News of Note
No PUC reinstatement occurs under the FAD rules where sales proceeds are reinvested in a closely connected corporation
Email this ContentThe paid-up capital reinstatement rule in draft s. 212.3(9)(b)(ii) for reinvested proceeds is not available where the replacement investment is in shares of a closely connected investment described in s. 212.3(16). This is odd: "Where that [closely-connected] test is satisfied, that investment should be viewed as a "good" investment, so arguably the PUC should be reinstated, since it would not have been constrained in the first place had that investment been made initially."
Neal Armstrong. Summary of Angelo Nikolakakis, "Foreign Affiliate Dumping – The New Paid-Up Capital Offset and Reinstatement Rules," International Tax (Wolters Kluwer CCH), October 2014 Number 78, p.1 under s. 212.3(9).
CRA reports on rulings which it refused to give on GAAR grounds
Highlights from yesterday’s Roundtable at the CTF Annual Conference in Vancouver include:
- Q.1 CRA indicated that there is essentially no difference between exchangeable shares and exchangeable units under the derivative forward agreement rules, so that in both cases (where the call right is not contained in a separate agreement) an assessment must be made as to whether the holder has retained the equity-type attributes referred to in the DFA definition.
- Q.2 In order to rule on loss transfers between corporations which are affiliated but not related, CRA at a minimum will require that they be affiliated for s. 69(11) purposes, i.e., only common de jure rather than de facto control is accepted.
- Q.3 CRA has reversed its position at the 2014 STEP Roundtable (2014-0522961C6) that the standard contractual recital of $1 (but not a dollar more) of consideration will cause the safe harbour - from deemed s. 68 allocation to a restrictive covenant – to not be available.
- Q.4 Where a foreign acquirer does pre-acquisition planning respecting the capitalization of a Canadian Buyco to acquire a non-resident target holding a Canadian Opco, with a view to being able to then effectively step up the PUC of the shareholding in the Canadian Opco through a series of transactions, CRA considers that GAAR would apply on the basis that the application of Part XIII tax to the surplus of the Canadian Opco has been avoided.
- Q. 5 CRA is not receptive to arrangements under which different types of income are streamed to different partners.
- Q. 6 Where a resident rolls a building into a new subsidiary partnership for a note and units, a non-resident subscribes cash for units a day later and the cash is used to pay off the note, CRA will apply GAAR as if the resident had instead dropped the building down only for units, and then sold half its units to the non-resident.
- Q. 9 CRA accepts Lehigh, so that s. 95(6)(b) applies principally respecting status manipulation.
Neal Armstrong. Summary of 2014 Annual CTF Roundtable.
Income Tax Severed Letters 3 December 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that a s. 85(1)(e.2) does not apply to transfers of property at less than FMV to sister corps
Two sister Canadian subsidiaries (Subco 2 and Subco 3) of Canadian parent (Parent) wish to consolidate ownership of their two foreign affiliate subsidiaries (FA 1 and FA 2) in another newly-formed subsidiary of Parent (Can Holdco – which already has acquired ownership of a portion of FA 2 from Parent). Accordingly, they transfer their FA shares to Can Holdco (their sister) on a purported s. 85 rollover basis in consideration for Can Holdco prefs with a fair market value equal to the ACB of the transferred shares (rather than their higher FMV). Can Holdco then redeems the prefs with cash subscriptions received from Parent and the redemption proceeds received by Subco 2 and 3 are distributed as PUC distributions back to Parent.
The effect of doing the FA transfers at ACB rather than FMV is to reduce the basis reduction to Parent’s investments in Subco 2 and 3, which have other important assets. CRA ruled that s. 85(1)(e.2) (and s. 15(1)) would not apply, stating that it would not be reasonable to regard any part of the excess of the FMV of the transferred shares over their ACB "as a benefit that Subco 2 or Subco 3 desired to have conferred on a person related to [them]." This sounds right - as the prefs are vapourized, the cash is completely circled and Parent retains its 100% indirect ownership of the FAs. However, it took CRA three years to so conclude.
Neal Armstrong. Summary of 2014 Ruling 2011-0415811R3 under s. 85(1)(e.2).
CRA will apply GAAR to any future D&D cases
CRA, after noting that it failed to apply GAAR in D & D Livestock (which entailed "the double utilization of the same amount of safe income in order to reduce a capital gain realized on an ultimate disposition of shares"), stated that it "would not hesitate to invoke the GAAR in similar files." More generally, it will challenge planning resulting in "in an unjustified duplication of fiscal attributes."
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 20, 2014-0534671C6 F under s. 245(4).
Swirsky has not affected the CRA policy on interest deductibility
Notwithstanding, Swirsky CRA considers that there generally will be no interest deductibility on loans incurred to acquire common shares only where there is a "permanent" corporate policy of not paying dividends.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 1, 2014-0534811C6 F under s. 20(1)(c).
CRA finds that forgiveness of source deductions would occur on income account
CRA considered that in the unusual event of a settlement by it of an amount of unremitted source deductions of an incorporated business for less than the amount owing, this would give rise to s. 9 income to the extent of the forgiveness.
Although such amounts are similar to other accrued liabilities and trade payable arising out of current operations, this position is not necessarily correct given that the settlement would have occurred outside the "normal trading operations of the business" (Queenswood), and by the time of their settlement the unremitted amounts might represent "past due debt incurred in a preceding year") (Oxford Motors, cf. Alco).
Neal Armstrong. Summaries of 2012 Annual CTF Roundtable, Q. 8, 2012-0453381C6 under s. 9 – forgiveness of debt, s. 80(1) – forgiven amount, and s. 12(1)(x).
CRA confirms that a majority-interest beneficiary of a trust does not have to be a beneficiary
CRA has confirmed that a "majority-interest beneficiary" of a trust includes a person which is not itself a beneficiary, but is affiliated with an actual majority interest beneficiary.
Although not discussed, this would suggest, for example, that there will be a loss restriction event respecting a subsidiary unit trust of a REIT every time that another person becomes affiliated with the REIT, e.g., the REIT incorporates a real estate nominee (the exclusions in s. 251.2(3) are not much help) or, respecting a family trust, when a family member has the misfortune to wed or give birth (see s. 251.1(5)(a)(ii)).
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 3, 2014-0534841C6 F under s. 251.1(3) - majority-interest beneficiary.
Mathieu – Tax Court of Canada finds that non-arm’s length stock option surrender proceeds were non-taxable
Until the introduction of s. 7(1)(b.1), stock option proceeds received from surrendering stock options to a corporate employer with which the employee did not deal at arm’s length were not taxable under s. 7. Paris J has found that, given the "clear and unequivocal" language of s. 7(3)(a), they also were not taxable as a benefit under s. 6(1)(a).
The protestation in the Explanatory Notes that s. 7(1)(b.1) was enacted to "clarify" the existing law clearly was incorrect and (as usual) ignored.
Neal Armstrong. Summaries of Mathieu v. The Queen, 2014 TCC 207 under s. 7(3)(a), s. 251(2)(a), Statutory Interpretation – Specific v. general provisions, Interpretation Act, s. 45(2).
Income Tax Severed Letters 26 November 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.