News of Note
CRA confirms that debt of a real estate company derives its value from real estate
Email this ContentIn the final version of an answer given at the 2012 IFA Roundtable, CRA confirmed that the determination as to whether the value of the shares of a parent are derived directly or indirectly from Canadian real property (so as to be taxable Canadian property) will not be affected by whether its wholly-owned Canadian subsidiary is capitalized only with equity or with debt as well.
Neal Armstrong. Summary of 17 May 2012 IFA Conference Roundtable 2012-0444091C6 under s. 248(1) – taxable Canadian property.
A partnership stub period accrual under s. 34.2 may not represent safe income “on hand”
Where a corporate partner with a calendar taxation year includes an accrual in income under s. 34.2(2) with respect to the six-month stub period following the June 30 fiscal period end of a partnership of which it is a member, CRA considers that in computing the safe income on hand of the corporation on December 31, a negative adjustment should be made if, in fact, the partnership sustained a loss during the stub period – as the "phantom income" inclusion under s. 34.2 does not represent income "on hand."
On the other hand, in another interpretation also released today, CRA indicated that "in general" it would consider that the s. 34.2(2) income inclusion would result in an increase in the value of the shares in question, so that it would be acceptable for the corporation to choose not to claim a transitional reserve under s. 34.2(11) so as to increase the amount of the safe income on hand attributable to its shares.
Neal Armstrong. Summaries of 21 March 2014 T.I. 2012-0471021E5 and 14 February 2014 T.I. 2012-0454481E5 F under s. 55(2) and s. 34.2(11).
Income Tax Severed Letters 16 April 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Restrictive covenant rule exemption may not apply on a sale to unrelated holdcos
Under the s. 56.4(7)(b) rule, s. 68 will not apply to allocate proceeds to a non-compete granted by a vendor to an arm’s length purchaser if the covenant is to not compete with the purchaser or a person related thereto. Accordingly, this exemption will not apply where the purchasers are a group of unrelated holdcos (purchasing a holdco of the vendor) and the non-compete is given to the Opco owned by them.
Neal Armstrong. Summary of Manu Kakkar, "Paragraph 56.4(7)(b ) Related-Person Problem and Arm's Length Minority Acquisitions," Tax For The Owner-Manager, Volume 14, Number 2, April 2014, p. 8 under s. 56.4(7)(b).
The requirement for transactions to be “related” may limit the scope of the “series” concept
S. 248(10) deems a series to include "any related transactions" completed "in contemplation" of the series. Unless the "related" branch is to be ignored (see Placer Dome), it restricts at least somewhat the scope of the series concept otherwise resulting from the broad interpretation of "in contemplation of" in Copthorne.
Alarie and Lockhart also advert to the Wittgenstein concept of "family resemblances" (analogizing to family members who "despite having no single set of features in common… may quite visibly belong to the same family,") and suggest that in order for transactions to be assimilated to a series they "must bear a family resemblance to those that Parliament could reasonably be considered to have had in mind in invoking the series concept as a means of anti-avoidance."
Neal Armstrong. Summary of Benjamin Alarie and Julia Lockhart, "The Importance of Family Resemblance: Series of Transactions After Copthorne", Canadian Tax Journal (2014) 62:1, 273-99 under s. 248(10).
CRA finds, despite daily interest accrual requirement, that bonuses paid to depositors were interest
CRA found that "promotional bonuses" paid by a credit union to depositors, calculated as a percentage of the deposit balances at specified anniversaries provided that a deposit had been in place for a stipulated period, constituted interest to the depositors. Although CRA professed a requirement that an amount "must be calculated on a day-to-day accrual basis" to qualify as interest, in context it did not treat this as entailing any requirement that the accrued interest must be capable of being calculated at the end of each day during the term of the debt – so that the daily accrual requirement may be largely vacuous. See s. 12(1)(c) commentary - Daily accrual of interest.
Neal Armstrong. Summary of 22 January 2014 T.I. 2014-0517121E5 under s. 12(1)(c).
CRA requires dual T4A issuances for fees to paid to an artist’s corporation and dues paid to her union
Where a producer pays fees under a contract of service with the corporation of an incorporated performing artist and also is obligated to pay additional dues directly to the artists’ union, CRA considers that the producer is required to issue two T4As for the respective amounts to the corporation (to be included in its business income) and to the artist (to be included in her employment income).
Neal Armstrong. Summary of 7 March 2014 Memo 2013-0507171I7 F under Reg. 200(1).
CRA does not accommodate pad sales by real estate pension corps
A s. 149(1)(o.2)(ii) pension corporation is required to limit its real estate activities to "acquiring, holding, maintaining, improving, leasing or managing capital property that is real property" of the corporation.
Where the pension corporation acquires a single parcel to develop as a shopping centre but severs and sells off a small portion that represents excess land, CRA quite predictably considers that it would be a question of fact whether the excess land was acquired as capital property. (The problem is that appreciation by the time the severance is obtained may be anticipated.) Finance accommodated the similar issue of pad sales by REIT subsidiaries by providing the new rules on "eligible resale properties."
Neal Armstrong. Summary of 5 March 2014 T.I. 2013-0490641E5 under s. 149(1)(o.2).
Income Tax Severed Letters 9 April 2014
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The typical structuring of old-for-new option exchanges generally will not satisfy the accommodation of option exchanges in the revised bump denial rules
Comments of Carr and Colden on the recent bump denial amendments include:
- Although specified property has been expanded by deeming shares to include options on shares (which sounds good), this provides no relief if a stock option exchange is structured in the usual manner: to benefit from the amendment, the parent must acquire the old target options in exchange for new parent options, so that the old options cannot simply be cancelled first.
- The inclusion in specified property of debt which was issued solely for money should extend to convertible debt. However, the convertible debt might be determinable property (described in s. 88(1)(c.3)(ii)), given that specified property is not excluded from determinable property.
- In the context of the new rule which is intended to provide relief by permitting a person to be a specified person before the incorporation of the bump parent, such person should be considered (as an interpretative matter) to satisfy the proposed requirement of being related to the bump parent at the very moment of the incorporation of the bump parent notwithstanding that the bump parent would not yet have issued any shares.
Neal Armstrong. Summaries of Brian R. Carr and Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99 under ss. 88(1)(c.9), 88(1)(c.4)(ii) and 88(1)(c.2)(i).