News of Note
CRA permits safe income to be allocated based on which class of discretionary shares receives dividends
Email this ContentWhere a corporation has different classes of discretionary-dividend common shares, CRA effectively considers that the safe income on hand of the corporation can be allocated to whichever class of shares a discretionary dividend is paid on. For example, if Husband holds 99 Class A common shares of Opco and his estranged wife held 1 Class B common share (issued at the same time as the Class A shares, and entitled to only 1% of the remaining property on liquidation), which she has transferred under s. 85(1) to a new Holdco, CRA will accept that a dividend, which is paid only on the Class B share, comes 100% out of all of Opco’s safe income, so that the dividend is tax-free (subject to Part IV tax considerations). In particular, CRA accepts the proposition that the fair market value of the Class B share immediately before the dividend payment reflects the amount of the declared dividend, and also reflects the safe income that will imminently be distributed on the share.
At the 2015 annual CTF conference, CRA indicated (in Q.6(c)) that where a non-participating discretionary share (e.g., a non-cumulative preferred share) has no accrued gain, then a dividend paid thereon which violates the purpose test cannot benefit from safe income - but, where this occurs, CRA is prepared to accept that the safe income on the common shares of the same corporation will not be reduced. CRA has now essentially confirmed this position, but garnished with more detailed analysis.
CRA declined to express a view as to whether an $8,000 reduction in an accrued capital gain of $120,000 was significant. Probably not much should be read into this.
Neal Armstrong. Summary of 3 December 2015 T.I. 2015-0593941E5 F under s. 55(2.1)(c).
Scheuer – Federal Court of Appeal indicates that investors in a gifting tax shelter might be better off suing their own advisors – rather than CRA for issuing a tax shelter number
The taxpayers, who participated in the same gifting tax shelter as Ficek, sued CRA for negligence in issuing a tax shelter registration number to the promoter and in not warning them of potential problems. In finding that their statement of claim should be struck “for failing to assert a cognizable cause of action,” Dawson JA noted that issuance of a tax shelter number was not discretionary (i.e., was required if the specified information was submitted) and that the “written warning tax shelter promoters are mandated by paragraph 237.1(5)(c)… to display” (that the number does not confirm any tax benefits)
is consistent with Parliament’s intent that taxpayers should participate in a tax shelter at their own peril, not at the peril of Canadian taxpayers generally. … The issuers of [the related] opinions, who benefited financially from the provision of their professional advice, are better placed to indemnify the plaintiffs in the event of negligence in the exercise of their professional responsibilities.
…The above conclusions … reflect that the performance of statutory duties does not generally give rise to private law duties of care.
Neal Armstrong. Summary of The Queen v. Scheuer, 2016 FCA 7, under General Concepts – Negligence.
The Aggressive Planning section manages "sham" assessments
Before a GST assessment based on “sham” is made, an auditor must prepare a position paper explaining that position and send it to the Aggressive GST/HST Planning Section - HQ for review, which then “works closely with the TSO in ensuring the two elements of sham are demonstrated” (i.e., deceit, as broadly defined in Antle, and actual legal rights which are different), and also approves the final assessment.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 6 under General Concepts – Sham.
CRA continues to consider that costs incurred respecting capital raises to fund an operating subsidiary are not creditable under ETA s. 186(1)
Memorandum 8.6, para. 11, Example 3, indicates that “HoldCo” may not claim input tax credits under ETA s. 186(1) for legal and accounting costs incurred in connection with raising money through issuing shares, even where the issuance proceeds are used to purchase additional shares in “OpCo,” all of whose property is acquired for consumption, use or supply in widget manufacturing - on the basis that the services are acquired for consumption or use in relation to the first order supply (the share issuance) and not in relation to the shares of OpCo. Although this approach was rejected by the Tax Court in Stantec, CRA will not revise this example, stating that the Tax Court decision was an informal procedure case and that its approach on this issue was not dealt with on the appeal to the Federal Court of Appeal.
Neal Armstrong. Summary of 26 February 2015 CBA Roundtable, Q. 17 under ETA s. 186(1).
