News of Note
CRA states that a distribution by a discretionary trust of a taxable capital gain in excess of the trust’s income could be a s. 105(1) benefit
Email this ContentA discretionary family trust realized a taxable capital gain of $200,000, as well as a rental loss from a building of $100,000, with no other items of income or expenses for that year. The trust distributed the $200,000 taxable capital gain to a beneficiary at year end in cash.
CRA rejected the suggestion that the trust could take a s. 104(6)(b) deduction for $200,000, thereby generating a $100,000 loss.
Respecting the status of the distribution in excess of the trust income of $100,000, CRA did not simply indicate that it was a capital distribution, and instead stated:
Depending on the circumstances and terms of the trust deed, where an amount paid to a beneficiary exceeds the trust's taxable income for the year and does not represent a distribution of property as capital by virtue of the trust deed, the excess could be a benefit conferred by the trust to be included in computing the income of the beneficiary under subsection 105(1).
Neal Armstrong. Summary of 18 April 2019 External T.I. 2017-0716451E5 F under s. 104(6)(b).
Hoch – Tax Court of Canada finds that “or” is generally disjunctive
The principal rabbi at a Toronto schul beneficially owned (together with his wife) 3/8ths a Toronto home, and the schul beneficially owned the other 5/8ths. The schul T4’d him for a s. 6(1)(a) benefit for his free use of the 5/8ths of the home, and he claimed an off-setting deduction under s. 8(1)(c)(iii). Respecting the 3/8ths of the home, he claimed a deduction under s. 8(1)(c)(iv) from his employment income equal to the fair rental value of that portion of the home.
CRAs disallowed the s. 8(1)(c)(iv) deduction on the basis that a deduction could not be claimed under both ss. 8(1)(c)(iii) and (iv). It likely was bothered by how the taxpayer’s approach effectively undercut the rule in ss. 8(1)(c) (iv) which limits the fair rental value deduction to 1/3 of the taxpayer’s compensation.
MacPhee J agreed with CRA that the “or” separating ss. 8(1)(c)(iii) and (iv) was disjunctive. He indicated that “or … in the ordinary sense is prima facie disjunctive” but “can also be conjunctive in limited circumstances,” – and such limited circumstances were not made out here. Instead:
It is unlikely that Parliament intended for a person to avoid the limitations imposed by subparagraph 8(1)(c)(iv) by simply claiming amounts under both subparagraphs (iii) and (iv).
Neal Armstrong. Summary of Hoch v. The Queen, 2019 TCC 99 under s. 8(1)(c)(iv).
CRA finds that Art. IV(6) of the Canada-US Treaty works to reduce Canadian branch profits tax earned through multiple stacked LLCs
Two U.S. corporations that were “qualifying persons” for purposes of the Canada-U.S. Treaty (USCo1 and USCo2) held 58% and 42%, respectively, of LLC1 which held LLC2 which, in turn, held LLC3. LLC3 operated a Canadian branch business.
Headquarters stated:
[T]he fact that there may be more than one fiscally transparent entity in the corporate chain does not alter the fact that the condition of there being an entity that is fiscally transparent and through which a U.S. resident person derives income is already met.
Accordingly, if all the LLCs were fiscally transparent for U.S. income tax purposes (so that LLC1 was a partnership for U.S. purposes), USCo1 and USCo2 would be considered to be deriving income through LLC3 that met the same tax treatment condition in Art. IV(6) – and, similarly, LLC1 Itself would be considered to be deriving such income as a qualifying person if it had chosen to be treated as a corporation. Thus, in both scenarios, such income would be entitled to the branch profits rate reduction in Art. X(6).
Neal Armstrong. Summary of 4 April 2019 Internal T.I. 2017-0736531I7 under Treaties – Income Tax Conventions – Art. 4.
Owen J finds that it was costly for Justice to pursue its allegations of sham in the Cameco transfer-pricing litigation
Owen J made a lump sum award for legal fees of Osler borne by Cameco in its successful appeal of transfer-pricing adjustments for three of the years in dispute (2003, 2005 and 2006) of $10.25M, which represented about 35% of the Osler fees charged for those years. Factors mentioned by Owen J included:
- Settlement offers made by Cameco (one less than 30 days before trial, and one after trial) did not have any real bearing on his award given their “de minimis nature” (i.e., although Cameo offered “$32 million of additional taxable earnings in 2006 … no additional tax in any of the three years under appeal” was offered.
- The “volume of work was significantly increased by the Respondent’s reliance on sham, i.e., Cameco had “to address minute administrative details of how it and its subsidiaries carried on business.”
- He did “not accept the Respondent’s submission that it could not have anticipated the costs incurred by the Appellant given the Respondent’s vigorous pursuit of the allegation of sham.”
Neal Armstrong. Summary of Cameco Corporation v. The Queen, 2019 TCC 92 under Tax Court of Canada Rule 147(3).
CRA confirms that there is no rollover for tax deferred cooperative shares on a triangular amalgamation
Where s. 87(2)(s) applies to an amalgamation of agricultural cooperative corporations, then shareholders will not be considered to have realized income as a result of the disposition of their “old” tax deferred cooperative shares for equivalent new shares, there will be no withholding required under s. 131.1(7) and their new shares will be treated as tax deferred cooperative shares until such time as they are disposed of. CRA has confirmed that s. 87(2)(s) will not apply to shares that are exchanged for shares of the parent on a triangular amalgamation, so that the exchanging shareholders will be required to recognize proceeds of disposition under s. 131.1(2).
