News of Note
Income Tax Severed Letters 6 November 2013
Email this ContentThis morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA treats bitcoins as securities rather than commodities for capital v. income account purposes
CRA has issued a Press Release stating that its positions in IT-490 on Barter Transactions and in IT-479R on Transactions in Securities apply to transactions in digital currency such as bitcoins.
Neal Armstrong. Summaries of 5 November 2013 CRA Press Release "What you should know about digital currency" under s. 9 – Capital gain v. profit - Commodities, and commodities futures and derivatives, and s. 9 – Computation of profit.
Mast - Tax Court finds that being required to repay at least 50% of the loan principal over the 10-year term, with the balance on maturity, did not represent bona fide repayment arrangements
S. 15(2.4) excludes various types of loans made to employees from the shareholder loan rule in s. 15(2). However, s. 15(2.4)(e) provides that this exemption does not apply if the loan was not received because of the employee's (or a spouse's) employment.
In finding that a $1 million interest-free loan received by the sole shareholder and principal employee of a corporation was received by him qua shareholder rather than employee, Angers J adopted a requirement in 2011-0406271E5 (similar to IT-119R4, para. 11) that the taxpayer establish that a loan might be made on similar terms to a non-shareholding employee. This was not established here as, among other things, it was an unsecured loan representing a substantial portion of the corporation's retained earnings. The reasons do not indicate any appreciation for the notion that a corporation may make a loan to an individual who is its critical and key employee on very favourable terms as an employment incentive.
There is a disturbing finding that there were no bona fide repayment arrangements as required by s. 15(2.4)(f) notwithstanding that the taxpayer was required to pay back a minimum of $50,000 of principal a year (i.e., faster amortization than most housing loans) and the term was 10 years. Given the similarity of s. 15(2.4)(f) to other provisions, this has broader implications
Neal Armstrong. Summary of Mast v. The Queen, 2013 TCC 309 under s. 15(2.4).
Ross – Tax Court finds that untruthfulness on audit may not matter for statute-barring purposes
If you file a return honestly on the basis of the information available to you at the time, but you are untruthful to CRA on a subsequent audit when you become aware of a problem, can CRA now reassess that return (which otherwise is statute-barred) on the basis that such reassessment "can reasonably be regarded as relating to …any misrepresentation made by the taxpayer…that is attributable to neglect, carelessness or willful default or any fraud…in filing the return or supplying any information under this Act." Bocock J’s reasoning would appear to suggest that your misrepresentation "reasonably related to a period subsequent," rather than to the return-filing year, so that the year cannot be opened up.
Ross concerned the registration of a flimsy pension plan rather than the filing of a return, so that it related only to the branches of ss. 152(4)(a)(i) and (4.01) respecting misrepresentations in "supplying any information under the Act" rather than in filing returns. In obiter dicta, Bocock J boldly went one step further and stated that "the Minister would not be entitled to reassess outside the normal period under paragraph 152(4) where the taxpayers' only misrepresentations were made outside the returns and occurred solely in supplying information under the Act." This will be controversial.
Neal Armstrong. Summaries of Ross v. The Queen, 2013 TCC 333 under ss. 152(4.01), 152(4)(a)(i) and Reg. 8502(a).
Hochschild Mining plc will use a Canadian Buyco to acquire IMZ following a s. 86 spin-off of IMZ's non-targeted assets
Hochschild Mining plc, a UK-listed Latin American miner with 60% ownership of a Peruvian joint-venture company, is interested in the 40% minority stake held by TSX-listed International Minerals Corporation but not in its Nevadan gold assets. IMZ will transfer its Nevadan assets to a wholly-owned Newco subsidiary (Chaparral Gold) and spin-out Chaparral Gold to its shareholders under a s. 86 reorganization. As part of the same Yukon plan of arrangement, a wholly-owned Canadian Buyco subsidiary of Hochschild will acquire all the IMZ shares for cash.
This transaction is consistent with a recent tendency to spin-out subsidiaries on s. 86 reorgs (see Fission/Alpha Minerals, Resverlogix/RVX Therapeutics, C&C/Platino, Erdene/Advanced Primary Materials and CTF/FleetCor) rather than s. 84(2) distributions, and a preference of some foreign purchasers to use Canadian Buycos even in the face of the foreign affiliate dumping rules (see IMIC/Afferro, Serabi/Kenai and Coeur d'Alene/Orko). The RRSP disclosure notes that if Chaparral Gold satisfied the public corporation conditions as late as six months after its first taxation year, it could retroactively elect to be a public corporation from inception.
It is not expected that the spin-off of Chaparral Gold will qualify for US tax purposes as a Code s. 355 tax-free spin-off. Instead, the plan of arrangement will be treated as a single integrated transaction resulting in a capital gain or loss to US shareholders.
