News of Note
CRA rules that a purchaser could acquire Lossco’s business through a sub LP and then acquire Lossco as an empty shell to get its losses under s. 88(1.1)
Email this ContentA foreign-owned Canadian-resident corporation (“Taxpayer”) used a subsidiary LP to acquire the sole business of a “Lossco” that was in CCAA proceedings and then, a number of years later (and perhaps well after the completion of the CCAA restructuring) it purchases the shares of Lossco for nominal consideration and winds up Lossco. Lossco had generated non-capital losses and investment tax credits from its business before the sale of that business by the CCAA monitor to the subsidiary LP of Taxpayer.
CRA ruled that (i) proceeding in this two-step manner, and (ii) the absence of any activity or assets in Lossco for a number of years following its sale of its business and prior to its acquisition by Taxpayer, did not preclude Taxpayer from utilizing Lossco's non-capital losses and ITCs in sheltering income allocated to it by the subsidiary LP and by other subsidiary LPs carrying on similar businesses.
Neal Armstrong. Summaries of 2018 Ruling 2017-0711071R3 under s. 88(1.1)(b) and s. 88(1)(e.3).
Income Tax Severed Letters 31 October 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that s. 84(3) does not apply to the cancellation of preferred shares held by a partnership in the corporation into which it is wound-up
A family farming partnership was dissolved as a result of all the members transferring their partnership interests to a jointly-owned corporation (Opco). One of the partnership’s assets was preferred shares of Opco. These preferred shares were cancelled for no consideration in connection with the winding-up of the partnership and the transfer of its assets to Opco.
CRA confirmed that because the preferred shares were cancelled for no consideration, no s. 84(3) deemed dividend arose.
Respecting an assertion by the correspondent that s. 98(5) applied to the partnership winding-up, CRA indicated that this raised the issue of when the partners transferred their interests in the partnership to Opco, and stated:
[W]here such transfers occur simultaneously … subsection 98(5) would not be applicable, given that Opco would not be a partner of Partnership immediately before Partnership ceased to exist.
Neal Armstrong. Summaries of 27 June 2018 External T.I. 2018-0745681E5 F under s. 84(3), s. 98(5) and s. 28(1)(f).
CRA finds that resource royalties payable under a federal statute generally are deductible in computing business income
S. 18(1)(m), which generally prohibited the deduction of resource royalties, was repealed over 10 years ago – but is their deduction nonetheless prohibited by s. 18(1)(a)? CRA stated, regarding royalties paid under the Canada Petroleum Resources Act (Canada):
[T]he amount of [such] royalties … is not subject to that restriction because, inter alia, if it were not paid, a taxpayer could lose the opportunity to carry on its business and thereby earn income … [and such amount] is generally deductible in computing the business income of a taxpayer.
Neal Armstrong. Summary of 27 June 2018 External T.I. 2018-0742881E5 F under s. 18(1)(a) – income-producing purpose.
CRA indicates that recognizing a s. 50(1)(b) loss on shares does not trigger a s. 7(1.1) benefit
Where an arm’s length employee of a Canadian-controlled private corporation (“Opco”) acquires shares under a stock option, the resulting benefit (which is added to the adjusted cost base of the shares under s. 53(1)(j)) will not be triggered if the employee elects under s. 50(1)(b) to recognize a capital loss in the year Opco goes bankrupt, whereas such benefit will be triggered when Opco ultimately is wound up and its shares cancelled. Symmetry is achieved assuming that the employee qualified for the s. 110(1)(d.1) deduction and the capital loss qualified as a business investment loss. CRA did not address the scenario where the shares of the bankrupt corporation are never cancelled.
Neal Armstrong. Summary of 28 May 2018 External T.I. 2017-0692931E5 under s. 7(1.1).
Tax Interpretations is uploading the remaining CRA income tax severed letters
To date, we have uploaded all the interpretations (including rulings and Roundtables) that have been released by the Income Tax Rulings Directorate under its severed letter program since April 2005. We have now acquired the balance of the severed letters (going all the way back to the first batch released in early 1993) and will be uploading them over the next two months.
All the severed letters will continue to be open access, and our summaries and translations of them will continue to be subject to the usual paywall (currently, three business weeks per month).
