21 November 2017 CTF Annual Conference Roundtable

This shows the questions posed by Carrie Smit (Goodmans) and Penny Woolford (KPMG) at the Annual CTF CRA Roundtable held on November 21, 2017, as well as summarizing the CRA responses. Titles have been modified or added. The CRA presenters were:

Stéphane Charette, Acting Director, Financial Industries and Trusts Division, Income Tax Rulings Directorate

Stéphane Prud'Homme, Director, Reorganizations Division, Income Tax Rulings Directorate

The official version of the questions and answers (including for the last two questions, which were not answered in the November 21, session) were relased on December 5, 2017,

Q.1 – S. 107(2) distribution by resident trust to Canco owned by non-resident

Consider a situation where the trustees of a Canadian resident discretionary family trust (Trust) are planning to distribute all or a portion of Trust’s property (Property) to one of more of its beneficiaries in advance of Trust’s 21st anniversary.

  • The Property does not consist of any properties described in subparagraphs 128.1(4)(b)(i) to (iii)
  • Trust’s individual beneficiaries (NR Beneficiaries), who are intended to receive the Property, emigrated from Canada and are non-residents of Canada at the relevant time
  • One or more Canadian companies (Canco) that are wholly owned by one or more of the NR Beneficiaries are also beneficiaries of Trust

Instead of distributing the Property to the NR Beneficiaries directly, the trustees propose to distribute the Property, on a tax-deferred basis pursuant to subsection 107(2), to Canco. The result is that the Property will no longer be held by the Trust and as such will not be subject to the 21-year deemed disposition rule. In addition, since the Property will be distributed to one or more Canadian resident corporations, subsection 107(5) should not be applicable and thus the Property will be transferred out of the Trust on a tax-deferred basis pursuant to subsection 107(2).

Does the CRA agree with this conclusion?

Preliminary response

Stéphane Charette: As you may know, in 2006, at the CTF annual conference, as well as the 2017 STEP conference, and the APFF conference in October, the CRA addressed the tax implications associated with other 21- year deemed disposition planning methods.

What was considered at those Conferences was the distribution of property by a Canadian-resident discretionary family trust to a Canadian corporation whose shares were wholly owned by a newly established Canadian-resident discretionary trust. In those files, the CRA was of the view that the transactions circumvented s. 104(5.8), as well as s. 104(4). The CRA indicated it had significant concerns with these transactions and would consider applying the GAAR.

In the current scenario, instead of a Canadian discretionary family trust owning the shares of Canco, there is a non-resident beneficiary or beneficiaries. In that situation, any capital gain on the property distributed to Canco may be deferred beyond the 21st anniversary of the trust, and potentially beyond the lifetime of the non-resident beneficiary - or indefinitely. It is important to note that this deferral would not be achieved if the beneficiary were a Canadian individual resident.

The CRA’s view is that s. 107(5) is there to ensure that Canada maintains the ability to tax the gain that accrued while the property was held by the Canadian trust. The transactions in the question do not achieve that intention. In fact, we are of the view that they contravene one of the underlying principles for the taxation of capital gains, which is that the gain that accrued in Canada should be taxed. We feel that this underlying scheme is supported by ss. 70(5), 104(4) and 107(2).

We are of the view that these transactions circumvent the application of ss. 107(5) and (2.1) in a manner that would frustrate or defeat the object, spirit or purpose of those provisions as well as ss. 70(5), 104 and 107(2) and the Act as a whole. CRA has significant concern regarding these transactions and will consider applying GAAR, when faced with a similar set of transactions, if there is no substantial evidence supporting that GAAR should not be applied.

Accordingly, the CRA Income Tax Rulings Directorate will not be providing income tax rulings on such transactions if there is not sufficient evidence that GAAR should not apply.

Official response

21 November 2017 CTF Roundtable Q. 1, 2017-0724301C6 - 21 year planning & NR beneficiary

Q.2 – Trusts and principal residence exemption

The Department of Finance released new rules in a Notice of Ways and Means Motion on October 3, 2016 which restrict the circumstances under which a personal trust will be able to claim the principal residence exemption effective for taxation years starting in 2017 or later.

Only certain trusts will be eligible to claim the exemption under the new rules. Eligible trusts include life interest trusts (e.g., alter ego trusts, spousal or common-law partner trusts and joint spousal trusts), among certain other trusts.

Under the new rules proposed in the NWMM, where the trust acquires the property on or after October 3, 2016, the terms of the trust must provide the eligible beneficiary with “a right to the use and enjoyment of the housing unit as a residence throughout the period in the year that the trust owns the property”.

Does a life interest trust’s deed have to include the specific wording found in new subclause 54(c.1)(iii.1)(A)(III) of the definition of “principal residence”? One of the conditions of being classified as a life interest trust is that only the settlor and/or his or her spouse, as the case may be, is entitled to receive or otherwise use any of the trust’s capital property during their lifetime. Is it sufficient that the trust deed already incorporates language providing that no one other than the life interest beneficiary has the right to use any of the trust property, which would include any housing unit held by the trust?

