News of Note
Income Tax Severed Letters 15 December 2021
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
6610048 Canada – Federal Court of Appeal confirms that a quick exit from a development project at a gain was on income account
The taxpayer acquired an assembly of lots between 2006 and 2008 for development as a mixed use (commercial and residential) project close to a proposed train station that would link the site (in the downtown of the City of Masouche) by train to Montreal. The Court found no reversible error in the Tax Court judgment confirming that gains (realized mostly in 2009) from various dispositions of the lots, before construction had commenced, were on income account. LeBlanc JA stated:
[T]he TCC scrupulously followed the approach … required of it under Safeway. In particular, it concluded from the evidence before it that the appellant's sole motivation at the time of the acquisition of the land in question was clearly to resell it at a profit, noting in this regard that the appellant had never intended to carry out the development project desired by the City of Mascouche. …
[T]he lands in question … were located in close proximity to the future train station … [and] the City of Mascouche had undertaken, in order to facilitate the implementation of the development project on the axis of such station, to modify its urban plan and by-laws, to achieve, before the end of 2007, free circulation on the land and to complete certain infrastructure work. All of this, in the opinion of the TCC, made it objectively foreseeable that the value of the land would increase significantly and rapidly.
Finally, the principals had a real estate development background and the project entailed significant risks (which the taxpayer reduced by exiting early at a gain.)
This case may solidify the reputation of Safeway as being the leading case in the area.
Neal Armstrong. Summary of 6610048 Canada Inc. v. The Queen, 2021 CAF 229 under s. 9 – capital gain v. profit – real estate.
Boeckh - Court of Quebec finds that an investment company focused on capital gains was a trader or dealer for s. 39(5)(a) purposes
Boeckh was a closely-held investment company whose portfolio (of over $100 million for many of the years at issue) was focused on Canadian public companies in the resource and high tech sectors. In finding that an election that Boeckh had made under the Quebec equivalent of s. 39(4) was ineffective by virtue of the exclusion for a trader or dealer in securities, so that its stock market gains were on income account, Riverin JCQ found that:
- A qualified investment professional (an experienced CFA) devoted himself full-time to managing Boeckh’s portfolio;
- The portfolio had what he considered to be a high turnover (of around 30%, with the percentage of securities held for over two years, ranging from 31% to 45%, and those held for over five years ranging from 14% to 24%).
- Boeckh’s objective was to generate gains rather than dividends, and focused on companies with a high potential for appreciation.
In other words, Boeckh managed its portfolio like a typical mutual fund. Note that the s. 39(4) election is not available to mutual funds regarding their non-Canadian portfolios.
Neal Armstrong. Summary of Investissement Boeckh Inc. v. ARQ, Nos. 500-80-033896-169, 500-80-035759-175 under s. 39(5)(a).
Two CRA challenges to cross-border hybrid arrangements are at the Tax Court stage
Alexandra MacLean noted that a number of files in the CRA project on cross-border hybrid mismatches have reached the notice of objection stage, two cases are at the Tax Court stage already, and some files have been resolved through audit agreements.
Neal Armstrong. Summary of Alexandra MacLean on Hybrid Mismatch Rules, 25 November 2021 CTF Panel.
We have published 11 more translations of CRA interpretations
We have published a translation of a ruling released by CRA last week and a further 10 translations of CRA interpretation released in March and February, 2006. Their descriptors and links appear below.
