News of Note

The proposed ETA s. 272.1(8) is not a general partner distribution recharacterization rule

The draft ETA s. 272.1(8) rule merely deems fair market value consideration to have been paid to the general partner of an investment limited partnership for its management and administration services, without regard to the partnership distributions (such as on a “carry”) that in fact are paid.

That said, the new amendments, in conjunction with the existing rules, will likely lead to increased scrutiny of the activities of investment limited partnerships and may provide additional scope for … CRA … to assert on audit that partnership distributions (or portions thereof) should be characterized as taxable fees for services, as well as for disputes regarding the fair market value for such services.

Neal Armstrong. Summary of Allan Gelkopf, Robert Kreklewich and Zvi Halpern-Shavim, "Finance Canada Seeks Comments on New Tax Proposals Regarding Investment Limited Partnership Rules", Canadian Current Tax, Vol. 28, No.1, October 2017 p. 4 under ETA s. 272.1(8).

CRA applies the "holder-by-holder" method to treat contingent s. 251(5)(b) rights as being exercised re all the other shareholders

X, the sole shareholder of a CCPC, sells 25% of his shares to Acquireco, whose shareholders (also executives) are his son (as to 30%) and 10 unrelated individuals (each with 7%). The Acquireco shareholders’ agreement provides that, on any voluntary departure, the remaining shareholders have a proportionate right to acquire the departing employee’s shares.

In finding that X’s son would be deemed to control Acquireco by virtue of s. 251(5)(b)(i), so that s. 84.1 would apply to X’s sale to Acquireco, CRA stated:

As a general rule, the CRA will apply this presumption [in s. 251(5)(b)(i)] by taking into account the rights of Mr. X's son in respect of all other shareholders ("holder-by-holder" method). Accordingly, Mr. X's son would have rights to all of the shares because he would have rights to the shares of each of the shareholders if each of them became a shareholder affected by an event provided for in the agreement.

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.17 under s. 251(5)(b)(i).

CRA states that a legally non-severable farm that is used both in farming and as a residence is one property for purposes of the s. 110.6 principal-use tests

A husband and wife equally own a partnership which for some time has been holding land which as to 80% was used in the farming business and as to 20% was used for their residence (with the residence not being legally severable). CRA indicated that because under the Quebec Civil Code “an owner of an immovable (for example, a piece of land) is the owner by accession to all structures and works located on the immovable,” the land was to be treated as one indivisible property for purposes of determining under the “interest in a family farm or fishing partnership” definition whether the land was used principally (over 50%) in a Canadian farming business. (The common law is the same.)

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.16 under s. 110.6(1) - “interest in a family farm or fishing partnership" - s. (a)(i).

CRA agrees that appreciated goodwill is now eligible for the s. 111(4)(e) step-up

The assets of a corporation sold to a third party include valuable goodwill with a nil cost. Since goodwill relating to a business is now a Class 14.1 depreciable property, the corporation can step-up the goodwill in accordance with s. 111(4)(e).

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.15 under s. 111(4)(e).

Univar – Federal Court of Appeal finds that using old s. 212.1(4) to extract surplus from a non-resident target’s Canadian sub was not abusive

A non-resident's acquisition of the shares of a Netherlands public company (Univar NV) indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using the pre-2016 version of s. 212.1(4). This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian ULC, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.

Webb JA noted that the purpose of s. 212.1 “was not to prevent the removal from Canada, by an arm’s length purchaser of a Canadian corporation, of any surplus that such Canadian corporation had accumulated prior to the acquisition of control” since a non-resident could use a Canadian Buyco with full outside basis and paid-up capital to acquire an arm’s-length Canadian target and then extract the target’s surplus. Accordingly, the above transactions were not an abuse of s. 212.1:

The shares of Univar NV were acquired in an arm’s length transaction and, at the time that such shares were acquired, the avoidance transaction was contemplated. Therefore, the avoidance transaction would be part of the series of transactions by which control of Univar Canada was indirectly acquired in an arm’s length transaction. Whether the surplus of the Canadian corporation is removed by completing the alternative transactions described … above or by completing the transactions that were done in this case, the same surplus is removed from Canada.

Neal Armstrong. Summary of Univar Holdco Canada ULC v. Canada, 2017 FCA 207 under s. 212.1(4) and s. 245(4).

CRA states that an individual accessing the “+1” rule on a principal residence disposition need not complete Form 2091

On page 2 of Schedule 3 of the return for the year of disposition of a principal residence, if the individual checks the box for Case 1, there is a concern that by virtue of this effectively being a designation for all the years during which the taxpayer was owner, this could result in wasting the extra year under the “+1” computation.

No worries! CRA stated:

Box 1 may be checked to designate [the house] as the individual’s principal residence for all years (or for all years less one year). … [T]he CRA will not require Form T2091 to be completed… .

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.3 under s. 54 - principal residence - para. (c).

CRA appears to indicate that it is still not applying penalties for failure to issue T4As to independent contractors

In a fractured response to whether a s. 162(7) penalty will be imposed for failure to provide a T4A to a service provider even if the provider’s invoice bear a proper GST/HST registration number, CRA indicated that, although in 2010, it had announced a “temporary measure” indicating that it would not penalize taxpayers for failure to complete Box 048 (re fees for services):

However, this has never had the effect of relieving taxpayers of their responsibility to report these payments. Thus, a penalty under subsection 162(7) is applicable for non-filing if payments for services are not reported on the T4A form, even if an invoice with valid tax numbers is provided to the payer.

This might mean: a penalty is applicable but not applied.

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.2 under s. 162(7).

CRA will not assess a s. 162(7) penalty for failure to file a nil T2 return

CRA considers that the reasoning in Exida.com indicates that a Canadian corporation with no taxable income (or a loss) for a year is subject to a s. 162(7) penalty for failure to file a nil T2 return. However, it affirmed its policy that it nonetheless will not assess the penalty in these circumstances.

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.1 under s. 162(7).

ADT Canada – Quebec Court of Appeal holds that a home security monitoring service was not a supply of a “telecommunication service”

ADT Canada, which provided its security-monitoring services remotely and, thus, used significant telecommunication services, was found to be making a single supply of a security service to its customers rather than of a “telecommunication service,” which was defined in the Quebec Sales Tax Act (essentially with the same wording as in the ETA) as one would expect.

Neal Armstrong. Summary of Services de sécurité ADT Canada inc. v. Agence du revenu du Québec, 2017 QCCA 1507 under ETA s. 123(1) - telecommunication service.

CRA is inclined to base the s. 6(2) standby charge on the leasing cost to the employer rather than the automobile’s cost to an affiliated purchaser

In the situation where Holdco acquires an automobile and leases it to a related corporation (Opco) at a fair market value rent, with Opco making the automobile available to one of its employees, a literal reading the standby charge formula would indicate that the standby charge is based on both the cost of the automobile to Holdco and the leasing cost to Opco, so that effectively there is double taxation. Finance has been notified about this.

Depending on all the facts of the situation, CRA generally would be inclined to base the standby charge only on the leasing cost to Opco.

Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.13 under s. 6(2).