News of Note
CRA rules that the negative repo spread on a reverse repo was not interest
Email this ContentIn a traditional “reverse repo” (the term, as contrasted with “repo,” that is used where the transaction is viewed from the perspective of the purchaser rather than the seller), the securities such as bonds are purchased for $X in cash and agreed to be repurchased by the seller at a later date at a somewhat higher price. This positive spread represents what economically is interest that the purchaser is earning on its cash. But what if the reverse repo occurs in a negative interest rate environment, so that the bond is repurchased by the seller at a “negative repo spread” (i.e., the repurchase price is lower than $X)?
CRA ruled that “[t]he negative repo spread … will not be considered to be interest or an amount paid or credited as, on account or in lieu of, or in satisfaction of interest for the purposes of paragraph 212(1)(b).” In its (less than prolix) reasons provided in its summary, it stated that “the agreements are purchase and sale agreements to which subsection 260(2) does not apply.” The notion appears to be that the form of the transactions (a sale and repurchase) will not be recharacterized. CRA might also have said (but did not) that negative interest is not interest.
This ruling interested the parties because they were affiliates. In particular, the purchaser (presumably, a resident) might have been concerned that the negative interest that in effect was paid by it to its non-arm’s length and non-resident counterparty might be subject to Part XIII tax.
Neal Armstrong. Summary of 2019 Ruling 2018-0776381R3 under s. 212(1)(b).
CRA states that investing carried on with the proceeds of sale of a business in which the spousal shareholders had been engaged full time generally would generate TOSI on resulting dividends
After a husband and wife’s corporation (in whose business they had worked full time for 5 years) has sold its business and reinvested the proceeds, they receive dividends out of the resulting investment income generated. Assuming that the exception for “excluded shares” did not apply, would the dividends be split income, because the definition of “excluded business” could no longer be met because the business had ceased?
CRA noted that the corporation’s investment activities might be a new business that is a related business, but stated that, in such case:
[T]he excluded business exception would not apply to husband and/or wife if such individual is not considered to be actively engaged in that investment business on a regular, continuous and substantial basis either during the particular taxation year or in any five prior taxation years. Consequently, the taxable dividends will be split income subject to TOSI unless another excluded amount exception applies.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.10 under s. 120.4(1) – split income.
Income Tax Severed Letters 2 December 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a specified individual splitting full-time work amongst multiple corporations might meet the excluded business activity test on less than 4 hours per week per corporation
A husband and wife collectively work full-time for various of their companies but work no more than an average of 4 hours per week in the business of each company.
CRA found that “[s]ince neither spouse works more than 4 hours in any business carried on by any of the particular corporations they own, the requirements of the bright line test in paragraph 120.4(1.1)(a) would not be met and, as such, it remains a question of fact as to whether either spouse would otherwise be considered to be actively engaged on a regular, continuous and substantial basis in the activities of each such business on the basis of the limited number of hours worked.” However, CRA went on to indicate that “useful” guidance was to be garnered from 2019-0799901C6, which indicated:
[A] husband and wife could both be considered to be actively engaged in the activities of a particular business carried on by their corporation on a regular, continuous and substantial basis for a particular year where the particular business did not require any other workers and only required them to spend on average 5 hours each per week in that business.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.9 under s. 120.4(1) – excluded business.
CRA confirms that charitable credits do not reduce an individual’s TOSI
CRA confirmed that the tax on split income cannot be reduced by s. 118.3 charitable credits. This could be a concern where, for example, a specified individual’s income was mostly split income in the form of a taxable capital gain arising on a sale whose proceeds were gifted to the charity.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.8 under s. 120.4(3).
CRA confirms that TOSI does not apply to rental properties held by individual co-owners
CRA confirmed that generally “split income … include[s] amounts that are included in a specified individual’s income in respect of a corporation, partnership or a trust … [and] does not include amounts that are included in the income of a specified individual as a result of the direct ownership of real property.” Accordingly, the tax on split income would not apply to rental income earned on rental properties held by related individuals in co-ownership, or taxable capital gains realized on the properties’ disposition.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.7 under s. 120.4(1) – split income.
