News of Note
S. 15(1.4)(c) helps avoid double taxation of car benefits
Email this ContentCRA has confirmed that s. 15(1.4)(c) can operate to prevent double taxation, so that if Son has an automobile benefit conferred on him by his corporate employer which is included in his employment income, that benefit will not be included in the income of his father (the corporate shareholder) notwithstanding the broad scope of s. 15(5).
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 1, 2014-0538101C6 F under s. 15(1.4)(c).
Making a s. 89(11) election does not trigger a year end
Where a corporation which otherwise would be a Canadian-controlled corporation makes a s. 89(11) election for a taxation year, it is deemed throughout that taxation year and thereafter (subject to revocation of the election) not to be a CCPC for specified purposes, including s. 249(3.1), which deems a year end when a corporation becomes or ceases to be a CCPC. However, since the deemed status change from making the election thus occurs at the very beginning of that taxation year, there is no effect on its taxation year end.
Neal Armstrong. Summary of 22 October 2014 Memo 2014-0550191I7 under s. 249(3.1).
CRA grants SDA ruling for SAR plan for CCPC whose FMV is determined using a simplistic formula
CRA ruled that "stock appreciation rights" of employees of a Canadian-controlled private corporation would not constitute a salary deferral arrangement before they could exercise cash-out rights. Cash-outs (based on the appreciation in their notional units from the time of grant) can occur not only on termination of employment but also when the fair market value of the CCPC passes specified thresholds. The FMV of the CCPC will be computed in accordance with a formula which starts with a weighted average of a multiple of adjusted EBITDA for various trailing reporting periods ("to ensure that the value of SAR Units is not unduly affected by a year that is exceptionally good or exceptionally bad"), and then adds cash (but not other working capital) and (in an obvious departure from valuation principles) the cumulative amount of corporate distributions, and subtracts debt (but not accrued liabilities).
The take away may be that in this context CRA is amenable to the FMV of an unlisted company being computed in accordance with an objective, but somewhat smoothed and arbitrary (and, therefore, at least somewhat inaccurate), formula.
Neal Armstrong. Summary of 2013 Ruling 2012-0435221R3 under s. 248(1) – salary deferral arrangement.
CRA finds that a copyright royalty paid for the use of photographs in a TV production is exempted from withholding
CRA considers that payments to a non-resident for the right to use photographs in a TV program enjoy the copyright withholding tax exemption without being excluded under s. 212(5) as a payment for the use of a film.
This is similar to 2013-0514291E5 F, where CRA states that it does not consider that this exclusion will apply where separate copyright royalties are paid to a non-resident for the right to reproduce music which is used in a film.
Neal Armstrong. Summaries of 5 November 2014 T.I. 2013-0506191E5 under s. 212(5) and s. 212(1)(d)(vi).
Brogan Family Trust – Ontario Supreme Court finds that CRA need not be notified of a rectification application to save unassessed tax
In Ontario, there generally is no need to notify CRA of a rectification application if the tax to be saved or avoided through the rectification has not yet been assessed by CRA.
Neal Armstrong. Summary of Canada (Attorney-General) v. Brogan Family Trust, 2014 ONSC 6354 under General Concepts – Rectification.
CRA challenges TFSA day trading
In contrast to s. 146(4)(b), which exempts an RRSP’s income from a business to the extent that the income is from trading qualified investments (see 2014-0538221C6 F), s. 146.2(6) indicates that a TFSA is taxable on its taxable income from any business.
CRA apparently is challenging day trading within TFSAs, and a case is expected "in the next year or two."
Neal Armstrong. Summary of Arthur B.C. Drache, "TFSAs as a Business," The Canadian Taxpayer, January 2, 2015 – Vol. xxxvii No. 1, p. 5 under s. 146.2(6).
CRA recognizes that a transfer for nominal consideration can be a gift
When asked whether a transfer of an immovable for $1 to a non-arm’s length person can be a gift, CRA responded that, in the absence of sham "the genuine legal relations must be respected in tax matters" – which sounds generally favourable. Note also that in ITTN No. 44, CRA stated, apparently based on s. 69(1)(c) re "gifts," that "a corporation that receives property from its shareholder for no consideration has a cost basis for that property equal to its FMV."
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 8, 2014-0538621C6 F under s. 69(1)(c).
ConocoPhillips – Federal Court of Appeal finds that a taxpayer can appeal a decision of CRA, to treat a Notice of Objection as invalid, to the Tax Court
Where a taxpayer wishes to demonstrate that its Notice of Objection in fact was filed on a timely basis because it did not receive the reassessment when alleged by CRA, the correct procedure is for it to appeal to the Tax Court for an adjudication of when the notice of reassessment was mailed.
Neal Armstrong. Summary of Minister of National Revenue v. ConocoPhillips Canada Resources Corp under s. 169(1).
CRA asserts that accrued recapture of depreciation is irrelevant to share valuation
Father transfers his shares of a real estate corporation with substantial accrued recapture of depreciation to his son.
After repeating (albeit, with confused terminology) its uncontroversial position that the assets of a corporation or other taxpayer are to be valued without taking into account deferred tax credits or debits, CRA then made the extraordinary statement:
In the situation provided, the CRA would not accept the latent taxes respecting the assets held by the corporation being considered in the determination of the FMV of the shares of the corporation.
Earlier in the interpretation, CRA referred to "deferred taxes" ("impôts différés"), so that the above statement referring to "latent taxes" ("impôts latents") apparently cannot be rationalized as merely indicating that you ignore the bogus deferred tax (or FITL) balances generated under GAAP.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 12, 2014-0538121C6 F under General Concepts – FMV – Shares.
Income Tax Severed Letters 14 January 2015
This morning's release of 20 severed letters from the Income Tax Rulings Directorate is now available for your viewing.