News of Note
CRA rules on a s. 55(3)(a) spin-off that includes a s. 86 exchange of identical shares
Email this ContentCRA ruled on the s. 55(3)(a) spin-off by DC (held by three siblings through holding companies and, in turn, holding three Opcos as well as three Landcos, one of them 50% owned by a third party) of the three Landcos to newly-formed TC held by the same holding companies. This ruling letter departed somewhat from the expected.
First, although no s. 86 ruling was given, the letter described a preliminary s. 86 reorganization to create the DC special shares that could then be transferred on a s. 85(1) rollover basis by the Holdcos to TC. The s. 86 reorganization entailed an exchange of the old common shares (and old special shares) for “new” common shares and the new special shares, with the new common shares apparently having the same attributes as the old common shares. For s. 86 to apply, all the old shares must be disposed of. CRA has indicated (e.g., in 2013-0495821C6 and 2004-0092561E5) that there has been no disposition if the “new” common shares have the same attributes as the old. Accordingly, it is common for there to be some change in the share attributes, e.g., amending the old shares immediately before the exchange so that they have two votes per share (2014-0558831R3) or according the new shares an explicit right to receive quarterly financial statements (2013-0491651R3). Is this sort of thing now unnecessary?
Second, there is a representation, that:
TC does not intend to sell or otherwise transfer any of the assets it will receive in the course of the Proposed Transactions.
This does not appear to be a requirement for a s. 55(3)(a) spin-off. Was this offered up by the taxpayer, or did Rulings insist on it?
Neal Armstrong. Summary of 2020 Ruling 2020-0854401R3 under s. 55(3)(a).
CRA indicates that the adoption of IFRS 9 means that loan impairment amounts for ITA and GAAP purposes will differ
In essence, the s. 20(1)(l) reserve for doubtful loans for a money-lending business of a financial institution takes into account, as a key component, 90% of the reserve or allowance for impairment determined in accordance with GAAP. IFRS 9, which replaced IAS 39 effective after 2018, introduced an “expected credit loss” (ECL) framework for the recognition by financial institutions of credit losses, which are determined as the sum of the amounts determined under the following three stages:
- Stage 1: An allowance to recognize ECLs resulting from default events that are possible within 12 months from when a loan is originated or purchased as well as existing loans with no significant increase in credit risk since initial recognition.
- Stage 2: An allowance to recognize ECLs for loans for which there have been significant increases in credit risk since initial recognition and the credit risk is not considered low.
- Stage 3: An allowance for credit-impaired loans where events have occurred to cause impairment.
CRA stated:
In order to determine the amount of an impaired loan reserve that may be deductible by a financial institution the Act requires that each loan must be specifically identified as being impaired and that impairment must be measurable on a loan by loan basis. A reserve set up to provide for possible loan losses with no evidence of impairment would be a reserve for a contingency, and subject to the prohibition in paragraph 18(1)(e) … .
Thus, CRA considers that the IFRS 9 approach starts recognizing a loss at too early a stage rather than measuring impairment on a loan by loan basis.
Neal Armstrong. Summary of 19 July 2021 External T.I. 2020-0869172E5 under s. 20(1)(l)(ii)(D).
CRA finds that a sale of corporate properties at a deliberate undervalue to corporations wholly-owned by the two respective equal shareholders could engage s. 56(2)
X and Y (unrelated individuals), who each wholly-owned operating corporations ("ACo" and "BCo"), also equally owned XYZCo, which built and sold two condominiums to ACo and BCo at a mutually agreed price that they knew to be below fair market value.
After the usual caveats about questions of fact, CRA indicated that if indeed this was the mutual back-scratching arrangement that it appeared to be, the sales likely were non-arm’s length transactions to which s. 69(1)(b) would apply. Furthermore, assuming that this should be characterized as a situation where X and Y were directing the conferral of a benefit on their respective corporations that would have been taxable to them under s. 15(1) if received directly, then s. 56(2) could apply to include the known FMV deficiencies in their respective incomes.
Neal Armstrong. Summaries of 1 June 2021 External T.I. 2020-0865201E5 F under s. 251(1)(c) and s. 56(2).
Income Tax Severed Letters 8 September 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kallis – Tax Court of Canada adopts a restrictive interpretation of what constitutes a money-lending business
The taxpayer used funds that he had generated from a successful career in the oil and gas industry to make interest bearing loans to third parties. Loans of $10 million at 16% interest that he had made to indirectly finance a pay-day loan company, and of $3.5 million that he had made at 22.5% interest to a junior venture capital company, went bad.
Wong J found that the taxpayer did not go “about his loan activities in an orderly, businesslike way, as a business person would normally be expected to do” and thus was not “in the business of lending money during the years under appeal because the positive indicia of a business were either absent or minimally present.” In this regard, she noted that:
- He lent surplus funds (presumably, as contrasted to using borrowed funds).
- The loans were unsecured.
- The number of borrowers and of loans was limited.
- The loan terms were not complex and had not been negotiated by him.
- He used word of mouth and social contacts to generate leads.