Income Tax Severed Letters 20 January 2016
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Birch Hill – Ontario Superior Court of Justice refuses to rectify stock option transactions on the basis that the s. 110(1)(d) deduction was peripheral to the larger sale transaction
Ten executives who were denied the ½ s. 110(1)(d) deduction for their $17 million stock option benefit on the basis inter alia that they had sold the shares acquired by them on exercise of their options to a specified person (who on-sold to the arm’s length purchaser of the corporation, namely, Rogers), rather than directly to Rogers, were denied a rectification of the sales agreement to add them as parties to it and to provide for the transfer by them of their optioned shares directly to Rogers. Dunphy J found that there was “insufficient evidence… of an initial mutual ‘mistake’ as to a dominant or even important issue to the [sale] transaction itself,” noting that “I cannot characterize as a mistake a matter which was simply too insignificant to the parties to make its way on to the radar screen when they were negotiating their $425 million transaction.”
Although CRA did not contest the rectification application, it also took the position that the shares were not prescribed shares because the Board on liquidation had the discretion to establish a fixed liquidation amount for the shares, and reserved the right to maintain its denial of the s. 110(1)(d) deduction on this alternative basis . This was a further ground for denying rectification, i.e., the proposed “fix” might not be effective.
Neal Armstrong. Summaries of Birch Hill Equity Partners Management Inc. v Rogers Communications Inc., 2015 ONSC 7189, under General Concepts - Rectification and Reg. 6204(1)(a).
Green – Tax Court of Canada finds that limited partnership losses flow through a 2-tier LP structure
Paris J found that the business losses of a limited partnership allocated to an upper-tier partnership in excess of its at-risk amount continue to be business losses in its hands, so that such losses can, in turn be allocated to the partners in the upper-tier partnership – so that, if the at-risk amount rules apply, it is only to restrict the losses that are allocated to the partners in the upper-tier partnership. This runs contrary to CRA positions (2012-0436521E5, 2004-0107981E5, 2004-0062801E5 and 5-94077) that business losses generated in a lower-tier limited partnership effectively can be extinguished.
Paris J thought that the Crown was reading too much into s. 96(2.1)(c), which provides that a business loss in excess of the at-risk amount “shall not be deducted in computing the taxpayer’s income for the year.” The upper-tier partnership (like other partnerships) only computes income for purposes of allocating it to its partners and is not itself a taxpayer for computing income under s. 3, so that s. 96(2.1)(c) does not apply to deny the recognition of business losses in the hands of the upper tier partnership for such computation purposes. Conversely, s. 96(2.1)(e), which deems the excess business loss to be a limited partnership loss, is intended to operate only at the level of a taxpayer who is required to compute income and taxable income, i.e., only at the level of the partners in the upper-tier partnership.
Neal Armstrong. Summary of Green v. The Queen, 2016 TCC 10, under s. 96(2.1).
Lupien – Tax Court of Canada finds that a distributor earning significant relative profits had no goodwill
Shortly before a corporation (“Antoni”) sold all its assets to a third party, it acquired all the assets of a corporation (“LCR”) owned by its shareholder’s brother, which had been distributing one of its imported product lines in North America. Although LCR earned a significant portion of the combined profits, Lamarre ACJ found that the assets so acquired from LCR did not include any valuable goodwill given inter alia that there was no evidence of a distributorship agreement with LCR that could not be terminated on short notice and that the asset sale agreement between LCR and Antoni had not listed goodwill as a transferred asset. As the consideration paid by Antoni was inflated, s. 160 applied to make LCR liable for Antoni’s unpaid taxes (jointly with LCR’s shareholder given subsequent dividends to him).
Neal Armstrong. Summary of Lupien v. The Queen, 2016 CCI 2, under General Concepts - fair market value – other.
CRA considers that payment by a spousal trust of life insurance premiums on the spouse’s life disqualifies the trust
One of the requirements to have a good spousal trust is that noone other than the spouse obtain the use of trust capital or income before the spouse’s death. CRA considers this requirement to be violated where a purported spousal trust pays insurance premiums on the spouse's life even though the life insurance proceeds will not be paid out until the spouse’s death.
Neal Armstrong. Summary of 16 November 2015 T.I. 2014-0529361E5 under s. 73(1.01)(c).
Leibovich – Tax Court of Canada finds that accommodations at a private school for students with special needs were not major enough to qualify the tuition as a medical expense
The tuition fees for a student who suffered from “Central Auditory Processing Dysfunction” did not qualify as a medical expense under s. 118.2(2)(e) given that major adaptations were not necessary (or recommended in the related clinical report) to accommodate him (and other students with learning disabilities) at the school.
Neal Armstrong. Summary of Leibovich v. The Queen, 2016 TCC 6 under s. 118.2(2)(e).