Income Tax Severed Letters - 2023-02-22

Ruling

2022 Ruling 2022-0933261R3 F - Subsection 104(4) and pipeline transaction

Unedited CRA Tags
84(2), 84.1, 104(4), 245
Summary Under
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2)
pipeline transaction for a trust realizing a s. 104(4)(b) gain and using a non-controlled Newco

Principal Issues: A trust realized a capital gain by the application of subparagraph 104(4)(b)(ii) on the deemed disposition of shares of the capital stock of a Canadian-controlled private corporation (CCPC) and will include the taxable capital gain realized in its income for the year. The trust will enter into a pipeline type transaction by transferring the shares of the capital-stock of the CCPC to a newly created corporation in consideration for shares of the capital stock of the new corporation. The assets of the corporation subject to the pipeline transaction consist mainly of shares of the capital stock of a subsidiary corporation which carries on an active business and loans receivable from the subsidiary corporation. The corporation subject to the pipeline transaction will continue to own the shares of the capital stock of its subsidiary and the operations of the subsidiary will be maintained for the years following the completion of the pipeline transaction. The corporation subject to the pipeline transaction will remain a separate entity from the newly created corporation following the completion of the pipeline transaction. One year after the pipeline transaction is completed, the corporation subject to the pipeline transaction will gradually pay dividends to the newly created corporation with the excess liquidity generated by its activities. The newly created corporation will gradually reduce the paid-up capital of the shares of its capital stock held by the trust. 1) Whether section 84.1 applies to reduce the PUC of the shares of the capital stock of the new corporation received by the trust as consideration for the disposition of the shares of the capital stock of the CCPC. 2) Whether subsection 84(2) will apply to the proposed transactions. 3) Whether subsection 245(2) will apply to the proposed transactions.

Position: 1) No. Favorable ruling given. 2) No. Favorable ruling given. 3) No. Favorable ruling given.

Reasons: In accordance with the provisions of the Act and our previous positions.

2021 Ruling 2020-0862431R3 F - Variation of a trust deed and addition of new beneficiaries

Unedited CRA Tags
69(1)(b), 248(1) "disposition" and 248(3).
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition
trust deed amendment by court order to permit addition of corporations that were only indirectly owned by family beneficiaries did not trigger a disposition/ such addition triggered disposition of trust interests but without proceeds
Summary Under
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b)
addition of corporate beneficiaries to discretionary trust resulted in a disposition by existing family beneficiaries, but not in the receipt by them of proceeds of disposition

Principales Questions: (1) Whether a particular variation of a trust deed by a Court judgment will (a) result in a disposition of all the assets of the trust and/or (b) cause a partial disposition of any part of the existing beneficiaries’ interest in the trust? (2) Whether the exercise by the trustees of their power to add new beneficiaries will (a) result in a disposition of all the assets of the trust and/or (b) cause a partial disposition of any part of the existing beneficiaries’ interest in the trust?

Position Adoptée: (1)(a) No, provided that the variation does not terminate the trust for private law purposes. (1)(b) No. (2)(a) No. (2)(b) Yes, disposition by the existing beneficiaries but no deemed proceeds of disposition under paragraph 69(1)(b).

Raisons: (1)(a). Prior position. No disposition of the trust’s assets as long as the changes do not result in a fundamental change to the beneficiaries’ rights or to the terms of the trust. (1)(b) In this particular situation, the variation does not add any beneficiary nor otherwise reduce the existing beneficiary’s rights. (2)(a) Prior position. No disposition of the trust’s assets where the trustees exercise a power granted to them in the trust deed. (2)(b) Prior position. The addition of a new beneficiary to a discretionary trust by the exercise of a power to add such beneficiary in the trust deed results in a disposition, by the existing beneficiaries, of a portion of their interest in the trust. However, provided the existing beneficiaries do not direct to whom the interest is transferred, they would not be deemed to have received proceeds of disposition under paragraph 69(1)(b). This is also true for the trustee/beneficiary who, in this particular situation, is not considered to have control over the decision to add a new beneficiary.

Technical Interpretation - External

6 January 2023 External T.I. 2020-0853901E5 - Replacement Property - a portion rented out

Unedited CRA Tags
44(1), 44(5), 13(4), 13(4.1), 248(1) - definition of former business property

Principal Issues: Whether certain properties which were acquired to replace a former business (FBP) property would be considered a “replacement property” for purposes of the replacement property rules in subsections 44(1) and 13(4) of the Income Tax Act, in a situation where two replacement properties are acquired to replace one FBP and a portion of the replacement properties will be rented out to arm's length tenants.

Position: Question of fact and it will depend on whether all the requirements listed in subsections 44(5) or 13(4.1) are met.

Reasons: see analysis.

17 November 2022 External T.I. 2021-0919001E5 F - Eligible Dividends and Non-Capital Loss Carry-Back

Unedited CRA Tags
89(1), "eligible dividend", “excessive eligible dividend designation”, "general rate income pool"; 111(1); 152(4), (4.01) and (6); part III.1; 248(1) "specified future tax consequence"
Summary Under
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - General Rate Income Pool - Element B
B of formula reduces GRIP by NCLs carried back
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(i)
CRA discretion re accepting adjustment to losses carried back provided that the amendment request is made within the s. 152(4)(b)(i) period and loss year not statute-barred
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(6) - Paragraph 152(6)(c)
s. 152(6)(c) permitted amending carryback request, if made within s. 152(6)(c) deadline and normal reassessment period, and implicitly authorized consequential Part III.1 reassessment
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(3)
s. 152(3) (and, consequentially, s. 185.2(2)) requires filing of amended return to reflect missing excessive dividend
Summary Under
Tax Topics - Income Tax Act - Section 185.1 - Subsection 185.1(2)
s. 185.1(2) election can be made before the incremental Part III.1 assessment that is being avoided

Principal Issues: (1) Impact of loss carry-back on GRIP computation; (2) Whether a corporation can file amended returns to cancel loss carry-backs and impact on GRIP computation; (3) Whether a corporation that has filed a return under Part III.1 can file a new return under that Part to rectify an understatement made in the initial return.

Position: (1) A loss carry-back will impact the computation of the GRIP of the corporation at the end of the year in respect of which the non-capital loss arises.

Reasons: The law.

Technical Interpretation - Internal

22 December 2022 Internal T.I. 2020-0856411I7 F - SSUC/CEWS -– Rémunération admissible

Unedited CRA Tags
5, 6(3), 125.7(1), 125.7(2), 153(1)
Summary Under
Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration
eligible remuneration for each qualifying period for CEWS purposes includes additional payments for vacation and sick leave pay

Principales Questions: Est-ce qu’une indemnité de congés annuels obligatoires, de jours fériés chômés et de congés de maladie qui est ajoutée par l’employeur au salaire ou traitement de base compris sur chaque chèque de paie d’un employé est une rémunération admissible versée à un employé admissible par une entité admissible aux fins de la SSUC dans une situation donnée? / Whether an allowance for compulsory annual vacation pay, statutory holiday pay and sick leave pay added by the employer to the base salary or wages on every paycheque of an employee is eligible remuneration paid to an eligible employee by a qualifying entity for the purposes of the CEWS in a given situation.

Position Adoptée: Oui, dans la situation donnée, nous considérons pour les fins de la SSUC que l’entité admissible a versé cette indemnité à un employé admissible à l’égard de la même semaine que l’est le salaire ou le traitement s’y rapportant. / Yes, in the given situation, we consider, for purposes of the CEWS, that the qualifying entity has paid the allowance to the eligible employee in respect of the same week that the salary and wages relating thereto are paid.