News of Note

A ruling released on Wednesday morning respecting the conversion of a mutual fund corporation (which at one point had been an ordinary taxable Canadian corporation) into a mutual fund trust through the utilization of an in-house s. 132.2 merger, essentially represents an amendment of a previously issued ruling, discussed in a previous post.  The amended ruling letter accommodates the elimination (through a further s. 107.4(3) transfer and s. 132.2 in-house merger) of a further subsidiary trust (Target) which had been acquired in the interim – as well as the elimination through the same techniques of a subtrust, in turn, of Target.

One point not mentioned in the previous post: a subsidiary LP of one of the subtrusts was to generate a loss which otherwise would have been extinguished, following its allocation to the subtrust, as a result of that subtrust being eliminated.  The ruling letter accommodates the capitalization of that loss through a s. 21 election, so that there is a stepped-up cost amount in the buildings received by the new public mutual fund trust.

Neal Armstrong.  Summaries of 2013 Ruling 2013-0488351R3 under s. 132.2 – qualifying merger and s. 21.

Although in common tax parlance one refers to land and building as distinct properties, at common law the improvements to land such as buildings form part of the land.  This often is not relevant as Reg. 1102(2) effectively deems depreciable property to be separate property from the land.

One place where this point is relevant is under Art. XIII, para. 9 of the Canada- U.S. Treaty, which potentially exempts part of the gain on the sale of real estate that has been held by a resident of the other country since before September 26, 1980.  In the example of recreational land in a common-law province on which a personal-use cottage building is erected after that date, the land and improvements will be considered to be one property, so that the portion of a subsequent gain of the U.S.-resident owner which can be partially exempted can include gain attributable to the building.  Also, only one s. 116 certificate would be required.

Neal Armstrong.  Summary of 4 December 2013 Memo 2013-0489051I7 under Treaties – Art. 13.

If a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), a dilemma arises: if a timely election under s. 184(3) is made to convert the dividend into a taxable dividend so as to eliminate the Part III tax, then that dividend cannot be converted back into a capital dividend if the objection to the Part III tax assessment ultimately is successful.  Contrary to an earlier position, CRA now is prepared to hold the processing of the s. 184(3) election in abeyance, so that it 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.

Neal Armstrong.  Summary of 4 December 2013 T.I. 2013-0504951E5 under s. 184(3).

A non-resident subsidiary (ForeignHoldco) of Canco will eliminate a non-interest-bearing loan previously made by it to Canco by declaring a dividend, paying the dividend by issuing a demand promissory note and then receiving the note from Canco in payment of the loan.  The only requested ruling was to the effect that dividends (including a liquidating dividend) previously received by ForeignHoldco from a Malaysian-resident subsidiary - whose income had been subject to Malaysian income tax at a rate of, at most, 3% on the basis that it was carrying on an offshore business activity in Labuan (an island which was a Malaysian federal territory) - qualified as an addition to ForeignHoldco’s exempt surplus in respect of that Labuan subsidiary.

Neal Armstrong.  Summary of 2013 Ruling 2013-0477871R3 under Reg. 5907(11.2).