Income Tax Severed Letters - 2025-01-15

Principal Issues: Various questions regarding the qualification criteria pursuant to subsections 84.1(2.31) and 84.1(2.32) I.T.A., including: the possibility to qualify for the exception in the case of non-voting and non-participating shares, as typical estate freeze shares; the possibility to qualify for the exception if the parent remains director or in other positions of power; and how the exception mechanism applies to successive transfers of shares.
FINANCE: Finance reviewed the questions and answers, including the ones on successive transfers (not possible to claim the exception more than once regarding the same business), and confirmed that the answers were in accordance with the underlying tax policy. Finance also confirmed that it would be in accordance with the underlying tax policy to claim the exception in respect of more than one class of shares that are sold as part of the same transfer.

Reasons: The law.

Principales Questions: 1. Based on the definition provided in subsection 251(4) of the Income Tax Act (“the Act”), a ''related group'' is a group of persons but a partnership is not always a person for the purpose of the Act. However, it is included in part I – section 3 – iv), Partnership, of form T1134. Can the CRA clarify its position as to when a partnership should be included in a group of reporting entities that are related to each other? 2. The instructions provided under part II, section 1, C., Other information of foreign affiliate, for form T1134 indicate that ''for the purposes of completing this return, gross indebtedness does not include set-offs or trade accounts payable”; can the CRA confirm that this is also the case for part II, section 3, A.4 of the form, and therefore that a trade accounts payable does not need to be reported as a loan from a foreign affiliate under part II, section 3, A.4?

Position Adoptée: 1. A ''group of reporting entities that are related to each other'' can include a partnership in certain cases. 2. No, these instructions are not applicable to part II, section 3, A.4.

Raisons: 1. If a partnership is considered a reporting entity, the administrative position relating to reporting entities that are members of a related group would be extended to partnerships if at least one of the partners is related to every other reporting entity forming the related group. 2. Subsection 90(6) of the Act does not generally apply to trade accounts payable provided that all of the conditions in the exception in paragraph 90(8)(b) of the Act are met. However, a trade accounts payable is still a debt. Therefore, the answer to the first question in part II, section 3, A.4 (4.1) would be “yes”, considering that the trade payable is an amount that the reporting entity owes to a foreign affiliate. If all of the conditions in the exception under paragraph 90(8)(b) of the Act are met, the answer to the second question would be ‘’no’’, considering that subsection 90(6) of the Act would not apply. The answer to the third question would be “yes”, to the extent that the trade payables meet all of the conditions for the exception under paragraph 90(8)(b) of the Act.

Principal Issues: Whether the conversion of ERDTOH into NERDTOH in a given situation is problematic.

Position: No position taken.

Principales Questions: Dans un exemple donné, est-ce que l’ARC est d’accord que le particulier doit inclure un montant de 5 000 $ à titre de gain en capital dans le calcul de son revenu? / In a given example, does the CRA agree that an individual must include $5,000 as a capital gain in his income?

Position Adoptée: Oui. / Yes.

Raisons: Libellé de la Loi. / Wording of the Act.

Principales Questions: 1) Dans une mise en situation donnée, quel pourcentage d’utilisation à des fins commerciales doit être utilisé pour calculer la récupération d’amortissement: celui de l’année d’acquisition de la voiture de tourisme ou celui de l’année de la disposition? 2) S’il s’agit du pourcentage d’utilisation à des fins commerciales de l’année de la disposition, l’ARC est-elle d’accord que cela pourrait donner lieu à un résultat inadéquat comme démontré dans la mise en situation donnée? / In a given scenario, which percentage of business use should be used to calculate the recapture of capital cost allowance: the percentage of business use in the year of acquisition of the passenger vehicle or the percentage of business use in the year of disposition? 2) If it is the percentage of business use of the year of disposition, does the CRA agree that this could lead to an inappropriate result as demonstrated in the given scenario?

Position Adoptée: 1) Lorsqu’une récupération d’amortissement doit être incluse dans le calcul du revenu pour l’année en vertu du paragraphe 13(1) L.I.R., cette récupération d’amortissement doit être incluse selon la proportion correspondante à l’utilisation à des fins commerciales de l’année de la disposition. 2) L’ARC accepte deux méthodes pour le calcul de la DPA dans la mise en situation donnée. Par conséquent, un travailleur autonome peut utiliser la méthode qui est la plus appropriée à sa situation. / 1) Where a recapture of capital cost allowance is required to be included in computing income for the year under subsection 13(1) I.T.A., such recapture of capital cost allowance is included in the proportion corresponding to the business use in the year of disposition. 2) The CRA accepts two methods for calculating CCA in the given situation. Therefore, a self-employed individual may use the method that is most appropriate to his or her situation.

Raisons: 1) Conformément à la méthode utilisée pour le calcul de la DPA. 2) Dans certaines situations, le calcul de la DPA et de la récupération d’amortissement peut donner un résultat différent selon la méthode de calcul utilisée. / 1) In accordance with the method used to calculate CCA. 2) In certain situations, the calculation of CCA and recapture of CCA may produce a different result depending on the calculation method used.

Principales Questions: Whether the CRA positions expressed in 2012-0456221R3 « Post Mortem Planning » Ruling and in 2013-0480361C6 STEP round table question are still valid.

Position Adoptée: Yes.

Raisons: Subsection 69(5) can apply to prevent the capital loss from being deemed nil under subsection 40(3.6) without it being considered as abusive according to subsection 245(2). Subsection 129(1.2) does not apply, since the purpose test of that subsection is not met and the tax integration system is respected.

Principales Questions: Est-ce que le paiement d’honoraires professionnels par un fiduciaire ou par un bénéficiaire d’une fiducie peut entraîner l’application du paragraphe 75(2)?/ May the payment of professionals fees by a trustee or a beneficiary of a trust result in the application of subsection 75(2)?

Position Adoptée: Question de fait / Question of fact.

Raisons: Sous réserve de l'examen de l'acte de fiducie et des circonstances propres à chaque situation, les conditions d'application du paragraphe 75(2) pourraient être satisfaites. / Subject to the review of the trust deed and the circumstances specific to each situation, the conditions for the application of subsection 75(2) could be met.

Principal Issues: 1) Is there an acquisition of control of a corporation by an unrelated group of persons in a situation where the two 50% shareholders of the corporation would each dispose of one third of their shares in the corporation to an unrelated person. 2) Is there an acquisition of control of a corporation in a situation where the corporation has 4 unrelated shareholders, none of which individually controls the corporation, and redeems the shares held by one of the shareholders such that the corporation now has 3 unrelated shareholders, none of which individually controls the corporation.

Position: 1) Question of fact 2) Question of fact.

Reasons: General comments provided.