News of Note

CRA indicated that it can seek the production of tax accrual working papers, provided that the request for such records is relevant to specific risks or items under audit, and it uses restraint in seeking the information. Factors considered before making such a request include the existence of large unexplained tax reserves.

CRA considers that (consistent with Atlas Tube) it may, in some circumstances, request a list from the taxpayer of its uncertain tax positions. Provided all relevant facts and transactions are included in the taxpayer’s uncertain tax positions, exclusions of the related advice and analysis may be accommodated. CRA recognizes the principle in BP that taxpayers are not required to self-audit.

Neal Armstrong. Summary of 27 November 2018 CTF Roundtable, Q.11 under s. 231.1(1).

CRA provided two contrasting examples illustrating the timing of the related business determination for split-income purposes. In the first example, Mr. and Mrs. A (both over 25) are equal shareholders of ACo, which two years previously sold the “Old Business” in which Mrs. A had been actively engaged on a regular, continuous and substantial basis for many years – but Mr. A, not at all. Since then, ACo’s sole activity has been the investing of the proceeds.

After noting that if ACo’s current investment activities constituted a business, the excluded share exclusion from the split income (TOSI) rules would apply, CRA went on to indicate that if ACo’s investment activities did not constitute a business, a dividend declared in the current year to Mr. and Mrs. A would be considered to be excluded amount, given the winding up of the Old Business in a previous taxation year and there being no other related business of ACo.

In another scenario, Mrs. and Mr. A instead are the respective sole shareholders of Opco (carrying on a non-services operating business) and Serviceco (earning income in Year 1 from Opco, but without Mr. A being actively involved in its business). In Year 2, Serviceco does not render any services and its activities are insufficient to constitute a business. CRA indicated that, as Serviceco earned its Year 1 income from the provision of services to Opco (i.e., derived amounts from Opco’s business) and the dividend paid in Year 2 can also be said to have derived directly or indirectly from the provision of services to Opco in Year 1 (and thus to be derived directly or indirectly from Opco’s business, being a related business), the Year 2 dividends paid by Serviceco of its after-tax income from Year 1 would not be excluded amounts.

Neal Armstrong. Summaries of 27 November 2018, Q.9 under s. 120.4(1) – excluded amount – (e)(i), and excluded share – (c).

CRA provided two examples of when it would apply GAAR where paid up capital (“PUC”) is reduced to nil in order to avoid a s. 88(1)(b) gain on a wind up.

Example 1. Subco was formed by Xco with an injection of capital of $1,000 (being the PUC of Subco’s shares). Parentco acquired Subco for $1. On the winding-up of Subco into Parentco, Subco had assets with a cost amount of $1,000, and no liabilities or retained earnings (nor were retained earnings realized by it after its acquisition by Parentco).

CRA noted that if the Subco shares instead were redeemed for $1,000, the $999 excess of the redemption proceeds over the shares' ACB would produce a capital gain given that the shares had full PUC. In particular, since the cost amount of the Subco assets was not increased by income earned or realized by Subco after its acquisition of control by Parentco, this indicated that Parentco has made a bargain purchase in the form of the tax attributes in those assets, so that the scheme of s. 88(1)(b) dictated that a gain be realized by Parentco on the winding up in the amount of $999. Thus, CRA would apply GAAR to a reduction of PUC without payment prior to the winding up.

Example 3. Parentco owned all Subco shares which have a PUC and ACB of $1,000. Subco used $2,000 borrowed from a third party to acquire assets with a cost amount of $3,000 – which subsequently lost all their value. Parentco claimed a s. 50(1) loss $1,000 (thereby reducing the shares’ ACB to nil) prior to winding up Subco and assuming Subco's debt.

CRA indicated that the net cost amount of the assets of Subco is $1000, and consequently Parentco should realize a capital gain of $1000 on the winding up of Subco, under s. 88(1)(b). Parentco would essentially have taken two deductions for the same loss of $1000 – first the $1000 loss on the Subco shares under 50(1), and an additional loss of $1000 on the assets of Subco. Thus, a PUC reduction to avoid the s. 88(1)(b) gain would be GAARable.

Very briefly, Example 2 indicated that where the net tax equity in the Subco assets was matched by safe income, avoidance of s. 88(1)(b) would not be abusive.

Neal Armstrong. Summary of 27 November 2018 CTF Roundtable, Q.5 under s. 88(1)(b).

We have now published the questions posed at the CRA Roundtable at the annual 2018 CTF Conference and our summaries of the oral responses of the Income Tax Rulings Directorate.

In response to Q.1 as to the allocation of safe income where a corporation has discretionary dividend shares, CRA indicated that:

• It stands by all positions on this matter that it has expressed since the 2015 CTF Annual Conference.
• On a going-forward basis the CRA is willing to provide assurance on the tax treatment of the discretionary dividend shares, but only in the context of a ruling request – and thus will no longer express its views on this matter in Technical Interpretations or Roundtable responses.

Neal Armstrong. Summary of 27 November 2018 CTF Roundtable, Q.1 under s. 55(2.1)(c).