News of Note
Income Tax Severed Letters 13 October 2021
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Creditors wishing to acquire the assets of a debtor in CCAA proceedings may weigh the respective merits of a credit bid or reverse vesting transaction
Under a credit bid, which allows existing secured creditors to bid up to the full face amount of their secured debt claim as currency for the acquisition of the debtor’s assets, the secured debt may be transferred by the secured creditors to a newly-established “CreditBidCo” in consideration for equity, so that CreditBidCo then acquires the debtor’s assets (and assumes some operating liabilities), with the full amount of its secured debt claim being extinguished.
In the absence of s. 79, the better view is that the acquisition by CreditBidCo is to be considered as a barter exchange, so that the proceeds of disposition to the debtor, the tax cost of the assets to CreditBidCo, and the repayment of the secured debt for s. 80 purposes reflect the assets’ current FMV.
Where s. 79 applies on a credit bid, the debtor would likely have proceeds of disposition exceeding the assets’ FMV and no forgiven amount, whereas the creditor would likely have tax cost in the assets exceeding their FMV. S. 79 may not apply based on the narrow meaning of "in consequence of" (see, e.g., Hallbauer) in s. 79(2) and the (Brill-based) proposition that “where property is acquired by a creditor under an agreement with the debtor for a fixed price, section 79 should not be applicable.”
Greater certainty on s. 79 not applying may be achieved with a three-party arrangement under which CreditBidCo would directly acquire the debtor’s assets, and in consideration it would issue its shares to the secured creditors who would agree to the extinguishment of their debt claims against the debtor.
In a “reverse vesting transaction”, the obligations of the debtor which are to be settled without payment are vested out of it and assumed by a new corporation (“ExcludedCo”), with the debtor corporation (owing only those debts to be retained or satisfied) being acquired by the new owner(s) (which could be secured creditors), and with ExcludedCo then being wound-up or placed into bankruptcy. The new equity owners effectively acquire the debtor’s tax losses and other tax attributes subject to the s. 80 grind (being the amount of the debt assumed by ExcludedCo) and the ss. 111(4) and (5) restrictions (and also may enjoy a high historic PUC in the debtor’s shares) - whereas an asset acquisition transaction generally would entail the assets being acquired at a FMV cost substantially less than the debtor’s existing tax attributes.
The interest stops rule (that interest on unsecured provable claims stops accruing at the commencement of relevant proceedings) does not appear to apply to secured creditors. If so, this accords relevance to the CRA position that the initial stay order in a CCAA proceeding means that any creditor cannot enforce payment, so that the “legal obligation” requirement in s. 20(1)(c) is not met.
This position appears to confuse a stay of the right to enforce payment and the termination of that right.
Neal Armstrong. Summaries of Janette Pantry, Carrie Smit, "Tax Considerations in Restructuring under the Companies’ Creditors Arrangement Act", draft 2020 CTF Annual Conference paper under s. 128(1)(g), s. 80(1) – forgiven amount, s. 80(1) – forgiven amount - para. (i), s. 79(2), s. 20(1)(c)(i).
CRA finds that a service of taking over the handling for insureds of their insurance claims was not GST/HST exempt
A company, which is not provincially licensed as an adjusting firm, for a commission took over the handling of a dispute where insured policyholders were challenging an insurance settlement offered by their insurer. CRA found that since the single supply for which the Company was paid its commission in essence was a service of negotiating and advancing the policyholder’s position to the insurer, and not a supply of “investigating and recommending the compensation in satisfaction of a claim,” it did not fall within the quoted wording of the insurance adjuster exemption in para. (j) of the ETA financial services definition. The company also did not satisfy the requirement in para. (j) that it be licensed under the laws of a province to provide its services.
Neal Armstrong. Summary of 26 January 2021 GST/HST Interpretation 197697 under ETA s. 123(1) – financial service – para. (j).
CRA finds that renovation work constituted a single supply so that component wheelchair hoist work was not zero-rated
CRA found that a registered charity received a single supply of renovation work notwithstanding that an identified component of the work was installing a hoist for a wheelchair lift which, had it been a separate supply, might have been zero-rated under ETA Sched. VI, Pt. II, s. 34. It stated that the component “elements are so intertwined and interdependent that they must be supplied together.”
Neal Armstrong. Summary of 4 May 2021 GST/HST Ruling 199267 under ETA s. 123(1) – supply.
Our translations of CRA Interpretations go back over 15 years
We have published a further 10 translations of CRA interpretation released in October and September, 2006. Their descriptors and links appear below.
