News of Note
CRA finds that a foreign partnership did not hold Bitcoins in an active business
Email this ContentThe definition of "specified foreign property" for purposes of the foreign property reporting rule in s. 233.3 includes an interest in a (mostly foreign-owned) partnership which holds "funds or intangible property…situated, deposited or held outside Canada," but with an exclusion in para. (j) of the definition for where such property of the partnership "is used or held exclusively in the course of carrying on an active business of the…partnership."
CRA considered that the para. (j) exclusion likely did not apply for a foreign partnership that held Bitcoins and engaged in related FX hedging and arbitrage transactions. Given that the definition of non-portfolio property (which refers only to "property...use[d]…in the course of carrying on a business in Canada") has narrower wording (i.e., merely "holding" in the course of a business is not enough to taint), this suggests that listed Canadian precious metal funds should not be considered to be SIFT trusts (or partnerships) even if they hold their property in Canada.
Neal Armstrong. Summary of 16 April 2015 T.I. 2014-0561061E5 under s. 233.3 – "specified foreign property".
CRA finds that the surplus recognition rule in Reg. 5907(2.01) for drop-down and sale transactions is not available where any liabilities are assumed
Reg. 5907(2.01) potentially allows the recognition for surplus purposes of unrealized gain on a transfer from one foreign affiliate to another, newly incorporated, foreign affiliate where the shares of the new foreign affiliate are then promptly sold to a third party. A requirement for this relief is that the "only consideration received in respect of" the drop-down is shares of the new foreign affiliate.
CRA considers that this requirement will not be satisfied if the new foreign affiliate assumes any liabilities of the transferor FA as part of the purchase. This appears to be technically correct. However, since any normal business or business division will have related liabilities, this interpretation eviscerates the rule.
Neal Armstrong. Summary of 22 April 2015 T.I. 2014-0550451E5 under Reg. 5907(2.01).
CRA affirms two-step approach for characterizing a mooted foreign partnership
In CRA’s Folio on "What is a Partnership?" it states that a two-step approach (similar to Memec) should be applied in determining whether a foreign arrangement is a partnership: determine the characteristics of the arrangement under the foreign law and contracts; and compare those characteristics with the attributes of a partnership under "Canadian law." CRA is somewhat vague as to whether it accepts the implicit approach in Backman that the Canadian law to be applied here is that of the common law provinces (carrying on business in common with a view to profit).
Neal Armstrong. Summary of S4-F16-C1: "What is a Partnership?" under s. 96.
CRA narrowly defines constructive receipt of employment income
Folio S2-F3-C1: "Payments from Employer to Employee," which mostly deals with s. 6(3), reflects significant revisions to IT-196R2. CRA has added a statement that s. 6(3) employment income can be "constructively received," and defines this situation as one where an "amount is credited to an employee’s debt or account, set apart for the employee or otherwise available to the employee without being subject to any restriction concerning its use."
CRA has added examples indicating that a signing bonus will be included even where the employee is subject to a potential obligation to repay the amount, and that an agreement at the time of hiring the employee to purchase her customer list on termination of employment also would give rise to employment income on the sale.
CRA has carried forward from IT-196R2 a statement that a payment which satisfies the specific s. 6(3) conditions will only be included in employment income if it has the "nature and quality" of employment income.
Neal Armstrong. Summaries of Folio S2-F3-C1: "Payments from Employer to Employee" under s. 6(3), s. 5(1) and s. 6(3.1).
Income Tax Severed Letters 6 May 2015
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA treats part of a building as a “former business property”
Insurance proceeds received for the destruction of part of a building qualified as "compensation for property damaged" (para. (f) of the "proceeds of disposition" definition) rather than "compensation for property destroyed" (para. (c)), so that it was necessary for the destroyed property to qualify as a "former business property" in order for the replacement property rollover to potentially apply to the reinvestment of the insurance proceeds. Although parts of the building were used as a rental property, the destroyed part had been used exclusively as a business property, so that such part qualified as a former business property. In other words, the destroyed part of the property in effect was viewed as a separate property in the context of the former business property definition but not in the context of characterizing the proceeds.
A further hurdle was that the scale of the reconstruction work had to be such as to be able to conclude "that a new property is acquired by the taxpayer."
