News of Note
CRA confirms that the exit tax exclusion for “rights” under a stock option “agreement” includes unvested rights under a free share plan
Email this ContentThe exit tax in s. 128.1(4) does not apply to a "right" of an individual under "an agreement" referred to in s. 7(1). CRA has confirmed that this exclusion includes unvested rights to receive shares (in this instance, "free" shares for which no exercise price will be paid) under "any arrangement under which a corporation agrees to issue its shares to one of its employees."
Neal Armstrong. Summaries of 26 February 2014 T.I. 2013-0487961E5 under s. 128.1(10) – excluded right or interest and Treaties – Art. 15.
Income Tax Severed Letters 26 March 2014
This morning's release of 19 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Placement agencies can avoid responsibility for source deductions by placing incorporated workers
A placement or employment agency need not deduct and remit source deductions and employer premiums if payments are made to a corporation (such as an incorporated worker) for services rendered. Thus, a placement agency may limit its potential exposure for such deductions and premiums by placing incorporated rather than unincorporated workers.
Neal Armstrong. Summary of Michael Gemmiti, "Placement Agencies: Insurable and Pensionable Employment", Canadian Tax Highlights", Vol. 22, No. 3, March 2014, p. 10 under s. 125(7) – personal services business.
CRA considers that the GST manufacturer’s rebate rule is only available for rebates paid to a third party
Although on its face, ETA s. 181.1 could apply where a registered vendor refunds part of the selling price together with GST to a registered purchaser, CRA’s position is that s. 181.1 only "applies to rebates paid by a supplier to third parties with whom the supplier was not dealing directly." The significance of this is that if the vendor does not issue (or receive) a credit note (or debit note) in the proper form for the adjustment, so that the vendor is not entitled to an input tax credit for the refunded GST under s. 232(3), the vendor also will not be entitled to claim an ITC under s. 181.1. However, in this situation CRA considers that the purchaser nonetheless is required to remit the refunded GST on general principles even though there is no explicit addition to its net tax obligation under s. 232.
Neal Armstrong. Summary of 8 July 2013 Interpretation 145134 under ETA s. 232(3).
CRA refuses to grandfather an existing trust from an adverse policy change without an indication of reliance on its earlier position
After having taken a more favourable position between 1988 and 1995, CRA then indicated that it considered the settlement of a revocable living trust to give rise to a new full-blown trust over all the contributed property. CRA refused to give the taxpayers the benefit of its more favourable previous policy respecting a revocable living trust that had been settled prior to 1988, stating that "it cannot be said that at the time, the subject taxpayers relied on opinions we subsequently expressed between 1988 and 1995." Consequently, the trust was subject to the 21-year deemed realization rule based on the year of settlement.
Neal Armstrong. Summary of 14 February 2014 Memo 2013-0490891I7 under s. 104(4).
CRA may challenge alleged payments of dividends through book entries
In response to a suggestion that a dividend to a sole individual shareholder was paid through a journal entry recording an increase in a loan owing to the shareholder or a decrease in a loan made to her, CRA stated:
The necessary documentation must be provided in a particular instance to corroborate that factually and legally a dividend has been paid by the corporation and received by the shareholder. In this regard, book entries are ancillary and serve only to report transactions [citing Hickman].
Sounds like a set-off agreement or written loan amendment would be a good idea.
Neal Armstrong. Summary of 30 January 2014 T.I. 2013-0515761E5 F under s. 82(1).
Canadian multinationals have a 26 June 2014 deadline to rewrite the history of their CFA distributions
Canadian corporate taxpayers can elect by June 26, 2014 to apply Reg. 5901(2)(b) (and various other provisions) retroactively, thereby effectively according a choice as to whether post-December 20, 2002 foreign affiliate distributions reduced surplus or instead ground basis. For example, this choice could resolve uncertainty where it was unclear whether an historic distribution was a capital or dividend distribution or inadvertently elevated taxable surplus. The taxpayer might also elect for a distribution to come out of exempt surplus before that surplus was eroded by exempt losses.
Neal Armstrong. Summaries of Geoffrey S. Turner, "June 2014 Election Deadlines for Retroactive Application of New Foreign Affiliate Reorganization Rules", CCH International Tax, No. 74, February 2014, p. 1 under Reg. 5901(2), s. 88(3.3), s. 95(2)(d.1) and s. 95(2)(e).
Descarries – Tax Court of Canada finds that using outside basis to step up outside PUC was contrary to s. 84.1's object
Some siblings would have realized a deemed dividend of $625,000 and a capital loss of $350,000 if they had wound-up a real estate company (Oka). Instead, they:
- did a dirty s. 85 exchange of their Oka shares for Oka shares with a stepped-up adjusted cost base
- transferred those shares to a Newco for Newco shares with a stepped-up paid-up capital
- redeemed most of their Newco shares (with cash derived from a previous loan from Oka to Newco), thereby realizing a capital loss to offset capital gain realized on the 1st step
- following a sale of the real estate, wound-up Oka, then Newco
so that they realized a deemed dividend of only $275,000 (i.e., $625,000-$350,000) and no net capital gain (or loss).
Hogan J found that these transactions abused the object of s. 84.1 (a general anti-avoidance rule analysis which the Crown had not suggested). The transactions were carefully designed to be well beyond the specific scope of ss. 84(2) and 84.1, but under the broader GAAR brush this didn’t matter.
Neal Armstrong. Summaries of Descarries v. The Queen, 2014 DTC 1143 [at 3412], 2014 TCC 75 under ss. 84(2), 245(4) and 171(1).
Income Tax Severed Letters 19 March 2014
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Two-tier joint ventures are not accepted for GST/HST purposes
Where all the members of a real estate joint venture (JV-1) enter into a 50-50 joint venture (JV-2) with a seventh person respecting a further property, JV-1 and JV-2 will be treated as separate joint ventures, so that a decision to have a GST joint venture election in place for JV-2 and not JV-1 will be respected. Furthermore, all participants in JV-2 will need to make the JV-2 joint venture election.
Neal Armstrong. Summary of 12 July 2013 Interpretation 152393 under ETA - s. 273.