These are additions to our set of 1,849 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 15 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2021-12-08 | 2020 Ruling 2020-0844081R3 F - Rollout of property to beneficiaries | Income Tax Act - 101-110 - Section 107 - Subsection 107(2) | s. 107(2) applicable to distribution of trust’s shares to beneficiaries followed by an immediate s. 85(1) roll into holdco controlled by father |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(4) | a trust should distribute shares of an Amalco whose predecessor had received shares as beneficiary of another discretionary family trust before the latter’s 21-year anniversary | ||
| 2006-03-17 | 3 March 2006 Internal T.I. 2005-0151871I7 F - Déduction des intérêts | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) | notes issued to replace notes issued to pay dividends did not qualify as refinancing borrowed money under s. 20(3) or as being for the acquisition of property per s. 20(1)(c)(ii)subsequently confirmed in 2006-0182321I7 F |
| 13 February 2006 External T.I. 2005-0153561E5 F - Aggregate Investment Income | Income Tax Act - Section 129 - Subsection 129(4) - Aggregate Investment Income - Paragraph (b) - Subparagraph (b)(iv) | rental income allocated by a unit trust could be active business income | |
| 2006-03-03 | 15 February 2006 External T.I. 2005-0126831E5 F - 120.4(1) - définition : montant exclu | Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (a) | para. (a) exclusion does not apply to substituted property |
| Income Tax Act - Section 248 - Subsection 248(5) | phrase “substituted property” must be used to engage s. 248(5) | ||
| 1 February 2006 External T.I. 2005-0142411E5 F - Don entre vifs - bien agricole admissible | Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) | words of transfer not determinative as to whether there is a gift or sale for nominal consideration | |
| 17 February 2006 External T.I. 2005-0153931E5 F - Primes d'installation médecins | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) | signing bonuses to medical practitioners to establish in remote areas are taxable | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | signing bonuses to medical practitioners to locate in remote areas are a taxable benefit | ||
| 2006-02-17 | 2 February 2006 External T.I. 2005-0152871E5 F - Crédit d'impôt pour emploi à l'étranger | Income Tax Act - Section 122.3 - Subsection 122.3(1) - Paragraph 122.3(1)(a) | partial funding under Reg. 3400 international development assistance program precludes credit |
| 7 February 2006 External T.I. 2005-0122381E5 F - Consequential assessment | Income Tax Act - Section 152 - Subsection 152(4.3) | taxpayer following a redetermination to allow a loss for Year 1 can carry that loss forward to a statute-barred year pursuant to s. 152(4.3) | |
| 2 February 2006 External T.I. 2005-0127351E5 F - Fiducie révocable -Prêt authentique | Income Tax Act - Section 75 - Subsection 75(2) | exception for bona fide loans/trustee may guarantee a loan | |
| 2006-02-10 | 2 February 2006 External T.I. 2005-0111911E5 F - Participation indivise dans un immeuble-fiducie | Income Tax Act - Section 70 - Subsection 70(5) | grant under will of usufruct and bare ownership to surviving spouse and children, respectively, resulted in a deemed s. 70(5) disposition to a testamentary trust |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) | grant under will of usufruct in 2-unit property to surviving spouse constituted a disposition to a testamentary trust which could make the (c.1) designation for the home unit | ||
| 2 February 2006 External T.I. 2005-0152431E5 F - Utilization of non-capital losses | Income Tax Act - Section 69 - Subsection 69(11) | s. 69(11) would not apply where losses are applied against services income of Amalco | |
| Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(a) - Subparagraph 256(7)(a)(i) | s. 256(7)(a)(i) applicable where sister transfers Lossco to Profitco owned equally by her and three siblings |
CRA warns that a trust should distribute shares of an Amalco whose predecessor had received shares as beneficiary of another discretionary family trust before the latter’s 21-year anniversary
CRA ruled that s. 107(2) would apply to the distribution of the shares of two CCPCs (Zco, a holding company, and Xco, an investment company) by a discretionary family trust (Trust 2) to its beneficiaries, who were father (Mr. A), mother (Ms. A) and the two children – following which the shares of Mr. A and of the children would be transferred on a s. 85(1) rollover basis into a holding company controlled by Mr. A.
