News of Note
CRA indicates that s. 7(1.3) does not preclude a gain arising on a short sale to fund an employee stock option exercise
Email this ContentAn employee, who engages in a short sale transaction to finance the exercise of stock options on the shares of the individual’s employer, short sells identical shares borrowed from a third-party lender and uses the short sale proceeds to inter alia fund the option exercise – and then uses the shares acquired on exercise to cover the short position. The employee had previously made an s. 39(4) election and, at the time of the short sale, held other identical shares.
Regarding the shares that the employee acquired on exercise and promptly disposed of by delivering to the lender to cover the short position, s. 7(1.31) generally would oust the application of ACB averaging under s. 47(1), so that no gain would be realized on that disposition (assuming no value change subsequent to exercise).
However, s. 7(1.31) would not apply to the disposition of the shares that were borrowed and then sold, because such shares “would not have been acquired pursuant to an agreement referred to in subsection 7(1).” Accordingly, a gain would be realized on that initial disposition if the existing shareholding had a low ACB.
CRA also reiterated its position that:
Where, in a taxation year for which an election under subsection 39(4) applies, a taxpayer makes a short sale, the two dispositions of securities (both the one that occurs at the time of the short sale and the one that occurs subsequently when the borrower delivers securities to the lender to cover its short position) are deemed to be dispositions of capital property to the short seller.
Neal Armstrong. Summaries of APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 7(1.31) and s. 39(4).
We have published 10 more translations of CRA interpretations
We have published 8 translations of CRA interpretation released between May 2011 and November 2006, which we translated some time ago but did not publish until now due to a filing mishap. Getting back on track, we have also published 2 translations of interpretations released in June 2006. Their descriptors and links appear below.
These are additions to our set of 1,796 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 1/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CIBC – Tax Court of Canada finds that s. 39(2) historically applied only to FX gains or losses on liabilities and foreign currency dispositions
CIBC realized an FX loss of C$126.4 million in 2007 when shares of a US subsidiary for which it had subscribed US$1 billion were redeemed for US$1 billion. Owen J rejected the CIBC position - that such loss was deemed by s. 39(2) to be a capital loss from foreign currency and therefore was excluded from the application of the s. 40(3.6) stop-loss rule, which applied only if the loss were viewed as having arisen from the disposition of the subsidiary’s shares – indicating that this position was inconsistent with a statement in the BMO case that: “[t]he gain or loss arising as a result of a disposition of a particular property was (and still is) determined under subsection 40(1)” before any application of s. 39(2).
Furthermore, Owen J disagreed with the CIBC position, stating:
[S]ubsection 39(2) was not required to address foreign currency fluctuations associated with acquisitions and dispositions of property other than foreign currency because subsection 40(1) read with due regard to the need to convert the amounts identified in that subsection into Canadian dollars already addressed such fluctuations and integrated them into the gain or loss computed under subsection 40(1).
… [T]his fact and the fact … that extending subsection 39(2) to dispositions of property other than foreign currency raises difficult issues together strongly suggest that Parliament did not intend that subsection 39(2) apply to dispositions of property other than foreign currency. …
In conclusion … subsection 39(2) as it read in 2007 was a stand-alone provision but Parliament did not intend that the subsection apply to dispositions of property other than foreign currency.
Neal Armstrong. Summary of Canadian Imperial Bank of Commerce v. The Queen, 2021 TCC 71 under s. 40(3.6), General Concepts – Stare Decisis and Statutory Interpretation – Prior Cases.
CRA finds that s. 104(18) can apply where an executor has discretion to defer the payment of income for the benefit of minor beneficiaries over an extended period
When it applies, s. 104(18) deems income of a resident trust to have become payable in a taxation year to a beneficiary under 21 years of age, even though the income was not actually paid or payable to the beneficiary in the year. For s. 104(18) to apply, the entitlement of the child to that beneficiary’s share of the unpaid income must be vested otherwise than because of the exercise by any person of, or the failure of any person to exercise, any discretionary power, and the right to which must not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).
The will of a Quebec resident left all his property in equal shares, to his two children, aged 10 and 15. His will extended the estate administration until the children’s respective shares were distributed to them on attaining 25, with the will providing, in the meantime, that all income generated on each child’s share was to be used in the executor’s discretion for the support or maintenance of that child, with discretion to encroach on capital in the child’s favour.
CRA applied the principle that:
In the case of an estate, the conditions of subsection 104(18) may be satisfied even if the will contains provisions giving the executor discretion as to the timing of the payment of income or capital to a beneficiary under 21 years of age, provided that the executor has no discretion as to the determination of the amount of income to which such a beneficiary is entitled.
