News of Note
CRA treats a distribution by a non-resident trust to a Canadian beneficiary, of IRA proceeds previously received by it, as income under s. 104(13)
Email this ContentCRA considers that proceeds from an IRA of a deceased U.S. resident which were distributed by her estate to a U.S.-resident trust, and by it to Canadian-resident beneficiaries, were income to them under s. 104(13)(a). The brief reasons cite s. 56(1)(a)(i)(C.1) (which requires the recognition by Canadian residents of IRA distributions as income). Although CRA did not cite s. 250.1(b) (stating that "a person for whom income for a taxation year is determined in accordance with this Act includes a non-resident person"), the logic may be that if the IRA proceeds instead are received by a non-resident trust, their distribution by that trust is income to the Canadian resident under s. 104(13)(a) – notwithstanding that the operation of the Canadian rules for trust taxation have no relevance to that trust (see also 2012-0448021E5).
As the distribution to the Canadian beneficiary is income to it, the U.S. withholding tax thereon of 15% (which CRA indicated would qualify as a non-business income tax) presumably would qualify for a foreign tax credit.
Summary of 2015 Ruling 2015-0570291R3 under s. 104(13).
Berger – Tax Court of Canada finds that an unsuccessful-to-date blog following the Maple Leafs was a business
A laid-off sports announcer who started a sports blog following the Maple Leafs was able to deduct his losses for the first 18 months (the period under review) notwithstanding his modest revenues and the personal element (qua sports fan and blogger). C. Miller J stated that the taxpayer’s course of conduct was "not so devoid of commercial reasoning to conclude the venture was personal and nothing more."
Neal Armstrong. Summary of Berger v. The Queen, 2015 TCC 153 under s. 3(a) – business source/reasonable expectation of profit.
CRA comments on the application of s. 74.4(2) to a freeze transaction effected by a family trust in favour of a new family trust
S. 74.4(2) imputes interest income where a resident individual transfers property to a non-SBC corporation (which is deemed under s. 84(9) or 51(1)(e) to occur on a s. 86 or 51 reorganization) if one of the main purposes of the transfer was to reduce the individual’s income and benefit designated persons respecting the individual (e.g., non-arm’s length minors) who also will be specified shareholders (under a modified definition).
CRA found that where a family trust which held common shares of the corporation and with minor (grandchildren) beneficiaries (Trust A) did a s. 51 exchange of its common shares for preferred shares, and a new family trust with a similar but expanded list of beneficiaries (Trust B) subscribed for new common shares, the grandchildren would be considered to be designated persons in respect of the old trust, viewed as the "individual" for s. 74.4(2) purposes. In particular, CRA stated "that a designated person in respect of Trust A would include…a person under 18 years who would be beneficially interested in Trust A if subsection 248(25) applied without taking into account clauses (b)(iii)(A)(II) to (IV), or a person under 18 years who did not deal at arm’s length with a [beneficially interested] person… ."
CRA was not asked the further question how the purpose test in s. 74.4(2) could or should apply where the designated persons in question (the grandchildren) are already beneficiaries of the old trust (Trust A).
Neal Armstrong. Summary of 2 June 2015 T.I. 2015-0570071E5 F under s. 74.4(2).
CRA rules that s. 261(21) does not apply to FX hedging with NR affiliates who are not subject to Canadian tax
On its face, s. 261(21) denies losses incurred, by a taxpayer who has made a functional currency election, in transactions (in this case, FX hedging contracts) with related persons who do not have the same tax-reporting currency at any time while those losses accrued. However, CRA has ruled that it will not apply s. 261(21) where the related (non-resident) affiliates in question "are not subject to tax under the Act on any amount included in their respective Canadian tax results."
Neal Armstrong. Summary of 2015 Ruling 2014-0561001R3 under s. 261(21).
Income Tax Severed Letters 30 June 2015
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The question whether the central management and control of a SPV is located in the home jurisdiction which is providing directions, is under review in Australia
An Australian decision (Esquire Nominees, [1973] HCA 67) appeared to establish that the central management and control of an offshore company was where the board of directors met and made their decisions, notwithstanding that they did not take actions on their own and were implementing a plan of Australian accountants. The correctness of this proposition was doubted recently in Hua Wang Bank Berhad, [2014] FCA 1392, which apparently now is under appeal to the Full Court.
Neal Armstrong. Summary of Joel A. Nitikman, "Central Management and Control and the Rule in Esquire Nominees: Where are we after Hua Wang Bank Berhad?", International Tax Planning, Federated Press, Vol. XX, No. 1, 2015, p. 1368 under s. 2(1).
Brilliant Resources makes a cash stated capital distribution without reliance on s. 84(2)
Brilliant Resources will be distributing a portion of the expropriation proceeds, previously received by its offshore subsidiary, as a stated capital distribution in reliance on s. 84(4.1) and will use the balance to start an investment business.
Neal Armstrong. Summary of Brilliant Resources Circular under Spin-Offs & Distributions - S. 84(4.1)(a) distributions of proceeds.
