News of Note

CRA intends for taxpayer to rely on appropriate exercise of discretion by senior auditors in voluntary disclosure matters when the new VDP takes effect later in 2018

Q.1 CRA explained that a major driver in its decision to make the voluntary disclosure program more stringent (along with pressure from the Finance Committee in the House of Commons) was CRA’s increasing confidence in its ability to detect high-risk taxpayers for audit.

Q.2, Q.15 The increase in CRA discretion under the revised program should be acceptable because there will be a group of three or four senior auditors whom representatives will be able to speak to on a no-names basis and who will have the judgment to give reliable guidance.

Q.8 There likely will be a delay in the implementation date for the new program until at least the summer of 2018 or perhaps October, although this decision is up to the Minister. Further major changes (or eliminating the VDP entirely) likely will not occur, if at all, for another three years.

Q.16 The revised Circular will be generally similar to the draft Circular.

Summary of 20 November 2017 CTF Annual Conference Panel on Issues in Administration and Enforcement.

CRA indicates that GAAR very well may apply to s. 107(2) distribution to a Canco owned by a non-resident beneficiary

In 2016-0669301C6 and 2017-0693321C6, CRA indicated that the distribution of property by a Canadian-resident discretionary family trust to a Canadian corporation whose shares were wholly owned by a newly established Canadian-resident discretionary trust circumvented the scheme of the 21-year rule in s. 104(4) as buttressed by s. 104(5.8), and would consider applying the GAAR.

CRA has now commented on the situation where property would be deemed by s. 107(5) to be disposed of at fair market value if distributed by such a trust to an individual beneficiary who had emigrated from Canada, but the property is instead distributed to a beneficiary that is a Canadian corporation owned by the non-resident beneficiary. CRA stated that it will consider that this transaction did not achieve the intention of s. 107(5) of ensuring that Canada maintains its ability to tax the gain that accrued while the property was held by the Canadian trust, and would consider applying GAAR, unless there was substantial evidence supporting its non-application.

Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.1 under s. 107(5).

Income Tax Severed Letters 22 November 2017

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

Justice Canada comments on rectification, and Q.1 to Q.11 of the CTF Roundtable, are available

We have published summaries of the CRA responses to the first 11 questions posed at this afternoon’s CTF Roundtable. We will post summaries of Q.12 to Q.14 tomorrow.

We have also published a summary of comments made by Diana Aird of the Department of Justice on what they are looking for in submissions on receiving Justice acquiescence to a rectification application.

We will provide summaries and posts on these and other items in due course.

CRA rules on the continuity of reserves on a s. 98(5) wind-up

The s. 98(5) wind-up rules are largely missing the detailed continuity rules contained in the s. 87 amalgamation rules. CRA has ruled that on such a winding-up, there is a flow-through of the s. 20(1)(m) and (n) reserves to the successor former partner (termed, the “proprietor”), and a continued ability of the proprietor to deduct unamortized prepaid expenses under s. 18(9), as well as there being an ability to make a s. 20(24) election between the partnership and the proprietor. Interest on debt assumed by the proprietor was ruled to be deductible to the same extent as before the wind-up. No employee income will be triggered by the assumption by the proprietor of DSUs and RSUs.

Neal Armstrong. Summaries of 2015 Ruling 2015-0601441R3 under s. 20(1)(m), s. 20(1)(n), s. 20(24), s. 18(9), s. 20(1)(c)(ii), s. 6(1)(i), s. 34.2(11) and s. 98(5).

Six further full-text translations of CRA technical interpretations are available

The table below provides descriptors and links for six French technical interpretation released in April-May 2014, as fully translated by us.

These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2014-05-07 2 April 2014 External T.I. 2014-0521041E5 F - Application de 13(7.1) Income Tax Act - Section 13 - Subsection 13(7.4) general requirements for s. 13(7.4) to apply
Income Tax Act - Section 13 - Subsection 13(7.1) no s. 13(7.4) election required where s. 13(7.1) applies
2 April 2014 External T.I. 2012-0473151E5 F - Limitation du coût de location d'un véhicule Income Tax Act - Section 67.3 GST ITCs included under element E of formula
Income Tax Act - Section 248 - Subsection 248(16) GST ITCs constitute a “reimbursement” for car lease expense limitation purposes
11 March 2014 Internal T.I. 2013-0513221I7 F - Stock options General Concepts - Fair Market Value - Options stock options with no in-the-money value could have nil FMV
Income Tax Act - Section 52 - Subsection 52(1) s. 15 benefit due to shareholder receipt of stock options earned by corporation added to the ACB of the exercised shares
Income Tax Act - Section 15 - Subsection 15(1) double income inclusion under s. 56(2) or (4) to consulting corporation, and under s. 15(1) to its shareholder, where consultant's options issued directly by client to shareholder
Income Tax Act - Section 56 - Subsection 56(2) s. 56(2) benefit where corporation implicitly consented to consultant's options being issued by client directly to its shareholder
Income Tax Act - Section 56 - Subsection 56(4) implicit transfer by corporation when stock options earned by it were issued directly by its client to its shareholder
Income Tax Act - Section 248 - Subsection 248(28) s. 248(28) does not prevent a double income inclusion to corporation under s. 56 and shareholder under s. 15
Income Tax Act - Section 9 - Timing no s. 9(1) income inclusion from consultant being granted stock options until exercise
3 April 2014 External T.I. 2013-0512371E5 F - Qualification des montants gagnés au jeu de poker Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit on-line poker winnings were from more than a pastime
25 April 2014 External T.I. 2013-0515621E5 F - Frais de voyage / Travelling expenses Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) benefit where employer pays costs of friend to accompany employee on training trip
2014-04-30 27 March 2014 External T.I. 2014-0524851E5 F - Deemed year-end and CPCC status Income Tax Act - Section 249 - Subsection 249(3.1) Ekamant: s. 251(5)(b) does not vitiate actual control by share owner
Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) sub of public corporation does not become CCPC until time of its actual acquisition of control

