Income Tax Severed Letters - 2008-04-11

Ruling

2008 Ruling 2007-0247091R3 - Donation of Land to Charity

Unedited CRA Tags
110.1 248(32)

Principal Issues:
1) Whether the transfer of land by a corporate partnership to a Canadian charity will qualify as a gift for tax purposes.
2) Whether the proposed transaction results in the conferral of an advantage to the donor.

Position:
1) Yes, based on the facts provided.
2) Not in this case.

Reasons:
For the purposes of determining the eligible amount of the gift by the donor under proposed subsection 248(31), it is our view that the proposed transaction will not result in the conferral of an advantage to the donor under proposed subsection 248(32).

XXXXXXXXXX 2007-024709

2007 Ruling 2007-0248441R3 - Loss Consolidation

Unedited CRA Tags
20(1)(c) 112(1) 80(1)

Principal Issues: Are the loss utilization transactions acceptable?

Position: YES

Reasons: Meets the technical requirements of the provision

Ministerial Correspondence

2 April 2008 Ministerial Correspondence 2008-0267351M4 - Payments to home providers

Unedited CRA Tags
81(1)(h)

Principal Issues: 1. Are bed reservation fees included in the caregiver's income. 2. Can a caregiver receive tax free amounts in respect of two residences under 81(1)(h).

Position: 1. No if the conditions in 81(1)(h) are met. 2. A caregiver can own more than one residence and employ other individuals to provide care but an individual can only have one principal residence.

Reasons: The law.

Technical Interpretation - External

1 April 2008 External T.I. 2008-0269311E5 F - Ajustements salariaux rétroactifs

Unedited CRA Tags
110.2(1) 110.2(2)

Principales Questions: Est-ce que des montants incluant des ajustements salariaux rétroactifs, une indemnité additionnelle et des intérêts, versés aux cols blancs de la Ville de XXXXXXXXXX afin d'intégrer la grille salariale harmonisée découlant de la signature de la convention collective, peuvent être considérés comme un montant admissible aux fins de cette définition au paragraphe 110.2(1) de la Loi de l'impôt sur le revenu?

Position Adoptée: NON

Raisons: Ces montants ne sont pas reçus en exécution d'une ordonnance ou d'un jugement compétent, d'une sentence arbitrale ou d'un contrat par lequel le payeur et le particulier mettent fin à une procédure judiciaire car ils résultent d'ententes conclues dans le cadre du processus de négociations en vue d'obtenir l'intégration de la grille salariale harmonisée et de l'établissement ou du renouvellement de la convention collective.

Conference

5 October 2007 Roundtable, 2007-0243261C6 F - Bump-up in Cost of Prop. - 88(1)(c) and (d)

Unedited CRA Tags
88(1)(c)(vi); 88(1)(c.3); 88(1.7); 88(1)(d).

Principal Issues: a) Before the acquisition of control of a target corporation ("Targetco"), a specified shareholder of Targetco acquires a property from Targetco for cash consideration. Whether the property would be considered to be substituted property for the purposes of subparagraph 88(1)(c)(vi). b) In the past, CRA has determined that, an earn-out clause in a purchase and sale agreement would not be property described in subparagraph 88(1)(c.3)(i) or (ii), provided that the sole purpose is to establish the fair market value of the shares of the subsidiary on closing, and not a mechanism to distribute additional amounts based on the future sale or value of some particular property. Whether the same reasoning is applicable to other types of clause or agreement which is used, directly or indirectly, to establish the FMV of the shares of the subsidiary. c) Whether pre-change-of-control dividends in multitier corporate structures grind the amount of the bump pursuant to paragraph 88(1)(d)(i.1) and subsection 88(1.7), where a new company is inserted between the parent and the subsidiary after its acquisition of control.

Position: a) No. b) Recently, the CRA has determined that certain price adjustment clauses, that allowed the seller to receive an amount equal to the fair market value of the shares of the capital stock of the subsidiary on closing, as that amount is finally determined, would not be property described in subparagraph 88(1)(c.3)(i) or (ii). c) Yes.