Zco was the result of an amalgamation between it and a subsidiary (Yco), whose shares Zco had received under s. 107(2) in its capacity of beneficiary of another discretionary family trust (Trust 1). After issuing its s. 107(2) ruling regarding the distribution by Trust 2, CRA issued a caution that s. 245(2) could be applied to deem s. 104(4) (the 21-year deemed realization rule) to be applicable to Trust 2 if the distribution by it of its Zco shares did not occur before the 21st anniversary of the settlement of Trust 1.
Neal Armstrong. Summary of 2020 Ruling 2020-0844081R3 F under s. 107(2).
Finance anticipates an increased engagement with stakeholders on Pillars 1 and 2
At the CTF Annual Conference the comments of Shawn Porter included some general comments on the OECD Pillars project. He acknowledged that there was a significant amount still to do (and thus implicitly acknowledged a “risk” that the project might not succeed), and also noted uncertainty as to how the revenue impacts will be distributed among countries - not only the impact of open design issues and the use of accounting data, but hard-to-predict behavioural responses of the multinational firms and by countries.
He anticipated that the impetus and need for engagement with stakeholders will pick up soon as rules are released, more details become available and everyone works their way through the implementation period.
Perhaps what was most interesting (regarding other projects) was what he did not say. He said nothing regarding the Budget interest deductibility and hybrid initiatives, otherwise than to acknowledge that these, along with other measures, were to have been released in the summer (which, looking out the window, seems to have passed), and stated that “I do not have any news to announce today on any of these items.” Are these projects on hold, or merely on a slow track?
Neal Armstrong. 25 November 2021 CTF Conference - Finance Update.
Following Agnico-Eagle, CRA is reviewing whether the conversion of conventional convertible debentures gives rise to s. 214(7) interest
At the May 2009 IFA Roundtable, CRA stated that, where there is a conversion of a traditional convertible debenture by its original holder for common shares of the capital stock of the issuer, there would generally be no excess under s. 214(7). However, the Agnico-Eagle decision has forced a CRA review of its position, which has not yet been completed.
However, CRA continues to consider that the deemed payment of interest on convertible debentures under s. 214(7) arising on their transfer by a non-resident to an arm’s length resident does not generally constitute participating debt interest.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.16 under s. 212(3) - participating debt interest.
Income Tax Severed Letters 8 December 2021
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
In light of the current-use test, borrowed money used to acquire shares that were not excluded property could satisfy s. 95(2)(a)(ii)(D)
FA Finco (a foreign affiliate of Canadian Parent) lends to FA Holdco (a Delaware subsidiary of Canadian Parent), which uses the borrowed money to acquire all of the shares of FA Target, which are not excluded property. FA Target is merged into FA Opco (wholly-owned by FA Holdco), so that FA Holdco receives shares of the merged corporation (Mergeco), replacing its shares of FA Target and FA Opco. After the merger, substantially all of the property of Mergeco is excluded property.
Is the interest on the loan recharacterized under s. 95(2)(a)(ii)(D) as active business income? The focus of the query was on s. 95(2)(a)(ii)(D)(I), which requires that such interest be payable “under a legal obligation to pay interest on borrowed money used for the purpose of earning income from property.” CRA indicated that the current use test established under s. 20(1)(c) was relevant in this context – and that, under this test, there was a reasonable argument that the current use of borrowed money was linked to the Mergeco shares and that, to the extent that there was a reasonable expectation that FA Holdco would receive dividends on those shares, the use test would be met after the merger.
An additional requirement under s. 95(2)(a)(ii)(D)(III) is that the property referenced under the current use test in s. 95(2)(a)(ii)(D)(I) is excluded property. Although CRA was not asked about this, it did not challenge the proposition that this test could be satisfied post-merger by the Mergeco shares even though the shares acquired with the borrowed money were not excluded property (presumably FA Target was small relative to FA Opco).
Neal Armstrong. Summaries of 25 November 2021 CTF Roundtable, Q.15 under s. 95(2)(a)(ii)(D)(I) and s. 95(2)(a)(ii)(B).