Income Tax Severed Letters - 2018-01-31

Conference

21 November 2017 CTF Roundtable Q. 1, 2017-0724301C6 - 21 year planning & NR beneficiary

Unedited CRA Tags
104(4); 107(2); 107(2.1); 107(5); 245
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(5)
GAAR very well may apply to s. 107(2) distribution to Canco owned by NR beneficiary

Principal Issues: Can the CRA comment on the tax implications associated with the distribution of property from a discretionary family trust to a Canadian corporation that is wholly owned by a non-resident individual in order to avoid the application of subsection 107(5)?

Position: GAAR likely applicable.

Reasons: The transaction described circumvents the application of subsections 107(5) and 107(2.1).

21 November 2017 CTF Roundtable Q. 2, 2017-0724121C6 - Trusts and principal residence

Unedited CRA Tags
Section 54 definition of “principal residence”, 104(4)
Summary Under
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1)
right to use property of life interest housing trust would not be a right to use the house as a residence
Words and Phrases
right to the use ... as a residence

Principal Issues: Whether, for housing units acquired on or after October 3, 2016 by a trust for which a day is to be determined under paragraph 104(4)(a), (a.1), or (a.4), to qualify as a principal residence, the terms of the trust must provide the eligible beneficiary with a right to use and enjoy the housing units as a residence throughout the period in the year that the life interest trust owns the property.

Position: The wording of proposed subclause (c.1)(iii.1)(A)(III) of the definition of “principal residence” in the Oct 3, 2016 NWMM would have required it. However, the subclause has been dropped from Bill C-63 which was tabled in Parliament on Oct 27, 2017.

Reasons: Wording of the legislation.

21 November 2017 CTF Roundtable Q. 3, 2017-0724021C6 - Meaning of purpose

Unedited CRA Tags
55(2), 55(2.1)(b)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b)
QSBC purification transaction must not have any bad purpose described in s. 55(2.1)(b), as determined objectively as per Ludco

Principal Issues: A. Does a purification dividend have a purpose described in 55(2.1)(b)? B. Is the Ludco test the proper test to use to determine purpose?

Position: A. For 55(2) not to apply, none of the purpose described in 55(2.1)(b) can be present. For example, such purpose could be present if the dividend is paid with assets other than surplus assets or in contemplation of a possible disposition of the shares. B. The Ludco test is the correct test to use. Purpose has to be determined based on subjective and objective manifestations of purpose.

Reasons: A. Purpose test in 55(2.1)(b) B. Proper interpretation of case law.

21 November 2017 CTF Roundtable Q. 4, 2017-0724051C6 - Timing of deemed gain under 55(2)

Unedited CRA Tags
55(2)(c), 89(1)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) - Paragraph 55(2)(c)
immediate CDA addition for s. 55(2)(c) dividend
Summary Under
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a)
an immediate CDA addition for a non-redemption dividend subject to s. 55(2)

Principal Issues: Does deemed gain under 55(2)(c) occur at time of payment of dividend? Does addition to CDA of such gain occur at time of payment of dividend?

Position: Yes. Yes.

Reasons: The law.

21 November 2017 CTF Roundtable Q. 5, 2017-0726381C6 - 55(5)(f) and 55(2.3) with 55(2.1)

Unedited CRA Tags
55(5)(f), 55(2.3), 55(2.1)
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b)
notwithstanding dividend bifurcation under s. 55(5)(f) (or 55(2.3)), the s. 55(2.1)(b) purpose test is to be applied to the whole dividend
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.3)
dividend bifurcation under s. 55(2.3) does not detract from s. 55(2.1) purpose tests being applied to whole dividend
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(5) - Paragraph 55(5)(f)
bifurcated dividends are one dividend for s. 55(2.1)(b) purpose test but not under s. 55(2.1)(c)

Principal Issues: Is the non-safe income portion of a dividend subject to a separate test under 55(2.1)?

Position: No.

Reasons: See response.

21 November 2017 CTF Roundtable Q. 6, 2017-0724071C6 - Circular calculations Part IV tax

Unedited CRA Tags
55(2), Part IV tax
Summary Under
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2)
where Holdco receives a dividend subject to refundable Pt IV tax and to s. 55(2), two different dividends should be reported for Pt IV and s. 55(2) purposes
Summary Under
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b)
refunded Pt IV tax payable not reduced by application of s. 55(2)

Principal Issues: Whether a circular calculation can be made that results in a reduction or elimination of the amount of taxable dividend received and Part IV tax payable.

Position: No.

Reasons: The scheme of 55(2) does not support such circular calculation. The circular calculation is flawed and does not reflect reality. The Part IV tax is the real Part IV tax paid in the first tax return and remains the same in the second tax return. See response.

21 November 2017 CTF Roundtable Q. 7, 2017-0724261C6 - CRA Update

Summary Under
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc.
265 IT Bulletins are being replaced by Folios

Principal Issues: Can the CRA provide an update on the Folios Project?

Position: Comments provided.

21 November 2017 CTF Roundtable Q. 8, 2017-0724151C6 - Principal Purpose Test

Unedited CRA Tags
Section 245, Articles 6 and 7 of Multilateral Instrument, New Article 29 of OECD Model
Summary Under
Tax Topics - Treaties - Multilateral Instrument - Article 7 - Article 7(1)
central CRA committee may review PPT assessments/rulings available/uncertain relevance of GAAR jurisprudence

Principal Issues: Application of the Principal Purpose Test in Article 7 of the MLI.

Position: See response.

Reasons: See response.

21 November 2017 CTF Roundtable Q. 9, 2017-0724191C6 - Stock Option Deduction

Unedited CRA Tags
110(1)(d), 110(1.1)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1.1)
s. 110(1.1) mechanism is available where employer is exempt employer deduction denied under s. 18(1)(b) or 7(3)(b)

Principal Issues: Whether the 110(1.1) election can be available in situations where there is no deduction for the employer to "give up."

