News of Note

In 2004-0092561E5, CRA indicated that where Mr. X transfers common shares under s. 85 to the corporation in exchange for common and preferred shares of the corporation (in order to shift cost base over to the prefs), he will not have disposed of all of his common shares as he continues to have the same bundle of rights respecting common shares after this transaction.

CRA has now indicated that this position is not affected by the stipulation in the new Quebec Business Corporations Act that different classes of shares may have identical share provisions.  Accordingly, exchanging Class A common shares for Class B shares will not be considered to be a disposition if they have identical rights.

In light of the long-standing CRA position, it is common in s. 86 reorganization spin-off transactions for the "new" common shares issued on the s. 86 reorganization to have two votes per share.  See, for example, Fission and IMZ.

Neal Armstrong.  Summary of 11 October 2013 APFF Round Table Q. 13, 2013-0495821C6 F ("Subsection 85(1) and cost base isolation transactions") under s. 85(1).

Dividends paid by a mortgage investment corporation are deemed to be interest paid on a bond.  In CRA’s view, such deemed interest is "computed by reference" to income, profit, cash flow or other similar criteria described in the participating debt interest definition, so that such interest is subject to Part XIII tax.

This approach implicitly denigrates the role of the directors, who set dividends in their discretion rather than simply taking out their calculators to multiply the quarterly income by X%.

Neal Armstrong.  Summary of 2013 Refusal to Rule 2013-0475701R3 under s. 212(3) – participating debt interest.

To provide relief from the rule in s. 90(6), which potentially deems an income inclusion to a Canadian-resident taxpayer in respect of an upstream loan made by a foreign affiliate, s. 90(9) potentially allows a deduction under the s. 113 or 91(5) rules that would have been available if the upstream loan had instead been distributed as a dividend or a series of dividends to the taxpayer.

Ken Buttenham points out, among other observations, that it is unclear whether the 90-day look-back rule in Reg. 5901(2) (i.e., for back-dating year-end surplus balances to the time of the dividend) can be used for these purposes.

Neal Armstrong.  Summaries of Ken J. Buttenham, "Are you Ready for the Upstream Loan Rules?", Canadian Tax Journal, (2013) 61:3, 747-68, under ss. 90(6), 90(9) and 90(14).

A housing developer sought to avoid the requirement to charge GST, on the portion of the home sales prices that represented a recovery of municipal development levies, by inserting a clause in the sales agreements stating that the development levies had been (or would be) paid by it on behalf of the purchasers.  The Federal Court of Appeal has affirmed a finding by Woods J. that this did not work.  She had found that the clause was defectively drafted, so that the development levy on-charges were taxable.  Moreover, even a well drafted clause might not have done the trick given that the development levies often were paid in advance of the sales agreements (i.e., before the supposed principals had even been identified).

Neal Armstrong. Summaries of GF Partnership v. The Queen, 2013 TCC 53, aff’d 2013 FCA 260 under ETA ss. 153(1), 154(1), 254(6) and 296(2).