News of Note
CRA indicates that the Pt. IV and safe income exclusions under s. 55(2) can now be doubled up
Email this Content9711005 indicated, before the bifurcation of RDTOH into the eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) accounts, that it was not possible to use both the Part IV tax exception to s. 55(2) and the safe income exclusion.
Holdco holds all the shares of Opco having attributable safe income of $1,000,000 and a fair market value of $5,000,000. Opco has a general rate income pool of $1,000,000 and a NERDTOH balance of $70,000. Before Holdco’s sale of the Opco shares, Opco first pays a $1,000,000 dividend (designated as an eligible dividend) - and then pays a non-eligible dividend of $182,608, which generates a refund of the $70,000 of NERDTOH.
CRA seemed to indicate that Holdco can take advantage of both the $1,000,000 safe income exclusion and of the Part IV tax exclusion.
In particular, it noted that the $1,000,000 dividend is not subject to s. 55(2) as it does not exceed the $1,000,000 of safe income. Furthermore, since Opco is entitled to a dividend refund of its $70,000 in NERDTOH, Holdco is liable for $70,000 of Part IV tax on that dividend, so that such dividend is not subject to s. 55(2) under the Part IV tax exclusion in the s. 55(2) preamble, to the extent that such Part IV tax is not refunded as part of the same series.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.5 under s. 55(2).
CRA states that using a foreign corporation with Canadian CMC to produce a lower tax rate on investment income could be GAARable
A corporation which will generate investment income is incorporated outside Canada (and, thus, is not a Canadian corporation, as per s. 89(1) and, therefore, is not a Canadian-controlled private corporation under s. 125(7)), but has its central management and control (CMC) in Canada. As a non-CCPC, it is not subject to the refundable tax under s. 123.3, and is entitled to the s. 123.4(2) deduction. Would s. 245(2) apply?
CRA noted that the foreign incorporation produces a tax benefit consisting of the “avoidance” of the refundable tax under s. 123.3, and the generation of the s. 123.4(2) deduction, and then stated:
… If the purpose of such a transaction were to avoid CCPC status in order to defeat the purpose and intent of various anti-avoidance rules applicable to investment income, including section 123.3 and subsection 123.4(2), the CRA would consider, depending on the circumstances, application of the GAAR … .
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.4 under s. 123.3.
CRA finds that delegating property management to an independent property manager does not affect whether a trust is carrying on its rental operation as a business
CRA confirmed that it was not relevant to the determination, of whether a personal trust that had a portfolio of residential and commercial rental buildings was carrying on a business rather than earning income from property, that all its property management services were carried out through an independent third-party property manager rather than by its own employees or dependent agents.
CRA reiterated its position in IT-434R that “the renting of real property by an individual … will be regarded as a business operation only when the landlord supplies or makes available to tenants services of one kind or another to such an extent that the rental operation has gone beyond the mere rental of real property,” and that, accordingly, other factors such as “[t]he size or number of properties being rented” and “the extent to which their management or supervision occupies the owner's time” are not “to be taken into account in determining if the operation is a business.” Accordingly, CRA appears to continue to consider that a trust, such as a REIT, with a substantial rental operation, will not be considered by it to be carrying on a business, if it only provides basic and customary services to its tenants.
Here, CRA noted that the trust was described as providing cleaning and security services to the commercial tenants, which the Bulletin characterized as being non-basic services, so that a more detailed understanding of the facts might make it possible for CRA to conclude that the trust was carrying on a business.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.3 under s. 216(1).
CRA notes that unreasonable returns are bifurcated for TOSI purposes, and that loans to individuals do not generate split income
In an APFF question, CRA addressed the application of the tax on split income rules (TOSI) on strategies described to it as being intended to recover alternative minimum tax (planning which CRA addressed more directly in a subsequent question).
In the first scenario, Mr. X lent $100,000 to his spouse, Ms. X (also aged 30), at the 1% prescribed rate of interest. She then lent that amount as an unsecured loan to his wholly-owned personal holding company at a 5% rate of interest.
