News of Note
6 more translated CRA interpretations are available
Email this ContentWe have published a further 6 translations of CRA interpretations released in April 2012 and (going somewhat out of sequence) April 2011. Their descriptors and links appear below.
These are additions to our set of 813 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for April.
Gladwin Realty – Tax Court of Canada finds that using the CDA and negative ACB rules to generate “over-integration” was abusive
The taxpayer, a private real estate corporation, rolled a property under s. 97(2) into a newly-formed LP, with the LP then distributing to the taxpayer an amount approximating its capital gain of roughly $24M realized on closing the sale of the property. Such distribution generated a negative ACB gain to the taxpayer of that rough amount under s. 40(3.1) and an addition to its capital dividend account of roughly $12M (as this occurred before a 2013 amendment that eliminated such additions). The taxpayer recognized a further $24M capital gain at the partnership year end, which increased its CDA by a further $12M to $24M. It then promptly paid a $24M capital dividend to its shareholder. Later in the same taxation year, it was permitted to generate a capital loss of $24M under s. 40(3.12) to offset the s. 40(3.1) capital gain previously recognized by it.
Hogan J confirmed CRA’s application of s. 245(2) to reduce the taxpayer’s CDA by ½ the amount of the s. 40(3.1) capital gain, thereby generating Part III tax unless an s. 184(3) election was made.
First, the CDA rule “was adopted to ensure that only one-half of a capital gain would be subject to income tax if the gain was realized indirectly by a private corporation,” whereas here there was “over-integration,” i.e., the taxpayer purported “to pay a capital dividend equal to the entire capital gain realized from the sale of the Property.”
Second, “the purpose and effect of subsection 40(3.1) are to dissuade taxpayers from extracting from a partnership on a tax-free basis funds in excess of their investment in the partnership” - and s. 40(3.1) “and the alleviating rule in subsection 40(3.12) were not enacted to encourage taxpayers to deliberately create offsetting gains and losses for the purpose of inflating their CDA.”
Before recognizing either of the two capital gains, the taxpayer was continued to the BVI in order to cease to be a Canadian-controlled private corporation and to not be subject to additional refundable taxes under s. 123.3. CRA did not challenge this planning.
Neal Armstrong. Summary of Gladwin Realty Corporation v. The Queen, 2019 TCC 62 under s. 245(4).
Mammone - Federal Court of Appeal finds that s. 152(9) did not permit CRA to change the factual basis for its reassessment beyond the normal reassessment period
In December 2013, CRA purported to retroactively revoke the registration of a pension plan (the “New Plan”) to which a transfer had been made in 2009 of the commuted value of the taxpayer’s interest in his old (OMERS) registered pension plan. CRA, in reliance on the retroactive character of that revocation, then immediately reassessed the taxpayer to include the amount of the transfer in his income under s. 56(1)(a)(i) on the basis that the exemption for RPP-to-RPP transfers was not available. However, the initial revocation was invalid due to inadvertent failure by CRA to comply with the 30-day notice requirement in s. 147.1(12). CRA did not discover this mistake until well after the normal reassessment period for 2009, and then issued a second (this time, valid) notice of revocation.
Woods JA applied the statement in Gramiak “that allowing the Minister to raise an argument based on a legal and factual basis that is different from the one underlying the assessment after the normal reassessment period has expired would in effect do away with the limitation period.” She indicated that a valid revocation notice was an essential factual underpinning for the s. 56(1)(a)(i) income, and since a valid revocation in fact did not occur until 2017, “clearly, this was not a factual basis on which the reassessment was based when it was issued.” Thus:
[T]he Minister’s position impermissibly avoids the limitation period for the 2009 taxation year. The Minister’s reliance on the 2017 revocation notice was a new factual basis underlying the reassessment raised long after the limitation period had expired.
As the factual basis for the Minister’s reassessment had changed beyond the normal reassessment, the Minister was precluded from relying on having validly made a retroactive revocation of the New Plan.
Woods JA was well aware of s. 152(9), which at that time stated that “the Minister may advance an alternative argument in support of any assessment at any time after the normal reassessment period” but found that s. 152(9) had no traction, stating:
Moreover, this was more than a “new basis” to support the reassessment. It was also a new fact that did not materialize until after the limitation period had expired, when the Minister issued the second notice. (emphasis added)
S. 152(9) now states that “at any time after the normal reassessment period, the Minister may advance an alternative basis or argument”. She stated that this amended language “expands the scope of the new arguments that the Minister may make after the expiry of the limitation period,” but given the bolded language above, it is not clear that this expanded language would have changed the result.
Neal Armstrong. Summaries of Mammone v. Canada, 2019 FCA 45 under s. 152(4) and s. 152(9).
Ipsen SA acquisition of Clementia Pharmaceuticals includes a significant contingent cash payment (CVR)
The cash consideration for the proposed acquisition of Clementia Pharmaceuticals (a Canadian-incorporated NASDAQ-listed clinical-stage biopharmaceutical company) by a Canadian Buyco subsidiary of Ipsen S.A. includes not only an up-front cash payment of US$25.00 per share (for an aggregate of US$1.04 billion) but also a deferred payment, on the achievement by the end of 2024 of FDA approval of a new drug application made by Clementia, in the form of a contingent value right ("CVR") of US$6.00 per Share. The Canadian tax disclosure states that the proceeds of disposition to a Clementia shareholder are the Canadian-dollar equivalent of the full U.S.$31 per Share, but that the Clementia shareholders should consult with their tax advisors as to the availability of an s. 42(1)(b) capital loss if the timely FDA approval is not achieved.
