News of Note

Income Tax Severed Letters 19 June 2024

This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Tourigny – Court of Quebec finds that damages for a burnt warehouse were compensation for lost profits rather than proceeds of goodwill

The taxpayer (“Trac-World”), whose warehouse was destroyed by fire, received damages from the local municipality in settlement of its claim for providing inadequate water supply during the fire. The quit claim stated that the sum was paid to compensate for the loss of Trac-World customers.

Trac-World reported the sum as being proceeds of disposition of goodwill, giving rise to an eligible capital amount. In finding that, under the surrogatum principle, the amount instead was fully taxable as compensation for lost profits, Bergeron JCQ noted that over 90% of Trac-World’s claim had been for lost profits and that its statement of claim had made no mention of loss of goodwill.

Neal Armstrong. Summary of Tourigny v. Agence du revenu du Québec, 2024 QCCQ 1914 under s. 9 - compensation payments.

CRA finds that “cost” under s. 127(32) did not include costs of processing property after its acquisition

The rules in s. 127 require the recapture of the cost of property previously claimed as investment tax credits where the property is, for instance, converted to commercial use or sold. S. 127(32) provides inter alia that, in this context, the cost “shall not exceed the amount paid by the taxpayer to acquire the particular property from a transferor [thereof].”

CRA, in a diffident analysis, suggested that, in light of this wording in relation to trees which were converted into logs and then used to test some experimental lumber-producing equipment, the cost likely only included the cost of the trees (i.e., the stumpage fees paid to the province) and not all the additional costs incurred in processing the trees.

Neal Armstrong. Summary of 31 July 2023 Internal T.I. 2021-0876331I7 under s. 127(32).

CRA finds that assessment of a director under s. 227.1 does not restart the 10-year limitation on relief under s. 220(3.1)

A corporation was assessed in its 2007, 2008 and 2010 taxation years regarding unremitted source deductions for its 2006 to 2009 taxation years together with interest and penalties. CRA assessed the director pursuant to s. 227.1 in September 2018, and the director applied for relief under s. 220(3.1) in 2019.

After stating that “the director’s liability under subsection 227.1(1) arises from his joint and several liability with the corporation and does not create a second tax debt,” the Directorate found that the taxation years referenced in s. 220(3.1) were those in which the corporation’s liability for the unremitted source deductions arose rather than that in which the director was derivatively assessed. Accordingly, as the director’s application for interest and penalty relief was in respect of the 2006 to 2009 taxation years, the 10-year limitation in s. 220(3.1) applied.

Neal Armstrong. Summary of 26 March 2024 Internal T.I. 2023-0974091I7 under s. 220(3.1).

We have translated 8 more CRA severed letters

We have translated a ruling and interpretation released by CRA last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.

These are additions to our set of 2,866 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2024-06-12 16 April 2024 Internal T.I. 2023-0998991I7 F - Qualification fiscale de certaines sommes Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) amount per week of training in short-term program leading to a skills training certificate was a bursary/ amount paid upon graduation was a bursary or a prize
2024 Ruling 2023-0989121R3 F - Internal reorganization - 55(3)(a) and 55(3.01)(g) Income Tax Act - Section 55 - Subsection 55(3.01) - Paragraph 55(3.01)(g) transfer of real estate to separate Realtyco beneath a newly-formed Holdco
Income Tax Act - Section 75 - Subsection 75(2) 2 unrelated individuals were the settlors for each other’s family trust
Income Tax Act - Section 248 - Subsection 248(10) estate freeze transactions represented to be independent of subsequent transfer
Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) s. 55(3.01)(g) applied to the transfer (fresh after an estate freeze) by unrelated shareholders of Opco to a new Holdco, with an Opco realty spin-off to a new Realtyco sister
2001-10-26 14 November 2001 External T.I. 2001-0086765 F - FRAIS DE REPRESENTATION-EXCEPTION Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(c) s. 67.1(2)(c) exception is not precluded where the specific reimburser is a non-resident
8 November 2001 External T.I. 2001-0096435 F - Sous-alinéa 75(2)(a)(i) de la Loi Income Tax Act - Section 75 - Subsection 75(2) - Paragraph 75(2)(a) - Subparagraph 75(2)(a)(i) s. 75(2) does not apply by virtue of the trust property reverting to the settlor by operation of law
8 November 2001 External T.I. 2001-0103375 F - Décès du rentier Income Tax Act - Section 70 - Subsection 70(3) s.60(l)(ii)(B) annuity amounts, or entitlements thereto as trust income beneficiary, were rights and things
7 November 2001 External T.I. 2001-0103805 F - SENS D'ACTIFS Income Tax Act - Section 61.3 - Subsection 61.3(1) - Paragraph 61.3(1)(b) future income tax asset under GAAP is an asset
2 November 2001 External T.I. 2001-0107425 F - FONDS RESERVES ET BIENS ETRANGERS Income Tax Act - Section 206 timing of foreign property rules for segregated funds
6 November 2001 External T.I. 2001-0072335 F - CII-LOCATION Income Tax Act - Section 127 - Subsection 127(9) - Qualified Property - Paragraph (d) lessor can qualify for ITC even if lease is assigned to finance company immediately after the lease

CRA rules on s. 55(3.01)(g) applying to the transfer (fresh after an estate freeze) by unrelated shareholders of Opco to a new Holdco, with an Opco realty spin-off to a new Realtyco sister

The three unrelated individuals (A, B and C) holding the shares of Opco were to engage in preliminary estate-freeze transactions as a result of which trusts for the families of A and B will hold non-voting Opco common shares and Opco preferred shares will be held through holding companies for A and B. (C will participate, but did not use a family trust.)

