Income Tax Severed Letters - 2016-06-15

Ruling

2016 Ruling 2015-0612921R3 - Partnership contracting out to professional corps

CRA Tags
125(7), 245, 256(2)

Principal Issues: Partnership reorganization such that a partnership allows partners to incorporate professional corporations and the partnership enters into service agreements with the professional corporations to provide professional services to the partnership. Would the partner's professional corporation be considered to be carrying on a personal services business as defined in subsection 125(7) of the Act? Would the services fees earned by the professional corporation be specified partnership income as defined in subsection 125(7) of the Act?

Position: No. No.

Reasons: The proposed transactions conform to our requirements for these types of partnership reorganization rulings.

Technical Interpretation - External

31 May 2016 External T.I. 2016-0642011E5 - Functional currency election and partnerships

CRA Tags
261(6), 261(3)
Summary Under
Tax Topics - Income Tax Regulations - Regulation 229 - Subsection 229(1)
partnership with functional currency partner must file T5013 return and slips with CRA in the functional currency

Principal Issues: Whether a partnership is required to file a T5013 partnership information return and related slips and summary information in the elected foreign currency if one or more of its corporate members has made a foreign currency election under subsection 261(3) to comply with the requirements of functional currency reporting under subsection 261(6) of the Act.

Position: Yes

Reasons: All of the information requested on a partnership information return is prescribed information pursuant to subsection 229(1) of the Income Tax Regulations.

6 May 2016 External T.I. 2016-0646411E5 - Professional corporation & small business deduction

CRA Tags
125
Summary Under
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified partnership income
rulings for the multiplication of the small business deduction by professionals’ service corps will cease to apply

Principal Issues: Impact of 2016 Budget on partnership reorganization rulings

Position: See Below

Reasons: See proposed legislation in 2016 Budget and paragraph 16 of IC70-6R7.

4 May 2016 External T.I. 2016-0634551E5 - Ss 191(4) and PAC

CRA Tags
84(3), 191(4)
Summary Under
Tax Topics - Income Tax Act - Section 191 - Subsection 191(4)
operation of a price adjustment clause to reduce preferred shares’ redemption amount to below the shares’ “specified amount” can result in full Part VI.1 tax
Summary Under
Tax Topics - General Concepts - Price Adjustment Clause
effectiveness of share price adjustment clause on previously redeemed preferred shares can trigger Part VI.1 tax

Principal Issues: (i) Whether a PAC that is included in the terms or conditions of a taxable preferred share will negate the amount specified in subsection 191(4). (ii) How would the operation of the PAC affect the amount of original deemed dividends and additional deemed dividends that will qualify as excluded dividends for the purposes of subsection 191(4).

Position: (i) No. (ii) If the PAC becomes operative to increase the original redemption amount to an amount in excess of the specified amount, the additional dividends arising will not qualify as excluded dividends; however, the original deemed dividends will continue to qualify as excluded dividends. If the PAC operates to reduce the redemption amount to an amount less than the specified amount, the entire amount of the original deemed dividends will be disqualified as excluded dividends.

Reasons: (i) The 1989 Conference Report and document # 9309585 did not state a PAC would negate the specified amount. (ii) Where the PAC operates to increase the redemption amount, the excess amount calculated under subsection 191(5) will apply to deny excluded dividend treatment to the additional dividends. If the PAC operates to reduce the redemption amount, the condition stipulated in the mid-amble of subsection 191(4), that the specified amount does not exceed the FMV of property received as consideration on the issuance of the shares, will not be met.

27 April 2016 External T.I. 2016-0633101E5 F - Attribution of safe income

Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c)
discretionary dividend will not reduce safe income attributable to the other class of discretionary dividend shares to the extent the dividend is taxable under s. 55(2)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution
discretionary dividend shares may not satisfy the distribution definition

Principales Questions: 1. In a situation where there are two classes of shares in the capital stock of a corporation, the shares were issued to two different taxpayers at the same time and at the same price, and the fair market value (FMV) of the shares of each class is identical to the FMV of the other class, how would the safe income on hand of a corporation be attributed between the two classes of shares immediately before the time the shares of one of the classes are repurchased by the corporation.
2. Whether the answer would be different if a discretionary dividend was paid on the shares that will be purchased by the corporation before the purchase and if that dividend reduced FMV of the shares to be purchased without reducing the FMV of the other class of shares. The discretionary dividend would be equal to the FMV of the shares repurchased.

Position Adoptée: 1. In such a situation, the safe income on hand would be attributed equally to each class of shares of the capital stock of the corporation.
2. Based on the facts described in the present situation, the safe income on hand would be attributed equally to each class of shares of the capital stock of the corporation.

Raisons: 1. As the FMV and adjusted cost base of each class of shares of the capital stock of the corporation would be identical, the same amount of safe income on hand could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the share on which the dividend would be received (the capital gain being the same for each class held by each taxpayer).
2. If the FMV of the class of shares that would be purchased is equal to the total of the amount of the discretionary dividend plus the purchase price (that would be equal to nil in the present situation) and if such FMV is equal to the FMV of the shares of the other class, the same reason as the reason given in issue 1.

Technical Interpretation - Internal

9 March 2016 Internal T.I. 2015-0612501I7 - ITA 261(21) anti-avoidance

Summary Under
Tax Topics - Income Tax Act - Section 261 - Subsection 261(20) - Paragraph 261(20)(b)
s. 261(21) cannot apply to an FX hedging contract between a Canco which has the Canadian dollar as its functional currency and its parent which uses another currency
Summary Under
Tax Topics - Income Tax Act - Section 261 - Subsection 261(1) - Tax Reporting Currency
non-resident parent would have Canadian dollar as tax reporting currency

Principal Issues: 1. Does subsection (21) apply to reduce the foreign exchange loss of a taxpayer in respect of a hedging arrangement between the taxpayer and a related corporation that is a non-resident of Canada and is not subject to the provisions of the Act? 2. If a taxpayer enters into a hedging arrangement to hedge its foreign exchange risk in respect of a loan issued by the taxpayer any loss from which would be denied under subsection 261(21), does 261(21) also apply to deny a foreign exchange loss in respect of the hedging arrangement?

Position: 2. No. 2. No.

Reasons: Paragraph 261(20)(b) is not satisfied. Either the non-resident corporation does not have a tax reporting currency, or it has the Canadian dollar tax reporting currency – the same as the Canadian-resident corporation. The hedging arrangement must be considered separately from the loan.

8 March 2016 Internal T.I. 2015-0614421I7 - Returns filed or amended by bankrupt taxpayer

CRA Tags
150(3)
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Subsection 152(4.2)
CRA not precluded from acting on otherwise-valid s. 152(4.2) requests by bankrupt individual
Summary Under
Tax Topics - Income Tax Act - Section 128 - Subsection 128(2) - Paragraph 128(2)(a)
authority of trustee to make s. 152(4.2) request does not preclude bnakrupt from doing so

Principal Issues: Is the trustee in bankruptcy the only person who may file any outstanding returns or amend previous years’ tax returns for a bankrupt individual under subsection 152(4.2)?

Position: No.

Reasons: Paragraph 128(2)(a) of the Income Tax Act provides that the trustee in bankruptcy is the agent for the bankrupt for all purposes of the Act. This includes filing the returns required according to subsection 128(2) and any outstanding returns of the bankrupt according to subsection 150(3). However, the legislation does not preclude a taxpayer from filing outstanding returns or requesting an adjustment to a return under subsection 152(4.2) for taxation years prior to the bankruptcy. Note this position replaces the views expressed in document 2007-024648.