Income Tax Severed Letters - 2014-08-13

Ruling

2014 Ruling 2014-0526491R3 F - Split-up butterfly

CRA Tags
55(3)(b), 112(1), 18(6), 245(2), 56(2), 187.1, 15(1), 191(1), 85(1), 55(3.1), 80(1)

Principales Questions: Will subsection 55(2) apply to the proposed transactions?

Position Adoptée: No.

Raisons: Paragraph 55(3)(b) will apply.

2014 Ruling 2013-0505431R3 - XXXXXXXXXX

CRA Tags
66.2(6), 85(2), 86(1)(b), 86(1)(c), 66.2(5), 55(3.01), 53(1)(e), 98(2), 55(3)(a)
public trading in dividend recipient does not engage exclusion in s. 55(2)(a)(iv)
delay in filing articles of dissolution
s. 97(2) applicable to contribution (no equity consideration)

Principal Issues: 1- Is the transfer of a percentage of the interest in a royalty owned by a partnership (which is owned by Pubco and its wholly-owned subsidiary Subco), in line with policies relating to in-group consolidation transactions? 2 - Does the royalty qualify as CRP? 3 - Is the distribution of assets from Subco to Pubco considered to be good tax policy, i.e. no ACB grind on the redemption of the preferred shares? 4 - Will any of the proposed transactions for the first distribution of assets be described in any of subparagraphs 55(3)(a)(i) to (v)? 5 -Will any of the proposed transactions for the second distribution of assets be described in any of subparagraphs 55(3)(a)(i) to (v)? 6 - XXXXXXXXXX?

Position: 1 – Yes; 2 - This is an audit issue but we ruled favorably provided it meets the CRP definition; 3 - No. Representative changed Subco's capital under 86(1).4 - No. none of subparagraphs 55(3)(a)(i) to (v) will apply; 5 - No, none of subparagraphs 55(3)(a)(i) to (v) will apply; 6 - XXXXXXXXXX.

Reasons: 1 - As it is within a related group, the end result is a transfer of some of the CCDE pool from the partnership to Pubco. Under 98(2), Pubco acquires a CRP equal to the FMV of the interest in the royalty, and under subsection 66.2(5) Pubco incurs CDE equal to the cost of the interest in the royalty it acquires; 2 - This is an audit issue XXXXXXXXXX; 3 - No. Representative changed Subco's capital under 86(1). CRA normally requests that there be an ACB grind on a similar transaction by the conversion of some of the common shares into preferred shares. Consequently, we asked the representative to convert Subco's common shares and preferred shares into one common share and one preferred share. The FMV and redemption value of the preferred share corresponding to the FMV of the "Distributed XXXXXXXXXX Assets" as defined. 4 - No. None of subparagraphs 55(3)(a)(i) to (v) will apply. 5 - No. None of subparagraphs 55(3)(a)(i) to (v) will apply. These transactions will involve persons that are related to both dividend recipients (Subco and Pubco), or will involve the dividend recipient itself
6 - XXXXXXXXXX.

Technical Interpretation - External

22 July 2014 External T.I. 2014-0520701E5 - Meaning of "any amount" in subsection 216(4)

CRA Tags
216(4), 215(3)
deductible expenses include financing expenses not paid by agent

Principal Issues: What is the meaning of "any amount … available out of the rent or royalty received for remittance"?

Position: The words "any amount…available out of the rent or royalty received for remittance to the non-resident person…" refer to the amounts available for payment by the agent to the non-resident after the agent has paid allowable expenses on behalf of the non-resident. However, the CRA will allow the agent to withhold and remit Part XIII tax based on the amount that is the non-resident's net rental income. Thus, in the situation described, the agent could take into account allowable expenses paid by the non-resident.

Reasons: Subsection 216(4) provides an option for the agent of the non-resident to withhold and remit Part XIII tax based on net amounts. Generally, according to the text of subsection 216(4), those amounts will be the gross amount less any allowable expenses paid directly by the agent. However, in Guide T4144, Income Tax Guide for Electing Under Section 216, the CRA states that once a Form NR6 has been approved, the CRA will allow the agent to remit Part XIII tax based on the amount that is the non-resident's net rental income, thus allowing the agent to take into account expenses paid by the non-resident.

