CRA’s practice of accepting a consolidated s. 116 certificate request from a partnership disposing of taxable Canadian property (rather than requiring each partner to submit the request) created in its mind a technical issue where that partnership has both Canadian and non-resident partners, namely, that the certificate limit could only be based on the interests in the partnership property (that was TCP) disposed of by the non-resident partners, whereas the potential liability of the purchaser under s. 116(5) could be based on the excess of the global purchase price (reflecting also the interests in the partnership TCP property being sold by the resident partners) over the certificate limit.

However, CRA indicated that it considered that s. 116 can be interpreted such that, in determining the amount of the s. 116(5) liability, the purchase price is only the portion that is attributable to the interest sold by the non-residents, such that the certificate limit and the purchase price would line up, and there would be no resulting s. 116(5) liability.

Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.4 under s. 116(5).

We have uploaded summaries of the oral responses provided by CRA at the CTF Annual Roundtable to Q.1 and Q.4 to Q.9. We likely will provide summaries of the balance of the responses (including to Q. 2 and Q.3, which were discussed by CRA last) late tomorrow evening.

In Q.1, a wholly-owned subsidiary (Subco1) of Parentco effects an s. 55(3)(a) spin-off of one of its assets (all the shares of Subco2) to Newco, which is newly-formed by Parentco. If the spin-off is done in the most obvious way, the result is that the shares of Newco held by Parentco will have a pro rata ACB (based on their relative fair market value and the starting ACB of the shares of Subco1). This means that if the shares of Subco2 had a disproportionately high ACB relative to the other assets of Subco1, then on an s. 88(1) winding-up of Subco1, that high ACB would generally flow through under s. 88(1)(c) to Parentco, so that its low-ACB shares of Newco would be replaced by high-ACB shares of Subco2.

CRA indicated that the reorganization results in a misalignment between outside and inside basis, and would consider applying GAAR, because there is an undue ACB increase in the hands of Parentco that is contrary to the scheme of the Act, and, more specifically, of s. 55(2).

On the other hand, CRA indicated that it could be prepared to rule favourably on such a transaction if the transactions resulted in an increase in the ACB of the Newco shares corresponding to the ACB of the spun-off assets (the shares of Subco2). This is somewhat ironic: GAAR potentially would be applied if the spin-off is implemented in the most straightforward manner; whereas, CRA considers it to be preferable to engage in artificial steps to increase the tax basis transferred to Newco (e.g., engaging preliminarily in a “dirty” 85 exchange of the shares of Subco1 in order to isolate cost base in preferred shares.)

Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.1 under s. 55(2.1)(b).

The quantum of the small business deduction (SBD) grind under s. 125(5.1) based on the adjusted aggregate investment income (AAII) for the associated group may be reduced or eliminated if the investment portfolio generating the AAII is held through a joint partnership rather than a joint investment company (Investco). For example if Mr. X owns 100% of Opco (generating active business income) and 51% of Investco (with his spouse holding the other 49%), then all of the AAII of Investco will have to be accounted for in computing the SBC grind to Opco.

However, if the investment portfolio instead is held in a partnership that is owned by a 51/49 basis by respective holding companies for Mr. and Ms. X, only 51% of the AAII of the partnership will be included in computing the SBD grind of the Opco of Mr. X.

Neal Armstrong. Summary of Stan Shadrin, Alex Ghani and Josh Harnett, “Corporate Partnership May Avoid the Paragraph 125(5.1)(b) Grind,” Tax for the Owner-Manager,” Vol. 20, No. 4, October 2020, p.4 under s. 125(5.1).

A subsidiary (“Idameneo”) of an Australian public company provided medical centre facilities and services to doctors in consideration for 50% of the fees generated by them. In order to induce a doctor to join one of the medical centres operated by it, it would typically pay a lump sum in the range of $300,000 to $500,000 to the doctor in consideration for the doctor’s promise to conduct his or her practice from the medical centre for a specified period of around five years, along with an exclusivity covenant. The taxpayer entered into 505 such agreements in the four years that were assessed.

The Full Court reversed the primary judge, and found that Idameneo paid the lump sums as capital expenditures, stating that in each case, it was securing the “lasting protection for the goodwill of the [medical] Centre” and that it was “maintaining the structure of its business” by “ensuring it had in place the commitments that it needed to operate its business.”

The Court went on to state that “[i]f all that Idameneo had done was to set up the Centres and then secured practitioners as customers to occupy the Centres and pay for services then term contracts with upfront lump sum payments might indeed be seen to be analogous to those made in BP Australia,” where it was found that securing five-year agreements of gas stations to serve as BP gas stations did not give rise to an enduring benefit. However, here it was instead found that Idameneo’s “business activity was not focussed upon selling services to practitioners, it was focussed upon running the Centres and attracting patients,” so that the payments enhanced the goodwill of and built up the structure of Idameneo’s own business.

Neal Armstrong. Summary of Commissioner of Taxation v Healius Ltd [2020] FCAFC 173 under s. 18(1)(b) – capital expenditure v. expense - current expense v. capital acquisition.