Preliminary response

Stéphane Charette: In October 2016, there was a Backgrounder that was put out by Finance called “Ensuring a Stable Housing Market for all Canadians.” It announced three measures related to the Canadian housing market. One of those measures was designed to improve tax fairness for Canadian homeowners, and one of the stated goals was ensuring that the exemption from capital gains on the sale of a principal residence is available only in appropriate cases.

The Notice of the Ways and Means Motion that accompanied the Backgrounder proposed to add a paragraph (c.1) to the definition of principal residence in section 54. Paragraph (c.1) provided requirements that must be met in order for a property to qualify as a principal residence. Part of the (c.1) addition was subparagraph (iii.1), which was applicable in respect of the years beginning after 2016.

In the Bill C-63 proposed modification, the language that was in the original question was removed – it seems obvious that the wording was considered unnecessary.

If you are wondering what our position would be if ever such a situation arose in the future, the CRA’s view on that was that the wording that the beneficiary be entitled to the use of the principal residence trust's capital was not equivalent to the wording that was in the 2016 Backgrounder, which required that the beneficiary had the use or the enjoyment of the principal residence.

Official response

21 November 2017 CTF Roundtable Q. 2, 2017-0724121C6 - Trusts and principal residence

Q.3 – S. 55(2.1) “purpose”

A technical interpretation released in April 2017 (2016-0658841E5) notes that paying a dividend with the goal of purifying the corporation by distributing surplus assets so that the shares in the capital stock of that corporation are “qualified small business corporation shares” (QSBCS) within the meaning of subsection 110.6(1) would certainly be a relevant factor that should be taken into account.

The TI says, however, that it also should be ensured that the dividend has no other purpose described in paragraph 55(2.1)(b). The TI says that if, for example, the dividend paid to the corporation exceeds the amount that would be required to transfer the surplus assets, this could be a sign that the dividend has another purpose, which was one of those referred to in paragraph 55(2.1)(b).

CRA response - Background

Stéphane Prud'Homme: Before proceeding to the questions on s. 55, some background is desirable. We met with the Joint Committee on October 23 in Ottawa to discuss 96 slides that the Joint Committee had submitted to us on various perceived issues relating to s. 55.

Some issues related to the old s. 55(2) regime. We informed the Joint Committee that, with respect to certain questions that were asked, we had nothing to add to positions that CRA had previously provided. Those included questions on the valuation of safe income, creditor-proofing dividends, ordinary course dividends, and also same-class stock dividends.

There was also a second category of questions that require further study, and possibly discussion with the Department of Finance. A response to those questions will be published in the following months in the form of technical interpretations. Those were questions on the impact of s. 55(2) on the computation of cost, calculation of CDA, GRIP and LRIP accounts, and also on the application of s. 112(3).

Finally, there was a third category of questions that we found interesting and which required a quick response from the CRA, and answers to those questions have been incorporated into the following responses.

Q.3(a) Purpose v. result

If the dividend’s only purpose is to maintain the QSBCS status of the shares, the dividend should not have a purpose (but might have the result) of reducing the FMV or the gain on the shares. In this situation, would the CRA agree that the purpose tests are not met?

Preliminary response

Stéphane Prud'Homme: Subsection 55(2) could apply where any one of the purposes in s. 55(2.1) is present. Therefore, it is important to demonstrate that the payment or receipt of the dividend has none of the purposes described in s. 55(2.1)(b). Whether the payment of a dividend can be viewed as having only the purpose of maintaining QSBCS status, but has no purpose of reducing the value of the gain on the share or increasing the cost of property to the dividend-recipient, will be determined in light of all the relevant facts.

Where the dividend is paid with assets other than surplus assets, that may be a sign that the payment of the dividend has a purpose referred to in s. 55(2.1)(b). Another sign could be where the removal of a surplus asset is made in contemplation of the disposition of the shares of a corporation.

Those two questions are only examples, which is an important point. We question why the payment of a dividend to remove surplus assets is not covered by safe income, since the generation of surplus assets, or the disposition of such assets, would generally result in a realization of income.

Q.3(b) Objective v. subjective

Is the test under Ludco Enterprises Ltd et al v. The Queen, 2001 DTC 5505 (SCC) (Ludco), the right test to use to determine “purpose” in the context of subsection 55(2) as opposed to the test under The Queen v. Placer Dome, 96 DTC 6562 (FCA) (Placer Dome), which was a decision under subsection 55(2)?

Note that Ludco is a decision under paragraph 20(1)(c) which does not have both a purpose and a result test, and recent jurisprudence on subsection 55(2), including Placer Dome, does not apply the principle established in Ludco that the objective manifestation of purpose is critical to ascertain the purpose or intention behind actions under former subsection 55(2) because of the particular language therein that distinguishes between purpose and result. Placer Dome held that the purpose test in subsection 55(2) requires a subjective understanding whereas an objective approach is required for the result test. Also, it is understood that the determination of “purpose” in Placer Dome does not require the taxpayer to adduce corroborative or additional evidence when a taxpayer’s explanation of purpose is neither improbable nor unreasonable.

