News of Note
CRA will not accept an eligible dividend election conditional on an unsuccessful appeal generating a GRIP balance
Email this ContentIf a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), CRA is willing to hold the processing of a s. 184(3) election (to convert the dividend into a taxable dividend so as to eliminate the Part III tax) in abeyance, so that the election will be treated as void if the taxpayer’s objection is successful, and treated as timely filed if the objection (or subsequent appeal) is dismissed.
CRA is unwilling to extend this policy to the payment of a dividend thought to be made out of earnings eligible for the small business deduction (i.e., earnings thought not to generate a GRIP balance), so that no eligible dividend designation was made, where the corporation then is assessed to deny the deduction – so that CRA will not accept and hold in abeyance an eligible dividend designation made shortly after the assessment which is conditional on the corporation being unsuccessful in establishing that the earnings were eligible for the deduction.
Neal Armstrong. Summary of 12 March 2015 T.I. 2014-0541991E5 under s. 89(14.1).
CRA indicates that a trust declaration of an amount not yet received by it might be eligible for a separate “right or thing” return of a deceased beneficiary stating
A corporation held by a discretionary trust declares a dividend, with the trustees then resolving that the trust will pay the dividend, on receipt, to an individual beneficiary – who dies before the dividend is received by the trust. CRA indicated that it was possible that on death the trust declaration amount would be considered to be a "right or thing" of the individual for s. 70(2) purposes, stating, "an amount which a taxpayer has the right to receive at the moment of his or her death and whose value is determinable can constitute a right or thing…even if it is not payable at the moment of death because it is subject to a condition."
Neal Armstrong. Summary of 9 March 2015 T.I. 2012-0469761E5 F under s. 70(2).
CRA finds that a forfeited land-sale deposit was proceeds of a security interest rather than of taxable Canadian property
CRA considers that a sales deposit forfeited to a vendor represents proceeds of a contractual right. If the sale which did not close was of land in a common law province, doesn’t this mean that the forfeited deposit was proceeds of taxable Canadian property to a non-resident vendor given that the sales contract represented an equitable interest in land?
Not so. CRA considers that the disposition is of "a security interest derived by virtue of an agreement for sale," so that the disposed-of interest is deemed by s. 248(4) not to be an interest in real property, i.e., s. 116 (and presumably s. 115(1)(b)) would not apply.
Neal Armstrong. Summary of 16 March 2015 Memo 2013-0479861I7 under s. 248(4).
Cloud computing may facilitate MNE tax avoidance
Use of cloud computing makes it easier for a multi-national enterprise to avoid having a server (viewed as a potential permanent establishment) in a source jurisdiction and also may facilitate disguised transfers of intangibles under cover of the Cloud.
Neal Armstrong. Summaries of Mateusz M. Krauze, "Impact of Cloud Computing on Permanent Establishments Under the OECD Model Tax Convention," Tax Management International Journal, Vol. 44, No. 3, March 13, 2015, p. 131 under Treaties – Art. 5, Art. 9.
Presidential MSH Corp. – Tax Court of Canada finds that a definition of a noun referenced a remotely-placed verb
In the face of some submissions not made in Tawa, Graham J. revisited the question as to whether the refundable dividend tax account of a taxpayer is reduced by amounts which the taxpayer could have claimed, but failed to timely claim, as dividend refunds. S. 129(1) provides that the Minister "may...refund...an amount (...[the] "dividend refund"...) equal to [a formula amount]." Notwithstanding that "refund" is first used here as a verb (see also IA, s. 33(3)), Graham J found that the defined term refers to a refund of the formula amount, rather than to the formula amount whether or not refunded, so that the taxpayer’s RDTOH was not reduced by unclaimed dividend refunds. Although "dividend refund" was used inconsistently in the Act, he agreed with the purposive analysis in Tawa.
Neal Armstrong. Summaries of Presidential MSH Corporation v. The Queen, 2015 DTC 1101, 2015 TCC 61 under s. 129(1) and Statutory Interpretation - Interpretation Provisions.
CRA states that a shareholder benefit arising on a corporate tenant improvement must be estimated even if reimbursement for the improvement is required on lease termination
In IT-432R2, CRA states (based inter alia on Kennedy and Ginter) that if a corporate tenant improves a building owned by its shareholder, a shareholder benefit arises at that time based on the present value of the increase in the shareholder/landlord’s reversion. But what if under the lease the corporation at lease end must be repaid by its shareholder for the value of the improvements?
