News of Note
CRA considers a NAL transfer of lands, but with rights to rents being retained, to render the rents taxable to the transferee, not transferor
Email this ContentAn individual sold leased land in Quebec to a non-arm’s length corporation of which he was not a shareholder on that basis that he retained the right to all the rents. After finding that the rentals received by the corporation would probably not have the "quality of income” since their receipt was subject to the obligation to pay them over to the individual (see Premium Iron Ores, Wilson, Leonard Pipeline, Canadian Fruit, see also Minet, Wipf, cf. Canpar.) CRA went on to find that s. 56(4) would apply to include the rents in the income of the corporation - and then quoted its statement in IT-440R, para. 10 that:
where the transfer or assignment of the right to an amount that is income does not constitute a deliberate attempt to evade or avoid tax, the amount will be included only in the income of the transferor.
I don’t know about Quebec, but it is not clear that it would be appropriate to apply s. 56(4) in a common law province. It might be considered that the corporation never got any right to the income in the first place, so that there was never a transfer by it of that right back to the individual.
Neal Armstrong. Summaries of 28 October 2016 External T.I. 2016-0654331E5 F under s. 9 – nature of income, s. 18(1)(a) – incurring of expense, s. 56(2) and s. 56(4).
The rules have been expanded to partly address mergers of multi-class (switch fund) MFCs into MFTs
Before s. 131(4.1) was enacted, two funds in a multi-class mutual fund corporation could undergo a tax-deferred merger in which s. 86 was relied on to give a rollover to the terminating fund’s shareholders. S. 131(4.1) now in effect requires that the portfolios underlying the terminating and surviving funds must be identical before the shareholders qualify for a tax-deferred rollover. Thus, before the merger, the portfolio of each fund would be reorganized to ensure this identical nature.
A proposed amendment to s. 132.2 would permit, say, a multi-class MFC with 20 classes of shares to transfer its assets to 20 different MFTs on a class-by-class basis.
Many multi-class MFCs in the marketplace are fund-of-fund structures in which, for example, the Canadian equity class of the MFC may own only units of the MFT version of the manager’s Canadian equity fund. There are concerns (that have been raised with Finance) that, in that example, the Canadian equity class of the MFC may not transfer its units of the bottom fund to the bottom fund under s. 132.2.
Neal Armstrong. Summaries of Hugh Chasmar, "Corporate Class Funds", Canadian Tax Highlights, Vol. 25, No. 8, August 2017, p. 6 under s. 131(4.1) and s. 132.2(1) – qualifying exchange.
The Copthorne series test adds uncertainties as to the scope of s. 246.1
The apparent harshness and breadth of the proposed s. 246.1 rule for converting capital account transactions into deemed dividends to the individual recipient (but not, apparently, to the corporation) is compounded by the unpredictable nature of the concept of “series of transactions” enunciated in Copthorne, which could suggest that a capital dividend paid out of a gain, and the gain-producing transaction, are part of the same series even where the capital dividend was not planned.
The credit to the capital dividend account should not be eliminated but instead only suspended until the capital property leaves the affiliated group.
Neal Armstrong. Summary of Michael N. Kandev, "Proposed Section 246.1", Canadian Tax Highlights, Vol. 25, No. 8, August 2017, p.5 under s. 246.1.
Aon – Tax Court finds that replacing a parking garage roof with one better designed to deal with a problem was currently deductible
The roof for an underground parking garage deteriorated much more quickly than expected since it also served as a platform for ground level traffic, which resulted in significant water and salt damage. It was replaced with a better-designed roof to deal with these problems.
In finding that the $4 million repair expense was currently deductible, Jorré J noted the engineering improvements (see also Shabro) but, at the end of the day, gave weight to the facts that the garage was an integral part of a larger asset (an apartment complex) and “there is no improvement in the functionality or profitability of the garage and … there is no reason to conclude that the work has had any significant effect in terms of increasing the value of [the complex] compared to its value with the garage in a good state of repairs.”
Neal Armstrong. Summary of Aon Inc. v. The Queen under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs or running expense.
The MLI may have interpretive effects on existing Treaties even where their provisions are not directly changed by the MLI
It is unclear how the principal purpose test in Art. 7(1) of the Multilateral Instrument will be applied for Treaties where there already was a PPT (often, more narrowly worded.)
While some countries that have experience applying PPT-type rules might be expected to apply the new PPT in line with their past practice, the breadth of the new PPT would permit for substantially more aggressive approaches by countries inclined to take them.
Option A in MLI Article 13 provides that existing activity exceptions in Treaties would apply only where the activity is of a "preparatory or auxiliary" character, whereas Option B would do the opposite, and would provide that the existing activity exemptions are per se exceptions. Although the OECD had concluded that existing Treaty provisions already provided per se exceptions for locations at which only a single listed activity was conducted, the presence of these Options may cause uncertainty where countries choose neither Option.
If a source country adopts the expanded PE standard in its domestic law but its Treaty partner does not, the source country nonetheless may view a structure that does not rise to the level of a PE under the existing unmodified Treaty, as being subject to the PPT.