Preliminary response

Stéphane Prud'Homme: The short answer is that we like the approach in Ludco rather than Placer Dome.

In our view, the current test to use to determine the purpose in s. 55(2) is the Supreme Court’s test in Ludco, which is as follows:

In the interpretation of the Act, as in other areas of law, where purpose or intention behind actions is to be ascertained, courts should objectively determine the nature of the purpose, guided by both subjective and objective manifestations of purpose… .

Ludco followed the purpose test in respect of s. 18(1)(a) that was established by the Supreme Court in Symes. In our view, the test provided in Symes and Ludco constitutes the benchmark for purpose and intent. These tests have been followed in a long line of cases on various subjects, and our written answer lists dozens of such decisions.

The decision of the Federal Court of Appeal in Placer Dome was in response to the Crown’s argument at the time that purpose in s. 55(2), based on some Australian case law, should be understood in an objective sense. Of course, the Crown lost that argument – that being said, the Court of Appeal in Placer Dome relied on the McAllister Drilling decision. In both Placer Dome and McAllister Drilling, the Court determined the purpose of the taxpayers by not only listening to their testimony, but also by examining all the facts, and incorporating their testimony with the admitted facts and the evidence.

In our view, therefore, neither decision contradicts Ludco and Symes. They follow the standard established in those decisions that courts should objectively determine purpose, guided by both subjective and objective manifestations of purpose.

Finally, I would add that, where s. 55(2) arises, the Crown and CRA will ensure that all of the facts and evidence brought to the courts will help establish the objective manifestations of purpose of the taxpayers.

Official response

21 November 2017 CTF Roundtable Q. 3, 2017-0724021C6 - Meaning of purpose

Q.4 – S. 55(2) – Timing of deemed capital gain

Where subsection 55(2) applies to a dividend that is not received on a redemption, acquisition or cancellation of a share to which subsection 84(2) or (3) applies, the dividend recipient is deemed to have a gain under paragraph 55(2)(c), for the year in which the dividend was received from the disposition of the property.

In document 2011-0412131C6, the CRA indicated that the capital dividend account (CDA) addition that is caused by the application of former paragraph 55(2)(c) can only be available for distribution as a capital dividend in the taxation year following the year in which the gain was included in income by virtue of subsection 55(2).

Q.4(a) Timing of gain

Does the deemed gain occur at the time of the payment of the dividend?

Q.4(b) CDA

Does the addition to the CDA occur at the time of the payment of the dividend?

Preliminary response

Stéphane Prud'Homme: In light of the amended wording in s. 55(2)(c), and our understanding of the tax policy of s. 55(2), the CRA is of the view that the amount deemed to be a gain under s. 55(2)(c) is deemed to be realized on the disposition of a capital property at the time of the payment of the dividend – for purposes of inclusion in income, but also for the purpose of the definition of CDA.

Official response

21 November 2017 CTF Roundtable Q. 4, 2017-0724051C6 - Timing of deemed gain under 55(2)

Q.5 – Interaction of ss. 55(5)(f) and 55(2.3) with s. 55(2.1)

  • Opco pays a dividend of $1,000 to Holdco
  • FMV of Opco shares pre-dividend = $1,500
  • Safe income that can reasonably be viewed as contributing to gain on Opco shares = $900
  • Paragraph 55(5)(f) deems the portion of safe income of $900 to be a separate dividend and the portion of $100 that exceeds safe income to be another separate dividend

Q.5(a) Separate test

Are both dividends subject to a separate test under subsection 55(2.1) such that the portion of $900 of the dividend is exempt because it does not exceed safe income and the portion of the $100 of dividend may be exempt if its purpose is not to significantly reduce the gain or the value of the shares on which it is paid?

  • Opco pays a stock dividend with PUC of nil and FMV of $1,000 to Holdco
  • FMV of Opco shares pre-dividend = $1,500
  • Safe income that can reasonably be viewed as contributing to gain on Opco shares = $900

Preliminary response

Stéphane Prud'Homme: Under the old s. 55(2) regime, it was well understood that 55(5)(f) was a relieving provision, which allowed the taxpayer to only recognize, as a gain, the portion of the dividend that exceeds safe income.

Interestingly, the question was never raised as to whether the $100 portion of the dividend should be subject to the purpose test under s. 55(2), since it was well understood that the purpose test applied to the whole dividend – $1000 in the example – such that the exemption under s. 55(5)(f) would require the taxpayer to include in income, under s. 55(2), only the portion of the dividend that exceeds safe income.

The new rules, introduced by Bill C-15 have not changed anything in that respect, except for the fact that 55(5)(f) now operates automatically to segregate the dividends between safe dividends and non-safe dividends. Other than that, the scheme of the application of s. 55(5)(f) remains the same.