CRA noted that in these circumstances (e.g., she was essentially lending back to his company money that she got from him), it was “difficult to see how the factors enumerated in the definition of ‘reasonable return’ in subsection 120.4(1) could be satisfied.” Regarding what would be the impact if the holding company instead was equally owned by them, CRA stated that “the dividends received by Mr. X and Ms. X should also be considered in relation to Mr. X's and Ms. X's contributions to the related business, in order to determine whether the amount of interest income is otherwise a reasonable amount to Ms. X.”
However, if the interest at 5% was not a “reasonable return,” the split income amount of Ms. X would not be the total interest amount but, rather, only the excess over the reasonable return – so that, for example, if the reasonable return was 3%, her split income inclusion would be interest of 2%. (The statutory authority for this position appears to be the “to the extent of” language in the preamble of the excluded amount definition, so that this same approach could apply to other branches of the definition.)
In response to two other scenarios, CRA noted that, at least as a technical matter, the TOSI rules did not apply to loans by a specified individual at an unreasonably high rate of interest (including of funds derived from a related business) to a related individual (para. (d) of the split income definition only refers to loans to specified types of corporations, trusts and partnerships) or the payment of excessive salary by one spouse’s company to the other spouse (the specified individual) although, depending on the circumstances, it might review a GAAR application or (in the case of excessive salary) apply s. 67 or the benefit-conferral provisions.
Neal Armstrong. Summaries of 8 October 2021 APFF Roundtable, Q.2 under s. 120.4(1) – excluded amount – (g)(ii), split income – (d).
We have published 10 more translations of CRA interpretations
We have published a further 10 translations of CRA interpretation released in September, 2006. We also published a translation of a ruling released last week. Their descriptors and links appear below.
These are additions to our set of 1,766 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 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA finds that the EBP rather than s. 7 rules applied to a share plan for employees where share distributions were discretionary
We have published full-text translations of all the CRA preliminary written answers for the 2021 APFF federal (general) Roundtable, together with our summaries of the questions posed.
Turning to Q.1. a discretionary trust for present and future employees of a company that had held shares of the company since January 1, 2021, will add Mr. X as a discretionary beneficiary when he is hired on January 1, 2022 (without any change to its shareholdings). The questioner submitted that this was a s. 7(2) trust and seemed to suggest that the shares allocated to Mr. X could be treated as satisfying the 24-month holding period for purposes of the deduction for gains from the disposition of qualified small business corporation shares.
After referring to Transalta for the proposition “that a discretionary arrangement was not an agreement to issue or sell shares for the purposes of section 7 since no legal rights or obligations were created,” CRA stated:
[A] trust plan providing that the allocation and distribution of the corporation's shares to its employees, who are beneficiaries of the trust, will be made on an entirely discretionary basis would not be governed by s. 7. …
[S]ubsection 7(2) does not serve to deem the existence of an agreement to issue or sell shares for the purposes of section 7 where such an agreement does not, in fact, exist. …
Since this was such a discretionary plan under which the employee had no legally enforceable entitlement to the shares until they were distributed to him in the exercise of the trustees’ discretion, so that s. 7 was inapplicable, the employee benefit plan rules instead applied, i.e., the fair market value of the shares was to be included in the employee’s income under s. 6(1)(g) when distributed to him.
Neal Armstrong. Summaries of 8 October 2021 APFF Roundtable, Q.1 under s. 7(2) and s. 248(1) – EBP.
CRA rules on the transfer of RRSP proceeds to a lifetime benefit trust
CRA ruled on the transfer of proceeds of the RRSPs of the deceased to a "lifetime benefit trust" described in s. 60.011(1) for the benefit of his mentally disabled surviving son, with the trustees then purchasing an annuity described in s. 60.011(2)(a). The rulings included that:
- With the proper joint designations by the beneficiary (the son) and the executors, the amounts received out of the RRSPs would be deemed to be refunds of premiums in accordance with s. 146(8.1), and would be included in the beneficiary's income pursuant to s. 146(8).
- The amount paid by the trustees to acquire the annuity would be deductible by the beneficiary in accordance with ss. 60(l) and 60.011(3).
