News of Note
Non Corp Holdings – Ontario Superior Court of Justice rectifies the date of a capital dividend declaration to eliminate Part III tax
Email this ContentCCPCs generally can pay out ½ of capital gains as a capital dividend immediately after realization, whereas additions to the capital dividend account from sales of eligible capital property do not occur until the year end. The most common mistake giving rise to rectification orders is to pay a capital dividend immediately after receipt of proceeds of goodwill, rather than waiting until the beginning of the following year.
Following the sale of a business giving rise to a “capital gain” (likely, goodwill proceeds), the dividend of the targeted capital dividend amount was paid on the first day of the following year, but the resolution declaring the dividend was dated the last day of the current year. CRA required that this error be rectified (by changing the resolution date by one day) in order to reverse the Part III tax.
In granting this rectification order (which was not opposed by CRA), Dunphy J stated that (in contrast to his Birch Hill decision, where the denied rectification “would have materially re-ordered the transaction in ways that nobody had considered at the relevant time”), here:
There was a specific intention to allocate specific proceeds of a specific transaction to a specific tax account – the capital dividend account – to achieve a specific tax goal. A very minor mistake, in human terms at least, was made.
Neal Armstrong. Summaries of Non Corp Holdings Corp. v. A.G., 2016 ONSC 2737 under General Concepts – Rectification and s. 89(1) – capital dividend account – para. (c.1).
CRA finds that corporate PUC and capital surplus flowed through on a cross-border continuance
A non-resident corporation governed by a non-resident jurisdiction’s corporate law had issued share capital based only on the “nominal value” (perhaps better translated as “par value”) of its common shares, but with a share premium account from share issuances. It became resident in Canada through a change in its central management and control, and then continued under a provincial companies statute, with the issued share capital account and share premium account being relabelled as stated capital and contributed surplus, respectively, on the continuance. It then passed a resolution converting the newly-styled capital surplus account into further stated capital – and got a ruling that this did not generate a s. 84(1) deemed dividend.
This ruling letter is supportive of a view that paid-up capital (and capital surplus), however precisely labelled under the applicable corporate statute, maintain their status on various types of corporate migrations, such as a continuance, or perhaps a conversion of a C-Corp to an LLC (with the right drafting of the LLC agreement), notwithstanding that the treatment (and labelling) of the capital and surplus amounts under each statute will often differ to some extent.
Neal Armstrong. Summary of 2015-0584151R3 under s. 84(1).
Ferlaino – Tax Court of Canada requires the exercise price of employee stock options to be translated at the exercise-date spot rate
The former Director of Taxes at a large Canadian corporation argued unsuccessfully before Smith J that the computation of his s. 7(1)(a) benefits on exercising options on the shares of the listed U.S. parent should depart from the norm by translating his exercise price using the much higher exchange rate at the time of option grant, rather than the rate (of around par) at the time of exercise.
Neal Armstrong. Summaries of Ferlaino v. The Queen, 2016 TCC 105 under s. 7(1)(a) and s. 110(1.5)(a).
Income Tax Severed Letters 4 May 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Fowler v. HMRC Commissioners - First-Tier Tribunal finds that “treatment is the meaning:” employment income deemed by U.K. domestic legislation to be from carrying on a “trade” was therefore deemed by Art. 3(2) to be “business profits” for Treaty purposes
A U.K. domestic income tax provision (“s. 15 ITTOIA”) deemed the diving activities of a South African resident in the North Sea to be the carrying on of a U.K trade, notwithstanding that in fact he was an employee. The diver successfully argued that this meant that Art. 3(2) of the U.K-South Africa Treaty (which, in the standard OECD form, provided that any term not defined in the Treaty “shall, unless the context otherwise requires, have the meaning that it has …under the law of [the U.K.]”), deemed his earnings to be business profits for purposes of Art. 7 of the Treaty, so that they escaped U.K. taxation (as he had no permanent establishment in the U.K.) Brannan J stated:
It is the clear purpose of section 15 ITTOIA to re-characterise what would otherwise be the exercise of employment duties as the carrying on of a trade. In so doing, in my view, section 15 ITTOIA has the meaning that the activities of an employed diver in the UK Continental Shelf constitute trading activities and that the income therefrom must be trading income and, consequently, business profits within Article 7 – the treatment is the meaning.
