Aco will receive a grant (the “Government Assistance”), described under s. 12(1)(x)(iv), from a Crown corporation for the purpose of creating or repairing affordable housing.

CRA indicated that to the extent that the Government Assistance received by Aco was in respect of the acquisition of depreciable property (or land), s. 13(7.1) (or s. 53(2)(k)) will deem that amount to reduce the capital cost of the depreciable property (or land) – without any inclusion under s. 12(1)(x) pursuant to s.12(1)(x)(vi) and (in contrast with s. 13(7.4) or 53(2.1)) without any election required. The cost of depreciable property for these purposes includes any “capital expenditures (as opposed to current expenses) related to the construction of new affordable housing, or to convert existing buildings into affordable housing.”

To the extent that the Government Assistance was used to fund an expense that was otherwise fully deductible (e.g. landscaping under s. 20(1)(aa), investigation costs under s. 20(1)(dd), disability related modifications to buildings in accordance with s. 20(1)(qq), salary and certain repairs and maintenance under s. 9(1)), Aco could elect under s. 12(2.2) to reduce the expense by that amount (otherwise, there would be a s. 12(1)(x) inclusion – which would not matter because Aco could then deduct the related expense.)

Neal Armstrong. Summaries of 16 February 2024 External T.I. 2023-0984301E5 under s. 13(7.1) and s. 12(2.2).

In 2014, Bill C-43, which amended the FAPI rules in relation to partnerships, provided that the new rules would apply to taxation years ending after July 12, 2013, unless the taxpayer elected, under Bill C-43, to have the amendments be deemed to have come into force on January 1, 2010. The applicants (“Onex”) concluded that, based on their structure, they had already achieved the purpose of these amendments (as already reflected in returns filed for 2012 and 2013) and did not make the election. In June 2020, CRA reassessed the Onex returns for 2012 and 2013 to add over $190 million in taxable income, on the basis that the retroactive election had not been made. Onex then sought the authorization of the Minister pursuant to s. 220(2.1) to waive the requirement to file the election, in order for Onex to benefit from the amendments for its 2012 and 2013 taxation years or, alternatively, permission to file new returns for those years, under s. 220(3), so as to amend its earlier 2012 and 2013 returns and also make the election contemplated by Bill C-43.

In rejecting the Minister’s submission that the Bill C-43 election provision was not a part of the Act, so that the Minister did not have the discretion under the terms of s. 220(2.1) of the Act to waive the timely filing of an election under those Bill election provisions, Régimbald J noted that s. 42(3) of the Interpretation Act provided that “An amending enactment, as far as, consistent with the tenor thereof, shall be construed as part of the enactment that it amends” and that this submission was also inconsistent with s. 12 of that Act, favouring a remedial interpretation. He also noted that:

[T]he specific terms of subsection 220(2.1) do not specifically limit the Minister’s discretion to the waiving of the filing of “designations” but not of “elections,” nor limit the Minister’s discretion to only accept the waiver of documents that do not require a “decision.”

Regarding the Minister’s position that filing the election was not tied to the filing of a return, as required for s. 220(3) to apply, Régimbald J noted that, substantively, the effect was to amend the T5013 returns of the taxpayer, that per Bonnybrook s. 220(3) extended to documents other than returns and that CRA’s restrictive interpretation in this regard failed to take into account the remedial nature of s. 220(3).

Regarding the CRA position that the implied exclusion rule of statutory interpretation indicated that Parliament did not intend ss. 220(2.1) and 220(3) to be used to allow the late filing of an election that was not listed pursuant to s. 220(3.2) under Reg. 600, Régimbald J indicated that s. “220(3.2) may serve a different purpose and grant an additional and different type of relief to taxpayers, in relation to some specific types of elections” and that CRA had failed to consider this more remedial interpretation.

Regarding the CRA position that, even if it had the discretion under s. 220(3) to accept the filing of a new T5013 return, no extension was appropriate, Régimbald J found that CRA had failed to consider inter alia that its reassessment “would create injustices” given Onex’s representations that “they always intended to benefit from the ultimate tax result now provided by Bill C-43, and that their request was not an attempt at retroactive tax planning” – and that CRA had “failed to explain why, in its view, the ‘harsh consequences’ in this case better reflected Parliament’s intention”.

He set aside the Minister’s decision and remitted it back for reconsideration in light of his reasons.

Neal Armstrong. Summaries of Onex Corp. v. A. G. Canada, 2024 FC 1247 under s. 220(3) and Interpretation Act, s. 42(3).

Regarding a corporation (the “Inverted Payer Corporation”) incorporated under the laws of Canada that is subject to the “anti-inversion rules” in IRC §7874(b) (so that it is resident in the U.S. for IRC purposes), the Directorate indicated that under the “tie-breaker” rule in Art. IV(3) of the Canada-U.S. Convention (the “Convention”), the Inverted Payer Corporation is resident for Convention purposes in Canada because it had been incorporated there, so that s. 250(5) would not apply to deem it to be a non-resident. Accordingly:

• Dividend payments made by the Inverted Payer Corporation to a U.S. resident would be subject to Part XIII tax and to potential treaty-rate reductions in accordance with the normal rules (and dividend payments made to other non-residents also would be subject to Part XIII tax subject to any applicable treaty reduction).
• No Part XIII tax would apply to dividends paid by it to Canadian residents (including to any other such Inverted Payer Corporation).
• Dividends paid by it to a Canadian resident would be Canadian-source income, so that the resident would not be entitled any foreign tax credit for the U.S. withholding tax on such dividends if it does not have other sources of U.S. non-business income.
• Although Art. X(5) of the Convention bars the U.S. from taxing such dividends, IRC §7874(f) provides that the anti-inversion rules apply despite U.S. treaty obligations, and a U.S. court would respect this treaty override.

Neal Armstrong. Summary of 6 February 2024 Internal T.I. 2022-0936261I7 under Treaties – Art. 4.

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