In our view, there is no reason why the deemed segregated dividend of $100 should be subject to a separate test under s. 55(2.1)(b). Since s. 55(5)(f) does not contain an ordering rule, one may be tempted to argue that both deemed separate dividends could be protected by the safe income safe harbour. Such interpretation results in a duplication of the safe income protection, and is illogical because the purpose of s. 55(5)(f) is to bring into income the amount by which the dividend exceeds safe income.

If we look at the numbers in the example, an appropriate purposive reading of the relevant provisions would be as follows:

  • the taxable dividend referred to in the preamble of s. 55(2.1) is the whole $1000;
  • the dividend referred to in ss. 55(2.1)(a) and (b) is also the whole $1000;
  • the amount of the dividend referred to in s. 55(2.1)(c) is the portion of the dividend that exceeds safe income – it is deemed to be a separate dividend under s. 55(5)(f) – in this example, $100;
  • the taxable dividend referred to in the s. 55(2) preamble is the whole $1000 dividend; and finally
  • the amount of the dividend referred to in the preamble of s. 55(2) that is deemed not to be a dividend but to be a gain is the amount under s. 55(2.1)(c), which would be $100 in the example.

Q.5(b) Stock dividend

Similarly, when a dividend is a stock dividend subject to the rule in subsection 55(2.4), does the application of the rule in subsection 55(2.3) to segregate the dividend into two dividends result in the application of the test under subsection 55(2.1) separately to each such dividend? Consider for example, a stock dividend with a paid-up capital (PUC) of nil and a FMV of $1,000, and the safe income that contributes to the gain on the shares on which the stock dividend is paid is $900.

Preliminary response

Stéphane Prud'Homme: By virtue of 55(2), the amount of the stock dividend, for the purposes of 55(2.1), (2.3), and (2.4), is deemed to be the greater of the PUC increase and the fair market value of the shares issued as a dividend.

Once the amount is determined under s. 55(2), the whole dividend, $1000 in the example, is first subject to tests under s. 55(2.1)(a) and (b). Once it is determined that these provisions apply, the stock dividend is segregated into two dividends under s. 55(2.3), and the amount of the stock dividend in excess of safe income, the $100 portion in the example, is the amount referred to in s. 55(2.1)(c), and it is that amount that is subject to the application of s. 55(2).

Thus, it is the same approach as in the above question.

Official response

21 November 2017 CTF Roundtable Q. 5, 2017-0726381C6 - 55(5)(f) and 55(2.3) with 55(2.1)

Q.6 – Circular Pt. IV/55(2) calculations

Holdco receives a dividend of $400,000 that is subject to Part IV tax because the connected payer corporation has received a dividend refund. The Part IV tax payable by Holdco is $153,333 (38.33% of $400,000).

Holdco pays a dividend to its shareholders which results in a refund of the Part IV tax. The dividend received by Holdco would therefore be subject to the application of subsection 55(2).

If the dividend received by Holdco was originally taxed as a capital gain to Holdco, the refundable tax on the capital gain would be $61,333 ($400,000 x 50% x 30.66%).

Instead of having to pay the whole amount of $400,000 as a taxable dividend so that it can be established that the Part IV tax of $153,333 is fully refunded for subsection 55(2) to apply, Holdco would only need to pay an amount of $160,000 as a taxable dividend ($61,333 / 38.33%). Therefore, a capital dividend of $200,000 can be paid at the same time as the taxable dividend to the shareholders of Holdco.

This result can be achieved because of circular calculations where the dividend received is deemed to be reduced by the application of subsection 55(2) after each calculation, resulting in a reduced Part IV tax whereas the amount of the tax refund remains the same at each calculation.

Note that all numbers provided in this example are hypothetical.

Does the CRA agree with such circular calculation?

Preliminary response

Stéphane Prud'Homme: The scheme of s. 55(2), in our view, does not support such circular calculations.

This situation is quite different from a situation where shares held between two corporations are cross-redeemed. Here, it is proposed that the circular calculation causes the amount of the dividend received by Holdco to be reduced at each calculation because of the application of s. 55(2), and therefore the amount of Part IV tax – at the last iteration, the dividend received would be reduced to nil, and no Part IV tax is payable.

On that basis, the example proposes that there is only a capital gain of $400,000 to be included in the tax return of Holdco, and that the refundable tax on such capital gain is fully refunded by the payment of a taxable dividend by Holdco of $160,000.

We do not agree with this approach. For a dividend to be subject to s. 55(2), the Part IV tax has to be refunded. The Part IV tax in that situation is the real Part IV tax, and the refund has to be a real refund. This is based on the Ottawa Air Cargo decision. Based on that decision, both amounts cannot be theoretical.

In our view, Part IV tax has priority over s. 55(2). The circular calculation that eliminates the Part IV tax would be contrary to the scheme of s. 55(2). In the application of s. 55(2), the question that should be asked first is whether Part IV tax is payable on the dividend received. If no, then s. 55(2) applies. If yes, then it does not apply unless there is a refund of Part IV tax. If there is such a refund, then s. 55(2) applies, but only to the portion of the Part IV tax that was refunded.

