News of Note
CRA will not allow a late PAS election even where the surplus balances in question change through reassessment
Email this ContentA Reg. 5901(2)(b) election, to have a dividend treated as paid out of pre-acquisition surplus, must be made by the filing-due date for the taxation year in question. But what if CRA subsequently assesses the year in question so as to change the relevant surplus balances? The answer is the same:
[C]onsidering…that…[Reg.] 600…provide[s] no discretion to the Minister to extend the time for making an election under paragraph 5901(2)(b)… there is no… statutory or administrative discretion available to the CRA… to allow the taxpayer to late-file any required election… .
Although there are uncertainties as to how to deal with the carryback to an earlier year of a foreign accrual capital loss that was realized in 2011 (i.e, a year ending after the effective date of the introduction of the FACL rules), "it is the CRA's current practice to generally not challenge FACL carrybacks that straddle August 19, 2011, provided there is no double use of any such loss."
Neal Armstrong. Summaries of 21 April 2015 Memo 2014-0560811I7 under Reg. 5901(2)(b), Reg. 5903.1(1) and Reg. 5907(1) – net earnings.
CRA finds that a foreign affiliate which earns deemed active business income under s. 95(2)(a) does not also carry on an active business
A U.S.-dollar liability owing to Canco by its foreign subsidiary ("FA") arose as a result of a capital reduction on the FA shares (i.e., the capital reduction was owed to Canco) – with that debt later settled at a loss to Canco and a gain to FA in terms of Canadian dollars. CRA found that s. 95(2)(i) did not apply to the settlement of the debt (to avoid FAPI to FA) on the ground that there were no "proceeds" to FA when the debt arose. It further noted that although essentially all the assets of FA gave rise to (deemed) active business income under s. 95(2)(a), FA did not satisfy the further requirement in s. 95(2)(i)(B) that it in fact be "carrying on" an active business.
Neal Armstrong. Summary of 27 April 2015 Memo 2014-0546641I7 under s. 95(2)(i).
CRA confirms that the FAPI of a widely-held non-resident unit trust which is majority-owned by an investment dealer or other FI generally must be computed under the mark-to-market rules
Where s. 94.2(2) deems a non-resident unit trust whose units are majority-owned by an investment dealer, or other taxpayer subject to the mark-to-market (or specified debt obligation) rules ("FI"), to be a controlled foreign affiliate of FI, then the CFA will itself generally be deemed to be a FI, so that in computing the foreign accrual property income of the CFA, the mark-to-market and SDO rules would apply. In commenting on this situation where the FI lacked the data to do this computation properly in Canadian dollars, CRA refused to provide any comfort that it would permit the use of a (rough and ready) "proxy" method.
Neal Armstrong. Summaries of 9 July 2015 T.I. 2013-0475421E5 under s. 142.2(1) – financial institution, s. 95(2)(f.14).
Coast Capital Savings Credit Union – Tax Court of Canada finds that “sham” is only a sword for CRA, not a shield for the taxpayer
The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs effectively were stripped to offshore accounts. The trustee sought to amend its Notice of Appeal, from an assessment for failure to withhold under s. 116(5), by adding an assertion that the purchase transactions were shams.
In denying this request, V. Miller J stated: "in a tax case, a court will make a finding of ‘sham’, only when it is the Minister who is deceived."
Neal Armstrong. Summaries of Coast Capital Savings Credit Union v. The Queen, 2015 TCC 195 under General Concepts – Sham and s. 116(5).
New s. 55(3)(a) requires that there be an outside basis reduction for a spinning-off corporation
The exemption under the proposed version of s. 55(3)(a) requires that the exempted dividends arise under s. 84(3) (or (2).) Accordingly, where an intermediate holding company (Holdco) wishes to have its subsidiary (Opco) spin off a business to another Holdco subsidiary (Newco), so that Opco starts off by selling that business to Newco for preferred shares and retracting those prefs for a note, it no longer is possible (even ignoring CRA’s traditional unfavourable policy) to complete the spin-off through Opco dividending the note to Holdco (so that there is no reduction in the ACB of the Opco shareholding) and Holdco contributing the note back to Newco in consideration for shares. Instead, in order to generate a s. 84(3) dividend, Opco can distribute the note to Holdco as redemption proceeds for a portion of the Opco shareholding, before that note is contributed to Newco. This will result in a pro rata reduction in the ACB of that shareholding in Opco. However, Holdco will have full basis for its shareholding in Newco (i.e., a cost equal to the net fair market value of the business transferred to Newco).