CRA was unwilling to discuss the mitigation or elimination of the shareholder benefit that thereby arises and instead stated that "the extent to which the reimbursement would reduce the present value of the shareholder benefit under subsection 15(1) will depend on the relevant circumstances."
Neal Armstrong. Summary of 24 September 2014 T.I. 2014-0522261E5 under s. 15(1).
Income Tax Severed Letters 1 April 2015
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that the s. 98(1)(a) partnership relieving rule does not apply to a former partner
s.98(1)(a) indicates that until all the property of a dissolved partnership has been distributed, the partnership and the partnership property are deemed to continue.
CRA has confirmed that this rule does not apply to someone who has already ceased to be a partner at the time of dissolution, but notes that this point does not have much significance since ss. 98.1(1)(a) and (b) for various purposes deem the former partner not to have disposed of its partnership interest until the later of its residual entitlement (otherwise than under s. 96(1.1)) to partnership property being satisfied, and the end of the dissolution year.
Neal Armstrong. Summary of 26 January 2015 T.I. 2014-0545051E5 under s. 98(1).
The cashless application of cross-border interest payments (owing Canco to USCo) to satisfy a subscription obligation for shares of Canco is targeted to generate interest deductions in Canada and no income inclusions in the U.S.
A technique for a U.S. corporation ("USCo") to use double-dip financing of an acquisition of Canadian "Target" starts in a conventional manner with a Canadian acquisition vehicle ("Buyco") being capitalized by it with interest-bearing debt and equity in conformity with the Canadian thin cap rule and with Buyco ultimately being amalgamated with Target to form Canco. However, before the amalgamation, a three-party arrangement is entered into among USCo, Buyco and an LLC sub of USCo under which
- USCo will direct Buyco (or its successor, Canco) to satisfy its interest obligations as they come due by paying the interest amounts to LLC in satisfaction of its obligations under a forward sale agreement ("FSA") to subscribe for membership interest in LLC in equal amounts (with this FSA also containing a matching obligation to subscribe for a further membership interest when the principal of the loan comes due), and
- LLC will redirect that Canco instead retain those amounts on account of the subscription price for shares of Canco under a similar FSA between LLC and Buyco — so that Canco issues shares to LLC.
The targeted results are for the loan to be treated as equity for Code purposes (so that the shares issued by Buyco/Canco are treated as a tax-free stock dividend – and so that USCo can enjoy a U.S. interest deduction for any related financing), and for it to generate an interest deduction for Canadian purposes (with no withholding).
Neal Armstrong. Summary of Jack Bernstein and Francesco Gucciardo, "Update on Canada-U.S. Merges and Acquisitions," Tax Notes International, March 16, 2015, p. 993 under s. 20(1)(c).
CRA will apply the instalment method that minimizes the Canadian-dollar taxes payable of a functional currency reporter when it assesses for carried-back losses
Where a Canadian corporation uses an "elected functional currency" (e.g., the U.S. dollar) for purposes of computing its Canadian tax liabilities, it nonetheless computes its instalment obligations under the first instalment base method (s. 157(1)(a)(ii)) or second instalment base method (s. 157(1)(a)(iii)) based on its ultimate taxes payable in Canadian dollars for its previous taxation year or previous two taxation years, as the case may be (although instalments under the estimated method (s. 157(1)(a)(i)) effectively are computed in U.S. dollars). The remainder of its taxes payable for a year is computed by converting each of its required Canadian dollar instalment payment obligations into U.S. dollars at the applicable spot rates for the instalment due dates, with the total of the required instalments (expressed in U.S. dollars) deducted from its U.S. dollars payable for the year and with the difference converted to Canadian dollars at the spot rate on the balance-due day. A result of this is that where the corporation has carried back non-capital losses from subsequent years in computing its taxable income for, say, Years 1 and 2, the choice of instalment method for Year 1 or 2 may affect the Canadian dollar quantum of its adjusted tax liability for Year 1 or 2.
CRA considers that when in these circumstances it reassesses Years 1 and 2 to give effect to the carry-backs, it generally should use the instalment method that minimizes the Canadian dollar taxes payable – i.e., the same instalment method that was originally used for Year 1 or 2 is not required to be used in this recalculation.
Neal Armstrong. Summary of 21 January 2015 Memo 2014-0540631I7 under s. 261(11)(a).