We have published a webpage providing the questions posed, and summaries of the preliminary oral responses given, at the 2024 CTF CRA Roundtable, held yesterday.

Q.1 was a follow-up to the CRA "Update on Subsection 55(2) ..." (Full paper released on 22 December 2023) which stated that, where a shareholder acquires preferred shares as consideration for the transfer of property on a tax deferred basis, the accrued gain on the property, when subsequently realized by the corporation, would be viewed as contributing to the gain on the preferred shares, and accordingly would be included in the preferred shares’ safe income. In Q.1, CRA indicated that this position would not be extended to where the preferred shares are acquired in exchange for common shares, so that the accrued gains on the underlying property held by the corporation and any of its subsidiaries at the time of the share exchange will not be allocated to the safe income of the preferred shares once realized.

Instead, the allocation of the safe income to the preferred shares would follow CRA’s longstanding position that a portion of the safe income to which the exchanged shares would have been entitled immediately before the exchange simply flows through to the preferred shares. Regarding the safe income realized after the exchange, the preferred shares would generally participate in the safe income of the corporation in accordance with the shares’ dividend entitlement only.

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.1 under s. 55(2.1)(c).

CRA ruled on a supplemental employee retirement plan ("SERP") to provide benefits to senior employees based on the portion of their base salary (up to a cap) in excess of their maximum pensionable earnings for purposes of the company defined benefit registered pension plan (RPP). Each month, 1/12 of this eligible portion of their base salary would be credited to a notional account and, at year end, the notional balance would be adjusted for a notional positive or negative return based on that achieved for the year under the RPP. Upon retirement, a participant could elect to receive their notional account balance as a single lump sum payment, or in annual instalments over a period not exceeding 10 years, with the funding in either case to come only out of the employer’s general revenues.

CRA ruled that the SERP will not be a salary deferral arrangement (SDA) or retirement compensation arrangement, and that the only income inclusions to the participants would be pursuant to s. 56(1)(a)(i) of the payments to them. Regarding the SDA ruling, the CRA summary stated:

The SERP will provide for reasonable pension benefits and therefore none of the main purposes will be to postpone the payment of tax.

Neal Armstrong. Summary of 2021 Ruling 2021-0887611R3 under s. 248(1) – SDA.

A group settlement reached in respect of the appeals of a large group of taxpayers including the taxpayer allowed a deduction of losses in a specified amount for their 1995 and 1996 taxation year, allowed interest expense claims for various periods and allowed “any consequential claims by [the taxpayers] for the carryforward or carryback of any losses resulting from the reassessments set forth above.” Without further communication with the taxpayer, the Minister carried back the resulting non-capital loss of the taxpayer to his 1992 and 1993 taxation years. The taxpayer objected on the basis that this carryback was done without giving him a choice as to the application of the loss, and that he wanted the loss applied to years under appeal, i.e., 1997 and 1998.

In allowing the taxpayer’s appeal, Wong J noted that “the starting point is that it is the taxpayer’s choice as to the application of available non-capital losses” and found that there was nothing in the wording of the settlement that took away this right of direction of the taxpayer.

Neal Armstrong. Summary of Laprairie v. The King, 2024 TCC 149 under s. 169(2.2).

The taxpayers were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (CDAs), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.

In very general terms, the following steps were significant elements of the series of transactions:

1. Grenon’s RRSP transferred its units of FMO to a newly-formed unit trust (“TOM”) in exchange for units of TOM representing close to 100% of the issued and outstanding TOM units.
2. The taxpayers acquired such FMO units from TOM in consideration for issuing $161M in promissory notes.
3. The public transferred their units of FMO (the “public FMO units”) to a new unit trust (“FIF”), that was intended to be the replacement public vehicle for FMO, in exchange for units of New FIF.
4. The taxpayers acquired the public FMO units for $115M in promissory notes.
5. FMO realizing $226M in capital gains on one of the internal steps.
6. After various steps to clean up the structure, FMO distributed essentially all its assets (being some FIF units and promissory notes) to the taxpayers, and treating this as a distribution of the capital gains realized by it in 5 above.
7. The units of FMO were repurchased by FMO for nominal consideration. The appellants had full (FMV) cost for their FMO units when acquired in steps 2 and 4, and the capital gains distribution in step 6 did not reduce the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)(I). Accordingly, such repurchases resulted in the realization of largely offsetting capital losses (and, in light of the distribution of the increase to their CDAs arising in step 6, also resulted in negative CDAs.)

Monaghan JA found that the transactions could have accomplished their professed commercial objectives without the taxpayers’ involvement. In particular, their involvement entailed acquiring the FMO units at a high cost in steps 2 and 4, being allocated a capital gain by FMO in step 6 so as to generate a CDA increase which could then be distributed, and having their high cost FMO units redeemed in Step 7 so as to generate an offsetting capital loss - so that their only purpose was to generate a CDA account that could be distributed to their parents.

After noting that Triad Gestco had found that “the capital gain system … [is] aimed at taxing increases in ‘economic power’” rather than only “an arithmetic difference”, Monaghan JA stated that “[t]he appellants had neither an economic gain nor an economic loss; there was absolutely no change in their economic power as a result of their participation in the FMO reorganization” and “[a]s in Triad Gestco … avoidance transactions frustrated the object, spirit and purpose of the capital gain and capital loss provisions in the Income Tax Act.”

Neal Armstrong. Summaries of Magren Holdings Ltd v. Canada, 2024 FCA 202 under s. 245(1) – benefit, s. 245(4), s. 245(2), s. 104(6), General Concepts – Ownership, Sham.