News of Note
BNS – Federal Court of Appeal finds that interest on an audit adjustment accrued up to the time that the taxpayer, learning of the adjustment, requested a loss carryback to offset it
Email this ContentIn 2015, the taxpayer Bank requested to carry back $54 million of non-capital loss from its 2008 taxation year to its 2006 taxation year to offset the increase to its income for the 2006 year that would occur when the Minister implemented a concurrent settlement agreement regarding a transfer-pricing audit. The Minister did so, but calculated interest on the increased balance of tax owing for the Bank’s 2006 year (before application of the loss carryback) for the period of approximately eight years ending, pursuant to s. 161(7)(b)(iv), with the date of the Bank’s carryback request, rather than (pursuant to s. 161(7)(b)(ii)) with the return filing date for the loss year. The Bank submitted that s. 161(7)(b)(iv) was inapplicable because the reassessment of its 2006 year did not occur “as a consequence of [its carryback] request” as required by s. 161(7)(b)(iv) but “[r]ather, the reassessment was made in order to process the audit adjustment”.
The various reasons of Woods JA for rejecting the Bank’s position included:
- Given that “Parliament seeks certainty, predictability and fairness in tax legislation … [i]f Parliament did not intend to impose interest when a loss carryback is claimed as a result of an audit adjustment, it is likely that Parliament would have provided for this with explicit language”.
- The Bank’s position could produce anomalous results, e.g., if the Minister implemented the audit adjustment and the loss carryback in two separate reassessments rather than one, the “interest clock” would continue until the loss carryback was requested, whereas with a single reassessment, the “interest clock” would stop when the return for the loss year was filed: “There is no principled reason why the issuance of one or two reassessments should lead to diverse outcomes …”.
- It was “likely that Parliament knew that subparagraph (b)(iv) could function in a manner similar to a penalty … [and] that substantial interest could accrue under subparagraph (b)(iv) if the carryback request resulted from an audit”.
It also may be of interest that, in the course of dismissing a Bank argument not summarized above, Woods JA indicated that the “Minister has the right to reject a taxpayer’s request for a loss carryback” to offset an audit adjustment.
Neal Armstrong. Summaries of Bank of Nova Scotia v. Canada, 2024 FCA 192 under s. 161(7)(b)(iv), s. 111(1)(a), and Statutory Interpretation – French and English Version.
The excluded loan provisions in draft s. 15(2.01) help but are not a complete fix
S. 15(2.01) of the August 12, 2024 draft legislation proposes to exclude, from the application of s. 15(2), a loan the debtor of which is
- a corporation resident in Canada (CRIC), a foreign affiliate of the particular corporation referred to in s.15(2), or a foreign affiliate of a person resident in Canada with which such particular corporation does not deal at arm’s length; or
- a partnership, each member of which is a person described above, or another partnership of such persons or partnerships.
These amendments do not appear to address some situations, such as this example:
- Canco 1 is the 99.9% limited partner of LP 1, and its subsidiary, Canco 2, is the 0.1% general partner of LP 1 and LP 2; and LP 1 in turn wholly-owns the 0.1% general partner (Forco 1) of LP 3. The limited partners of LP 2 and LP 3 are arm’s length persons.
- LP 2 makes a loan to LP 3 to fund LP 3’s business.
- Canco 2 is the particular corporation, while Canco 1 is its shareholder. LP 3 does not deal at arm’s length with Canco 1 because Canco 1 controls its general partner. Therefore, LP 3 is connected with Canco 1, a shareholder of the particular corporation. Furthermore, Canco 2 is a member of LP 2, which advanced the loan. Therefore, a partnership (LP 3) which is connected with the shareholder (Canco 1) of the particular corporation has received a loan from a partnership (LP 2) of which the particular corporation (Canco 2) is a member. The conditions in s. 15(2.01) are not met, so that the s. 15(2) rules apply.
If the limited partners of LP 2 and LP 3 instead were Canco 1 and LP 1, respectively, the s. 15(2.01) exception would be satisfied since the loan recipient (LP 3) is a partnership whose only members are Forco 1 (an FA of LP 1, a resident person for s. 96 income computation purposes with whom the particular corporation does not deal at arm’s length and whose partners are all CRICs) and LP 1 (a partnership each member of which is a CRIC).