Thereafter, the Opco shareholders were to transfer their shares to a new Holdco, Holdco would transfer some of its (newly-acquired) Opco preferred shares to a newly-formed subsidiary (Realtyco) and Opco would transfer its real estate to its sister, Realtyco, for preferred shares (as, in the two preceding transactions, utilizing s. 85(1)), with the preference shares between Opco and Realtyco then being cross redeemed.

CRA ruled that these transactions will not be considered in themselves to result in a disposition or increase in interest described in any of ss. 55(3)(a)(i) to (v) and, in particular, that the share issuance by Holdco to the Opco shareholders will not be described in s. 55(3)(a)(ii) by virtue of s. 55(3.01)(g).

The ruling letter had a representation that the estate freeze transactions “will not be carried out with a view to completing the series of transactions that includes the Proposed Transactions and would be completed notwithstanding the implementation of the Proposed Transactions, and vice versa.” This is consistent with the proposition that transactions are not undertaken in contemplation of a subsequent series unless they are undertaken “in relation to” or “because of” that series” (see, e.g., Deans Knight at para. 55).

Neal Armstrong. Summaries of 2024 Ruling 2023-0989121R3 F under s. 55(3.01)(g) and s. 75(2).

CRA finds that the “six months” test in Art. 5(3)(b) of the Mexico Treaty should be day-counted (more than 183 days)

Art. 5(3)(b) of the Mexico-Canada Convention provides that a “permanent establishment” includes:

(b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve month period

Regarding how “six months” should be computed, the Directorate stated:

Considering that the testing period of six months is not required to be consecutive, the only reasonable interpretation of the term “periods aggregating more than” six months within any twelve month period” is to aggregate the number of days equivalent to the number of months.

This interpretation is quite similar to 23 November 2023 Internal T.I. 2020-0850381I7 (issued two days later), finding that the 3-month threshold for a drilling rig to be a PE under the Canada-US Treaty is counted based on days of consecutive or non-consecutive use.

Neal Armstrong. Summary of 21 November 2023 Internal T.I. 2021-0880101I7 under Treaties – Income Tax Conventions – Art. 5.

Canadian Western Trust – Federal Court of Appeal confirms that a TFSA trading in qualified investments was taxable on the profits

A self-directed TFSA was conceded by it to be carrying on a business of trading in qualified investments. However, it submitted that the exemption from tax for an RRSP on business income from the disposition of qualified investments in s. 146(4)(b)) should be read into s. 146.2(6) given that the RRSP and TFSA regimes were “mirror images” of each other.

In rejecting this submission, and before dismissing the appeal, Biringer JA stated:

We agree with the Tax Court that the appellant’s reading is unsupported by the text, context, and purpose of subsection 146.2(6), and would amount to a re-drafting of the provision … .

Neal Armstrong. Summaries of Canadian Western Trust Company, Trustee of Ahamed TFSA v. Canada, 2024 FCA 108 under s. 146.2(6) and General Concepts - Evidence.

CRA indicates that it could, but is not required, to amend a statute-barred year return to replace an inventory with a capital gain so as to eliminate a loss carryback and interest

The initial assessment of a particular year of the taxpayer resulted in an amount of tax payable, which remained unpaid, so that interest accrued thereon. A non-capital loss was then carried back from a subsequent taxation year, resulting in CRA issuing a notification that no tax was payable for the particular year.

The taxpayer then requested an amendment to its return for the particular year (which now was statute-barred) so as to recharacterize as a capital gain an amount previously reported as business income, thereby eliminating the loss carryback.

CRA indicated that such a request could be granted since it would have no impact on the tax payable for the particular year, but “emphasize[d] … that there is nothing in the Act that compels the Minister to automatically accept such requests.” However, it noted that if the amendment request was accepted, the accrued interest would be eliminated, stating:

[H]ad the taxpayer filed its initial tax return on that [capital gains] basis, the tax payable would be nil and a notification of no tax payable would be issued. In such a case, there would be no excess of tax payable over the tax paid on account of tax payable by the taxpayer and thus, no interest can accrue pursuant to subsection 161(1).

Neal Armstrong. Summaries of 25 January 2024 Internal T.I. 2023-0973901I7 under s. 152(4) and s. 161(1).

Income Tax Severed Letters 12 June 2024

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