Reasons: Wording of the Act and previous positions.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE
APFF - CONGRÈS 2007

5 October 2007 Roundtable, 2007-0243341C6 F - Deemed Year Ends

Unedited CRA Tags
87(2)(a); 256(7)(b); 249(4)

Principal Issues: A private corporation ("Holdco") that is controlled by a group of three persons amalgamates with a public corporation ("Pubco") to form "Amalco." As part of the amalgamation, the shareholders of Pubco receive non-voting shares of the capital stock of Amalco. Thus, the group of persons that controlled Holdco prior to the amalgamation will control Amalco on and after the amalgamation. Immediately after the amalgamation, Amalco redeems the non-voting shares. Finally, Amalco elects not to be a public corporation and as a result, becomes a Canadian-controlled private corporation. How many taxation year-ends result from the transactions described above?

Position: The taxation years of Holdco and Pubco that would otherwise have ended after the amalgamation will be deemed to have ended immediately before the amalgamation pursuant to paragraph 87(2)(a). Furthermore, the group of persons (the former shareholders of Holdco) will technically be deemed to have acquired, immediately before the amalgamation, control of Pubco pursuant to subparagraph 256(7)(b)(ii). Consequently and pursuant to paragraph 249(4)(a) (subject to paragraph 249(4)(c)) the taxation year of Pubco that would, but for paragraph 249(4)(a), have included the time of the deemed acquisition of control under subparagraph 256(7)(b)(ii), will be deemed to have ended immediately before that time. In other words, the deemed acquisition of control of Pubco resulting from the amalgamation will technically generate a deemed year-end with respect to Pubco immediately before the time that is immediately before the amalgamation. Finally and pursuant to paragraph 249(3.1)(a), the first taxation year of Amalco will be deemed to end immediately before the time Amalco becomes a Canadian-controlled private corporation.

Reasons: Wording of the Act.

5 October 2007 Roundtable, 2007-0243091C6 F - GRIP Calculation - Impact of a Loss Carry-Over

Unedited CRA Tags
89(1) "general rate income pool"; 89(7)

Principal Issues: 1) Whether the taxable income of a corporation may be less than nil. 2) What is the impact of the carry-forward of a loss on the GRIP? 3) What is the impact of the carry-back of a loss sustained in the 2006 taxation year or afterwards on the GRIP? 4) Whether the carry-back of a loss sustained in 2001, 2002, 2003, 2004 or 2005 in the taxation year 2001, 2002, 2003 or 2004, reduces the GRIP addition for 2006 under subsection 89(7). 5) What is the meaning of "specified future tax consequences"?

Position: 1) Pursuant to subsection 248(1), "taxable income" has the meaning assigned by subsection 2(2), except that in no case may a taxpayer's taxable income be less than nil. 2) Generally, the carry-forward of a loss will reduce the amount of the GRIP in the year the loss is deducted. In that respect, see variable D of the definition of GRIP in subsection 89(1) which refers to the corporation's taxable income. For the purpose of computing such taxable income, the amount of the loss carried-forward will be deducted pursuant to subsection 111(1). 3) The carry-back of a loss sustained in the 2006 taxation year or afterwards will reduce the amount of the GRIP in the year the loss is incurred. This is due to variable B of the definition of GRIP. Subsection 89(7) does not contain a mechanism similar to variable B of the definition of GRIP. 4) No. 5) The notion of "specified future tax consequence" is defined in subsection 248(1).

Reasons: Wording of the Act.

