The starting structure in Example 30 of “CRA Update on Subsection 55(2) and Safe Income” is that Holdco owned the shares of Opco with an FMV, ACB and safe income of $500, 0 and 0; and Opco owned Subco1 (whose shares also had an FMV, ACB and safe income of $500, 0 and 0) and Subco2 (whose shares had no value, ACB or safe income). Then:

1. Subco1 transfers its assets with an FMV and ACB of $500 and 0 on an s. 85(1) rollover basis to Subco2 for Subco2 shares.
2. A third-party purchaser subscribes $500 for Opco shares.
3. Subco2 redeems the shares of Subco1, Subco1 repurchases the shares of Opco, then Opco repurchases the shares of Holdco, in each case generating a $500 deemed dividend.

CRA indicated that although the deemed dividend from Subco2 to Subco1 is exempted under s. 55(3)(a) by virtue of s. 55(3.01)(g), the deemed dividend from Subco1 to Opco, and from Opco to Holdco, is subject to s. 55(2). In particular, the dividend from Subco2 is not subject to tax in the hands of Subco1 and none of the accrued gain on the assets has been realized, so that such dividend does not result in safe income to Subco1.

In response to a follow-up question, CRA indicated that the purpose of this example was merely “to illustrate the concept that a dividend income that has not been subject to tax should not constitute safe income for the benefit of a shareholder,” and stated:

The order of transactions described in the example would unlikely be implemented as such in the real world (for example, Subco1 does not need to redeem its shares held by Opco to achieve the results sought by Holdco) and a discussion on possible double-taxation in the scenario described is fruitless.

The double taxation issue was that, although “the capital gain realized by Opco on the redemption of shares of Subco1 would be included in the safe income of Opco and would not result in any double-taxation” (presumably because it would be there for potential future use), “[u]nfortunately, the deemed capital gain under subsection 55(2) would not be part of the safe income computed before the safe income determination time if all the transactions described are part of the same series of transactions” so that both Opco and Holdco would realize a capital gain. CRA further stated:

[W]e understand that transactions can be successfully implemented in a way to attract only one level of taxation if the ordering of transactions is carefully thought out … .

Neal Armstrong. Summary of 30 January 2024 External T.I. 2024-1005011E5 under s. 55(2.1)(c).

ETA s. 134 provides that where, under an agreement in respect of a debt or obligation, a person transfers property for the purpose of securing payment of the debt or performance of the obligation, the transfer is deemed not to be a supply, and where, on payment of the debt or performance of the obligation, the property is retransferred, the retransfer is also deemed not to be a supply.

An individual transferred title to his lands (which included a detached dwelling) to a builder, who paid off the existing mortgage on the lands with new mortgage financing, demolished the existing home and built a new one, and conveyed the lands back to the individual on being paid the full contract price plus GST.

CRA ruled that, as s. 134 deemed the transfer and retransfer not to be supplies, the individual had been charged GST on the portion of the contract price that related to the lands, in error.

Neal Armstrong. Summary of 15 November 2023 GST/HST Ruling 245913 under ETA s. 134.

This morning's release of 13 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their October, November, and December release) is now available for your viewing.

With a view to its imminent disposition of the shares of a subsidiary, the taxpayer continued to the British Virgin Islands, with the result that it ceased to be a Canadian-controlled private corporation (CCPC) and became a private corporation that was not a CCPC (its central management and control remained in Canada). CRA assessed on the basis that the resulting non-application of s. 123.3 (imposing refundable tax) and s. 123.4 (denying the general rate reduction on aggregate investment income) was an abuse of those provisions and of s. 250(5.1).

In finding no abuse of s. 123.3, D’Arcy stated:

Parliament has chosen, for policy reasons, to have different sets of rules for different corporations. …

Prior to being continued in the British Virgin Islands, the Appellant was on one side of the dividing line [a CCPC] and, after it was continued, it was on the other side of the dividing line [a non-CCPC]. …

[T]he Appellant’s choice to be taxed as a non-CCPC did not abuse section 123.3 since Parliament only intended it to apply to a corporation’s investment income that is taxed under the regime for CCPCs.

After indicating that the absence of a rate reduction under s. 123.4 for aggregate investment income reflected that it was subject to a low rate of tax once distributed as dividends, D’Arcy J noted that there was no abuse regarding the s. 123.4 rate reduction, since the rate reduction it enjoyed for its taxable capital gain reflected the unavailability of a dividend refund.

Finally, the application of s. 250(5.1) accorded with its rationale, which was “to equate the place of continuance of a corporation with its place of incorporation”.

Neal Armstrong. Summaries of DAC Investment Holdings Inc. v. The King, 2024 TCC 63 under s. 245(4), s. 123.3, s. 123.4(1) – full rate taxable income – (b)(iii) and s. 250(5.1).