CRA illustrates the generation of a loss to a capital beneficiary attributable to an eligible offset amount
CRA ran through two simple numerical examples showing the somewhat contrived operation of the rules in ss. 107(2)(a) and (c), and 107(1)(a) in computing a beneficiary’s capital gain or loss on receiving a distribution of shares from the personal trust in satisfaction of the beneficiary’s capital interest. The shares had an ACB of $100,000, the beneficiary did not have an (actual) cost for that capital interest, and there was a $20,000 liability respecting of the shares satisfying the “eligible offset” definition.
CRA noted that s. 107(1)(a) deemed the ACB of the capital interest to be the $100,000 cost amount of the distributed shares for capital gains purposes, so that there was no capital gain (i.e., the deemed $80,000 proceeds of disposition of the capital interest under s. 107(2)(c), being the excess of the $100,000 cost amount of the distributed property, being their deemed cost to the beneficiary, over the $20,000 eligible offset amount) – whereas, for capital loss purposes, the ACB of the capital loss was determined as nil on ordinary principles, so that there also was no loss.
In a variant of this example, the beneficiary’s interest was previously acquired at an actual cost of $100,000, so that there is a $20,000 capital loss on the beneficiary’s capital interest, reflecting the excess of the ACB over the 107(2)(c) proceeds of disposition of $80,000.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.6 under s. 107(1)(a).
We have translated 5 more CRA Interpretations
We have published 5 further translations of CRA interpretation released in October and September, 2009. Their descriptors and links appear below.
These are additions to our set of 1,331 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 ¼ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA agrees that it will not apply ss. 40(3.61) and (3.6), and 164(6), iteratively to eliminate a s. 164(6) loss carryback where the estate also realized a small capital gain
In the first taxation year of an estate, it realizes a capital loss of $1,000,000 on redeeming a portion of the common shares of a private company held by it, which it wishes to carry back under s. 164(6) to offset a portion of the capital gains realized in the deceased’s terminal return. However, in the same taxation year, the estate realizes $30,000 of capital gains on disposing of portfolio securities. Under an approach suggested by CRA in 2012, the $30,000 of capital gains would grind the capital loss available for purposes of the s. 164(6) election. The grind effected by the interaction of ss. 40(3.61) and (3.6) and the netting of the estate’s capital gains and capital losses in s. 164(6)(a), would continue to occur in an iterative manner, so that the estate’s $1 million capital loss would for s. 164(6) purposes would be reduced to nil.
CRA has withdrawn this earlier view, and now considers that the s. 164(6) election should be applied first to the amount of the capital loss determined without regard to the s. 40(3.4) or 40(3.6) stop-loss rules, and that such rules apply only to any capital loss of the estate that is not the subject of the s. 164(6) election. In the example, s. 164(6)(a) limits the elected amount to the net capital losses of $970,000, so that such elected amount is deemed to be a capital loss in the deceased’s terminal return which is preserved by the s. 40(3.61) relieving rule - whereas $30,000 of the estate’s capital loss remains in the estate so as to be subject to the s. 40(3.6) stop loss rule (such that the estate is taxed on $30,000 of capital gains).
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.5 under s. 40(3.61).
CRA notes that a capital gain’s geographic source for Canadian FTC purposes was re-sourced to Australia under the Treaty-source rule
A Canadian-resident individual is subject to Australian gains tax on the gain from selling the shares of a U.K. holding company holding an Australian real estate corporation. Under the Canadian domestic situs rules, the gain would have a U.K. source so that there would be no Canadian foreign tax credit for the Australian tax – but this is remedied by Art. 22(2) of the Canada-Australia Treaty (broadly similar, for example, to Art. 24(3) and 21(3) of the U.S. and U.K Treaties, respectively), which provides that income or gains of a Canadian resident which are taxed in Australia in accordance with Art. 13 of the Treaty are relevantly deemed to be sourced in Australia.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.4 under Treaties – Income Tax Conventions – Art. 24.