Accordingly, it appeared plausible to CRA that (subject to reviewing the details), s. 104(8) could apply.
Neal Armstrong. Summary of APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 104(18).
CRA finds that when two spouses separate in the same co-owned house, one can make an HBP withdrawal to purchase the co-ownership interest of her spouse
Two spouses (Mr. X and Ms. Y), who had been living in a home co-owned by them, did not cease to be spouses when they started living separate and apart in the same house, as such status would not cease until divorce. Accordingly, in order for a withdrawal, made later in the same year of their having started to live separate and apart, from her RRSP to qualify as a home buyer plan (HBP) withdrawal, resort was necessary by Ms. Y to s. 146.01(2.1)(a), which would deem both her and Mr. X not to have owned an owner-occupied home 90 days after such separation date, so that Ms. Y would not be precluded from then making an HBP withdrawal by virtue of her spouse (Mr. X) in fact having been such an owner-occupant.
It would make no difference if the house was co-owned by the two spouses (or if they were common-law partners) – rather than owned only by Mr. X. Again, once they had been living separate and apart for 90 days, then s. 146.01(2.1)(a) would deem Ms. Y and her spouse not to have had an owner-occupied home, provided that she satisfied the additional condition (in 146.01(2.1)(a)(iii)(A)) that she will have disposed of her co-ownership interest by the end of the second calendar year following that of the HBP withdrawal. Furthermore, in light of s. 146.01(2.1)(b), the “qualifying home” acquired by Ms. Y for HBP purposes could be the co-ownership interest of her spouse.
Neal Armstrong. Summaries of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 146.01(1) - regular eligible amount – (f), s. 248(1) – common-law partner and s. 146.01(2.1)(a).
Income Tax Severed Letters 3 November 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a s. 110.1(1)(a) deduction by a CCPC is applied first as a deduction to lower-rate business income, rather than higher-rate investment income
CRA noted that the effect of excluding most taxable capital gains from the definition of “full rate taxable income” in s. 123.4(1) is that where a CCPC, that has realized business income and taxable capital gains (e.g., from a sale of that business) in a year, has also made a charitable gift, the donation produces a tax reduction based on the low tax rate applicable to the business income rather than the higher rate applicable to aggregate investment income such as taxable capital gains.
Neal Armstrong. Summary of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 123.4(1) - full rate taxable income – (b).
CRA explains how to count 30 days for purposes of applying the superficial loss rule to a purchase by a spousal RRSP
Mr. A sold 1,000 shares of a listed company in a non-registered account on September 1, 2021 at a capital loss of $20,000. The RRSP of his spouse, Ms. B (who dealt with a different brokerage firm) acquired 1,200 shares of the same company on September 7, 2021 Ms. B’s RRSP sells the shares no later than September 28, 2021 (with settlement occurring two days later).
CRA noted that such sale would avoid the application of the superficial loss rule as the affiliated person (her RRSP) would not own the identical shares at the end of the 30-day period described in the superficial loss definition.
However, if her RRSP reacquired the shares on October 1, 2021, the superficial loss rule would apply: in light of 27(5) of the Interpretation Act, the 30-day period would not start running until October 1, 2021, so that October 1, 2021 would be the 30th day of the 30-day period.
Neal Armstrong. Summary of 2021 APFF Financial Strategies and Instruments Roundtable, Q.3 under s. 54 – superficial loss.
CRA notes that implementing a life insurance interest sharing strategy may entail the entire policy’s disposition and uncertainties as to what interest is disposed of
An individual owning a policy on that individual’s life with coverage of $1 million, a cash surrender value (“CSV”) of $250,000 and an adjusted cost basis ("ACB") of $150,000, donates ½ of the individual’s interest in the policy to a registered charity or, alternatively, only donates ½ of the entitlement to the CSV. Rather than responding to a query as to how the gain under s. 148(7) should be computed, CRA referred to the threshold issue of whether such a transaction would result “in a disposition of the entire interest in the policy rather than just a portion of it.” Furthermore, even if this was “a life insurance interest sharing strategy” that did not entail a disposition of the entire policy:
it would be necessary to determine whether it is possible to determine what fraction of the whole represents the portion assigned to the donee and also whether, as a result of the assignment, the donor and donee would be joint policyholders or, rather, each would own a separate policy.
Neal Armstrong. Summary of 2021 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 148(9) - disposition.
We have published 10 more translations of CRA interpretations
We have published a further 10 translations of CRA interpretation released in July and June, 2006. Their descriptors and links appear below.
These are additions to our set of 1,786 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 1/3 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 November.