Neal Armstrong and Abe Leitner. Summary of Circular of International Minerals Corporation under Spin-offs - S. 86 reorganization spin-offs.
Alpha Minerals and Fission Uranium merger of equals uses two simultaneous plans of arrangement, and nominal cash to avoid automatic rollover treatment
Alpha Minerals and Fission Uranium will each distribute newly-organized junior exploration companies to their respective TSXV shareholders under separate (ABCA and CBCA) Plans of Arrangement using s. 86 reorganizations. The Alpha shares will then be transferred to Fission under the Alpha Plan of Arrangement in consideration for Fission shares and nominal cash, resulting in Fission being owned approximately 49.3% and 47.9% by the former Alpha and Fission shareholders, and 2.8% by some new Alpha (flow-through share) investors.
The use of nominal cash to bust the s. 85.1 rollover is becoming more common, for example, in the Loblaw acquisition of Shoppers Drug Mart.
Eligible electing Alpha shareholders will complete s. 85 elections using the proposed Fission web-based system. Oh brave new world that has such features in’t!
Neal Armstrong. Summary of Alpha Minerals and Fission Uranium Circulars under Mergers & Acquisitions - Mergers – Shares for Shares and Nominal Cash.
D & D Livestock – Tax Court finds that stock dividends could be used to double-up on safe income
The safe income on hand (SIOH) of the holding company (HLL) for the taxpayer in respect of its shares of the taxpayer included safe income of $1.0M earned directly by the taxpayer and a further $0.5M earned in respect of a 50% shareholding (RTI shares) held by a subsidiary of the taxpayer (Newco 3).
A stock dividend of $1.5M paid by the taxpayer to HLL reduced such SIOH of HLL to nil. However, the taxpayer successfully argued that this stock dividend did not reduce its SIOH in respect of its shares of Newco 3. Accordingly, it could (and did) receive a further stock dividend of $0.5M from Newco 3 free of capital gains tax under s. 55(2).
Through other transactions (relying on ss. 85(1)((g) and (h)) the basis bump from the two stock dividends was combined in the ACB of the shares, held by a successor of HLL, in a replacement holding company for the RTI shares (Newco 2), so that on a sale of Newco 2 to a 3rd-party purchaser, the $0.5M safe income generated in respect of RTI effectively could be double-counted.
In other words, since the 1st stock dividend did not reduce the taxpayer’s SIOH in respect of its indirect investment in RTI, it effectively was able to use that SIOH a 2nd time to reduce a capital gain on a 3rd–party sale.
Neal Armstrong. Summary of D & D Livestock Ltd. v. The Queen, 2013 TCC 318 under s. 55(2).
Marret Resource adds requirement for annual redemption offer to its common share provisions
Marret Resource Corp., which is a TSX-listed public corporation engaged in lending to resource companies (and which does not appear to be a mutual fund corporation), is proposing to amend its articles to provide for an "annual liquidity right," i.e., an annual offer to redeem its common shares at a discount to NAV (assuming they are trading at least a 3% discount to NAV). It’s rather like building a requirement for the making of periodic issuer bids into the articles.
The tax disclosure does not suggest any taxable preferred share issues, nor indicate that redemptions would give rise to deemed dividends. The issued share capital in the financial statements suggests that the shares’ paid-up capital may also be higher than the current trading price.
Neal Armstrong. Summary of Circular of Marret Resource Corp. for addition of annual redemption feature to its common shares under Other – Liquidity Program.
The interest imputation rule in s. 80.4(1) trumps the general employee benefit rule in s. 6(1)(a)
Charging interest on credit card balances of bank employees at a lower rates than for regular card holders but at higher than the prescribed rate (currently 2%) does not result in a taxable benefit. CRA considers that the s. 80.4(1) rule, which does not impute income to the employees given the low prescribed rate, trumps s. 6(1)(a), which otherwise would recognize a benefit based on the interest rate differential between employee and regular credit cards.
Scott Armstrong. Summary of 6 September 2013 T.I. 2012-0463501E5 ("Reduced Interest Rate Credit Cards") under s. 6(1)(a).
A retroactive deemed disposition gives rise to a retroactive s. 116 filing requirement
You are a non-resident who converted your Canadian recreational property to rental use in Year 1, and elected under s. 45(2) for there to be no change-of-use deemed disposition. In your return for Year 3, you revoke the election so that you are deemed to have disposed of the property at fair market value on January 1 of Year 3.
CRA considers that the deadline for you to apply for a s. 116 certificate is January 11 of Year 3. Given that you did not make this deadline, this presumably means that you are liable to remit 25% of the property’s FMV to the fisc.
Neal Armstrong. Summary of 25 September 2013 T.I. 2013-0485751E5 F ("Rescinding 45(2) election by a non-resident") under s. 116(3).