The application of s. 55(2), in our view, does not eliminate the dividend that was already subject to Part IV tax, and has no effect on the Part IV tax that was paid on the original dividend. Otherwise, it results in the circular calculation that contravenes the scheme of s. 55(2).

Using the numbers in the example, if a Part IV tax of $153,333 is paid or payable, as declared in the initial tax return of Holdco, that Part IV tax is paid or payable for the taxation year. In the second return filed by Holdco, the Part IV tax paid for the taxation year remains unchanged, even though the amount of the dividend received has been reduced by the application of s. 55(2).

Of course, a capital dividend of $80,000 could be paid by Holdco after the receipt of the dividend of $400,000, due to the application of s. 55(2).

Official response

21 November 2017 CTF Roundtable Q. 6, 2017-0724071C6 - Circular calculations Part IV tax

Q.7 – CRA Folios update

Can the CRA provide an update on the Folios Project?

Preliminary response

Stéphane Charette: The CRA introduced the Folio project in 2013. A Folio is our web-friendly technical publication that takes consideration of the state of the law, and relevant Tax Court decisions and technical interpretations that the CRA has produced up until the date of the Folio publication.

The project was undertaken to phase out the IT Bulletins and the Income Tax Technical News. At the time, the Income Tax Rulings Directorate was managing this for the CRA. When they took that project, there were approximately 265 Bulletins that were identified as being out of date – so it was a very big task to undertake.

The determination of which Bulletin should be updated was based on the feedback from internal and external stakeholders, and on the availability of resources. Drafting a Folio is a large commitment from some of our agents and sometimes it can take months.

There are still Folios that are currently under development. Again, it is time consuming, but you will see some new folios released in the near future.

Official response

21 November 2017 CTF Roundtable Q. 7, 2017-0724261C6 - CRA Update

Q.8 – MLI “principal purpose test”

On June 7, 2017, Canada signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, commonly referred to as the Multilateral Instrument (“MLI”).

One of the minimum standards under the MLI is to address treaty abuse. Canada chose the Principal Purpose Test (PPT) (Article 7(1) of the MLI) but noted it intends where possible to adopt a limitation on benefits provision, in addition to or in replacement of Article 7(1), through bilateral negotiation.

In order to implement the MLI, the Department of Finance will prepare a bill to be introduced in Parliament. Assuming the bill receives Royal Assent, Canada will then deposit a notice of ratification with the MLI Depositary.

Paragraph 1 of Article 7 [Prevention of Treaty Abuse] of the MLI adapts the PPT as developed under BEPS Action 6 for multilateral modification of tax treaties as follows:

1. Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.

Q.8(a) GAAR Committee

Will the GAAR Committee review all situations where an auditor proposes to apply the PPT to ensure it is consistently applied and enforced?

Preliminary response

Stéphane Prud'Homme: The CRA expects that MLI will not enter force before 2019. However, the CRA is exploring methods of promoting consistency in the application of the PPT within the Agency. In this regard, the GAAR Committee may offer a useful model.

I would also like to add that the Income Tax Rulings Directorate will entertain PPT rulings once the rules are in effect.


Can CRA confirm how it intends to apply the PPT of the MLI relative to the GAAR?

Preliminary response

Stéphane Prud'Homme: The interactions between the PPT and Canadian domestic legislation will depend on how the statute implementing the MLI is drafted. S. 4.1 of the Income Tax Conventions Interpretation Act states that the GAAR applies to any benefit provided under a tax treaty.

The CRA continues to contemplate the application of the GAAR to transactions undertaken primarily to secure a tax benefit accorded by a tax treaty. In fact, the GAAR Committee has approved the application of the GAAR in certain treaty-abuse arrangements.

In appropriate circumstances, the PPT and GAAR could apply as alternative assessing positions.

Q.8(c) GAAR jurisprudence

Can CRA confirm whether the “object and purpose” clause in the PPT of the MLI will be interpreted consistently with the jurisprudence established under subsection 245(4) of the GAAR?

Paragraph 9 of new Article 29 of the draft 2017 OECD Model Tax Convention (released July 11, 2017) contains the bilateral “principal purpose test”, which was developed under BEPS Action 6, and is virtually identical to the PPT in Article 7(1) of the MLI.

Paragraph 182 of the Commentary to new Article 29 sets out examples that illustrate the application of paragraph 9 (i.e. the principal purpose test), with the caveat that the application of the principal purpose test must be determined on the basis of the facts and circumstances of each case.

Paragraph 187 of the Commentary to new Article 29 sets out examples of treaty-shopping strategies commonly referred to as “conduit arrangements”, as well as arrangements that should not be considered to be conduit arrangements.

Preliminary response

Stéphane Prud'Homme: Given the differences in wording between the PPT and the GAAR, we have yet to see how the case law on s. 245(4) will inform the PPT’s application. We note that the object and purpose test in the PPT must be read in conjunction with the added preamble language of Article 6.

Q.8(d) OECD examples

What weight will the CRA give to the examples set out in paragraphs 182 and 187 of the draft 2017 OECD Model Commentary in determining whether a particular structure or transaction satisfies the object and purpose clause within the PPT of the MLI?