CRA makes favourable ordering assumptions in applying the surplus application (s. 90(9)) upstream loan rule
S. 90(9) permits the s. 90(6) income inclusion to Canco, that otherwise would result from an unpaid upstream loan to it from FA, to be reduced by applicable FA surplus balances. However, s. 90(9)(b) provides that such surplus must "not [be] relevant…in respect of any deduction claimed under subsection…113(1) in respect of a dividend paid, during the period in which the particular loan…is outstanding… ."
CRA is flexible in applying this exclusion. For example, it is willing to treat exempt surplus as being reduced on a LIFO basis so that, if following the upstream loan, there is an actual FA dividend, it is willing to treat that as coming out of subsequently generated exempt surplus rather than trenching for s. 90(9)(b) purposes on previous exempt surplus that may be needed under s. 90(9). Furthermore, CRA notes that "that the relevant time at which to measure surplus is the [s. 90(6)] dividend time and not any time in a subsequent year in which a subsection 90(9) deduction is claimed to offset a subsection 90(12) inclusion [bringing back into income a previous year’s s. 90(9) deduction]," so that it would not matter for s 90(9) purposes if there is an exempt loss is a year subsequent to that for the dividend time.
Finally, in an extension of 2013-0483791C6 (where CRA indicated that a Reg. 5901(2)(b) election can be made on a notional s. 90(9) dividend), and assuming the numbers work, CRA considers that the s. 90(6) deemed dividend from Upstream Loan 1 can be eliminated under s. 90(9) based on exempt surplus at the time, and that the s. 90(6) deemed dividend from Upstream Loan 2 can be eliminated under s. 90(9) based on making a Reg. 5901(2)(b) election on this notional dividend.
Neal Armstrong. Summary of 28 May 2015 IFA Roundtable, Q. 4, 2015-0581501C6 under s. 90(9).
Sprott Physical Gold Trust offer for Central Goldtrust units provides choice between a taxable exchange and a s. 132.2 rollover
Sprott Physical Gold Trust (through a special bid LP owned by Sprott) is offering to acquire all the units of Central Goldtrust (GTU), another listed gold bullion fund in exchange for units ("PHYS Units") of Sprott Physical Gold Trust. GTU Unitholders are given the choice of exchanging their units directly in a taxable exchange, or participating in a s. 132.2 merger transaction, which would occur on a rollover basis. The transaction has been structured so that those GTU unitholders who will elect to participate in the rollover are counted towards satisfying the minimum (66 2/3%) required transaction approval.
For U.S. purposes, the exchange and merger would likely be viewed as a single transaction, so that it would likely qualify as a Code s. 368(a) reorganization. The PHYS Units are likely shares of a PFIC, so that there also likely would be a rollover under the PFIC rules.
The GTU trustees have recommended rejection of the offer for various reasons, including that "Sprott PHYS' redemption feature would expose certain non-redeeming U.S. Unitholders to potentially increased ongoing future tax liabilities if Sprott PHYS delivers gold to satisfy a physical redemption request from a unitholder and the price of gold exceeds Sprott PHYS' undisclosed Canadian dollar cost base for its gold holdings."
Neal Armstrong. Summary of Sprott Physical Gold Trust offer for Central Goldtrust units under Mergers & Acquisitions – REIT/Income Fund/LP Acquisitions – Section 132.2 Mergers – Bullion Fund Mergers.
Donne – Tax Court of Canada finds that a doubtful debt reserve (or other tax filing position) can be claimed as at the year end in light of subsequently revealed information, and can be claimed implicitly or on appeal
The taxpayer was owed interest (at 25% p.a.) by a relative’s company which, in turn, had essentially all its assets invested in loans to an arm’s length company which, as it emerged by April 2010, was engaged in a Ponzi scheme. Owen J found that whether there was a bad (or doubtful) debt for the interest as at the taxation year end (December 31, 2009) could be assessed in light of the circumstances at the filing-due date (April 30, 2010) – stating a useful principle that "the taxpayer may rely on information that comes into existence after the end of the year, but before the filing-due date, to fulfill his…obligation to report."
Respecting an argument that the taxpayer was required by s. 20(1)(l) or (p) to have "included" the interest in income before being entitled to the reserve – whereas, in fact, neither interest nor deduction appeared in the return (although an explanatory letter was attached) - Owen J stated (perhaps inconsistently with Langdon, Sears and Dominion) that this did "not alter the fact that the interest was included in [the taxpayer’s] income for 2009 by virtue of the application of the provisions of the ITA to the facts." Furthermore, "it is well established that it is open to a taxpayer to amend his return through the appeal process."
As its computers are dyslexic, CRA dislikes an income reporting or reserve deduction requirement being satisfied by attaching a letter.
Neal Armstrong. Summaries of Donne v. The Queen, 2015 TCC 150, under s. 20(1)(l) and s. 20(1)(p)(i).