News of Note
CRA accepts MSH, so that unclaimed divided refunds do not generate s. 186(1)(b) tax to the dividend recipient
Email this ContentCRA accepts MSH (which in turn, was effectively approved in the Federal Court of Appeal in 1057513 Ontario Inc.) and has reversed 2012-0436181E5, in now considering that a dividend refund which is not claimed on a timely basis does not reduce the refundable dividend tax on hand of the payor corporation. Among other things, this means that the dividend recipient will not be subject to Part IV tax under s. 186(1)(b) (based on the dividend refund calculated for the payor) if the dividend refund is not received by the dividend payor.
Neal Armstrong. Q.8 of 9 October 2015 APFF Roundtable.
Castro - Federal Court of Appeal finds that an inflated charitable receipt was not a s. 248(32) “advantage” – but the wrong amount invalidated it
Various individuals made cash contributions to a registered charity on the basis that the charity would issue charitable receipts to them for 10 times the amount of their contributions.
Scott JA agreed with Woods J below that the inflated charitable receipts did not constitute a benefit (so as to vitiate the cash amount of the contributions as "gifts" on general principles), and similarly found that the the inflated receipts were not "advantages" so as to invalidate the contributions under s. 248(30)(a). However, he denied a charitable credit for the cash contributions on the basis that the inflated amounts shown on the receipts rendered the receipts invalid.
He did not decide, on the Crown’s further argument that the taxpayers lacked donative intent, on procedural grounds.
Neal Armstrong. Summaries of Castro v. The Queen, 2015 FCA 225, rev'g sub nom. David v. The Queen, 2014 DTC 1111 [at 3236], 2014 TCC 117, under s. 118.1(1) – total charitable gift, s. 248(32), Reg. 3501(6), and Interpretation Act, s. 32.
CRA finds that a terminal-return capital gains exemption claimed on bequested shares grinds their ACB for s. 84.1 purposes to the family beneficiaries
The capital gains deduction was claimed in the terminal return of an individual (X) for shares which were bequeathed to his son, and the son then transferred these shares to his holding company. The principal issue, respecting whether s. 84.1(2)(a.1)(ii) applied to grind the ACB of his shares (by the amount of this claim) for purposes of the application of s. 84.1 to the share transfer to the holding company, turned on this question: was a deduction under s. 110.6 claimed respecting a previous disposition of the shares by an individual with whom the son did not deal at arm’s length?
In responding affirmatively, CRA stated that "the relation between the parties is to be evaluated at the moment giving rise to the application of section 110.6." Since the disposition giving rise to the capital gain for which the deduction was claimed was deemed by s. 70(5)(a) to have occurred immediately before X’s death (when X obviously was not dealing at arm’s length with his son), the s. 110.6(2.1) claim ground the shares’ ACB for s. 84.1 purposes.
Neal Armstrong. Q.7 of 9 October 2015 APFF Roundtable under APFF Roundtable.
CRA provides ample grandfathering in changing its position for recognizing recapture from erroneous CCA claims
If, as a result of the erroneous inclusion of acquired property (e.g., property which was not acquired for an income-producing purpose) in a class of depreciable property, the bogus CCA claims thereon cause the UCC of the class, on a proper determination, to have become a negative amount, CRA now considers that the negative balance for the class will be recognized as recapture of depreciation in the first year following the acquisition which is not statute-barred. This is a change of position from IT-478R2, para. 14, which stated that a negative balance arising in a statute-barred year "will not be added into the taxpayer's income for that year or a subsequent year."
This new position will be reflected in an imminent Folio, but "will apply on a prospective basis to property acquired or transactions entered into after December 31, 2015."
Neal Armstrong. Summary of 29 July 2015 Memo 2015-0575921I7 under s. 13(1) and s. 13(21) - undepreciated capital cost - E.
Lanesborough REIT is issuing units in satisfaction of a dry income distribution
Lanesborough REIT used all of the net cash proceeds from the sale of a property to pay down debt. Although it has some operating losses, it nonetheless needs to make a special distribution in order to distribute its resulting taxable income. It will do this by making a special distribution to its unitholders on December 31, payable in treasury units, with the number of outstanding units then immediately consolidated to the same number as before. It appears to be contemplated that a s. 104(21) designation will be made in order to flow out capital gains treatment to the unitholders, so that the special distribution will be twice the taxable income to be distributed.
Neal Armstrong. Summary of Lanesborough REIT Press Release under Spin-Offs & Distributions – Taxable dividends-in-kind – MFT dry income distributions.
Income Tax Severed Letters 4 November 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that an amalgamation can cause a combined positive CDA balance to be zeroed
If Holdco (a CCPC) has realized $1M in allowable capital losses on its public company portfolio, its subsidiary (Opco) has realized a $1M taxable capital gain from the sale of its operating business, and Opco then pays a capital dividend of $1M to Holdco, Holdco will have a resulting positive capital dividend account balance of $1M, as para. (a) of the CDA definition (respecting the non-taxable portion or non-deductible portion of capital gains or losses) will not reduce the positive CDA balance arising under para. (b) of the CDA definition from the receipt of the dividend – so that Holdco can then pay a capital dividend of $1M to its individual shareholder. However, if this dividend is not paid, the ability to do so will disappear if Holdco then amalgamates with Opco, as this will cause the CDA balance to go down to nil.
Summary of Q. 6 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA confirms IC 75-7R3 re requests for refunds for errors made in already-filed returns
In response to the specific example of a corporation which discovered that it had failed to claim the intercorporate dividend deduction in a return for which the 90-day objection period has expired, CRA noted that it still stands by IC 75-7R3, dated July 9, 1984, respecting the circumstances in which it will make a reassessment for a reduction in tax payable – so that such an adjustment would be available provided that the normal reassessment period does not expire without the giving of a waiver.
Summary of Q. 25 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA requires the allocation of investment counselling fees as between interest and dividends in computing aggregate investment income of a CCPC
Dividends which are deductible in the computation of taxable income are expressly excluded from "aggregate investment income," as defined in s. 129(4). Accordingly, where a Canadian-controlled private corporation incurs investment counselling fees for a portfolio which generates both dividends from Canadian corporations and interest income, it will be necessary to determine the portion of those fees which relate to the earning of the interest income as contrasted to the dividend income. Only the interest-related portion of the fees will reduce the CCPC’s aggregate investment income.
Summary of Q. 24 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA specifies how to file a s. 185.1(2) election in (non-prescribed) manner
No Regulation has been promulgated specifying the "prescribed manner" for electing under s. 185.1(2) to convert an excessive capital dividend into a taxable dividend. CRA indicates that you should follow the directions on its website.
Summary of Q. 23 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.