Tax Professionals Group Seminar Q&A (Vitaliy Anissimov presenting)

Q1. The Swirsky decision and the CRA's position regarding paragraph 31 of Bulletin IT-533

Q.1(a) Effect of Swirsky re common share financing.

Can the CRA confirm that its position expressed in paragraph 31 of Bulletin IT-533 remains the same, despite certain comments by judges in Swirsky?

Notes From Presentation

The Swirsky decision of the Federal Court of Appeal has not caused CRA to change its general position in IT-533, para. 31 that normally interest on money borrowed to acquire common shares is deductible on the basis that there is a reasonable expectation that dividends will be paid in the future, although dividends do not have to be paid currently.

Official Response

10 October 2014 APFF Roundtable, Q. 1, 2014-0534811C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

See summary under s. 20(1)(c).

Q.1(b) Interest deductibility where no dividends

Does the CRA recognize that a corporation may not pay dividends for a number of years (for example, a mining company during the exploration stage), without that compromising the deductibility of interest on loans to acquire common shares in such a corporation?

Notes From Presentation

The response here is similar to that for 1(a). In some circumstances, CRA potentially could conclude that there was no reasonable prospect for dividends to ultimately be paid, in which case the interest would be non-deductible.

Official Response

10 October 2014 APFF Roundtable, Q. 1, 2014-0534811C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

See summary under s. 20(1)(c).

Q2. Conversion of currency and average exchange rate

Can the CRA clarify its administrative position regarding the use of average exchange rates for conversion of foreign currency transactions (interest, dividends, calculation of capital gains or losses, etc.)?

Notes From Presentation

Although CRA is prepared to accept the use of average exchange rates as a departure from the use of spot rates referred to in s. 261, this is done on a case by case basis. However, following Gaynor, the use of average exchange rates is not acceptable for capital gains or loss computation purposes.

Official Response

10 October 2014 APFF Roundtable, Q. 9, 2014-0538631C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

Q3. Payment of a capital interest by a discretionary family trust

Will interest paid by a trust on a note issued by the trust to a beneficiary in settlement of a capital interest of such beneficiary in the trust be deductible in the calculation of the trust's income under paragraph 20(1)(c) of the ITA?

Notes From Presentation

The test in s. 20(1)(c)(i) clearly would not be satisfied as there would be no borrowing.

Respecting the tests in s. 20(1)(c)(ii), it might be considered that the note was consideration for property acquired. However, following Bronfman Trust, the income-producing purpose test would not be satisfied.

Official Response

10 October 2014 APFF Roundtable, Q.9, 2014-0538261C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

Q4. Section 80 of the ITA and reverse earn-outs

Q.4(a) No s. 143.4 grandfathering

In a situation involving the purchase of shares of a target corporation ("Target") by a newly formed corporation ("Newco") for consideration that includes an earn-out clause (resulting in a debt which is subsequently forgiven), can the CRA confirm that a reduction in the cost of the shares of Target (through the application of subsection 143.4(2) of the ITA) prior to the subsequent merger of Target with Newco would allow the debt to qualify as an "excluded obligation" (as defined in subsection 80(1) of the ITA) and, consequently, the settlement of the debt following the merger should not result in a "forgiven amount" (as defined in subsection 80(1) of the ITA)?

Notes From Presentation

CRA noted that the question assumed that there was a liability in respect of the earn-out and that s. 143.4(2) applied to reduce the cost of the Target Shares. CRA indicated that a determination of these points would depend upon a review of the particulars of the situation.

However, on the basis of these assumptions, the suggested conclusion was correct, i.e., there should be no "forgiven amount" on the basis of the "excluded obligation" definition.

Q.4(b) S. 143.4 grandfathering

When a transaction has occurred and a debt has arisen in a taxation year ending before March 16, 2011 (such that section 143.4 of the ITA does not apply due to the transitional rule), or when there is no "right to reduce" (within the meaning of subsection 143.4(1) of the ITA), would the CRA be of the opinion that the fact that the shares no longer exist after the merger and that their cost is therefore not reduced could result in a "forgiven amount" because the debt that is settled would not qualify as an "excluded obligation" within the meaning of subsection 80(1)?

Notes From Presentation

On the same assumptions, as there was no reduction under s. 143.4(2) before the amalgamation, the debt would no longer be an excluded obligation so that the debt forgiveness rules would not be excluded from applying.

Official Response

10 October 2014 APFF Roundtable, Q. 15, 2014-0538151C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

See summary under s. 80(1) - excluded obligation.

Q5. D & D Livestock

What is the CRA's position regarding [D & D Livestock] which allowed a taxpayer to take into account twice the amount of the "safe income" in the context of subsection 55(2) of the ITA?

Notes From Presentation

CRA accepts the characterization that in this case, the safe income on hand was used twice. In that case, GAAR was not involved. In any other assessment, GAAR likely would be applied as the double-utilization of the SIOH would be considered to be abusive. More generally, CRA finds it abusive whenever there is a double utilization of attributes.