Neal Armstrong. Summary of Sam Li, “The Revised Shareholder Loan Rules,” International Tax Highlights, Vol. 3, No. 4, November 2024, p. 9 under s. 15(2.01).
Killam Apartment REIT will be using the s. 132.2 merger rule together with a renunciation to eliminate its corporate subsidiary
At the beginning of 2016, Killam Properties Inc. (KPI) effectively converted to a REIT under a Plan of Arrangement pursuant to which most of its shareholders exchanged their KPI shares for units of the REIT on a taxable basis, but with some electing to receive rollover treatment by transferring their shares on a s. 97(2) rollover basis for exchangeable units of a subsidiary LP (Killam MLP) - into which the REIT then also contributed the KPI shares acquired by it on a taxable basis.
Starting with 2003-0053981R3, CRA issued various rulings permitting an income fund or REIT to eliminate a corporate subsidiary by creating a mutual fund corporation (MFC) through a distribution of shares of the MFC, having a nominal value, to its unitholders, then amalgamating the corporate subsidiary with the MFC to form Amalgamated MFC, and then effecting a s. 132.2 merger of Amalgamated MFC into the income fund or REIT.
On October 11, 2024, CRA issued a ruling letter confirming the tax consequences of transactions of this general character for the elimination of KPI, including the application of the s. 132.2 rules, and the REIT is now proposing to implement. A complicating factor is that KPI is held by the REIT through Killam MLP rather than directly. Accordingly, the proposed transactions include a renunciation by Killam MLP of the receipt of redemption proceeds for its 99.999%+ shareholding in Amalco MFC, somewhat similar to that ruled on in 2016-0660321R3.
Neal Armstrong. Summary of Circular of Killam Apartment Real Estate Investment Trust dated October 18, 2024 under Public Transactions - Other - Internal S. 132.2/107.4 Mergers - Corporate Sub s. 132.2 Merger.
Income Tax Severed Letters 20 November 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The object of the FABI rules would be better met if the FABI definition were expanded
The “relevant tax factor” (RTF) proposals released on August 9, 2022 would have subjected all foreign accrual property income (FAPI) and “taxable surplus” of foreign affiliates (FAs) of CCPCs to an RTF of 1.9 (instead of 4), so as to tax all FAPI and taxable surplus of such FAs at 52.63% rather than 25%.
However, to address the issue that some FAPI and taxable surplus amounts would not be aggregate investment income (AII) if earned in Canada by a CCPC, the revised RTF proposals of August 12, 2024 introduced the concepts of “foreign accrual business income” (FABI) and “FABI surplus,” which effectively are types of FAPI and taxable surplus which continue to be subject to an RTF of 4, provided that timely elections are made.
However, FABI (under the s. 93.4(1) definition) only includes:
- services income under s. 95(2)(b)(i), when specified conditions are met; and
- income from a business of developing real estate for sale, or leasing of real estate or other immovable property, that is an “investment business” but would not be an “investment business” if it were possible to meet the “five full-time employees (or equivalent)” test by counting services performed in Canada by other members of the corporate group.
The definition of FABI surplus, which in addition to FABI and certain other amounts, includes an FA’s net earnings or net loss from an active business carried on by the FA in a country, would, for example, address the situation where an FA is carrying on an active business in a foreign treaty country but is earning taxable surplus because its central management and control is in Canada.
The definition of FABI does not capture income from the following, which also would not be AII where earned in Canada by a CCPC:
- an adventure in the nature of trade;
- the active trading of securities, currencies, or commodities;
- the business of insuring or reinsuring risks;
- services deemed to be FAPI under s. 95(2)(b)(ii);
- the business of disposing of Canadian or foreign resource properties;
- the business of developing real estate for sale with insufficient employees;
- the business of leasing property other than real property with insufficient employees; and
- a non-qualifying business.
Neal Armstrong. Summary of Christopher Montes, John Farquhar, and Evan Raymer, “Mind the Gap: FABI Relief Falls Short for CCPCS,” International Tax Highlights (IFA), Vol. 3, No. 4, November 2024, p. 2 under s. 93.4(1) - FABI.