- His deficient record-keeping was more consistent with investing than running a business.
His losses were on capital account.
Neal Armstrong. Summary of Kallis v. The Queen 2021 TCC 58 under s. 18(1)(b) – capital loss v. loss - debt.
Ressources Eastmain - Court of Quebec finds that as a junior exploration company’s CEO devoted "substantially all" (75%) of his time to exploration, his salary was not CEDOE
A junior exploration company with two projects in northern Quebec claimed significant portions of the remuneration of its president and CEO as Canadian exploration expense that was eligible for Quebec exploration credits. The correctness of this claim turned principally on whether, under the Quebec equivalent of the “Canadian exploration and development overhead expense” definition, his remuneration was not “in respect of a person employed by the taxpayer whose duties were not all or substantially all related to exploration or development activities.”
Fournier JCQ accepted that the CEO devoted approximately 75% of his time to exploration activities, and only the balance of his time to such matters as investor relations and attending board meetings. He noted in this regard that the federal jurisprudence accorded an “elastic” meaning to the phrase “substantially all.” Accordingly, the claimed salary amounts qualified for the credits.
Fournier JCQ also found that: the costs of constructing dirt berms at the exploration sites to contain the escape of harmful effluent were currently deductible, given that the berms deteriorated and had to be replaced each year; and that the costs for a recent hire to attend a university geology course qualified as CEE.
Neal Armstrong. Summaries of Ressources Eastmain Inc. v. Agence du revenu du Québec, 2021 QCCQ 4379 under Reg. 1206(1) – CEDOE – para. (b), s. 18(1)(b) – capital expenditure v. expense – current expense v. capital acquisition, s. 66.1(6) – CEE – para. (k.1), para. (f).
We have translated over 1700 CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 10 translations of CRA interpretation released in February and January, 2007. Their descriptors and links appear below.
These are additions to our set of 1,703 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 14 2/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for September.
CRA finds that employer coverage of collision damage to a leased car is ignored for standby charge purposes and that electric vehicle charging costs can be inferred from kilometres
CRA, reversing 2011-0399691I7, found that an amount paid by an employer to compensate a lessor for the total loss of an employer-leased automobile (which was self-insured for collision damages by the employer) was not to be included in the standby charge calculation in s. 6(2), i.e., it no longer considered such amounts to be payable by the employer to the lessor “for the purpose of leasing the automobile.”
CRA also was asked about employees who are provided with electric vehicles for use in performing their employment duties and who are required to recharge the vehicle battery at home - and may not be able to identify the portion of their monthly electricity bill pertaining to such charging. CRA noted that this allocation was relevant because:
- the electricity costs paid by the employee that are established to be attributable to the personal use of the vehicle reduce the operating expense benefit under s. 6(1)(k)
- employer reimbursements for reasonable employment-related electricity costs paid by the employee, generally are not a taxable benefit
- where there is no such reimbursement, employment-related electricity costs that are established may be deductible by the employee under s. 8(1)(h.1), where its documentary requirements are met
CRA then stated:
Where it is not possible to produce supporting documentation showing the exact amount of electricity expenses incurred for an electric vehicle, other means for establishing the amount of employment-related electricity costs may be acceptable. For example, the establishment of an average per-kilometre electricity cost could be a reasonable method.
Neal Armstrong. Summaries of 10 June 2021 External T.I. 2017-0696041E5 under s. 6(2) – E and s. 6(1)(k).
CRA indicates that pre-production revenues cannot be netted against costs of bringing a new mine into production
Can revenues earned while a mine is in the development phase and before the mine comes into production in reasonable commercial quantities (“Pre-Production Revenues”) be netted against expenses included in a taxpayer’s Canadian development expenses under para. (c.2) of the definition thereof, rather than being included in income under s. 9?
In responding negatively, CRA noted that there was a telling contrast with the permitted netting of Pre-Production Revenues in parts of the definition of Canadian exploration expense. CRA also stated that the purpose of moving what now was para. (c.2) from the CEE to the CDE definition was “to better align the tax treatment of pre-production mining expenditures with the tax treatment of pre-production oil and gas expenditures,” and inferred that no such netting was permitted for the latter type of expenditure.
Neal Armstrong. Summary of 3 May 2021 External T.I. 2019-0831981E5 under s. 66.2(5) - "Canadian development expense" - (c.2).
CRA considers that a promissory note issued in satisfaction of a capital dividend has full cost
S. 52(1) does not deem a promissory note issued to a shareholder in payment of a capital dividend to have a cost equaling the dividend amount (as the dividend was not included in the recipient’s income). Does that matter?
CRA responded:
Our Directorate is generally of the view that the cost of a promissory note, received as full and absolute payment of a dividend for which the election under subsection 83(2) has been made, equals the principal amount of the promissory note, thereby achieving a result more consistent with the role of subsection 83(2) under the integration scheme embodied in the Act.
Neal Armstrong. Summary of 21 June 2021 External T.I. 2019-0815871E5 F under s. 54 – ACB.