Official Response

10 October 2014 APFF Roundtable, Q. 20, 2014-0534671C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

See summary under s. 245(4).

Q6. Winding-up of a partnership into another partnership

In a situation where a partnership ceases to exist as a result of the acquisition by a single partner (which is a partnership itself) of all interests in the first partnership, assuming that subsection 98(2) of the ITA does not apply and considering that subsection 98(5) does not apply, is the CRA of the opinion that subsection 98(3) of the ITA may apply on the cessation of the first partnership?

Notes From Presentation

The partnership in the original APFF Roundtable question was a Quebec partnership. The CRA position is that s. 98(5) does not apply where an upper-tier partnership becomes the sole member of a lower-tier partnership given its interpretation of the phrase "carries on alone" in s. 98(5). Accordingly, the question is whether s. 98(3) applies. A review of the Partnership Agreement would be required. However, generally, s. 98(3) would not apply as under that provision all members must receive an undivided interest in the partnership property. That requirement would not be satisfied here.

Official Response

10 October 2014 APFF Roundtable, Q. 23, 2014-0538171C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

Q7. Calculation of surpluses

Q.7(a) Criteria for reporting currency

What criteria does the CRA apply to determine that it is reasonable to maintain surplus accounts in Canadian currency or in a currency other than that of the country of residence of the foreign affiliate, or for changing the currency?

Notes From Presentation

CRA referred to the summary of the CRA position given by Brian Darling at the 1992 Corporate Management Tax Conference and indicated that there were no changes. In particular, the amendment of Reg. 5907(6) effective 18 December 2009 to no longer preclude the use of Canadian currency, did not affect the general considerations discussed by him.

Official Response

10 October 2014 APFF Roundtable, Q. 24, 2014-0538181C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

See summary under Reg. 5907.

Q.7(b) FX date for surplus conversion

For surplus accounts of foreign affiliates calculated in the foreign currency of a particular country before the amendments introduced by the Technical Tax Amendments Act, 2012, S.C. 2013, c. 34, does the CRA accept that the balance as at December 18, 2009 is converted to Canadian currency at the exchange rate on that date and that the surplus accounts are then maintained in Canadian currency?

Notes From Presentation

The s. 261 Rules should be used i.e., the balance would be converted using the spot rate at the commencement of the taxation year following that date. A switch to Canadian currency would require satisfaction of the general criteria for changing the reporting currency and would need to be reviewed by CRA. Approval would be on the basis of what was reasonable in the circumstances. No change would be permitted where there appeared to be retroactive tax planning involved.

Official Response

10 October 2014 APFF Roundtable, Q. 24, 2014-0538181C6 F

(Respecting identical question in French at 2014 APFF Roundtable.)

See summary under Reg. 5907.

Presentation of Sarazin, D.G.

Certain Points made in the Presentation of Mickey Sarazin, the Director General of the Rulings Directorate, on "Income Tax Rulings Today and Where We Want to be Tomorrow".

A disproportionate amount of time has been spent by the Directorate dealing with the needs of tax professionals. Rulings fees contribute to about 10% of the budget, yet servicing rulings and technical interpretation requests traditionally has taken up 90% of the time. The inventory of rulings has decreased from around 500 about 10 years ago to about 120 now. There is a renewed emphasis on engaging more with other stakeholders including Finance and Justice, as well as internal CRA constituencies.

The Folio Project has taken a lower priority in the past than it should have (in the first two years, only two of 150 officers were assigned to it.) It is not right for Folios to take lower priority than Technical Interpretations. Not all the previous IT Bulletins will reappear as Folios and Folios on new topics will be prepared based on stakeholder input.

The Directorate faces staffing issues. Approximately 55% of the key people in the Directorate will retire within 3 to 5 years.

The National Technical Capacity Building Forum has been expanding. For the current year there have been 34 national sessions and 7 specialty sessions in which a broad range of CRA people can participate by internet or conference telephone. Justice has started participating in these sessions as well as Quebec Revenue.

The advance rulings consultation process started slowly – only 6 or 7 in the first 9 months. In the last 3 months there were 21 files – 17 of them concluded. In 9 of them the taxpayers were told “no way.” Most (i.e., 8) of the balance are proceeding as rulings requests and the other 2 likely are in the works.

Although somewhat controversial (based on concerns about "virtual management"), the use of satellite offices has been adopted in order to increase the ability to attract strong people. The Toronto satellite office in particular is increasing, they have run out of space in the Front Street office and will now start using space in the North York office. This will keep expanding and he anticipated that within 5 years, there might be someone at the Director General level in the Rulings function in Toronto. There also are satellite offices in Montreal and Laval, and one likely will open up in Vancouver.

There are now 7 committees engaging both CPA Canada and CRA dealing with services issues, fixing conflicts between taxpayers and auditors, dealing with flaws in the law through developing administrative accommodations or making joint submissions to Finance, SR&ED issues, GST/HST issues, training issues, and red tape reduction (e.g., the T1135).