Neal Armstrong. Summary of 4 March 2015 T.I. 2014-0550761E5 F under s. 44(1).
Jennings – Tax Court of Canada finds that rezoning expenses were fully deductible
Six years after the taxpayers acquired a triplex, they discovered that it was not zoned for that use, and applied to get it rezoned. In finding that the substantial related expenses were deductible, Woods J noted that although there was in a sense a long-term benefit from the rezoning, it did not produce any change in how the property was used.
This is a more favourable result than Shabro, where the replacement of a floor, which was damaged because it rested on a former landfill site, by a floor supported by steel piles, was a capital expenditure even though (similarly to Jennings) the taxpayer thereby only got what it thought it had in the first place (a suitable building) - although it may have helped that the expenditures did not effect any change to, or acquisition of, tangible property (see BP Australia, Strick v. Regent, Oxford).
Neal Armstrong. Summary of Jennings v. The Queen, 2015 TCC 96 under s. 18(1)(b) – capital expenditure v. expense – improvements v. running expense.
Standard Life –Tax Court of Canada restrictively interprets s. 138(11.3), thereby casting doubt on a favourable CRA interpretation of the s. 95(2)(k) fresh start rule, and applies a “window dressing” doctrine
Prior to the introduction of mark-to-market rules in 2007, Standard life Assurance Company of Canada (which to that point only carried on business in Canada) scrambled to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006. It relied on the s. 138(11.3) rule, which defined an "insurer" as a Canadian life insurer which also carried on business in another country and provided that where "designated insurance property of the insurer for a taxation year [2006], was owned by the insurer at the end of the preceding taxation year [2005] and was not designated insurance property of the insurer of the insurer for that preceding year," such property could be bumped in the 2006 return.
Pizzitelli J found that in order for s. 138(11.3) to apply, it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year (2005) rather than only in the current year, so that the bump was not available. In contrast, in 2014-0536581I7 CRA found that the requirement, in the similar fresh start rule in s. 95(2)(k), that the "affiliate" whose property is sought to be bumped have carried on the business in question in the preceding year, was satisfied notwithstanding that it was not an affiliate in the preceding year.
In any event, the intended Bermuda business did not commence until 2008. In the meantime, there were just a few isolated acts, such as hiring a bookkeeper with essentially nothing to do, entering into a reinsurance contract with an affiliate which was backdated to December 2006, and getting a Bermuda licence which prohibited any business with third parties. This all was "window dressing" - a term which Pizzitelli J defined as "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayer’s intention for entering into the transaction."
Neal Armstrong. Summary of Standard Life Assurance Company of Canada v. The Queen, 2015 TCC 97 under s. 138(11.3).
Under the new charitable credit rules, it may be desirable for executors to complete gifts within 3 years of the death
Although for deaths after 2015, s. 118.1(5) will deem gifts made by the deceased’s will to have been made instead by his estate at the time of transfer of the property by it to the donee, the executors will be able to allocate such gifts between the deceased and the deceased's estate, provided that the estate is a "graduated rate estate" at the time the gift is made. This is potentially problematic for gifts made out of the residue of a complex estate or an estate in litigation, so that by the time the transfer is made the estate may no longer qualify as a graduated rate estate.
Neal Armstrong. Summary of Jessica Fabbro, "Dying to Donate – Determining Charitable Donation Tax Credits on Death after 2015", Tax Topics, Wolters Kluwer, No. 2249, April 16, 2015 under s. 118.1(5.1).
CRA considers individuals paid on a per diem or per job basis to be deemed employees
Employment is deemed to include an "office," which is defined to include a position "entitling the individual to a fixed or ascertainable stipend or remuneration." CRA considers that this includes a position entitling the individual to a per diem amount for each day of sitting or other work or (in this case) a fixed amount per completed file – even though the number of sittings or files would not be known until towards the end of the year.
This suggests, for example, that CRA would consider a trustee of a REIT who get s paid a fixed amount per board meeting to be a deemed employee (and thus eligible for s. 7 treatment).
Neal Armstrong. Summary of 7 November 2014 Memo 2014-0549861I7 under s. 248(1) – office.