News of Note
CRA indicates that share redemptions can qualify as PUC distributions under the PUC reinstatement rule in the foreign affiliate dumping rules
Email this ContentCRA has indicated that a share redemption by a CRIC (or qualifying substitute corporation) will be considered to be a distribution or reduction of paid-up capital by the CRIC for purposes of the PUC reinstatement rule in s. 212.3(9)(c). However, it often will be preferable for the CRIC to effect a distribution of the subject shares or proceeds, rather than using such property to redeem its shares, given that only part of a PUC increase under s. 212.3(9) may reduce the deemed dividend arising on a share redemption. See Example 9-A.
Neal Armstrong. Summary of 23 May 2013 IFA Round Table, Q. 6(b) under s. 212.3(9).
CRA indicates that a dividend substitution election does not require a QSC
CRA has indicated that a s. 212.3(3) dividend substitution election can be made by a corporation resident in Canada (CRIC) under the foreign affiliate dumping rules even if there is no qualifying substitute corporation in the group. This means that even in these circumstances, the election may be used to determine which non-resident corporation received the s. 212.3(2) dividend from the CRIC, or which class of shares such dividend was paid on; and also can avoid a requirement to trace PUC to the non-resident investment. See Example 3-B.
Neal Armstrong. Summary of 23 May 2013 IFA Round Table, Q. 6(h) under s. 212.3(3).
2013 IFA Round Table
We are providing a summary of the CRA responses to questions posed to them at the 2013 IFA conference
We caution that we had difficulty making out some of the responses. CRA stated that it would be providing its full written comments in about three weeks' time.
Daishowa - Supreme Court finds that assuming an obligation on a property is not consideration if the obligation is "embedded" in the property
The taxpayer held forest tenures, which under Alberta law were subject to reforestation obligations. When the taxpayer sold the tenures and transferred the reforestation obligations, the Minister included the purchaser's assumption of those obligations in the taxpayer's proceeds of disposition - essentially treating the assumption of reforestation obligations in the same way as an assumption of a mortgage encumbrance.
The Supreme Court found that the reforestation obligations were embedded in the forest tenures, given that Alberta's statutory regime made it impossible to transfer the forest tenures without the reforestation obligations, or vice-versa. Therefore, the reforestation obligations were an intrinsic factor that reduced the purchase value of the tenures rather than a "distinct existing liability" that a purchaser could assume as part of the consideration it paid - i.e. more like anticipated future repairs on a property rather than a mortgage encumbrance.
Scott Armstrong. Summary of Daishowa-Marubeni International Ltd. v. The Queen, 2013 SCC 29, under s. 13(21).
Income Tax Severed Letters 22 May 2013
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A functional currency conversion of a Canadian taxpayer to the U.S. dollar and then back again generally will change the amount of its non-capital losses
A taxpayer elected to have the U.S. dollar as its functional currency for its 2009 calendar taxation year and revoked that election for its 2011 taxation year. The U.S. dollar appreciated from 1.1 loonies on December 31, 2008 to 1.2 loonies on December 31, 2010.
If you applied common sense and expected that a non-capital loss of Cdn. $1,200 incurred by the taxpayer in 2008 would still be a non-capital loss of that amount (if not already utilized) when the taxpayer converted back to Canadian dollars, you would be wrong. Due to the appreciation of the U.S. dollar, that non-capital loss would now be Cdn. $1,309.
Neal Armstrong. Summaries of 13 February 2013 2011-0430921E5 F under ss. 262(12) and 261(15).
CRA notes that generally no terminal loss is available on the disposition of property of a class both to an affiliated and unaffiliated person
CRA was asked whether, in the situation where all the properties in a depreciable class were disposed of both to an affiliated and unaffiliated person, a terminal loss could be triggered by ordering the dispositions so that the dispositions to the unaffiliated person occurred second.
No! CRA indicated that even if the dispositions are so ordered, the notional depreciable properties which arise under s. 13(21.2)(e)(iii) based on an accrued terminal loss on the disposition of properties to the affiliated person, are deemed to be part of the same class as the properties which were disposed of to the unaffiliated person. Accordingly, the requirement that there be no properties left in the class at the end of the year in order to claim a terminal loss, generally would not be satisfied.
Neal Armstrong. Summaries of 11 March 2013 T.I. 2012-469231E5 F under ss. 13(21.2) and 13(21.1).
CRA finds that an interest-free loan made outside a corporate group did not give rise to an imputed income benefit
CRA has found that the making of an interest-free loan by a Canadian corporation (owned by a discretionary trust) to another Canadian corporation (owned by the individual who was the sole trustee and a beneficiary of that trust) did not give rise to any taxable benefits. CRA appears to accept the reasoning in Cooper that if there is no imputed interest under a specific provision such as s. 80.4, income should not be imputed under the more general conferral-of-benefit provisions.
Neal Armstrong. Summaries of 12 December 2012 Memorandum 2012-0464411I7 under ss. 246(1) and 20(1)(e).
Intra-group loss shifting transactions for FTC utilization purposes were not abusive
CRA found that using somewhat conventional intra-group loss-shifting techniques in order for a Canadian corporation to generate additional income so as to fully claim foreign tax credits (and generate non-capital losses in its Canadian subsidiaries who did not have a foreign tax credit problem) was not abusive. CRA also noted that its GAAR analysis on loss-shifting transactions was that "since we would normally allow for such losses to be utilized under an amalgamation, two entities who choose not to amalgamate for business reasons, should not be disadvantaged."
Neal Armstrong. Summaries of 18 December 2012 Memorandum 2012-0461651I7 under ss. 111(1)(a) and 110.5.
Humber College - Tax Court finds that it was absurd not to allow a college to apply its GST rebate retroactively
Humber College was late in reporting the GST payable by it on the purchase of several properties, and in claiming the related 67% rebate. The Minister charged interest from the filing deadline, but only applied the rebate from Humber's actual filing date. If Humber had not filed for the rebate but waited instead for the Minister's assessment, s. 296(2.1) of the ETA would have compelled the Minister to apply the rebate as of the filing deadline.
C Miller J found that this basing of the interest calculations on the gross GST owing, rather than the net amount after rebate, contradicted the "inescapable conclusion that subsection 296(2.1) of the Act simply presumes the college applying for the rebate would naturally have the retroactive treatment." Accordingly, Humber's approach, of retroactively netting the rebate for interest computation purposes, worked.
S. 296(2.1), respecting the deduction of available rebates on CRA assessments, is similar to s. 296(2), respecting the deduction of available input tax credits on CRA assessments. However, Paquin found that in a late-filed return situation, ITCs did not reduce interest charges until the time they actually were claimed. C Miller J distinguished Paquin on the basis that, unlike rebates, "ITC’s are not inextricably linked to the transaction giving rise to the GST." In other words, the right to the rebate (which effectively is like a rate reduction) is somewhat automatic, whereas potentially difficult conditions must be satisfied in order to earn ITCs.
Neal Armstrong. Summaries of Humber College Institute of Technology & Advanced Learning v. The Queen, 2013 TCC 146 under ETA ss. 280(1) and 296(2.1).