Preliminary response

Stéphane Prud'Homme: The draft 2017 OECD Model and Commentary have not yet been approved, and the CRA will refrain from commenting on those paragraphs at this time.

Official response

21 November 2017 CTF Roundtable Q. 8, 2017-0724151C6 - Principal Purpose Test

Q.9 – Stock option deduction

In technical interpretation 2015-0572381E5, the CRA concludes that the stock option deduction in paragraph 110(1)(d) is not available where an employee is issued treasury shares of a corporation having a value equal to the in-the-money value of the options upon surrender of the options. This appears to be because no shares are acquired under the option agreement as required by subparagraph 110(1)(d)(i).

The technical interpretation did not comment on the potential application of subsection 110(1.1). In general, subsection 110(1.1) provides a mechanism for an employer to ensure the availability of the deduction for the employee when shares are not acquired under the option agreement if, among other requirements, the employer elects to forego its deduction for the stock option expense.

Can the CRA confirm that where the employer files a valid election under subsection 110(1.1) the stock option deduction can still be available in a situation such as the one above, despite the fact that there is no deduction for the employer to “give up” as contemplated by subsection 110(1.1)?

Preliminary response

Stéphane Charette: The quick answer is “yes we can.”

Interpretation 2015-0572381E5, issued in August 2016, was unfortunately silent on the potential use of 110(1)(d). Paragraph 110(1)(d) was introduced in March 2010 in order to combat the double-deduction that was occurring at that time where the employee was getting cash in lieu of securities. This led to a double-deduction – because no securities were actually issued, s. 7(3) did not apply. The employer would make a deduction for the cash amount, and the employee would also get the s. 110(1)(d) deduction.

Thus the amendment to 110(1)(d) was introduced to require the employee to exercise the option by acquiring the shares, and 110(1.1) was also enacted in order to indicate that, if the employer filed the election – and the key to the election was that the employer or a person related to the employer would not take a deduction for the amount - then s. 110(1)(d) could allow the employee to take the deduction.

We have reviewed 110(1.1) and consulted with some colleagues and we’ve determined that the situation where the employer does not take a deduction, either as because of 7(3)(d) or because the employer is not subject to Canadian tax, we’ve determined that the 110(1.1) election is available, and we can confirm that we will accept in cases like that, so that the employee will be able to take the stock option deduction.

Official response

21 November 2017 CTF Roundtable Q. 9, 2017-0724191C6 - Stock Option Deduction

Q.10 – Tax shelter rulings

Does the Canada Revenue Agency provide advance income tax rulings with respect to limited partnership financing arrangements involving the application of the at-risk rules in the context of a tax shelter?

Preliminary response

Stéphane Prud'Homme: No.

Given the scope of a ruling, we feel that the nature of these arrangements is such that providing a binding ruling by the CRA with respect to the tax consequences would not be appropriate.

A ruling consists of representations of fact on future transactions by a taxpayer and CRA’s interpretation of how the Income Tax Act will apply to those representations. The purpose of a ruling is to provide certainty.

Our position regarding rulings on questions of fact remains as stated in Information Circular 70-6R7. We will continue to refuse to rule when the matter is mainly a question of fact, and the circumstances are such that all the pertinent facts cannot be established at the time of the ruling request.

In our view, it is not useful or helpful to rule on questions of fact that cannot be determined at the time, and making the ruling subject to a caveat that the ruling is inapplicable if the facts prove to be otherwise.

Although the CRA does not verify factual representations at the time of the ruling, the facts should be verifiable at that time. The CRA’s concern is that, in these arrangements, there are crucial aspects, such as arm’s-length issues, and the impact of future events, or other questions of fact, about which there is a level of uncertainty. In other words, in our view it is more appropriate, for these types of arrangements, to examine these facts in the course of the audit process.

This is not a new position – I refer you to 2012-0440191R3.

Official response

21 November 2017 CTF Roundtable Q. 10, 2017-0724291C6 - Tax Shelters

Q.11 – Application of Art. IV(6) and (7) to ULC held by C Corps through LLCs

The CRA previously indicated that Article IV(6) of the Canada-U.S. Tax Treaty (the “Treaty”) does not treat a particular amount as being derived by a U.S. resident member of a U.S. LLC where that amount is disregarded under U.S. taxation laws.

  • LLC1 and LLC2 are limited liability companies created under the laws of Delaware
  • Mind and management of LLC1 and LLC2 is in the U.S., and both are disregarded entities for U.S. tax purposes
  • USCo1 and USCo2 are U.S. residents for the purposes of the Canada-U.S. Tax Treaty (the Treaty), qualifying persons for the purposes of Article XXIX-A and regarded entities for U.S. tax purposes
  • ULC is treated as fiscally transparent for U.S tax purposes

Can the CRA confirm whether dividends that ULC pays to LLC1 and LLC2 will be eligible for treaty benefits? Such dividends would not be disregarded payments for U.S. tax purposes, but would be treated as partnership distributions.

