News of Note
CRA finds that there is no source disappearance where an interest-free advance made to a wholly-owned corporation (and funded with borrowed money) is forgiven
Email this ContentThe sole shareholder of a CCPC uses borrowed funds to make an interest-free advance to the CCPC, and the CCPC then makes a proposal under the BIA, which is accepted by the creditors and entails the shareholder advance being cancelled. CRA considered that “the actual use of borrowed money, following the debt cancellation, continues to be for the purpose of investing in the shares of the corporation,” so that if “there is a reasonable expectation of deriving dividends,” the interest payable by the shareholder would continue to be deductible under general s. 20(1)(c)(i) principles without the need to resort to the s. 20.1(1) rule for source extinctions.
Neal Armstrong. Summary and translation of 2015-0588951C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 3.
CRA considers that shares acquired on stock option exercise must be disposed of in one transaction to avoid basis averaging
The s. 7(1.31) rule is intended to avoid basis averaging under s. 47 when executives exercise stock options and then immediately sell the acquired shares – so that they will not realize a capital gain even if they also held low-basis shares of the same company. This rule does not work if the executive, immediately after exercise, disposes of the acquired shares in two tranches, e.g., she donates some of them to a charity and transfers the balance to her personal holding company. The second disposition is tainted (i.e., the safe harbour in s. 7(1.31) is not available) because there was an intervening disposition of identical shares (i.e., the first disposition) following the exercise.
It is not clear whether feeding the acquired stock into the market over the course of a trading day but with settlement occurring in three days’ time essentially independent of the precise trading times, would be problematic.
Neal Armstrong. Summary and translation of 2015-0595841C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 2.
Critical illness policies can be transferred free of capital gains tax
A corporate owner of a critical illness insurance policy can transfer it free of capital gains tax as insurance policies are excluded from capital gains treatment and there is no provision explicitly taxing such a policy’s disposition.
Neal Armstrong. Summary and translation of 2015-0588941C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 1.
CRA notes that transfer adjustments to increase to sales prices (but not reduce purchases) increase gross revenue for Reg. 402 purposes
CRA considers that an upward adjustment under s. 247(2) to a Canadian resident’s sales proceeds – but not a downward adjustment to its purchase price for goods – increases its gross revenue for provincial income allocation purposes.
Neal Armstorng. Summary of 1 September 2015 Memo 2013-0507381I7 under Reg. 402(3).
CRA addresses the status of mutual funds with limited windows for unit redemption
Since 1991, CRA has had a policy of considering units of a trust to be redeemable on demand for purposes of the unit trust test in s. 108(2)(a) where a provincial securities commission policy treats the units as redeemable on demand for securities’ laws purposes – even where the securities legislation accepts a right to redeem only twice a year as satisfying this condition. It is not clear how useful this position is given that most or all REITs and income funds do qualify as mutual funds for securities law purposes and, therefore, are not able to qualify as mutual funds whose units are redeemable on demand for such purposes.
Neal Armstrong. Summary of 16 November 2015 T.I. 2015-0595041E5 under s. 108(2)(a).
Income Tax Severed Letters 16 December 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Effective January 1, 2016, Appeals files will be sent back to Audit if information requested by Audit is now provided
Points on the Appeals process made by Anne-Marie Levesque, Assistant Commissioner, Appeals at the Annual CTF Conference include:
Q.3: CRA has changed its practice so that an appeals officer can consider a request for interest or penalty relief at the same time as considering the objection – but only a decision letter will be given at that stage so as to not invalidate the objection.
Q.4: Effective January 1, 2016, if an appeals officer is provided with information which had been requested by but not provided to the auditor, the appeals officer will be required to send the file back to the auditor for review of the additional information to determine whether it changes the initial audit determination.
Q.5: There have been quite a number of cases where the appeals officer has disagreed with a valuation report, and asked for another valuation, or overturned the reassessment. Appeals also has overturned reassessments notwithstanding a GAAR Committee recommendation to apply the GAAR (so that it is worthwhile making submissions to Appeals to overturn a GAR Committee adverse opinion) – and, conversely, Appeals can raise the GAAR even if Audit did not raise it. Appeals does not go through the GAAR Committee, and can apply the GAAR on its own.
Neal Armstrong. Answers of Anne-Marie Levesque, Assistant Commissioner on Appeals Procedures.
CIBC – Tax Court of Canada responds favourably to the dilemma of asserting that a damages payment was legally necessary without waiving privilege for the legal advice on that point
Issues in the appeal of CIBC respecting whether it could deduct the Cdn.$2.9 billion it paid to settle the Enron-related actions against it included whether the settlement amount should have been reimbursed to it by subsidiaries whose conduct may have been the primary basis for the actions.
Rossiter CJ rejected arguments that CIBC had waived solicitor-client privilege by putting its legal knowledge in issue including its position that “its most significant Enron-related liability exposure for the entire CIBC group of entities was created by the parent bank’s (CIBC’s) own conduct, and…not that of its subsidiaries or affiliates,” stating that merely indicating that legal advice informed its position did “not amount to putting its reliance on legal advice in issue in these appeals.” Moreover, the voluntary disclosure by CIBC of some privileged documents did not amount to waiver of the remainder of the privileged communications as the Crown had not shown that such disclosures were misleading in any way.
However, the report of a consultant hired in the Enron litigation by U.S. counsel to advise on damages and related strategy was not privileged, and numerous documents prepared in connection with the Enron litigation were no longer covered by litigation privilege, as the Enron litigation was finished, and it was quite different from the current tax litigation.
Large numbers of Crown discovery requests which CIBC tried to reject on the grounds of irrelevancy were accepted. Rossiter CJ stated:
This particular motion seems in large part to be the result of obstruction by CIBC...[which] I...do not believe...is the proper way to litigate, and there are certainly consequences to that strategy that the Court should and will consider.
Neal Armstrong Summaries of CIBC v. The Queen, 2015 TCC 280, under s. 232(1) – solicitor-client privilege, Tax Court Rules 82(2), 84, 95(1), 86(1).
CRA considers that psychotherapy services are not GST-exempt
Supplies of various listed regulated health care services by “practitioners” are exempted from GST. CRA accepts that a regulated Traditional Chinese Medicine practitioner qualifies as a practitioner for these purposes. However, supplies of psychotherapy services by someone who qualifies only as a psychotherapist are not exempted.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 97 under ETA, Sched. V, Pt. II, s. 1 – practitioner, s. 7, Sched. VI, Pt. I, s. 2, Pt. II, s. 37, ETA s. 225.2(2).
684761 B.C. Ltd. – Tax Court of Canada confirms CRA’s ability to issue additional assessments without voiding previous reassessments
CRA reassessed the taxpayer within the normal reassessment period, and then issued a “Notice of Additional Assessment” assessing penalties under ss. 163(1) and (2) beyond the normal reassessment period. The taxpayer argued that CRA had inappropriately “bifurcated one assessment process into two distinct products” - and the additional assessment was in substance a reassessment so that it displaced the previous reassessment. In rejecting this submission, Rip J noted that the subsequent assessment was indeed an additional assessment, and rather than being esoteric, it was one of the tools available to CRA.
Neal Armstrong. Summary of 684761 B.C. Ltd. v. The Queen, 2015 TCC 288, under s. 152(4).