H&R REIT is proposing to expand its cross-border stapled/fixed investment trust structure

The units of H&R REIT are stapled to those of H&R Finance Trust. H&R Finance Trust holds notes of the indirect U.S. subsidiary of H&R REIT (“U.S. Holdco”). H&R Finance Trust is intended to qualify as a fixed investment trust for Code purposes, so that its unitholders are treated as if they held such notes directly. This avoids the U.S. earnings stripping limitations on the level of permitted interest deductions by U.S. Holdco as well as to a significant extent accessing the U.S. portfolio interest exemption from U.S. withholding tax.

U.S. acquisitions by U.S. Holdco were funded with loans from H&R REIT. In order that much of this additional debt can access the benefits of the stapled structure, H&R REIT and H&R Finance Trust are proposing an Alberta Plan of Arrangement under which H&R Finance Trust will make a s. 107.4 transfer (effectively, a gift) of its notes of U.S. Holdco to H&R REIT and, following the replacement of those notes and some of the newer debt with amended notes, and the distribution to the unitholders of units of a new fixed investment trust with nominal assets (the “F17 Trust”), the amended notes will be transferred by the REIT under s. 107.4 to the F17 Trust. Thus, there will be a replacement stapled structure similar to what was there before, except that the new Finance Trust (F17 Trust) will hold more U.S. Holdco debt.

The repayment of a “significant amount” of the existing loans owing by U.S. Holdco to H&R REIT through the issuance of the additional notes, in the amended form suitable for their on-transfer to the F17 Trust, is anticipated to generate a significant FX gain, but not so as to produce a result which is out of line with 2016, when significant capital gains also were pushed out to the H&R REIT unitholders.

Implementation of this Arrangement is conditional on receiving rulings from CRA.

Neal Armstrong. Summary of Circular of H&R REIT and H&R Finance Trust under Other – Releveragings.

Meberatu – Tax Court of Canada finds that an employee could deduct cell phone expenses

A personal support worker claimed around $900 a year in cell phone expenses as a deduction from her employment income on the basis that she was required by her employer to be able both to notify clients when she was going to be late and to report to her employer. She provided no documentary support.

Graham J stated that although he had the option to “not allow Ms. Meberatu any cell phone expenses on the basis that she has not proven that she incurred those expenses,” he instead chose to allow her $120 per year, stating:

This amount is a conservative estimate of Ms. Meberatu’s actual costs. I am not prepared to reward her failure to produce documents and provide a reliable breakdown of her employment-related cell phone use by using a middle or high estimate. If Ms. Meberatu wanted her income to be determined accurately, she should have provided a means for me to do so.

This case is intriguing not only because the taxpayer fared quite well (if in fact her expenditure was mostly for personal use) notwithstanding having lost, turfed or suppressed her records, but also because of the finding that there can be a cell phone deduction from employment income – perhaps under s. 8(1)(i)(iii) (“the cost of supplies that were consumed directly in the performance of the duties”)?

Neal Armstrong. Summary of Meberatu v. The Queen, 2017 TCC 211 under s. 8(1)(i)(iii).

CRA follows Elim Housing in finding that an Ontario nursing home qualified for enhanced GST/HST rebates

Elim Housing found that a B.C. long-term care facility, whose residents mostly had dementia, severely impaired mobility, complex medical issues and a life expectancy of between three months and three years, was making "facility supplies," so that it was eligible for the enhanced 83% federal public service body rebate. This likely overruled 3 July 2012 Ruling 109082 (re a nursing home). CRA has now (in response to a ruling request dated back in July 2011) ruled that an Ontario nursing home (the “Facility”) that was operated by a registered charity qualified for the federal 83% PSB rebate as well as the Ontario 87% PSB rebate. CRA stated:

After comparing the services and the care provided at the Facility to its residents to the elements described in Elim, we are of the view that facility supplies are provided at the Facility by the Corporation.

The Elim elements described by CRA included:

  • physicians visited residents frequently (e.g., roughly on a bi-weekly basis); …
  • registered nurses were at the facility at all times, and nurses were in regular communication with physicians for prescription or advice;
  • the facility received funding for 2.8 hours of care per resident per day …;
  • the care provided was of a different type than ordinary assistance with activities of daily living that a more robust individual might require.

Neal Armstrong. Summaries of 24 July 2017 Ruling 138196 under s. 259(1) – facility supply and s. 259(14).

CRA rules on subordinated notes with a mandatory conversion event

CRA provided rulings on interest being deductible and not being considered participating debt interest respecting subordinated notes with conventional terms other than that, on a redacted specified event (presumably respecting a shaky financial condition, as defined), the notes would be automatically converted into preferred shares based on a pre-determined conversion ratio. This fixed conversion ratio is different from 2014-0523691R3, where there was conversion into a formula quantity of common shares, but this made no difference. Here there was a similar statement in the summary that:

The borrower-lender relationship will continue to exist until such time as a [mandatory conversion event] occurs or until such time as it is or it became apparent the [mandatory conversion event] would occur.

Neal Armstrong. Summaries of 2016 Ruling 2015-0602711R3 under s. 20(1)(c)(i) and s. 212(3) - participating debt interest.