Thus, Art. 3(2) applied notwithstanding that the domestic provision in question was blatantly a deeming provision rather than a definition and merely deemed the underlying activity to be a trading activity rather than explicitly deeming the resulting income to be “profits” of an enterprise.
Brannan J also stated:
If a Contracting State changes its domestic law after the conclusion of a double tax treaty in such a way as to reallocate income from one article to another...that could contravene the requirements of good faith imposed by Article 31(1) of the Vienna Convention... .
That issue did not arise here as the domestic deeming provision was enacted well in advance of the Treaty in order to give a break (through greater deductions) to divers, whose activities were dangerous.
Neal Armstrong. Summary of Fowler v. HMRC Commissioners, [2016] UKFT 0234 (TC) under Treaties – Art. 3.
CRA confirms that gifts made by will of the deceased can no longer be treated as gifts by a surviving spouse
Until recently, there was a CRA administrative practice to accept the allocation of gifts made under the will of a deceased to the return of a surviving spouse. As a result of the recent amendments respecting estate gifts (including the proposed January 15, 2016 amendments) this policy will not apply where the death occurred after 2015.
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 8, 2016-0624851C6 Tr under s. 118.1(1) - “total charitable gifts.”
CRA considers that professional fees incurred after acceptance of a voluntary disclosure commence to be deductible
S. 60(o) accords a deduction for fees incurred “in preparing, instituting or prosecuting” an income tax objection (or appeal). CRA considers that this does not provide a deduction for fees incurred in making a voluntary disclosure. However, from the moment the voluntary disclosure is accepted, further fees incurred in defending the taxpayer’s position vis-à-vis CRA qualify under s. 60(o).
Neal Armstrong. Summaries of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 7, 2016-0625731C6 Tr under s. 60(o) and s. 20(1)(cc).
The traditional CRA policy on s. 31 is still reflective of its position post-Craig
CRA essentially considers that the post-Craig version of s. 31 essentially codifies its views as to how the provision worked before that case was decided. Respecting the situation where an individual who had carried on a farming business, but with a full-time job as his main source of income, then retired (so that he received full pension income), CRA stated that in light of its positions that a multi-factor test should be applied, the fact that he now devoted most of his time to operating the farm could not be treated as conclusive that he was not subject to the s. 31 loss restriction rule.
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 7, 2016-0625131C6 Tr under s. 31(1).
CRA strictly interprets the s. 6(1)(a)(iv) safe harbour for counselling
S. 6(1)(a)(iv) provides a safe harbour from an employee taxable benefit for counselling services respecting the mental or physical health of the employee or the employee’s re-employment or retirement. CRA considers that this exception “does not include a service that entails more than simply advice, or is preventive or curative treatment.”
If there is a taxable benefit on general principles (which might occur where the service is not principally for the employer’s benefit and is not provided under a private health services plan), CRA considers that it should be valued at what the “employee would have to pay for this service if the employee assistance program did not exist.”
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 12, 2016-0624811C6 Tr under s. 6(1)(a)(iv).
CRA considers that the related occupant of a principal residence can be charged FMV rent
CRA considers that a house unit can qualify as a principal residence of a taxpayer even where the child of the taxpayer, who is the one residing at the house, is being charged a fair market value rent by the taxpayer (in order to help fund the seniors’ residence fees of the taxpayer).
Neal Armstrong. Summary of 21 January 2016 Quebec CPA Personal Income Tax Roundtable, Q. 10, 2016-0625161C6 Tr under s. 54 - principal residence - (a).