2 July 2014 External T.I. 2014-0529731E5 F - Stop-loss Rules

CRA Tags
40(3.3), 40(3.4)
taxpayer able to designate sourcing of disposed-of shares/illustration of application of CRA formula

Principales Questions: Whether subsections 40(3.3) and 40(3.4) would apply to deem a corporate taxpayer's loss to be nil in three different hypothetical situations.

Position Adoptée: Taking as granted that the taxpayer would select among the Publico shares owned at a particular time the substituted property as being the first shares disposed of; in the First and Second Hypothetical Situation, both losses would not be deemed to be nil pursuant to paragraph 40(3.4)(a) as the condition set out in paragraph 40(3.3)(c) would not be met; and in the Third Hypothetical Situation, the corporate taxpayer's loss deemed to be nil pursuant to paragraph 40(3.4)(a) would be an amount of $41.67.

Raisons: Based on previous administrative positions.

27 June 2014 External T.I. 2013-0498191E5 F - Interaction entre 55(2) et l'impôt de partie IV

CRA Tags
112(1), 55(2), 129(3), 186(4)
Part IV tax on cross-redemptions takes into account the Part I tax (and RDTOH addition) generated by s. 55(2) application thereto
s. 55(2) tax on cross-redemption deemed dividends between connected CCPCs gave rise to circular Part IV tax

Principales Questions: Dans une situation donnée, est-ce qu'on peut tenir compte seulement du solde du compte d'IMRTD d'une société donnée immédiatement avant la réception d'un dividende par celle-ci aux fins du calcul du RTD ou de l'impôt de la partie IV de cette société ou d'une autre société?

Position Adoptée: Non. Nous sommes d'avis que, tant à l'article 129 qu'à l'article 186, il est prévu que le compte d'IMRTD ainsi que le RTD et l'impôt de la partie IV d'une société donnée se calculent en fonction de la totalité des montants pertinents à cet égard pour une année d'imposition entière donnée.

Raisons: Libellé des dispositions pertinentes de la Loi.

20 June 2014 External T.I. 2014-0532221E5 - Disposition of Canadian resource property

CRA Tags
66.2, 59(3.2), 70(5.2), 66(15), 66.4: 69(1)(c)
deemed disposition of oil and gas royalty

Principal Issues: What is the tax treatment of future Royalty payments received by an estate?

Position: The Royalty Payments are included in income under section 9 or paragraph 12(1)(g).

Reasons: Text of the legislation.

21 May 2014 External T.I. 2014-0528021E5 - Classification of Timber Limits

CRA Tags
1100(1)(f), 13(21), ITR Schedule II - Class 15, 39(1)(a), 20(1)(a), 1100(1)(e)
timber limit v. timber resource property

Principal Issues: What is the income tax treatment of proceeds of disposition of land with standing timber where the timber is harvested and the land is subsequently disposed of?

Position: The disposition of the timber limit may result in a recapture or capital gain.

Reasons: Application of the law.

Technical Interpretation - Internal

9 July 2014 Internal T.I. 2014-0525371I7 - Assessments beyond the normal reassessment period

CRA Tags
152(7), 152(4), 152(8), 152(3.1), 150(1)

Principal Issues: Whether an assessment or reassessment may be made beyond the normal reassessment period to increase tax payable where the taxpayer has failed to file a return of income and the Minister has issued an arbitrary assessment for the particular taxation year.

Position: Yes.

Reasons: Subparagraph 152(4)(a)(i) provides that the Minister may make an assessment, reassessment or additional assessment beyond the normal reassessment period where the taxpayer has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act. Whether the failure to file a return of income is attributable to neglect, carelessness or wilful default will depend on the particular facts. However, it is our understanding that, generally, the CRA will not issue an arbitrary assessment in these circumstances without first requesting the taxpayer file a return. In these circumstances, it is likely that the taxpayer would have been aware; therefore, the misrepresentation was attributable at least to neglect.