5 October 2007 Roundtable, 2007-0243161C6 F - Safe Income and Section 85.1

Unedited CRA Tags
55(2)

Principal Issues: Shareholders of a public corporation ("Pubco") would transfer a portion (1/3) of their shares of the capital stock of Pubco in favour of a newly-created corporation ("Newco"). Subsection 85.1(1) would apply to these transfers of shares. Pursuant to paragraph 85.1(1)(b), the cost to Newco of the shares of the capital stock of Pubco would be deemed to be the paid-up capital of the shares transferred immediately before the transfer. Pubco would then redeem the shares of its capital stock held by Newco. Subsection 84(3) would apply to such redemption of shares. Whether, in these circumstances, Newco could benefit from a portion (1/3) of the safe income on hand of Pubco generated prior to the acquisition of the shares of the capital stock of Pubco by Newco.

Position: Yes. Under the terms of subsection 55(2), it is necessary to analyse the capital gain inherent in the shares of the capital stock of Pubco held by Newco at the time of their redemption, in order to determine the extent to which the gain is attributable to safe income on hand or to something other than safe income on hand. In the particular situation described above and considering, among other things, that the cost to Newco of the Pubco shares acquired from the public will be deemed to be the paid-up capital of such shares, it would seem, at first glance, that a portion of the capital gain inherent in the shares of the capital stock of Pubco held by Newco at the time of their redemption would be reasonably attributable to 1/3 of the safe income on hand of Pubco. CRA's general position is that the safe income on hand of a share is normally limited to the period during which the shareholder held the share (the "holding period"). The "holding period" general principal is mainly based on the fact that the pre acquisition safe income on hand is, in most cases, reflected in the adjusted cost base of the shares to a particular shareholder and therefore cannot contribute to the gain on those shares during the shareholder's holding period. However, there are exceptions to this general principle, such as when the calculation of safe income on hand involves shares acquired following the exercise of options or as a result of a stock dividend, or when the shares are acquired on a roll-over basis. In these situations and depending on the circumstances, it is possible that safe income on hand accrues on a share before it is owned by a particular person. In the situation described above, it would be inappropriate to apply the "holding period" general principle since Pubco's safe income on hand existing at the time of the acquisition of the Pubco shares by Newco would not be reflected in the cost of the Pubco shares to Newco

Reasons: Wording of the Act and previous positions.

5 October 2007 Roundtable, 2007-0243221C6 F - Meaning of "Reorganization" in 84(2)

Unedited CRA Tags
84(2)

Principal Issues: A public corporation ("Xco") operates two mines. One of the mines produces zinc, the other one gold. Xco wishes to separate these two mines. First, Xco transfers the zinc mine to a newly created wholly-owned subsidiary ("Newco"). Xco then reduces its stated capital and distributes the shares of the capital stock of Newco to its shareholders. Would subsection 84(2) apply to these transactions. More specifically, whether these transactions would constitute a "reorganization" of Xco's business for the purposes of subsection 84(2), considering the recent decision of the Tax Court of Canada in McMullen.

Position: General comments provided only. It appears from the Kennedy case that the "reorganization" of a business is different from its winding-up or discontinuance. Based on the Kennedy case, it appears that the business of a corporation continues on a reorganization and that it is not necessary for such business to cease in order that there be a "reorganization" for the purposes of subsection 84(2). Instead, the corporation's business continues to be carried on, albeit in a different form or on a different scale.

Reasons: Wording of the Act and previous positions.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE
APFF - CONGRÈS 2007

6 October 2006 Roundtable, 2006-0195991C6 F - GAAR and Recent Jurisprudence - Subsection 245(3)

Unedited CRA Tags
245(3)

Principal Issues: What is the CRA's position with respect to the notion of "avoidance transaction" in light of the recent GAAR cases.

Position: CRA's position is that a series of transactions can contain an "avoidance transaction" as defined in subsection 245(3), even if it is determined that the series of transactions has an overall bona fide non-tax purpose. Consequently and subject to subsection 245(4), CRA's position is that subsection 245(2) may apply to deny a tax benefit resulting from a series of transactions, unless it can be established that each transaction in the series was carried out primarily for bona fide non-tax purposes. This position is in accordance with the wording of subsections 245(2) and (3). It is also supported by the Canada Trustco decision rendered by the Supreme Court of Canada and by the Department of Finances's Technical Notes relating to paragraph 245(3)(b). In the Desmarais case, the Court indicated that it had to determine if at least one transaction in the series was an avoidance transaction, and then went on to deal with subsection 245(4). This approach is in accordance with CRA's position. In the Lipson case, the transactions involved were admitted to be avoidance transactions within the meaning of subsection 245(3). Finally, in the Overs decision, the Court found that none of the transactions analyzed constituted an avoidance transaction.

