Income Tax Severed Letters - 2011-12-23


2011 Ruling 2011-0414431R3 - Related Foreign Entity Financing

Unedited CRA Tags
15(1), 15(2), 15(2.6), 15(2.6), 15(9), 17(1), 17(2), 80.4(2), 91(1), 212(2), 214(3)(a), 245

Principal Issues: Whether a loan from a controlled foreign affiliate to a related non-resident entity will trigger the application of subsection 15(2) and Part XIII.

Position: No

Reasons: Subsection 15(2) does not apply to loans between non-residents.

Ministerial Correspondence

29 November 2011 Ministerial Correspondence 2011-0424591M4 - Carried Interest

Principal Issues: How "carried interest" is taxed in Canada.

Position: Question of fact - general comments provided.

Reasons: See IT-479R Transactions in Securities

29 November 2011 Ministerial Correspondence 2011-0422061M4 - Taxation of Indians

Unedited CRA Tags

Principal Issues: General

Position: General comments only

Reasons: No specific question.

Technical Interpretation - External

20 December 2011 External T.I. 2011-0423771E5 - Payments Based on Production or Use

Unedited CRA Tags

Principal Issues: Whether the comments in Technical Interpretation 9718365 ("TI 9718365") are still applicable.

Position: Yes.

Reasons: IT-462.

13 December 2011 External T.I. 2011-0416261E5 - Article XXII(4) of the Canada-U.S. Treaty

Unedited CRA Tags
ITA: 212(1)(b), 214(15)(a), 247(2); Canada-U.S. Treaty: Article XI(1)(2), Article XXII(4)

Principal Issues: Would the notional guarantee fee imputed by subsection 247(2) of the Act be exempt from Part XIII tax under paragraph 1 of Article XI of the Canada-U.S. Treaty or under paragraph 4 of Article XXII?

Position: Paragraph 4 of Article XXII of the Canada-U.S. Treaty would apply.

Reasons: Based on the intent of the parties to the Canada-U.S. Treaty, paragraph 4 of Article XXII was specifically added to apply to guarantee fees in order to harmonize the treatment of guarantee fees paid by residents of the United States and Canada.

12 December 2011 External T.I. 2011-0416801E5 F - Safe Income on Hand - Stub Period

Unedited CRA Tags
safe income generally prorated in stub period

Principales Questions: Corporation A is a CCPC and carries on a residential and commercial construction business. Corporation A issues progress billings as work on a project proceeds for the purposes of reporting contract revenues as described in IT-92R2. Corporation A's only issued and outstanding shares consist of 100 common shares. Corporation A has only one construction project outstanding, for which construction costs and profits are estimated to be respectively $20,000,000 and $2,000,000. In Corporation A's first taxation year, say year 1, work in progress (hereinafter "WIP") and construction expenses amount to respectively $11,000,000 and $10,000,000. In the computation of its year 1 net income for income tax purposes, Corporation A deducted the WIP and, consequently, incurred a non-capital loss of $10,000,000. At the beginning of year 2, transactions are implemented and the application of subsection 55(2) is triggered. How, in the particular situation, will the safe income on hand (hereinafter "SIOH") be computed for the stub period starting on the first day of year 2 and ending on the safe income determination time?

Position Adoptée: General comments provided. The key factors are that the computation of SIOH for the stub period must be reasonable in the circumstances and that generally the SIOH for the stub period is determined by allocating a proportion of the income of the corporation for the taxation year to the stub period.

Raisons: Question of fact and previous positions.

6 December 2011 External T.I. 2011-0423181E5 F - Safe Income

Unedited CRA Tags
where Shareholder with high SIOH Class F shares converts its low SIOH Class A shares on rollover basis into Class F shares, there is downward averaging of SIOH per share

Principal Issues: OPCO has one shareholder (hereinafter referred to as "SHAREHOLDER") which holds 200 Class "A" and 100 Class "F" shares of the capital stock of OPCO. The 200 Class "A" and 100 Class "F" shares of the capital stock of OPCO have a paid-up capital of, respectively $200 and $100, and a fair market value of, respectively $200,000 and $100,000. The adjusted cost base for SHAREHOLDER of the 200 Class "A" and 100 Class "F" shares of the capital stock of OPCO is, respectively $200 and $100. The safe income on hand (hereinafter "SIOH") attributable to the 200 Class "A" and 100 Class "F" shares of the capital stock of OPCO is respectively $80,000 and $100,000. If SHAREHOLDER acquires 200 Class "F" shares of the capital stock of OPCO in exchange for its 200 Class "A" shares of the capital stock of OPCO on a tax-deferred basis pursuant to subsection 51(1), whether the SIOH of the 300 Class "F" shares of the capital stock of OPCO held by SHAREHOLDER will amount to $180,000.

Position: Yes. The SIOH attributable to the Class "A" shares of the capital stock of OPCO would flow to the new Class "F" shares acquired by SHAREHOLDER under the circumstances. The SIOH would be allocated proportionally to each Class "F" shares of the capital stock of OPCO held by SHAREHOLDER.

Reasons: Question of fact and previous positions.

1 December 2011 External T.I. 2011-0425501E5 - Low Rate Income Pool

Unedited CRA Tags
89(1), 89(14), 185.1(1), 185.2(1), 185.2(2), 185.2(4).

Principal Issues: Whether, in a particular taxation year, the calculation of the low rate income pool (hereinafter "LRIP") of a particular corporation that is not a Canadian-controlled private corporation (hereinafter the "non-CCPC") can be modified by the Minister when the modification relates to an understatement made by the non-CCPC in the computation of its LRIP pursuant to subsection 89(8) in a previous taxation year which is now statute-barred.