CRA discusses the application of the SAM formula to a self-constructed MURC
A selected listed financial institution (SLFI), which is the builder of a multiple unit residential complex (MURC) situated in Ontario and a MURC situated in a non-participating province, is deemed to have made and received a taxable supply by way of sale of those MURCs around the time of substantial completion and occupancy by the first tenant. The special attribution method (SAM) formula in ETA s. 225.2(2) for computing the SLFI tax reads as follows:
[(A - B) x C x (D / E)] - F + G
where in, simplistic terms, A-B is the federal GST paid (A) minus ITCs claimed (B), the middle part of the formula grosses this net federal tax up to a blended HST rate based on the location of the stakeholders in the SLFI, and the F and G components make technical adjustments.
CRA indicated:
- The SLFI is not entitled to the Ontario new residential rental property (NRRP) rebate, by virtue of the prohibition in s. 263.01(1) against paying a rebate of provincial HST to a SLFI.
- The federal GST on the self-supply pursuant to s. 191(3) is included in Element A, whereas the Ontario HST is included in Element F.
- Regarding Element G (which can reflect negative amounts) there would be a negative amount equal to the federal NRRP rebate pursuant to G2(iii) of the formula in s. 46(a) of the SLFI Regulations.
CRA did not provide any numerical example, so I will make one up to illustrate my understanding (or misunderstanding). A REIT which is a SLFI with a blended HST rate of 10%, incurs $5 million of GST and $8 million of Ontario HST on its substantial completion of a (directly held) Ontario apartment building, and it has no federal NRRP rebate because the pro rata value of each unit is over $450,000 and excavation commenced before 2023. Its federal GST is grossed up to $10 million from which it subtracts its Ontario HST of $8 million, so that its net tax insofar as this project is concerned is $2 million. To vary the example, if it qualified for a full federal NRRP rebate of $5 million, it would have a net tax refund of $3 million
Neal Armstrong. Summary of 16 May 2024 GST/HST Interpretation 224829 under ETA s. 225.2(2).
We have translated over 3,000 severed letters
We have translated a further 6 CRA interpretations released in May of 2001. Their descriptors and links appear below.
These are additions to our set of 3,005 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 23 ½ 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 |
|---|---|---|---|
| 2001-05-25 | 10 May 2001 Internal T.I. 2001-0066107 F - TABLE RONDE - QUESTION 32 | Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | absence of cost step-up to s. 69(1)(b) transferee does not produce a capital gain on subsequent disposition due to such gain being recapture pursuant to s. 13(7)(e)(iii) |
| Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(a) | parenthetical exclusion prevents double taxation to a NAL transferee otherwise arising from the deemed high capital cost under s. 13(7)(e)(iii) but with no ACB step-up under s. 69(1)(b) | ||
| 10 May 2001 Internal T.I. 2001-0065727 F - AVANTAGE - FONCTIONNEMENT AUTOMOBILE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(l) | s. 6(1)(l) can include a benefit relating to the operation of an automobile in the income of an employee of a member of a partnership | |
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(y) | unlike standby benefit, operating benefit for an employee of a partnership member is addressed by s. 6(1)(l) | ||
| 10 May 2001 Internal T.I. 2001-0066047 F - CRITERES RÉSIDENCES D'ACCUEIL | Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(h) | taxpayer must ordinarily reside at the place as a principal residence | |
| 10 May 2001 Internal T.I. 2001-0066067 F - SOCIÉTÉ DE PERSONNES - PARTAGE REVENU | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(c) - Subparagraph 53(2)(c)(v) | salary paid to partners is treated as drawings and is an ACB deduction rather than an income deduction | |
| Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) | partner salaries are non-deductible | ||
| 14 May 2001 Internal T.I. 2001-0065687 F - VENTE CREANCE A ESCOMPTE | Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) - Subparagraph (b)(i) | blended monthly payments of interest and principal received pursuant to a mortgage acquired at a discount each gave rise to a capital gain | |
| Income Tax Act - Section 43 - Subsection 43(1) | apportioned ACB of discounted mortgage that is disposed of with each blended payment is determined by apportioning the discount | ||
| Income Tax Act - Section 9 - Computation of Profit | holder on income account of a mortgage can choose to recognize the discount only after he has recovered his purchase price through the blended principal payments | ||