Preliminary response

Stéphane Charette: In examining this situation, it is necessary to also consider the application of Article IV, para. 7(b). An examination first of para. 6 of Article IV, indicates that its requirements are met, i.e., the nature of the amounts being flowed up to USCo1 and USCo2 are both partnership distributions. However, having regard to para. 7(b) of Article IV, being a kind of anti-avoidance provision, and in looking at ULC, it is apparent that because ULC is fiscally transparent, the payment from ULC of a dividend is viewed as a partnership distribution, so that the same result in the two jurisdictions is not being obtained. Accordingly, the application of 7(b) of Article IV of the Treaty would effectively go against the result of the preceding stage of analysis. In this case, we consider that the Treaty reduction should not be available to the dividend payment, and that the LLCs on their own would not receive the benefit of para. 1 of Article IV, so that the 25% withholding rate would apply.

Official response

21 November 2017 CTF Roundtable Q. 11, 2017-0724081C6 - ULC-LLC structures & Treaty

Q.12 – Election not to be a public corporation

Under paragraph (c) of the definition of “public corporation” in subsection 89(1) of the Income Tax Act (the Act), a Canadian resident corporation that was considered to be a public corporation because its shares were previously listed on a designated stock exchange in Canada is considered to continue to be a “public corporation” unless, after the time it last became a public corporation, either it elects not to be a public corporation (under subparagraph (c)(i) of the public corporation definition) or the Minister designates it not to be a public corporation (under subparagraph (c)(ii) of the public corporation definition).

A corporation that intends to elect not to be a public corporation must meet the prescribed conditions in subsection 4800(2) of the Income Tax Regulations (Regulations). One of these conditions is that insiders of the corporation must hold more than 90% of the issued shares of each class of shares that were previously listed (under subparagraph 4800(2)(a)(i) of the Regulations) or designated (under subparagraph 4800(2)(a)(ii) of the Regulations) (Insider Requirement).

In a situation where a private corporation (Acquisitionco) acquires all of the shares of a publicly-listed target corporation (Targetco), the designated stock exchange often takes several days to formally delist the purchased shares.

Prior to the formal delisting of its shares, can Targetco make a valid election not to be a public corporation under subparagraph (c)(i) of the public corporation definition at a time when Acquisitionco owns 100% of Targetco so that when Acquisitionco and Targetco vertically amalgamate to form a new corporation (Amalco), Amalco would not be considered to be a public corporation?

Preliminary response

Stéphane Prud'Homme: If Targetco is still a public corporation immediately before the amalgamation then, by s. 87(2)(ii), Amalco will also be deemed to be a public corporation.

If Targetco meets the prescribed conditions and makes an election before the amalgamation, Targetco will be excluded from being a public corporation under (c)(i) of the “public corporation” definition in s. 89(1). However, Targetco would still be a public corporation under para. (a) of that definition as long as a class of Targetco shares is still listed on a designated stock exchange.

The reason for Targetco making an election before the amalgamation, is to meet the insider requirement before its shares are cancelled. However, the CRA has stated the position in the past, in certain situations involving vertical amalgamations, that the fact that the shares of a public corporation no longer exist at the time of making an election would not preclude the insider requirement from being met. Accordingly, in those situations where Amalco makes an election after the time that Targetco shares are delisted, Amalco will not be considered to be a public corporation.

CRA will continue to rule on a case-by-case basis as to whether the prescribed conditions in subparagraph (c)(i) of the “public corporation” definition, and in Regulation 4800(2), will be met in a situation where shares of a public corporation no longer exist.

Official response

21 November 2017 CTF Roundtable Q. 12, 2017-0723771C6 - Election not to be a public corporation

Q.13 – Online authorization process

The CRA has implemented a new online authorization process that can be used to authorize representatives to access client accounts. When making a request through this new process, the CRA requires that certain information contained in the request matches information it already has on file (e.g., authorized signing officer).

However, representatives and clients are finding it difficult to verify the authorized individuals CRA already has on file, particularly for larger and non-resident corporations where employees regularly leave the company. These issues lead to delays, repossessing requests, and resubmissions of change documentation.

Is the CRA aware of this issue and will it consider introducing a procedure to regularly verify or update authorized signing officers in the CRA’s files so that this information is kept current?

Preliminary response

Stéphane Charette: Although we are aware of this issue, we do not expect to comprehensively verify those records. Given the number of businesses in our data base, it would be very time- and resource-intensive to validate the delegate information process with each registrant.

All we can say is that, if you have the proper information then you are already in the system – if you do not, then you will get a message indicating that there is an error in the information. Therefore, I would suggest that, before you press enter or reenter again, you confirm with your clients the delegate information that should be entered in the system.

Our understanding is that, at a certain point, you are going to be rejected from the system and will not be able to access it anymore - and your client will have to get in touch with CRA to validate or provide new information. Once you have the proper delegate information, if it needs to be changed, a representative will be able to submit that information through a further request in the system.

