News of Note
CRA refuses to condone mark-to-market accounting for trading liabilities of financial institutions
Email this ContentIt is understood that many financial institutions such as securities dealers and banks mark-to-market both the assets used in their core businesses and the related liabilities for income tax (as well as accounting) purposes, notwithstanding that the Act only specifically authorizes mark-to-market accounting for qualifying assets. This practice has been called into question by a recent technical interpretation. It indicates that it does not accord with the Act for financial institutions to recognize, on an accrual basis, gains or losses on liabilities due to fluctuations in interest rates, credit ratings or other adjustments. Although the CRA position could be technically correct, the result of applying this policy is that the income for tax purposes of a financial institution may not reflect that it is maintaining a largely hedged book in the sense that decreases in the value of its assets as a result of increasing interest rates will be largely matched by decreases in the value of its liabilities.
Neal Armstrong. Summarized under ITA s. 9 "computation of profit".
CRA finds that s. 98(5) is not available where a landlord partnership is wound-up into the tenant partner
CRA indicated in a French technical interpretation that the s. 98(5) rollover was not available where the wound-up partnership had been renting its sole property (a retirement residence) to the partner into which it was wound-up (because the rental activity ceased on the merger of tenant and landlord). This is another illustration that the s. 98(5) is available in a narrower set of circumstances than under s. 98(3).
Neal Armstrong. Summary under ITA s. 98(5).
Tax Court finds that GAAR did not apply to a surplus strip
McClarty, 2012 TCC 80, concerned transactions that had the effect of distributing assets of a family holding company to a family trust, and permitting that distribution to be realized by the trust as a capital gain rather than as a dividend - so that the property could then be distributed to the minor children without being subject to the "kiddie tax" under s. 120.4. Angers, J. found that none of the transactions were avoidance transactions under the general anti-avoidance rule because they all had a primary purpose of protecting assets from a potential suit. Not surprisingly, Angers J also found that the words "in any manner whatever" in s. 84(3) did not authorize CRA to treat preferred shares that in fact were redeemed in the hands of an affiliated corporation as if they had been redeemed in the hands of the family trust (which had owned those shares earlier in the series of transactions).
Scott Armstrong. Summary under ITA s. 245(3) and ITA s. 84(3).
CRA issues negative HST rulings on (a) contract-subcontract relationships between financial service providers and (b) the sale of a brokerage business
In a recent headquarters letter, CRA found that commissions earned by a "managing general agent" for agreeing with an insurance company to arrange for the sale of policies to individual policy holders did not qualify as an exempt financial service for HST purposes because the master agent dealt with the individuals clients through subcontractors (various insurance agents) rather than directly with the clients. Even more startling is that CRA found that where an insurance agent had sold its business to another agent, the deferred commissions which the purchaser now was entitled to receive became subject to HST because the purchaser itself was not the person who earned the commissions through the provision of financial services. Both interpretations do not make sense from a policy perspective (and are also questionable on technical grounds) and could have significant negative consequences for other financial service providers, such as mutual fund managers.
Neal Armstrong. Summary under ETA s. 123(1) - "financial service".