The U.S. tax consequences to U.S. shareholders turn on whether the fair market value of the CVRs is “reasonably ascertainable.”
Neal Armstrong. Summary of Clementia Pharmaceuticals Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Canadian Buyco.
Prince – Federal Court finds that a 30-day letter is not a judicially-reviewable “decision”
Annis J found that a CRA “fairness” letter to the taxpayer setting out proposed reassessments for his 2007 to 2016 taxation years and giving him 30 days to provide additional information and representations was not a “decision” that he had the jurisdiction to review under the Federal Courts Act.
In addition, even if he had such jurisdiction, he would not have exercised it in the taxpayer’s favour. Much of the taxpayer’s complaint was that the taxpayer at the same time was advancing his position that CRA should accept a “voluntary” disclosure made by him as being within the ambit of the CRA VDP program. Annis J found that there was nothing in this that was prejudicial given that “even if the VDP application was granted after the assessment was made, the CRA would issue a new reassessment taking into account its decision.”
Neal Armstrong. Summaries of Prince v. MNR, 2019 FC 348 under Federal Courts Act, s. 18.1(3) and ITA s. 220(3.1).
Supreme Court grants leave in MacDonald
The Supreme Court has granted leave to appeal in MacDonald, where the Federal Court of Appeal found that the question of whether a derivative was acquired as a hedge should be determined on an objective basis rather than having substantial regard to whether or not it was the intention of the taxpayer to acquire the derivative as a hedge.
Leave was declined in Rio Tinto (finding that fees incurred by a public board in determining to make a bid, as contrasted to its implementation, were currently deductible).
Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128, leave granted 21 March 2019, under s. 9 – capital gain v. income – futures/forwards/hedges.
Crius Trust sale is to be accomplished as an asset sale followed by a unit redemption
Crius Energy Trust (the “Trust”) holds its US electricity and natural gas distribution business indirectly through a US corporate subsidiary (“US Holdco”). The shares of US Holdco are held through two Canadian corporate subsidiaries of the Trust; and debt owing by US Holdco (bearing interest at rates up to 11%) is held by a Canadian-resident subsidiary trust of the Trust. These Canadian subsidiaries are intended to be portfolio investment entities.
The equivalent of a sale of the Trust for cash will be accomplished by the shares of the two Canadian subsidiaries and the debt being sold to the purchaser (a subsidiary of Vistra Energy Corp.) for cash, with the cash then being used by the Trust to redeem its units, with the realized capital gains being distributed on the redemption. This produces an efficient result for the resident unitholders, as the distributed capital gains should not reduce the ACB of their units.
The transactions are expected to close in the second quarter of 2019. If the transactions instead occurred in a taxation year of the Trust beginning after the 2019 budget date, draft s. 132(5.3) effectively would impose Trust-level tax on an indeterminate portion of the capital gain on the sale that was distributed and allocated to the redeemed unitholders. Accordingly, it would be necessary to structure the sale differently – e.g., a sale of the subsidiaries for both cash and a note of the purchaser, distributing the resulting capital gain in cash to the unitholders, and then having the unitholders sell their Trust units to the purchaser for cash.
For US purposes, the Trust is treated as a partnership. The gain recognized on the sale of the subsidiaries increases the basis of the US unitholders in the units of the Trust, thereby helping to alleviate from double taxation on the units’ redemption.
Neal Armstrong. Summary of Crius Energy Trust Circular under Spin-Offs & Distributions – REIT sales proceeds distribution.
CRA continues to accept deliberate triggering of CDA additions for distribution purposes
CRA noted that the approach of the GAAR Committee to surplus-stripping has changed significantly:
- Since 2015-0610701C6 the Committee has considered that it will no longer recommend the application of GAAR to certain corporate reorganizations through which there is a deliberate triggering of a capital gain in order to distribute a capital dividend to its shareholders.
- Conversely, consistently with Descarries and Pomerleau, the Committee will now apply GAAR to a surplus-stripping arrangement involving the transfer of a family business to a related party.
Neal Armstrong. Summary of 7 March 2019 CTF GAAR Seminar - Suzanne Saydeh on GAAR Committee under s. 245(4).
Income Tax Severed Letters 20 March 2019
This morning's release of 6 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on hybrid post-mortem 164(6)/pipeline transactions
CRA has provided the usual rulings for a pipeline transaction in which the estate with a resident beneficiary sells a company (Opco) with apparently some sort of real estate business to a Newco for consideration consisting mostly of a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time. These pipeline transactions are to be immediately preceded by transactions in which the estate utilizes Opco's capital dividend account to step up the ACB of a portion of its Opco shares and also to redeem those Opco shares so as to generate a capital loss that can be carried back under s. 164(6).
The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 10% per quarter for the first year. This contrasts with:
- 2018-0767431R3, where these two parameters were 12 months and 15% per quarter in the first year;
- 2014-0540861R3 F and 2014-0548621R3 - 12 months and 25% per quarter; and
- 2016-0670871R3 - 30 months and 15% per quarter.
Neal Armstrong. Summary of 2018 Ruling 2018-0780201R3 under s. 84(2).