CRA confirms that a new individual depository account exceeding $50,000 cannot be designated for FATCA exclusion once it falls below $50,000
ITA s. 264(1)(b), when read in conjunction with the (FATCA) InterGovernmental Agreement, effectively provides that a Canadian financial institution may designate a financial account to not be a U.S. reportable account for a calendar year if the account is a New Individual Account unless the account balance exceeds $50,000 at the end of “any” calendar year. CRA confirmed that this means that once the $50,000 threshold is exceeded at any year end, “it remains reportable regardless of its balance in subsequent years, and thus may no longer be designated pursuant to paragraph 264(1)(b).”
Neal Armstrong. Summary of 20 August 2018 External T.I. 2018-0759081E5 under s. 264(1)(b).
Laplante – Federal Court of Appeal finds that a purported distribution of QSBCS gains to family trust beneficiaries was a sham
The taxpayer (Laplante) was the dominant trustee of a family trust (DL Trust) that had realized a capital gain of around $6M on the sale of qualified small business corporation shares. He passed a trust resolution for the distribution of the taxable capital gain to the family members in amounts sufficient to use up their capital gains exemption. However, immediately upon their receipt of their distribution cheques, they endorsed them over to Laplante and executed deeds of gift in his favour. He paid all their alternative minimum tax liabilities for that year.
In the Tax Court, Ouimet J had found that the purported distribution of the taxable capital gain to the trust beneficiaries was a sham (or, to be more precise, a “simulation” under Art. 1451 of the Quebec Civil Code), stating that the beneficiaries
had each accepted a mandate [i.e., agency] from Mr. Laplante whose essential features consisted in receiving from the DL Trust a distribution in the amount of $375,000 and thereupon paying that amount to Mr. Laplante. In so doing, they were required to use their capital gains exemption, which was essential. In consideration, they were permitted to keep the recoveries of alternative minimum tax made by them in the subsequent taxation years.
In affirming this decision, Boivin JA stated that Ouimet J:
did not err in finding a simulation in this case, i.e., that the appellant was the true beneficiary of the amounts distributed by DL Trust to the seeming beneficiaries.
The Rulings Directorate took a similar approach in 2011-0424341I7 F (see also 2013-0475501I7 F).
Neal Armstrong. Summary of Laplante v. Canada, 2018 CAF 193 under General Concepts – Sham.
Gerbro Holdings has been affirmed
The Gerbro Holdings case concerned a privately-held Canadian investment company, whose governing investment guidelines mandated its holding up to 60% of its funds in hedge funds. Although the hedge funds in which the company invested were in low tax-rate jurisdictions, Lamarre ACJ accepted that tax deferral was not “one of the main reasons” for acquiring these investments and that there instead was an “overarching commercial reason for investing" in these funds, e.g., the reputation of the hedge fund managers – and these offshore funds were selected as being the best choices. Accordingly, those investments were not subject to the offshore investment fund rules in s. 94.1.
This decision has now been briefly affirmed in the Court of Appeal, with Webb JA simply stating:
We are not convinced that the Associate Chief Justice made any reviewable error in her thorough and detailed Reasons.
Neal Armstrong. Summary of Gerbro Holdings Co. v. The Queen, 2016 TCC 173, briefly aff’d 2018 FCA 197 under s. 94.1(1).
CRA is no longer requesting country-by-country breakdowns of income derived from mutual funds in its FTC audits
In the autumn of 2017, CRA requested numerous taxpayers to provide information respecting their foreign tax credit claims including as to the allocation of their income from Canadian mutual funds as between the U.S., Europe and Asia. This information was not available on the T3s issued by such mutual funds. In response to a query on this, CRA stated:
[W]here a mutual fund is invested in a significant number of countries and the burden of allocating the respective information may be burdensome to the taxpayer, the CRA will revise its administrative position and request taxpayers to provide an amended tax slip that correctly reflects the federal foreign tax credit amounts claimed. In general, the CRA will no longer systematically require a breakdown of foreign income by country, type of income and foreign taxes paid by country in such situations.
We have now published full-test translations of all the CRA and Finance responses to the questions posed at the two 2018 APFF Roundtables (together with summaries of the questions posed.) We have not summarized various questions posed at the 2018 APFF Financial Strategies and Instruments Roundtable to which the Finance representative did not provide written responses.
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.12 under s. 126(1).