These are additions to our set of 1,754 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 15 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
GST/HST Severed Letters April/May 2021
This evening's release of eight severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their April 2021 and May 2021 release) is now available for your viewing.
CRA rules on accessing the losses under s. 88(1.1) of a Lossco with nominal assets
A new corporation (the Taxpayer) was formed to acquire most of the remaining assets of a corporation (Lossco) that, together with its parent (Parentco) was in CCAA proceedings. It then continued to carry on that business in a similar manner, including hiring most of the employees and, in fact, hiring some more. Later, the Taxpayer acquired the shares of Lossco (which at that point had only nominal assets and no business or employees), and wound-up and dissolved Lossco. CRA ruled that s. 88(1.1) was generally available to flow through the Lossco non-capital losses (as reduced by some debt forgivenesses that had occurred under the CCAA court order) to the Taxpayer. The point may be that there is no requirement to receive significant assets, or perhaps no assets at all, on a s. 88(1) wind-up in order for the losses to flow through under s. 88(1.1).
CRA cast some shadows in 2018-0780041C6 on the standard practice of reducing the PUC of a Subco’s shares to a nominal amount before winding it up under s. 88(1), so as to avoid any potential gain under s. 88(1)(b) (e.g., where Parent acquired the net tax equity in Subco at a bargain price (for a low share ACB), avoiding a s. 88(1)(b) gain on wind-up through reducing PUC is considered by CRA to be abusive). Here, the proposed transactions specified that the PUC of the Lossco shares would be reduced immediately before its wind-up to an amount “not less than” the (modest) cost amount of the Lossco assets.
Neal Armstrong. Summary of 2021 Ruling 2020-0869161R3 under s. 88(1.1) and s. 88(1)(b).
Income Tax Severed Letters 6 October 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Whether crypto is intangible property situate outside Canada may be indeterminate
Specified foreign property” for s. 233.3 reporting purposes includes intangible property situated, deposited, or held outside Canada that is not used or held exclusively in the course of carrying on an active business.
What is stored in a digital wallet is not the actual cryptocurrency but rather one or both of the owner’s public keys (akin to a bank account number) and private keys (akin to the PIN for that account). The situs of a private key is arguably what is most relevant to determining the cryptocurrency’s situs.
The situs of a cold wallet (i.e., a physical storage drive) is generally its physical location. For a hot wallet (i.e., a digital wallet connected to the internet), the primary server location used by the wallet provider “should be strongly determinative of situs.”
Reporting requirements are unclear if the taxpayer stores a private key in multiple locations at once, for example, where a document containing a private key is saved on a computer in Canada, and also in cloud storage in circumstance where it is difficult to ascertain the host server’s geographic location(s), e.g., for large providers whose server locations are often numerous or highly confidential. Similar uncertainty may exist where the owner uses multiple wallets, e.g., with one wallet stored in Canada, and another abroad.
Neal Armstrong. Summary of William Musani and Ashvin Singh, “Foreign Property Reporting: Where Is Your Crypto?” Tax for the Owner-Manager, Vol. 21, No. 4, October 2021, p. 6 under s. 233.3(1) – specified foreign property – (a).
A person may not be related to herself for QSBC share purposes
Unlike the concept of “affiliated person,” as to which s. 251.1(4)(a) provides that all persons are affiliated with themselves, persons are deemed to be related to themselves only for specific purposes under ss. 251(5)(c), 55(5)(e)(ii) and 261(1.5).
Suppose that Ms. Y sells all the shares of her company to a family trust whose beneficiaries are she and her spouse and children. On a subsequent third-party sale by the trust of those shares, the QSBC definition requires that the shares have been owned by the trust, or a person related to the trust, for the prior 24-month period – and in this regard, s. 110.6(14)(c)(ii) provides that where a person who sold shares to a trust was related to all the beneficiaries, that person and the trust are deemed to have been related for the above purpose.
Ms. Y is related to her spouse and children, but no provision specifically deems her to be related to herself for such purposes and, thus, s. 110.6(14)(c)(ii) “cannot be relied on to deem the trust to be related to Ms. Y.”
Neal Armstrong. Summary of David Carolin and Manu Kakkar, “Are Persons Related to Themselves? CGE Planning and the 24-Month Holding Period Rule,” Tax for the Owner-Manager, Vol. 21, No. 4, October 2021, p. 3 under s. 110.6(14)(c)(ii).