- During the lifetime of the beneficiary, each payment received under the annuity by the Trust would be included in his income rather than the Trust’s income pursuant to ss. 56(1)(d.2) and 75.2.
Neal Armstrong. Summary of 2020 Ruling 2020-0848231R3 F under s. 60.011.
Income Tax Severed Letters 13 October 2021
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Creditors wishing to acquire the assets of a debtor in CCAA proceedings may weigh the respective merits of a credit bid or reverse vesting transaction
Under a credit bid, which allows existing secured creditors to bid up to the full face amount of their secured debt claim as currency for the acquisition of the debtor’s assets, the secured debt may be transferred by the secured creditors to a newly-established “CreditBidCo” in consideration for equity, so that CreditBidCo then acquires the debtor’s assets (and assumes some operating liabilities), with the full amount of its secured debt claim being extinguished.
In the absence of s. 79, the better view is that the acquisition by CreditBidCo is to be considered as a barter exchange, so that the proceeds of disposition to the debtor, the tax cost of the assets to CreditBidCo, and the repayment of the secured debt for s. 80 purposes reflect the assets’ current FMV.
Where s. 79 applies on a credit bid, the debtor would likely have proceeds of disposition exceeding the assets’ FMV and no forgiven amount, whereas the creditor would likely have tax cost in the assets exceeding their FMV. S. 79 may not apply based on the narrow meaning of "in consequence of" (see, e.g., Hallbauer) in s. 79(2) and the (Brill-based) proposition that “where property is acquired by a creditor under an agreement with the debtor for a fixed price, section 79 should not be applicable.”
Greater certainty on s. 79 not applying may be achieved with a three-party arrangement under which CreditBidCo would directly acquire the debtor’s assets, and in consideration it would issue its shares to the secured creditors who would agree to the extinguishment of their debt claims against the debtor.
In a “reverse vesting transaction”, the obligations of the debtor which are to be settled without payment are vested out of it and assumed by a new corporation (“ExcludedCo”), with the debtor corporation (owing only those debts to be retained or satisfied) being acquired by the new owner(s) (which could be secured creditors), and with ExcludedCo then being wound-up or placed into bankruptcy. The new equity owners effectively acquire the debtor’s tax losses and other tax attributes subject to the s. 80 grind (being the amount of the debt assumed by ExcludedCo) and the ss. 111(4) and (5) restrictions (and also may enjoy a high historic PUC in the debtor’s shares) - whereas an asset acquisition transaction generally would entail the assets being acquired at a FMV cost substantially less than the debtor’s existing tax attributes.
The interest stops rule (that interest on unsecured provable claims stops accruing at the commencement of relevant proceedings) does not appear to apply to secured creditors. If so, this accords relevance to the CRA position that the initial stay order in a CCAA proceeding means that any creditor cannot enforce payment, so that the “legal obligation” requirement in s. 20(1)(c) is not met.
This position appears to confuse a stay of the right to enforce payment and the termination of that right.
Neal Armstrong. Summaries of Janette Pantry, Carrie Smit, "Tax Considerations in Restructuring under the Companies’ Creditors Arrangement Act", draft 2020 CTF Annual Conference paper under s. 128(1)(g), s. 80(1) – forgiven amount, s. 80(1) – forgiven amount - para. (i), s. 79(2), s. 20(1)(c)(i).
CRA finds that a service of taking over the handling for insureds of their insurance claims was not GST/HST exempt
A company, which is not provincially licensed as an adjusting firm, for a commission took over the handling of a dispute where insured policyholders were challenging an insurance settlement offered by their insurer. CRA found that since the single supply for which the Company was paid its commission in essence was a service of negotiating and advancing the policyholder’s position to the insurer, and not a supply of “investigating and recommending the compensation in satisfaction of a claim,” it did not fall within the quoted wording of the insurance adjuster exemption in para. (j) of the ETA financial services definition. The company also did not satisfy the requirement in para. (j) that it be licensed under the laws of a province to provide its services.
Neal Armstrong. Summary of 26 January 2021 GST/HST Interpretation 197697 under ETA s. 123(1) – financial service – para. (j).