News of Note
CRA finds that re-immigration step-down election under s. 128.1(6)(c) is available for shares which formerly were taxable Canadian property
Email this ContentThe election in s. 128.1(6)(c) typically permits an individual who previously was subject to the departure tax under s. 128.1(6)(b) to adjust downwards the departure proceeds of disposition and the adjusted cost base of those properties on return to Canada. CRA also considers that the election is available to the individual respecting shares of a corporation that, at the time of emigration, were taxable Canadian property for which the individual deferred the departure tax by posting security under s. 220(4.5) and that now, at the time of immigration, no longer are taxable Canadian property.
Neal Armstrong. Summary of 30 July 2015 T.I. 2013-0494871E5 under s. 128.1(6)(c).
CRA finds that corporate partners cannot avoid income inclusions under the thin cap rules by selling their interests to non-resident affiliates before year end
Ss. 12(1)(l.1) and 18(7) provide for the inclusion in a Canadian corporate partner’s income of a proportionate share of "deductible" partnership interest expense on debt subject to the thin cap rules. S. 96(1) only requires the computation of income (and of deductions such as interest) for a partnership which has "taxpayers" as members.
Someone argued that where the two Canco partner sell their interests to two non-resident sisters who are not "taxpayers," so that none of the partnership income for the year is allocated to taxpayers, no s. 96(1) computation is required so that the partnership has no "deductible" interest for the year – with the result that there is no income inclusion to them under s. 12(1)(l.1).
After noting that each partner’s "specified proportion" of the partnership debt is based on its share of partnership income for the previous year, CRA rejected the above argument on the basis that s. 96(1.01)(a) deemed each Canco to continue to be a member of the partnership at the year end for s. 96(1) purposes.
Neal Armstrong. Summary of 28 June 2015 T.I. 2015-0567811E5 under s. 12(1)(l.1).
Income Tax Severed Letters 26 August 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Humane Society – Federal Court of Appeal confirms revocation of registration of a charity whose recorded expenses included substantial personal expenditures
Ryer JA found that "the obligation of a charitable organization to maintain adequate books and records is foundational" so that the mixing of substantial personal expenses of an officer into the recorded expenses of the organization was a reasonable basis for a decision to revoke its registration.
Neal Armstrong. Summaries of Humane Society of Canada for the Protection of Animals and the Environment v. M.N.R., 2015 FCA 178 under s. 168(1)(e), s. 172(3)(a.1) and s. 189(7).
Remtilla – Tax Court of Canada finds that a T1 adjustment request was a waiver keeping the year in question open
When the taxpayer realized a large loss from options trading in 2008, he decided to report it on income account and filed a T1 adjustment request for his smaller 2005 loss and 2006 and 2007 gains from option trading (previously reported on capital account) to be adjusted to income account. After negotiations, CRA assessed all the years as on income account. The taxpayer objected to the assessments of 2006 and 2007 as being statute-barred notwithstanding his agreement to this treatment in the settlement agreement with CRA.
V. Miller J. dislikes sharp practice. She found that the T1 adjustment request was itself a waiver that kept the 2006 and 2007 years open given that it together with the accompanying letter contained all the necessary information and that "a reasonable person observing Mr. Remtilla’s interactions with the CRA in 2009 and in 2012 would infer that he always intended the T1 Adjustment Requests to be acted upon."
Neal Armstrong. Summary of Remtilla v. The Queen, 2015 TCC 200, under s. 152(4)(a)(ii).
C.J. McCarty Inc. – Tax Curt of Canada finds that a CCPC providing the services of its engineer shareholder at an hourly rate to a single client over the course of a large project did not have a personal services business
A CCPC providing the engineering services of its principal employee to a single client at an hourly rate during the course of three successive consulting contracts with that client was found by Lyons J not to be carrying on a personal services business. Hourly rates were the norm in the industry, the client had very little control over how the engineer went about managing the project, in these instances he spent all his time for the one client because it was a big project, and he had risks (e.g., being sued).
This case will be welcomed in the oil patch (see Virji, Muirhead, see also Dynamic).
Neal Armstrong. Summary of C.J. McCarty Inc. v. The Queen, 2015 TCC 201 under s. 125(7) – personal services business.
CRA confirms that a subsequent spin-off by the “profitco” in a loss-shifting transaction will not prejudices the loss shifting rulings given
The mechanics described in a ruling letter for spinning off various business divisions of an indirect subsidiary of a public corporation to newly-incorporated sisters entail the ACB of the shares in the capital of spinner being split pro-rata with that of the spinees – rather than full ACB being generated in the shares of the spinees (see Hanneman). There is a representation that these transactions will not have any "material effect" on the trading price of the parent’s shares (as well as not being disclosed to any shareholder), which is a bit like saying the transactions are somewhat of a waste of time (or at least that the resulting business benefits will not be visible for quite some time).
The spinner was also the "profitco" in a loss shifting transaction for which a 2012 ruling letter was received. Those transactions are described as already having been completed (i.e., the set-up transactions but not the unwind?) CRA confirmed that the transactions described in the second ruling letter would not cause the 2012 rulings to cease to be binding, given that the subsequent transactions of spinner/profitco would occur on a tax-deferred basis and would not create new business activities.
Neal Armstrong. Summaries of 2015 Ruling 2014-0559181R3 under s. 55(3)(a) and s. 111(1)(a).
CRA indicates that a gain from a trust disposition of QSBC shares can be allocated to a subsequently-added beneficiary
Where a discretionary family trust realizes a capital gain from the disposition of qualified small business corporation shares, there is nothing to stop it from allocating that gain under ss. 104(21) and (21.1) to a beneficiary (e.g., a "new" spouse) who is not added as beneficiary until later in the year (or, it would seem, in a subsequent year if there is an earnout so that recognition of the gain is deferred).
Neal Armstrong. Summary of 23 June 2015 T.I. 2015-0571801E5 F under s. 104(21.2).
CRA will not allow a late PAS election even where the surplus balances in question change through reassessment
A 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).