Reasons: Wording of the Act and previous positions.

6 October 2006 Roundtable, 2006-0196031C6 F - Bump-up in Cost of Shares - Bump Denial Rules

Unedited CRA Tags
88(1)(c)(vi) 88(1)(c.3) 88(1)(c.4)

Principal Issues: Two individuals ("X" and "Y") would each own 50% of the issued and outstanding shares of a taxable Canadian corporation ("Canco"). X and Y would be non-residents of Canada. Canco would own all of the issued and outstanding shares of a U.S. corporation ("Usco"). A third party ("Acquisitionco US") would incorporate a taxable Canadian corporation ("Acquisitionco CAN"). Acquisitionco CAN would then acquire all of the issued and outstanding shares of the capital-stock of Canco for cash consideration. Canco and Acquisitionco CAN would then amalgamate to form "Canco 2." Canco 2 would like to increase the cost of the shares of the capital stock of Usco pursuant to subsection 87(11) and paragraphs 88(1)(c) and (d). After the acquisition of control of Canco by Acquisitionco CAN, X and Y would become employees of Acquisitionco US and receive, as part of their remuneration, shares of the capital-stock of Acquisitionco US.

Position: Each of X and Y would be a "specified shareholder" of Canco before control of Canco is acquired by Acquisitionco CAN. Furthermore, the shares of the capital-stock of Acquisitionco US received by X and Y would constitute "substituted property" under subparagraph 88(1)(c.3)(i). The said shares of the capital-stock of Acquisitionco US received by X and Y would not be "specified property" as defined in paragraph 88(1)(c.4). Consequently and provided that the acquisition by X and Y of the shares of the capital-stock of Acquisitionco US is part of the series of transactions or events that includes the amalgamation of Canco and Acquisitionco CAN, subparagraph 88(1)(c)(vi) would apply to deny a "bump-up" in the cost of the shares of the capital-stock of Usco.

Reasons: Wording of the Act.

5 October 2005 Roundtable, 2007-0243151C6 F - Calculation of Safe Inc after the Kruco Decision

Unedited CRA Tags
55(2); 55(5)(c); 96(1)(f).

Principal Issues: a) Where a corporation is a member of a partnership, whether the computation of the safe income on hand of such corporation would include any accrued income or loss of the partnership referable to the stub period that is not otherwise included in the safe income on hand of the corporation. b) In a particular taxation year, a corporation incurs borrowing expenses described in subparagraph 20(1)(e)(ii). Whether the corporation's safe income on hand for such particular taxation year should be reduced to reflect the portion of the borrowing expenses that will be deductible only in future taxation years. c) In a particular taxation year, a corporation incurs SR&ED expenses. However, the corporation will only claim as a deduction the said expenses in taxation years subsequent to the particular taxation year in which the expenses were incurred, pursuant to subsection 37(1). Whether the corporation's safe income on hand for such particular taxation year should be reduced to reflect the SR&ED expenses that will be deducted only in future taxation years.