On the other hand, if butterfly-style mechanics instead were used to spin-off the business to Newco, the resulting ACB of Holdco’s Newco shareholding would be equal to a pro-rata portion of its previous ACB in the Opco shareholding. Accordingly, the first (note distribution and contribution) mechanics generally produce a better result.
Neal Armstrong. Summary of Carla Hanneman, "Reorganization Strategies for Proposed Paragraph 55(3)(a)", Canadian Tax Focus, Vol. 5, No. 3, August 2015, p.8 under s. 55(3)(a).
Unpaid fees owing by Canco to FA potentially may give rise to a double income-inclusion to Canco
If Canco owes fees to FA, there potentially could be a double income inclusion to Canco (albeit, in different years) under ss. 90(6) and 78(1). The double inclusion might be addressed by filing a s. 78(1)(b) agreement. "However, it is not clear whether and how subsection 90(6) will apply to the loan that is then deemed to be made to the taxpayer (Canco) by the creditor (FA) on the first day of the taxpayer's third taxation year."
Neal Armstrong. Summary of Clara Pham, "An Unpaid Amount Could Be an Upstream Loan", Canadian Tax Focus, Vol. 5, No. 3, August 2015, p.5 under s. 90(6).
Income Tax Severed Letters 19 August 2015
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on hybrid pipeline transaction
CRA has ruled on a sort of hybrid post-mortem transaction in which a portion of the estate’s common shares of "Investments" (which holds marketable securities and cash) are redeemed in its hands for a promissory note (thereby giving rise to a capital loss which will be carried back under s. 164(6) to the terminal year) and it sells the balance of its shares to a "Newco" in consideration for a Newco promissory note. Under the latter pipeline transaction, Investments will be amalgamated with Newco after one year, and the notes will thereafter be repaid at the rate of 25% per quarter. These 12 mo./25% parameters also managed to escape the CRA propensity for over-redaction in 2014-0559481R3 F.
Neal Armstrong. Summary of 2014 Ruling 2014-0540861R3 F under s. 84(2).
CRA rules on transferring already-earned profits to an affiliate through use of a partnership
It may be possible to transfer profits which already have been earned to a Lossco in the same group in order to access Lossco’s non-capital losses. CRA has ruled on a transaction in which (to simplify somewhat) the units of an LP which already has earned profits for the year will be transferred to the Lossco before the fiscal year end of the LP – so that most of those LP profits will be allocated to Lossco. The partnership agreement for LP will be amended "to clarify that it allocates its income for income tax purposes only to those partners that are partners at the end of its fiscal period."
Neal Armstrong. Summaries of 2014 Ruling 2013-0516071R3 under s. 111(1)(a), s. 34.2(14) and s. 96(1)(f).
Tele-Mobile – Tax Court of Canada rejects an attempt to bifurcate U.S.-to-Canada cell phone calls into a non-taxable U.S.-roaming service and a taxable Canadian leg
When Telus charged its Canadian customers for calls made from the U.S. to Canada, its invoices contained a separate charge for a roaming service, relating to the part of the service that was performed in the U.S., on which it did not charge GST, and a second charge for connecting the call from the U.S. to Canada, which it conceded was subject to GST. C Miller acknowledged that in the context of local calls in the U.S., a roaming service had "commercial efficacy as a standalone supply." However, in this context of cross-border long distance calls, insofar as the customers were concerned they were getting a "seamlessly integrated" service of the long distance call. As there was only a single supply, all the charges therefor were subject to GST under ETA s. 142.1(2)(b)(ii) given that a part of the supply (i.e., the receiving of the telecommunication in Canada) was performed in Canada.
Similar issues respecting whether a supply can be bifurcated arise, for example, under ETA 142(1)(g), which deems a supply of a service to be made in Canada if the service "is to be performed in whole or in part in Canada."
Neal Armstrong. Summary of Tele-Mobile Company v. The Queen, 2015 TCC 197 under ETA, s. 123(1) – supply.