Position: Yes.

Reasons: Nothing in subsection 110(1.1) restricts its application to situations in which the employer is otherwise entitled to a deduction.

21 November 2017 CTF Roundtable Q. 10, 2017-0724291C6 - Tax Shelters

Unedited CRA Tags
237.1, 96(2.2)
Summary Under
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.2)
no rulings on at risk rules’ application to tax shelter LPs

Principal Issues: Does the Canada Revenue Agency provide advance income tax rulings with respect to limited partnership financing arrangements involving the application of the at-risk rules in the context of a tax shelter?

Position: No.

Reasons: The CRA will not give rulings with respect to limited partnership financing arrangements involving the application of the at-risk rules in the context of a tax shelter. See Rulings document 2012-0440191R3. This is not a new position.

21 November 2017 CTF Roundtable Q. 11, 2017-0724081C6 - ULC-LLC structures & Treaty

Unedited CRA Tags
Articles IV(1), IV(6), IV(7) and X(2) of the Canada-U.S. Treaty
Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 4
Treaty anti-hybrid rule (Art. 7(b)) rule applies to dividends paid by a ULC to two LLCs held by U.S. C-Corps

Principal Issues: Are dividends paid by a ULC to its two LLC shareholders eligible for treaty benefits in order to reduce the rate of Canadian withholding tax?

Position: No.

Reasons: To the extent that, for U.S. income tax purposes, the ULC is considered to have made partnership distributions, it is our view that treaty benefits would not be available to reduce the rate of Canadian withholding tax applicable to payments of dividends by the ULC.

21 November 2017 CTF Roundtable Q. 12, 2017-0723771C6 - Election not to be a public corporation

Unedited CRA Tags
Public corporation definition in subsection 89(1)
Summary Under
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Public Corporation - Paragraph (c) - Subparagraph (c)(i)
CRA may rule that an election for a listed Target to cease to be a public corporation can be made after Target’s amalgamation

Principal Issues: Can a public corporation (Targetco) make a valid election (Election) not to be a public corporation under subparagraph (c)(i) of the public corporation definition in subsection 89((1) at a time when all of its listed shares (on a designated stock exchange in Canada) are acquired by a private corporation (Acquisitionco), such that, following the acquisition, the new corporation (Amalco) formed on a vertical amalgamation of Acquisitionco and Targetco would not be considered to be a public corporation?

Position: Amalco would be deemed to be a public corporation by virtue of paragraph 87(2)(ii).

Reasons: This is because Targetco would still be a public corporation under paragraph (a) of the public corporation definition immediately before the Amalgamation, even though at that time Targetco would be excluded from being a public corporation under subparagraph (c)(i) of the public corporation definition. However, the CRA has taken the position in the past in certain situations involving vertical amalgamations (see for example document nos. 2015-0577141R3 and 2008-0268961R3) that the fact that shares of a public corporation no longer exist at the time of making an Election would not preclude the insider requirement (prescribed in subsection 4800(2) of the Income Tax Regulations) from being met. Accordingly, in those types of situations, where Amalco makes an election after the time that Targetco shares are delisted, Amalco will not be considered to be a public corporation.

21 November 2017 CTF Roundtable Q. 13, 2017-0724271C6 - Online Authorization Process

Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1)
CRA validation of online authorization through matching with names on file

Principal Issues: Updating authorized individuals.

Position: It is the taxpayer's responsibility to update its information with CRA.

21 November 2017 CTF Roundtable Q. 14, 2017-0724241C6 - Section 116 procedures for tax-deferred dispositions on foreign mergers

Unedited CRA Tags
87(8.4), (8.5), 116
Summary Under
Tax Topics - Income Tax Act - Section 87 - Subsection 87(8.5)
requirements for letter election
Summary Under
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1)
s. 87(8.5) election with evidence of ACB will be accepted as basis for certificate

Principal Issues: Joint election under proposed paragraph 87(8.4)(e) and its interaction with section 116.

Position: See responses below.

Reasons: Administrative position.

21 November 2017 CTF Roundtable Q. 15, 2017-0724091C6 - Conversion from a US LP to an LLC

Unedited CRA Tags
248(1) "corporation", "disposition"
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f)
an LLC resulting from a conversion from a US LLC has high inside and outside basis
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1)
conversion from LP to LLC a disposition

Principal Issues: Where a U.S. limited partnership is converted into a limited liability company, what would be the adjusted cost base of the membership interest, and of the LLC assets immediately after the conversion?

Position: General comments provided.

21 November 2017 CTF Roundtable Q. 16, 2017-0703891C6 - Medical assistance in dying

Unedited CRA Tags
118.2(2)(a)
Summary Under
Tax Topics - Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(a)
qualifying costs of medically-assisted dying can potentially qualify for the METC

Principal Issues: Whether medical assistance in dying would be considered a medical service for the purpose of the medical expense tax credit (METC).

Position: It is our view that services for medical assistance in dying are medical services for the purpose of the METC when they are provided by a medical doctor or nurse practitioner as outlined in the Criminal Code, in conjunction with the requirements of the respective provincial and territorial health-related laws, rules and policies, as applicable.

Reasons: The term “medical service” is not defined in the Act, and health-related matters generally fall under provincial and territorial jurisdiction. Although the legislation on medical assistance in dying is part of the Criminal Code, provinces and territories may create additional health-related laws or rules. Accordingly, one would have to consider such laws and rules, in addition to specific standards of practice and policies relating to medical assistance in dying as set out by regulatory bodies in their respective jurisdiction. Also, all the applicable conditions in section 118.2 of the Act must be met in order to claim amounts paid as medical expenses.