Position: Yes. Variable A in the formula for computing the LRIP of the non-CCPC would be adjusted to correct the understatement for the purposes of computing Part III.1 tax in the particular taxation year.

Reasons: According to the law.

23 November 2011 External T.I. 2011-0399661E5 - Deductibility of employee rebate

Unedited CRA Tags
ITA 6(1)(a), 18(1)(a)

Principal Issues: Whether an employee cash rebate paid by a manufacturer to an employee of a related company is an eligible deduction?

Position: Always a question of facts.

Reasons: The law. Previous positions.


7 October 2011 Roundtable, 2011-0411971C6 F - Appraisal Fees Deductibility

Unedited CRA Tags
appraisal fees for valuing capital property for the purpose of its acquisition or disposition are an ACB addition

Principal Issues: Are appraisal fees of capital property incurred for financial reporting purposes deductible as current expenditures?.

Position: Yes.

Reasons: Question of fact. Expenditures incurred to prepare financial statements are generally on account of income.

7 October 2011 APFF Roundtable Q. 4, 2011-0412071C6 F - Modifying a Capital Dividend Election

Unedited CRA Tags
83(2), 184(2), 184(3)
originally declared dividend not altered by subsequent resolution
short-cut method for direct assessment of shareholders for excess amount

Principal Issues: In two fact situations, where (1) In a resolution dated October 31, 2011, the directors of a corporation validly declare a capital dividend to its three shareholders (Mrs. A and B and Mr. C) which becomes payable November 30, 2011 (2) the corporation realizes a capital loss which causes the capital dividend to be greater than its CDA before the dividend becomes payable and (3) in a new resolution, the directors of the corporation split the dividend in two: (i) if the T2054 is filed after the dividend is split and before it becomes payable, whether the CRA would accept the resolution splitting the dividend for the purpose of the T2054? and (ii) if the T2054 is filed before the directors split the dividend and the dividend becomes payable, whether the CRA would accept an amended T2054 based on the new resolution?

Position: In both situations, the T2054 must be prepared on the basis of the October 31, 2011 directors' resolution whether it's filed before or after the directors pass a resolution to split the dividend in two. In our opinion, after validly declaring a dividend the directors of the corporation cannot modify the dividend. Hence, technically, subsection 184(2) would be applicable when the dividend becomes payable or when the T2054 must be filed (November 30, 2011). In both cases, the corporation should inform its Tax Services Office that its total capital dividend payable is in excess of its CDA, that the excess is caught by subsection 184(2) and that it wishes that the effect of making the election under subsection 184(3) apply to it. In doing so, the corporation could avoid a part III assessment otherwise applicable and meet its objective of paying to its shareholders a capital dividend of the amount of its CDA and a taxable dividend in the amount of the excess. In such circumstances, CRA could apply its administrative practice (designated "Short Cut Method") under which no part III assessment is issued to the corporation and reassessments are only issued to the shareholders to include in their income their respective part of the taxable dividend.

Reasons: The law and CRA`s administrative practice (Short Cut Method)

7 October 2011 APFF Roundtable Q. 29, 2011-0412131C6 F - Subsection 55(2) and Capital Dividend Account

Unedited CRA Tags
55(2)(b)(c), 55(5)(f), 89(1)
CDA addition from application of s. 55(2)(c) is only available in the following years
dividend paid in contemplation of subsequent arm’s length share sale is part of proceeds of that sale

Principal Issues: Holdco owns all of the issued and outstanding shares of the capital stock of Opco. Holdco considers selling all its shares of the capital stock of Opco to an arm's length party. In the taxation year preceding the year during which the shares are sold, Opco pays a taxable dividend to Holdco. The amount of the taxable dividend is in excess of Opco's safe income. As such, subsection 55(2) would apply to the taxable dividend. In the event that Holdco wants to pay a capital dividend from its capital dividend account, when will the deemed capital gain triggered pursuant to subsection 55(2) be credited to its capital dividend account?

Position: In the particular situation, the capital gain triggered pursuant to subsection 55(2) will generally be added to Holdco's capital dividend account when it will dispose of the Opco shares, pursuant to paragraph 55(2)(b). However, in the event of the application of paragraph 55(2)(c) to a dividend, the capital gain would be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property and as such, could be distributed as a capital dividend only in the following years. Finally, where, in a particular situation, part of a taxable dividend would be attributable to safe income and the dividend recipient would try to apply subsection 55(2) without making a paragraph 55(5)(f) designation, probably in order to obtain a tax benefit as part of a surplus stripping arrangement, we are of the opinion that GAAR would apply in the particular situation.

Reasons: According to the Law and previous positions.

Technical Interpretation - Internal

15 December 2011 Internal T.I. 2011-0413891I7 F - Récupération d'amortissement-Recapture CCA

Unedited CRA Tags
129(6); 125(7)
reasonable to pro-rate recapture of depreciation between active business income and property income based on relative periods of use
successive business and property income use of rental property reflected in apportionment of source of ensuing recapture

Principales Questions: Une société de gestion loue un bien immeuble pour une période de deux ans à une société associée et par la suite loue ledit immeuble à une autre société non associée, avant de le vendre. Le revenu au titre de la récupération d'amortissement découlant de la vente de l'immeuble est-il en partie un revenu provenant d'une entreprise exploitée activement et en partie un revenu de bien? A management corporation leases a building during two years to its associated corporation and then to third parties before to sell it. Whether recapture CCA could be treated in part as active business income and in part as investment income?

Position Adoptée:

Cette position permet de respecter la politique fiscale sous-jacente des paragraphes 129(6) et 129(1).
This position is in accordance with the tax policy underlying subsection 129(6) and subsection 129(1).