Official response

21 November 2017 CTF Roundtable Q. 13, 2017-0724271C6 - Online Authorization Process

Q.14 – S. 116 procedure for s. 87(8.4) mergers

The Department of Finance released draft legislation on September 16, 2016 (subsections 87(8.4) and (8.5)) to provide a mechanism for deferral of recognition of gains and losses from dispositions of shares of Canadian resident corporations caused by certain foreign mergers. This deferral would be available provided such shares are “taxable Canadian property” and do not constitute “treaty-protected property”.

Subsequently, on October 25, 2017 the Department of Finance released revised legislative proposals, followed on October 27 by Bill C-63, which expanded the scope of the tax-deferral mechanism of subsections 87(8.4) and (8.5) to also include joint elections made in connection with dispositions of certain taxable Canadian property (that is not treaty-protected property) that are interests in partnerships and interests in trusts. The revised wording in subsections 87(8.4) and (8.5) of Bill C-63 also contains details concerning the joint election mechanism, which had not been outlined in the original September 16, 2016 proposals. The draft proposals of subsections 87(8.4) and (8.5) in Bill C-63 apply to foreign mergers that occur after September 15, 2016.

Q.14(a) Elections before enactment

One of the conditions in proposed subsection 87(8.4) is that the new corporation and disposing predecessor foreign corporation must make a joint election in accordance with prescribed rules. For foreign mergers occurring after September 15, 2016, will the CRA accept elections for the tax deferred treatment of dispositions under proposed subsection 87(8.5) prior to enactment of the legislation?

Q.14(b) Manner of election

Can the CRA provide guidance on the manner of, and form for, making the joint election in proposed paragraph 87(8.4)(e)?

Q.14(c) Exemption from s. 116

Will the CRA extend its position to exempt dispositions of shares from section 116 notification procedures in paragraph 1.82 of Income Tax Folio S4-F7-C1, “Amalgamations of Canadian Corporations”, to dispositions of shares in respect of which an election is made under proposed paragraph 87(8.4)(e)?

Q.14(d) Reliance on ACB

If the CRA is not prepared to extend the position, can the CRA provide guidance on how it will review notifications for dispositions of shares submitted prior to the enactment of the proposed legislation? Specifically, would the CRA be prepared to issue clearance certificates in respect of a disposition of shares on the basis that the proceeds of disposition of the shares will be equal to their adjusted cost base to the disposing predecessor foreign corporation?

Q.14(e) Share valuation

Given that the proceeds of disposition of the shares will be deemed to be equal to the adjusted cost base of the shares to the disposing predecessor foreign corporation, will the CRA require that the notification include the valuation of the shares in order to issue a section 116 clearance certificate?

Preliminary responses

Q.14(a) and (b)

Stéphane Charette: The proposed provisions state that there must be an election in writing. The CRA’s longstanding position, outlined in Income Tax Technical News No. 44, is to encourage the taxpayers to file under the proposed legislation so for foreign mergers prior to the enactment of Bill C-63, we will accept the taxpayers’ joint election in writing.

No particulars of the election details are provided in the provisions. All we can offer as a comment is that whatever information the taxpayers think would be required to justify such a transaction should be provided.


Stéphane Charette: CRA will not extend the admin position you’ll find in paragraph 1.82 of the S4-F7-C1 to those proposed transactions. In other words, we will confine that position to s. 87(4).


Stéphane Charette: Yes, we will. For all the foreign mergers occurring after September 15, 2016, the CRA will generally be prepared to issue a certificate of compliance under s. 116 for cases where the proceeds of disposition of the shares on the foreign merger are equal to the ACB of the predecessor foreign corporation.


Stéphane Charette: We will not require a valuation of the fair market value, although we will require some justification for the ACB.

Official response

21 November 2017 CTF Roundtable Q. 14, 2017-0724241C6 - Section 116 procedures for tax-deferred dispositions on foreign mergers

Q.15 – Inside/outside basis for US LLC successor to LP

CRA previously indicated that, upon the conversion of a U.S. limited partnership (USLP) into a U.S. limited liability company (LLC), the USLP is considered to have disposed of its assets at fair market value (FMV) and the holder of a partnership interest is also considered to have disposed of its interest at FMV. Thus such a conversion could trigger a gain or loss in respect of the partnership interests and the partnership's assets.

Can the CRA comment on the adjusted cost base (ACB) of the membership interests in the converted entity (i.e. the LLC) to the members, as well as the LLC’s ACB in its assets immediately after the conversion?

There was insufficient time to respond orally to this question.

Official response

21 November 2017 CTF Roundtable Q. 15, 2017-0724091C6 - Conversion from a US LP to an LLC

Q.16 – Expenses of medically-assisted death

The Supreme Court recently issued its ruling in Carter v. Canada (2015 SCC 5) which indicated that Canadians are entitled to obtain medical assistance to end their lives under appropriate circumstances. Does the CRA consider costs of medical assistance to end an individual’s life eligible medical expenses for purposes of the medical expense tax credit?

There was insufficient time to respond orally to this question.

Official response

21 November 2017 CTF Roundtable Q. 16, 2017-0703891C6 - Medical assistance in dying