Position: a) Yes. The holding period of a particular share of a particular corporation for the purposes of subsection 55(2) generally contains "stub periods." CRA's long-standing position is that the computation of safe income on hand of a corporation during the holding period would include safe income on hand in these stub periods and, if the corporation is a member of a partnership, would also include any accrued income or loss of the partnership referable to the stub period that is not otherwise included in the safe income on hand of the corporation. Both the Tax Court of Canada and the Federal Court of Appeal have stated in VIH Logging Ltd. (these decisions having been rendered after the Federal Court of Appeal's decision in Kruco Inc.) that the computation of safe income on hand of a corporation during the holding period must include the safe income on hand generated in the stub periods. This interpretation was found to be not only consistent with the language of subsection 55(2), but also with its purpose. b) Yes. In Kruco Inc., the FCA recognized that the calculation of safe income is only the first step and that a second step, the determination of the safe income on hand, is required by the Act. In CRA's view, safe income on hand reductions made to reflect the impact of cash outflows (such as non-deductible expenses or expenses that are not yet deductible in the year they are incurred), which are not deducted in the computation of the corporation's net income for tax purposes but still have the effect of reducing the amount of disposable after-tax income by an equivalent amount, are in line with the general principles set out by the FCA in Kruco Inc. with respect to the calculation of safe income c) The corporation's safe income on hand for the particular taxation year should be reduced to reflect the SR&ED expenditures of a current nature that will be deducted only in future taxation years. The SR&ED expenditures of a capital nature generally relate to the acquisition of property by the corporation. Consequently, CRA's position is that a corporation's safe income on hand will not be reduced by the amount of capital SR&ED expenses until the year that such amount are claimed as a deduction in computing the corporation's net income for tax purposes.

Reasons: Wording of the Act and previous positions.

5 October 2007 APFF Roundtable Q. 10, 2007-0243171C6 F - Surplus Stripping

Unedited CRA Tags
84.1; 45(2); 84(3)
treatment of Employeeco purchase depends on whether it has a separate economic interest
leveraged Employeeco buyout could be an arm’s length transaction

Principal Issues: Scenario a) An individual ("X") owns 100 % of the shares of OPCO. A freeze is carried out at OPCO's level. In the process, X disposes of his OPCO common shares in consideration for preferred shares of OPCO. A key employee of OPCO incorporates "EMPLOYEECO" and subcribes for 100 common shares of its capital stock for a nominal amount in cash. X and EMPLOYEECO then subscribe for 65% and 35% respectively of OPCO common shares, for nominal amounts in cash. X then disposes of 35% of his OPCO preferred shares in favour of EMPLOYEECO. Funds used to pay the purchase price of the OPCO preferred shares come from OPCO's surpluses. Scenario b) EMPLOYEECO borrows from a financial institution the funds needed to acquire 35% of the OPCO common shares held by X. EMPLOYEECO's borrowing is paid out of OPCO's future earnings. Scenario c) Same as Scenario b) except that X has a balance of sale price receivable from EMPLOYEECO. Scenario d) X disposes of all of his OPCO common shares in favour of EMPLOYEECO. X has a balance of sale price receivable from EMPLOYEECO. In order to protect his balance of sale price receivable, X subscribes to non-participating voting shares of the capital-stock of EMPLOYEECO that gives him control of the corporation.

Position: Scenario a) After the proposed transactions, Mr. X continues to own a significant interest in OPCO. In fact, Mr. X continues to control OPCO. EMPLOYEECO may be viewed as merely accommodating Mr. X since EMPLOYEECO does not appear to have any independent interest in acquiring the preferred shares of OPCO. CRA would probably apply section 84.1 as a primary position. Under this provision, EMPLOYEECO would be deemed to have paid a dividend to Mr. X. Alternatively, CRA would consider applying subsection 245(2) to redetermine the tax consequences and to recharacterize the proceeds received by Mr. X as a taxable dividend. Scenarios b) and c) Based on the limited information provided with respect to the given situation, there is no reason to believe that X and EMPLOYEECO would not deal with each other at arm's length with respect to the acquisition of the OPCO common shares. On such a basis, subsection 84.1(1) would appear to be inapplicable. However, in the context of a partial disposition of shares, the position of the Rulings Directorate would be to consider the potential application of subsection 245(2), after a careful review of all the facts and circumstances surrounding a particular situation. Scenario d) Mr. X would control EMPLOYEECO at the time of the disposition (or shortly after) and this would trigger the application of section 84.1.

Reasons: Wording of the Act and previous positions.