Income Tax Severed Letters - 2016-06-22


2015 Ruling 2015-0604051R3 - Internal Reorganization

CRA Tags
15(1.1), 55(3)(a), 112(1), 212(2), 212.3, 245(2), 248(1)
note resulting from share redemption required to be vapourized on amalgamation/GAAR assessment required to reduce outside Canadian basis that US parents “paid for” by paying 5% Canadian withholding tax/rep re pubco share value being unaffected
s. 55(3)(a) rulings conditional on U.S. parents accepting GAAR assessments to reduce their outside basis
pro-rata highly dilutive stock dividend
extensive reps required re series of transactions

Principal Issues: 1. Whether paragraph 55(3)(a) will apply in the context of an internal spin-off reorganization.
2. Whether subsection 245(2) will apply with respect to the internal spin-off reorganization.

Position: 1. Subsection 55(2) will not apply because the exemption in paragraph 55(3)(a) applies.
2. Subsection 245(2) will apply with respect to the ACB of the Canco1 Class A common shares held by USco3 and XXXXXXXXXXco1 after the reorganization.

Reasons: 1. There is no transaction described in subparagraphs 55(3)(a)(i) to (v) as part of the series of transactions as part of which the deemed dividends will be received.
2. The high ACB represents a tax benefit that may, due to the stock dividend, generate a loss if the shares constitute taxable Canadian property. Furthermore, the loss would not be reduced by the application of subsection 112(3) or any other similar stop-loss rule.

Technical Interpretation - External

13 June 2016 External T.I. 2016-0637031E5 - Capital property excludes ECP

CRA Tags
248(1), 54, 39(1)
concepts of capital property and eligible capital property do not overlap
definition of capital property effectively excludes eligible capital property

Principal Issues: Does “capital property” include “eligible capital property”?

Position: No.

Reasons: Based on the respective definition of each term in subsection 248(1) and section 54 taking into consideration the definition of all other relevant terms including the meaning of “capital gain” and “capital loss” as assigned by section 39.

7 June 2016 External T.I. 2016-0648971E5 - Replacement property

CRA Tags

Principal Issues: Whether a commercial rental property (land and building) could be considered replacement property for a former property (expropriated farmland).

Position: Question of fact, likely not.

Reasons: See below.

20 April 2016 External T.I. 2016-0633961E5 F - Computation of safe income - stub period

CRA Tags
13(1), 55(2)
recapture/eligible capital amount realized on sale before safe-income determination time included in safe income

Principales Questions: In a situation where a corporation sold its depreciable properties and its eligible capital property before the end of the taxation year of the corporation and where a dividend was paid by the corporation after the sale of these assets (and before the end of the taxation year), whether the amounts computed pursuant to subsections 13(1) and 14(1) at the end of the taxation year would be added to the safe income before the safe income determination time with respect to the dividend.

Position Adoptée: We would accept to take the position that the safe income immediately before the safe income determination time would include the income computed pursuant to subsections 13(1) and 14(1) if the sale of the assets occurred before that safe income determination time (even if we can reach another conclusion when considering only the wording of the provisions). However, we would also take the position that the income taxes payable with respect to those types of income would have to reduce this safe income because they do not contribute to the capital gain on a share of the capital stock of the corporation.

Raisons: Textual, contextual and purposive approach. As the sale of assets occurred before the safe income determination time, we can conclude that the income is earned or realized at the time of the sale.

Technical Interpretation - Internal

14 December 2015 Internal T.I. 2014-0558661I7 - Application of Article V(9) to a partnership

CRA Tags
96(1), Treaties Article V(9)
services PE of U.S. partnership based on collective Canadian activities of all partners
Words and Phrases

Principal Issues: How to compute the thresholds in Article V(9) of the Canada-U.S. Tax Convention when the services are provided through a partnership?

Position: The thresholds are computed at the partnership level.

Reasons: Canadian law. Accords with the OECD approach.

21 October 2015 Internal T.I. 2015-0592781I7 - treatment of bond locks

CRA Tags
hedges re dividend or interest obligations of parent on income account
losses on interest or dividend rate hedges could be amortized/any gains immediately includible

Principal Issues: Whether losses on bond locks would be on income or capital account; whether such losses, if on income account, should be amortized.

Position: Income account; yes.

Reasons: Long-standing administrative position; application of case law.