| Income Tax Act - Section 20 - Subsection 20(14) | application of s. 20(14) to acquisition of mortgage | ||
| 10 May 2001 Internal T.I. 2001-0065697 F - SOCIÉTÉ EXERCANT UNE PROFESSION LIBERALE | General Concepts - Illegality | where profession is carried on in a corporation contrary to the regulatory requirements, the corporate income is earned by the professional | |
| Income Tax Act - Section 9 - Nature of Income | income earned by a professional corporation contrary to the professional rules is personal income of the professional |
CILI – Court of Quebec finds that the satisfaction of a resolutory sales condition nullified the original sale so that reconveyance of the realty to the vendor was not a supply
Two individuals, who wished to acquire a condo unit in a building (“265”) which was still under construction by the taxpayer (“CILI”), agreed with CILI to acquire another unit in an already completed building (“260”) and move there on condition that, when the 265 unit became available, they would acquire the 265 unit at no loss, if a purchaser had not been found for the 260 unit by a specified date. When that date arrived, and the 260 unit had not yet been sold, CILI, and the two individuals, entered into a “deed of retrocession” pursuant to which the original sale was annulled, the purchase price returned to them, and they acquired the 265 unit from CILI.
CILI also entered into a somewhat similar transaction with the son of its principal. In order to meet a bank-imposed sales target, CILI sold the development’s model condo suite to him for rental by him back to it, on the condition that CILI would take back the unit from him once a third-party purchaser had been secured. When this “resolutory” condition was satisfied, the unit was returned to CILI pursuant to a deed or retrocession, and the purchase price refunded.
On both sales, CILI collected the applicable QST, refunded such QST on the retrocession, and claimed a credit for such refunded tax pursuant to the Quebec equivalent of ETA s. 232, which the ARQ refused on the grounds that the retrocessions represented second taxable supplies of the two units, rather than evidencing annulments of the previous sales.
Before allowing CILI’s appeal, Fournier JCQ found that under the Quebec Civil Code:
A resolutory condition has the effect of destroying the contractual link existing between the parties by extinguishing it as if it had never existed. …
Thus, the return of the unit in each case was to reflect that the original taxable supply was nullified, rather than representing a further taxable supply, so that the application of the s. 332 equivalent was confirmed.
Neal Armstrong. Summary of Corporation immobilière des Laurentides Inc. v. Agence du revenu du Québec, 2024 QCCQ 5297 under ETA s. 232(1).
CRA has confirmed that prior SR&ED claims for non-statute-barred years can be amended to reflect excluded loans
In response to CAE, effective for loans made after 2019, “excluded loans” were excluded from “government assistance” as defined in s. 127(9) for ITC purposes and from s. 12(1)(x) receipts and governmental assistance under s. 13(7.1). Simplistically, an excluded loan is a government-sourced loan which must be non-forgivable and have reasonable repayment terms, but which otherwise can have non-commercial terms, such as a low interest rate.
CRA representatives confirmed that taxpayers impacted by the change in the s. 127(9) definition of government assistance may submit amended tax returns with their revised SR&ED forms for the years affected even where their SR&ED reporting deadline has passed, provided that the taxation year is not statute-barred.
Neal Armstrong. Summary of EY, “Concessional loans – Claimants may amend prior SR&ED claims for taxation years that are not statute-barred,” Tax Alert 2024 No. 54, 15 November 2024 under s. 127(9) – government assistance.
CRA treats the conversion of a Delaware corporation to an Iowa LLC as the continuation of the same entity
A Delaware corporation was converted into an Iowa limited liability company pursuant to provisions in the applicable statutes that contemplated that the converted entity was the same entity as the converted corporation. The Directorate indicated that since both companies were corporations for ITA purposes, it would rely on the foreign company law, which treated the conversion as not entailing the converted company as ceasing to exist and to instead be continued, so that it would regard the Iowa LLC as the same entity as the Delaware corporation.
Neal Armstrong. Summary of 30 July 2024 Internal T.I. 2024-1019041I7 under s. 248(1) - disposition.
Neal H. Armstrong editor and contributor