News of Note

A new corporation (the Taxpayer) was formed to acquire most of the remaining assets of a corporation (Lossco) that, together with its parent (Parentco) was in CCAA proceedings. It then continued to carry on that business in a similar manner, including hiring most of the employees and, in fact, hiring some more. Later, the Taxpayer acquired the shares of Lossco (which at that point had only nominal assets and no business or employees), and wound-up and dissolved Lossco. CRA ruled that s. 88(1.1) was generally available to flow through the Lossco non-capital losses (as reduced by some debt forgivenesses that had occurred under the CCAA court order) to the Taxpayer. The point may be that there is no requirement to receive significant assets, or perhaps no assets at all, on a s. 88(1) wind-up in order for the losses to flow through under s. 88(1.1).

CRA cast some shadows in 2018-0780041C6 on the standard practice of reducing the PUC of a Subco’s shares to a nominal amount before winding it up under s. 88(1), so as to avoid any potential gain under s. 88(1)(b) (e.g., where Parent acquired the net tax equity in Subco at a bargain price (for a low share ACB), avoiding a s. 88(1)(b) gain on wind-up through reducing PUC is considered by CRA to be abusive). Here, the proposed transactions specified that the PUC of the Lossco shares would be reduced immediately before its wind-up to an amount “not less than” the (modest) cost amount of the Lossco assets.

Neal Armstrong. Summary of 2021 Ruling 2020-0869161R3 under s. 88(1.1) and s. 88(1)(b).

Specified foreign property” for s. 233.3 reporting purposes includes intangible property situated, deposited, or held outside Canada that is not used or held exclusively in the course of carrying on an active business.

What is stored in a digital wallet is not the actual cryptocurrency but rather one or both of the owner’s public keys (akin to a bank account number) and private keys (akin to the PIN for that account). The situs of a private key is arguably what is most relevant to determining the cryptocurrency’s situs.

The situs of a cold wallet (i.e., a physical storage drive) is generally its physical location. For a hot wallet (i.e., a digital wallet connected to the internet), the primary server location used by the wallet provider “should be strongly determinative of situs.”

Reporting requirements are unclear if the taxpayer stores a private key in multiple locations at once, for example, where a document containing a private key is saved on a computer in Canada, and also in cloud storage in circumstance where it is difficult to ascertain the host server’s geographic location(s), e.g., for large providers whose server locations are often numerous or highly confidential. Similar uncertainty may exist where the owner uses multiple wallets, e.g., with one wallet stored in Canada, and another abroad.

Neal Armstrong. Summary of William Musani and Ashvin Singh, “Foreign Property Reporting: Where Is Your Crypto?” Tax for the Owner-Manager, Vol. 21, No. 4, October 2021, p. 6 under s. 233.3(1) – specified foreign property – (a).

Subject to exceptions, s. 26(3) of the Provincial Sales Tax Act (B.C.) deems the purchase price of a “taxable component” (namely “tangible personal property, software or a taxable service that would be subject to tax under this Act if purchased separately from other property or services”) to equal the fair market value of the taxable component. The BC Ministry of Finance has revised its Bulletin on Bundled Sales and Services to indicate that:

If, for a single price, you lease a taxable good together with an exempt good or real property, you must charge PST on the fair market value of the lease of the taxable good. …

It provides an example of a lease of a restaurant building with affixed machinery (beer tap equipment) and various furniture for a rent of $15,000 per month. Although a building lease is exempt, PST is required to be charged on what would be the FMV of a lease of the beer tap equipment and the furniture (of $2,500 and $1,000 per month, respectively). However, this requirement to bifurcate does not apply if “the right to use the goods is merely incidental to an agreement for the right to use real property.”

The concept of “incidental” is defined quite narrowly in PST 315.

Neal Armstrong. Summary of Bulletin PST 316 "Bundled Sales and Leases" under Other Legislation – BC – Provincial Sales Tax Act – s. 26(3).

CRA ruled that the gifting by a non-resident of Canada, who was a resident of a redacted country for purposes of Art. 4(1) of the Treaty with that country, would be exempted under Art. 13(6) of that Treaty on the gain realized by him on gifting to his non-resident children all the shares of a wholly-owned single-purpose non-resident holding company through which he held vacant land in Canada. The land was held for investment purposes and the holding company had no business. CRA also ruled that there would be no s. 116 withholding obligation provided that the children (who were all minors) filed the required notifications under s. 116(5.02), so that the Holdco shares would constitute treaty-exempt property under s. 116(6.1).

Apparently the Treaty in question did not include shares of a company - that was not a resident of Canada but held Canadian real estate - in its definition of real or immovable property.

Neal Armstrong. Summary of 2020 Ruling 2019-0801011R3 under Treaties – Income Tax Conventions – Art. 13 and s. 116(5.02).