News of Note
We have summarized questions posed at the October 7, 2016 APFF Roundtable for which we have brief written notes of the oral response, together with a summary of those notes. Points covered include:
- Q.1B: After studying the issue, CRA has determined that it will not be providing relief from the requirement to issue T4As for fees paid for services.
- Q.1C: Where there is an acquisition of control of a corporation with a calendar year end, thereby resulting in two taxation years ending in that year, CRA will permit the filing of a T106 to cover both taxation years.
- Q.3: Where a purchaser defaults on its purchase of a rental property, CRA considers that the damages paid by the purchaser to the vendor cannot be recognized as a capital loss given that there has been no disposition of property by it.
- Q.4: A right which otherwise might be taxable under the salary deferral arrangement rules is excluded from the SDA definition if it is a right to a bonus for services rendered in Year 1 which is paid within three years following the end of Year 1 (i.e., by the end of Year 4). CRA will not extend this deadline by a few months to permit performance-based criteria for Year 4 (which affect the amount of the ultimate payout) to be measured based on year-end results for Year 4.
- Q.7: Ss. 256(1.4) and 251(5)(b) reference a right (including a contingent right) to shares and a right to cause a corporation to redeem shares. There is not considered to be such a right where the shareholders’ agreement for a corporation carrying on a franchised operation (“Franchisee”) specifies that in the event that the individual manager of Franchisee (who holds 50% of Franchisee’s commons shares) departs, the other 50% common shareholder (the Franchisor) has the mandate to find a third party to purchase the manager’s shares – or that, in such event, the manager’s shares are to be automatically redeemed by Franchisee.
- Q.20: CRA accepts the finding in Poulin that the structuring of a sale transaction so that the vendor secured a tax advantage (the capital gains deduction) “does not mean that the parties acted in concert without separate interests.” However, if the only reason for the existence of a Buyco is a tax benefit to the vendor, then there is an accommodation, so that the transaction is not an arm’s length one.
- Q.21: Where a Canadian-controlled private corporation has agreed in writing to pay specified bonuses in its shares, the value of the shares will not be included in the employee’s income when issued, and their paid-up capital can be equal to that value.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable.
CRA applies its view that a contribution of FA1 shares to FA2 causes the FA2 shares to be substituted property for s. 93(2.01) purposes
The stop-loss rule in s. 93(2.01) applies to grind the capital loss realized on the disposition of a share of a foreign affiliate by the amount of exempt dividends previously received on that share “or on a share for which [it] was substituted.”
The 2016 IFA Roundtable dealt with a contribution Canco made to a foreign subsidiary (FA2) of its shares of a non-resident Finco subsidiary (FA1 – which previously had paid exempt dividends to Canco). CRA found that s. 93(2.01) denied a subsequent capital loss realized on an arm’s length sale of the FA2 shares to the extent of such dividends, on the grounds that the shares of FA2 were substituted shares for those of FA1. This was so even though the contribution did not entail any exchange of property and even though the FA1 shares likely would never have generated an accrued loss (given that its asset was an interaffilate loan).
This answer was a foreshadowing of an internal technical interpretation (i.e., dealing with an actual audit situation involving Luxcos) which CRA issued on June 22.
CRA finds that a “legal representative” of a taxpayer has potential personal liability for the maximum value of the property under its control from the moment that the taxpayer’s tax debt was assessed
A trust, whose sole individual beneficiary has an unpaid tax liability for 2014 of $150,000 (which was assessed on April 30, 2015), holds a portfolio with a fair market value of $125,000 on December 31, 2014 and (due solely to market declines) of $100,000 on April 30, 2015 and of $70,000 on January 1, 2016, being the date when the sole trustee (viewed for s. 159 purposes as the beneficiary’s ”legal representative”) receives a demand for payment.
CRA appears to consider that the trustee can be assessed for $30,000 under s. 159(3), being the deficiency between the $70,000 that was used (following the sale of all the trust property) to satisfy the payment demand, and the maximum value of the property under the control of the trustee after “the taxpayer’s liability arose on April 30, 2015.” This position is unfavourable in that it treats a legal representative as being personally liable for failing to immediately liquidate a portfolio (which is subject to market fluctuations) in respect of tax debts of which it may have no knowledge even though doing so may breach fiduciary or other obligations, and favourable in that it treats a tax liability as not arising for s. 159 purposes until it is assessed. If you are a legal representative, be careful about holding anything other than cash!
Neal Armstrong. Summary of 14 September 2016 External T.I. 2016-0638171E5 under s. 159(3).
CRA indicates that a general power to encroach on capital is not sufficient to make a deemed gain payable to a trust beneficiary
CRA indicated (similarly to the 2016 STEP Roundtable ) that in order for a deemed gain (e.g., under s. 48.1) to be made payable for purposes of s. 104(24):
- the terms of the trust must specifically permit an amount equivalent to the deemed capital gain to be paid or payable, or
- the trustee must have the discretionary power to pay out amounts that are defined as income under the Act.
CRA provided an expanded rationale for this position in the following terms:
Under trust law, capital gains would typically be considered to be part of the capital of a trust; however, a deemed capital gain created under a provision of the Act is a “nothing” for trust purposes. It is not possible to define a deemed capital gain to be income (or a capital gain) for trust purposes. A power to encroach on capital is not in and of itself sufficient to make a deemed capital gain payable.
Neal Armstrong. Summary of 8 June 2016 External T.I. 2015-0604971E5 under s. 104(24).
Herman Grad 2000 Family Trust – Ontario Superior Court of Justice finds that trusts, whose Alberta-lawyer trustees did not make substantial decisions, were resident in Ontario
In finding that a family trust and a spousal trust, that had two Alberta lawyers as their trustees, were resident in Ontario, Wilton-Siegel J noted that, in the context of an investment trust, “the principal decisions taken by trustees pertain to the investment of the assets of the trust and distributions to beneficiaries,” and noted the principle that “management and control of a trust may rest with a trustee who has little investment experience provided that the trustee has the power to retain others for advice and remains the ultimate decision-maker.” He found here that the ultimate decision maker instead was the family patriarch along with the CFO of the family companies, in the absence of evidence that there was any real decision-making by the trustees in relation to the core investing function or with respect to all but perhaps one of the trust distributions.
Neal Armstrong. Summary of Herman Grad 2000 Family Trust v. Minister of Revenue, 2016 ONSC 2402 under s. 2(1).