. 84.1 (the “Exception”).

However, retaining the Control Shares would prevent the parent from benefiting from the Exception both because (i) they would entail the parent still controlling the subject corporation subsequent to the disposition of the Freeze shares, contrary to ss. 84.1(2.31)(c)(i) and 84(2.32)(c)(i), and (ii) they would not qualify as non-voting preferred shares as defined in ss. 84.1(2.31)(d)(i) and 84(2.32)(d)(i).

Regarding the requirements in s. 84.1(2.31)(g) or s. 84.1(2.32)(h) for a timely transfer of business “management” to the children (specified in s. 84.1(2.3)(i) to refer to the direction or supervision of business activities) CRA stated:

[W]here the parent remains a director of Parent Inc. and steps are not taken to completely and permanently cease to hold such office, within the time periods stipulated by paragraphs 84.1(2.31)(g) and 84.1(2.32)(h), including any longer period that is reasonable in the circumstances, the requirements of subparagraphs 84.1(2.31)(g)(ii) and 84.1(2.32)(h)(ii) would not be satisfied … regardless of whether the parent is the sole director or one of the directors, and regardless of whether the direction of the day-to-day activities is in the hands of the children.

Regarding where the parent sold the Freeze Shares (assumed to qualify as “non-voting preferred shares”) in three annual tranches, and retained the Control Shares until the third such sale (or, alternatively, sold them in three tranches, with the Freeze Shares), CRA noted that since the Exception, by virtue of s. 84.1(2.31)(a) or 84.1(2.32)(a), can only apply to the first disposition of shares by the taxpayer for which it is claimed, the second and third dispositions of the Freeze Shares could not qualify for the Exception. Furthermore, the Exception would not be available for the first disposition if the parent retained the Control Shares (as discussed above).

CRA indicated that if, in the case of a gradual (rather than immediate) transfer, the children’s corporation instead purchased all of the parent's shares but paid only for 20% over the following 10 years, and given that the shares sold on the first disposition were QSBCS, s. 84.1(2.32)(f)(ii) would not be satisfied because, at the end of the 10-year period, the parent would still hold a claim against the purchaser corporation having a FMV equal to 80% (i.e., over 30%) of the FMV of all of its interests held immediately before the disposition for which the Exception was claimed.

Neal Armstrong. Summaries of 10 October 2024 APFF Roundtable, Q.2 under s. 84(2.32)(c)(i), s. 84.1(2.3)(i), s. 84(2.32)(a), and s. 84.1(2.32)(f)(ii).

We have uploaded our summaries of the first 13 questions posed at the 10 October 2024 APFF Federal Roundtable held in Gatineau together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers. The remaining four questions and answers will be added within a few days, perhaps tomorrow evening.