Parties are permitted under the MLI Arbitration provisions (Part VI) to craft their own reservations with respect to the scope of cases that will be subject to arbitration. If the other party objects to such "free form" reservations, Part VI will not apply to their Treaty. Of the 26 countries that chose to adopt Part VI, 16 made such "free form" reservations. Many of the reservations involve carving out broad, and often vague, categories of cases, including, for example, all cases involving the application of domestic anti-avoidance rules, or all cases involving serious penalties. Canada is mentioned as an example.
Neal Armstrong. Summaries of Manal Corwin and Jesse Eggert, "Understanding the Operation, Impact, and Practical Implications of the MLI", Tax Management International Journal, Vol. 46, No. 8, 11 August 2017, p. 407 under Multilateral Instrument, Art. 7, 13 and 28.
Income Tax Severed Letters 6 Septemeber 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Gillen – Tax Court of Canada finds that property was not used in a business for s. 110.6(14)(f)(ii) purposes when it was beneficially acquired and dropped-down on the same day
The availability of the enhanced capital gains exemption to a group of taxpayers depended on the proposition that a newly-formed limited partnership had used, in a Canadian active business, applications to the Saskatchewan government for potash exploitation rights before it transferred such property to a newly-incorporated corporation (“Devonian”), whose shares were sold a number of months later. D’Arcy J found that, in fact, on the same day that the LP acquired the permit rights from the general partner, it had transferred the beneficial ownership of those permit rights to Devonian, so that its fleeting beneficial ownership of those assets did not qualify them as being used in a Canadian active business.
In rejecting the taxpayer’s submission that, until the subsequent completion of the transfer of the permits to Devonian (on their subsequent grant by the government), the taxpayer nonetheless was using the permit applications in a business carried on by it, as required under the s. 110.6(14)(f)(ii) test, D’Arcy J stated that this ignored the so-called “relation-back” theory, and in this regard quoted a judicial statement that “while the trust relationship between vendor and purchaser may be dubious before closing, once the agreement is completed the trust relationship is solidified retroactively.”
Neal Armstrong. Summaries of Gillen v. The Queen, 2017 TCC 163 under s. 110.6(14)(f)(ii), General Concepts – Ownership, General Concepts – Effective Date.
Our translations of CRA technical interpretations and Roundtable items now go back 3 years
Full-text translations of six technical interpretations released between October 10, 2014 and September 3, 2014, are listed and briefly described in the table below.
These (and the other translations covering the last three years of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for September.
CRA rules on a s. 55(3)(a) split-up between Newcos for two siblings which were related due to multiple-voting shares held by the father’s and mother’s Holdco
S. 55(5)(e)(i) provides that siblings are unrelated for s. 55(3)(a) purposes, and s. 55(4) stipulates that a transaction which is inserted so as to make persons related for s. 55 purposes is to be ignored for such purposes.
CRA has ruled on a s. 55(3)(a) split-up of a real estate rental corporation (Canco) whose common shares were held by Son Holdco and Daughter Holdco and whose prefs were held by a Holdco for the father and mother of Son and Daughter (Holdco 1). Before the split up of the real estate between Newco 1 (whose common shares and prefs were acquired on the spin-off by Son Holdco and Holdco 1, respectively) and Newco 2 (whose common shares and prefs were acquired on the spin-off by Daughter Holdco and Holdco 1, respectively), Holdco 1 subscribed (presumably a nominal amount) for “super” voting shares of Canco and of Newco 1 and 2, so that at all relevant times, Canco, Newco 1 and Newco 2 were controlled by the two parents.
CRA also ruled that the undepreciated capital cost of depreciable property could be split based on the relative capital cost rather than relative fair market value of the depreciable properties that were spun-off. (Butterfly rulings typically have prorated UCC based on relative FMV – see e.g., 2014-0530961R3 and 2013-0498651R3).
Neal Armstrong. Summary of 2017 Ruling 2016-0675881R3 under s. 55(3)(a), s. 55(4), s. 85(1)(e) and s. 186(1)(b).
CRA has raised the avoidance of an FMV disposition on a dividend-in-kind of a life insurance policy with Finance
A corporation (“Holdco”) holds a policy on the life of its sole shareholder with a nominal cash surrender value (“CSV”) and an adjusted cost basis (“ACB”) and fair market value (“FMV”) of $50K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the ACB of $50K, since the FMV of the consideration received by it is nil. Accordingly, the transfer occurs on a rollover basis - whereas its proceeds of disposition would have been $450K if Holdco instead had paid a $450K dividend to its shareholder, and he had purchased the policy for $450K. (In both scenarios, he would include a $450K dividend (plus gross-up) in his income.)
This Interpretation is essentially identical to 2016-0671731E5 F, except that in the latter, there was a modest excess of the CSV of the policy over the ACB, so that such excess was realized as a gain on the dividend-in-kind –rather than a much higher gain that would have been realized on a sale of the policy at FMV. In both Interpretations, CRA considered that the lower gain in the dividend-in-kind scenario might be anomalous, and has raised this with Finance.
Neal Armstrong. Summary of 18 May 2017 CLHIA Roundtable, Q.2, 2017-0690331C6 under s. 148(7)(a).