Neal Armstrong. Summary of 25 February 2019 External T.I. 2019-0793911E5 F under s. 87(2)(s)(ii).
Income Tax Severed Letters 8 May 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Universo Home – Tax Court of Canada finds that a backdated declaration of trust did not preclude a finding that a company was the beneficial owner of a new home construction
CRA denied the ability of a home builder (“Universo Home”) to claim a GST new home rebate purportedly assigned to it pursuant to ETA s. 254(4) on the basis that Universo Home had no interest in the property at the time the home was constructed and, therefore, did not qualify as its “builder.” The difficulty centered on the fact that the 2011 purchase and 2013 sale documentation named the wife (Mrs. Dhesi) of the sole shareholder (Mr. Dhesi) of Universo Home as the purchaser and vendor of the property, and the fact that Declaration of Trust, which named Mrs. Dhesi as the nominee for Universo Homes, was found by Bocock J to have not been signed until sometime before (perhaps, shortly before) the closing of the 2013 sale.
Bocock J nonetheless found that Universo Home was the beneficial owner for some period prior to the sale, partly on the basis that it paid for the construction work and reported the property as an asset for financial statement purposes. Accordingly, it qualified as a builder for rebate purposes.
Bocock J also intimated in obiter that even if Universo Home had not acquired beneficial ownership, it still would have qualified as having an “interest” in the property (which was all that the “builder” definition required) by virtue of potential builder’s liens on the property for the construction work that it had performed.
Neal Armstrong. Summary of Universo Home Construction Ltd. v. The Queen, 2019 TCC 87 under ETA s. 254(4).
CRA indicates that "an interest … in a corporation other than shares" includes debt
A private foundation that, at the end of a taxation year, holds more than 20% of a class of a corporation’s class of shares (for example, as the result of a bequest) faces a potential penalty under s. 188.1(3.1). Could this excess be resolved by the corporation redeeming the shares for a promissory note? The issue lies in s. 188.1(3.2), which states that if a private foundation enters into a transaction to avoid a “divestment obligation percentage” by substituting shares for "an interest … in a corporation other than shares," then such interest is deemed to have been converted back into shares at their FMV.
When asked about this, the Charities Directorate stated:
[W]e take the said term [“interest”] to include (in a broad, general sense) any right to have the advantage accruing from anything, and any right in the nature of property (such as a right of a creditor for repayment from the debtor's assets, as in the foundation's case), and not limited to stock options or other rights to acquire shares … .
Neal Armstrong. Summary of 12 December 2018 Interpretation Letter of the CRA Charities Directorate to Simon Cheung under s. 188.1(3.2) and summary of Simon Cheung, "Private Foundations: Exceeding the 20 Percent Limit", Canadian Tax Focus, Vol. 9, No. 2, May 2019, p. 5 under s. 188.1(3.1).
Colitto – Tax Court of Canada finds that a director’s s. 227.1 liability cannot flow through to a transferee under s. 160 unless the s. 227.1(2) claim procedures have first occurred
The taxpayer’s husband (Mr. Colitto) was acknowledged to be liable under s. 227.1 for the failure of his corporation to remit source deductions between February and August, 2008. On May 2, 2008, Mr. Colitto transferred real estate to the taxpayer (Ms. Colitto) for nominal consideration. In 2016, CRA assessed Ms. Colitto on the basis that Mr. Colitto’s s. 227.1 liability had flowed through to her under s. 160 (to the extent of the real estate value). At issue was whether, under s. 160(1)(e)(ii), such liability was an amount that the transferor of the real estate (Mr. Colitto) was liable to pay under the Act in “or in respect of the taxation year in which the property was transferred or any preceding taxation year.”
Visser J found that Mr. Colitto’s s. 227.1 liability did not arise until 2011, when the last precondition for its application was satisfied, i.e., the corporation’s source-deduction tax debt was executed and returned unsatisfied. Hence, “Mr. Colitto’s liability arose pursuant to section 227.1 … in his 2011 taxation year and was not in respect of his 2008 taxation year” – so that the condition in s. 160(1)(e)(ii) quoted above was not satisfied. Although the reasoning of Visser J thus was quite straightforward, he provided a detailed contextual discussion of ss. 227.1 and 160 and their interplay, given that he was disagreeing with four prior Tax Court decisions, which found that the s. 227.1 liability arises at the time of the failure of the corporation to remit rather than when the subsequent steps to collect that corporate liability have failed.
Neal Armstrong. Summary of Colitto v. The Queen, 2019 TCC 88 under s. 160(1)(e)(ii).
Van Steenis – Federal Court of Appeal affirms that “return of capital” distributions by a mutual fund reduced the unitholder’s deductible interest
The taxpayer borrowed $300,000 to purchase units of a mutual fund trust in 2007. The distributions made thereafter by the trust were exclusively return-of-capital distributions, and by 2015, about 2/3 of the taxpayer’s capital had been returned. Most of these distributions were used for personal purposes. The Tax Court had confirmed CRA's denial of a portion of the loan interest expense claimed in the 2013 to 2015 period, on the basis that the current use of a portion of the borrowed funds was now such personal use.
In dismissing the taxpayer’s appeal, Laskin JA stated:
We are not persuaded that the requirement to trace the borrowed money to a current eligible use applies only where there has been a disposition, in whole or in part, of the original investment. … The focus of [s. 20(1)(c)] is the current use of the borrowed money, not on the current ownership status of the property initially acquired with it.
Neal Armstrong. Summary of Van Steenis v. Canada, 2019 FCA 107 under s. 20(1)(c)(i).