News of Note
CRA notes that income allocated under s. 96(1.1) can have specific sourcing, e.g., as dividend income
Email this ContentCRA declined to comment specifically on a scenario in which a Canadian professional partnership, which holds a 70% interest in a corporation carrying on a business ("Opco"), agrees with a retiring partner under s. 96(1.1) that he will preserve a right to a share of the dividends that may eventually be paid by Opco to the partnership. However, CRA noted that "the presumptions in subsection 96(1), in particular, those respecting the nature of items of income, should apply respecting the part of the income shared by each partner of the partnership, including the departing partner."
CRA also noted that the departing partner generally could claim a capital loss if the only amounts he would thereafter receive from the partnership would be a share of Opco dividends determined in accordance with the s. 96(1.1) agreement, if he happened to have a positive adjusted cost base for his partnership interest after taking into account all his partnership distributions.
Neal Armstrong. Q. 17 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA does not require a price adjustment clause to reduce income for an excessive management fee
When CRA disallows part of the deduction by a corporation of the management fee charged to it by another (presumably affiliated) corporation ("Managementco"), it generally will accept a downward adjustment to the revenues of Managementco if Managementco reimburses the other corporation for the denied amount, Managementco’s relevant taxation year is not statute-barred and it sends a written request to CRA in which it "demonstrate that it has reimbursed, or committed to reimburse, a sum equivalent to that whose deductibility was denied." However, CRA will not do this "if there is abuse or a deliberate overstatement of the fees."
Neal Armstrong. Q. 10 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA is non-committal on interest deductibility where only the indirect use of borrowed funds is to acquire Target’s shares
When asked about interest deductibility where, in the context of a leveraged buy-out, the Bank lends to Target under a secured loan bearing interest at 5%, Target lends the same sum to Acquireco at 5.5% interest, and Acquireco uses the same sum to purchase all of the shares of Target, CRA stated:
The submitted situation is not a typical leveraged buy-out structure. It instead more resembles… C.R.B. Logging… . We are not currently disposed to take a position respecting such a hypothetical scenario, but would be prepared to consider this question in the context of an advance ruling request.
Neal Armstrong. Q. 11 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA confirms that a part disposition of a partnership interest results in an anomalous pro rata reduction in the partner’s at-risk amount for the year of disposition
If a taxpayer disposes of all of its limited partnership interest partway through the partnership year but is allocated a partnership loss for that year, its full partnership ACB before the disposition can be taken into account (by virtue of s. 96(1.01)) in computing its at-risk amount at the end of that year, so that it would typically be able to deduct that loss against its other sources of income.
In contrast, if it instead disposes of most but not all of its partnership interest, there will be an immediate pro rata reduction in the ACB of its partnership interest, so that its at-risk amount at the end of the partnership year, and the deductible amount of the loss, will be correspondingly reduced. CRA notes that "no legislative provision alters this result."
Neal Armstrong. Q. 16 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
Income Tax Severed Letters 28 October 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Abstracting from Descarries, CRA will no longer permit an individual to effectively use the ACB of shares previously stepped-up using the capital gains deduction to create a loss to offset a gain on the sale of common shares
Following Descarries, CRA will no longer issue rulings in which an individual can in effect use shares (e.g., preferred shares) whose ACB was stepped up using the capital gains deduction ("CGD") (by redeeming those shares to create a deemed dividend and a capital loss) to offset or reduce a capital gain on a disposition of his or her common shares. CRA articulates the common thread between Descarries and such a now-GAARable transaction as follows:
Such transactions effectively accomplish a distribution of surplus of a corporation in the form of a capital gain even while such capital gain is reduced by a capital loss sustained from the disposition of shares whose ACB arose from the CGD or from the FMV of such shares on V-Day.
Neal Armstrong. Q. 14 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA acknowledges that no secondary adjustments are required for the operation of most income attribution provisions
Suppose that most of the income of a partnership has been allocated and distributed to a partner which is a personal trust, but that CRA reallocates most of such income under s. 103 to the other partner, which is a corporation (subject to a lower tax rate than the trust). Notwithstanding that the trust partner has enjoyed income on which it is not subject to tax, CRA acknowledges that there is no obligation for the trust to make any reimbursement payment to the other partner. More generally, CRA acknowledges that the operation of s. 15(1), 51(2), 69(1), 74.1(1) or (2), 74.4(2), 75(2), 85(1)(e.2), 86(2), or 103 to attribute income of one taxpayer to a second taxpayer does not obligate the first taxpayer to reimburse the second taxpayer therefor. This contrasts with ss. 20(1)(j), 90(14), 227(6.1) and 247(13), which provide for the tax consequences of a reimbursement.
Neal Armstrong. Q. 13 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA accepted that GAAR did not apply where a taxpayer deliberately triggered the application of s. 55(2) – but has notified Finance
Less overall tax is paid if, rather than Opco paying a taxable dividend to one of its shareholders (A, an individual), A rolls his shares into a new Holdco, Opco redeems the shares now held by Holdco (but without any s. 55(5)(f) designation being made by Holdco so that all of the redemption proceeds are subject to capital gains treatment under s. 55(2)), and then Holdco pays a capital dividend to A. CRA commented:
[T]he GAAR committee…recommended that the GAAR not be applied [in a similar file] having regard to the current state of the jurisprudence.
Nonetheless, the CRA is concerned by this type of tax planning, which in particular, is contrary to the integration principle. Accordingly, we have brought our concerns…to…Finance.
See also 16 June 2014 STEP Roundtable Q. 7, 2014-0522991C6.
Neal Armstrong. Q. 15 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA acknowledges that s. 18(3.1) does not require capitalization of repair or maintenance expenses incurred during a renovation
When asked if it agreed with Janota (a light-weight case cited for the proposition that s. 18(3.1) applies only to the capitalization of soft costs), CRA was somewhat non-commital, but acknowledged that "the general expenses of repair and maintenance which are incurred during the period of Construction [defined to include renovation or alteration] of a building but which are otherwise not related to such Construction do not come within subsection 18(3.1)."
By the way, a glitch in the translation of Q. 12 (where s. 55(2.1)(a) was rendered as s. 55(3)(a)) has been corrected.
Neal Armstrong. Q. 3 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA lets the chips fall where they may in interpreting the new s. 55(2) rules
Holdco holds shares of Opco with a nominal ACB and no safe income. In order to creditor-proof Opco, Holdco lends money to Opco equal to the accrued gain on the shares and receives that money back as an actual dividend (targeted to be tax-free). It does not matter if this transaction has no capital gains avoidance purpose. CRA accepted that since the purpose of the creditor-proofing is to reduce the fair market value of the Opco shares, the full amount of the dividend is deemed to be a capital gain.
Suppose that in the same transaction, the dividend from Opco was subject to Part IV tax, but this tax was refunded as a result of payment of an equivalent dividend to the individual shareholder of Opco. Under the new rules, it does not matter that the individual is not a corporation eligible for the s. 112(1) deduction, so that the dividend amount will still be deemed to be a capital gain.
Under a variation of the first alternative where the shares of Opco have full ACB, the dividend amount also will be a capital gain in CRA’s view, so that the ACB can only be utilized on a future disposition of the Opco shares.
Neal Armstrong. Q. 12 of 9 October APFF Roundtable under 2015 APFF Conference.