News of Note
CRA indicates that having equipment owned separately from the services business in which its product is used could permit it to qualify as Class 53 property
Email this ContentEquipment was acquired by a corporation (“Aco”), wholly-owned by a dental surgeon, to manufacture dental restorative products for use as part of its dental services. Alternatively, the surgeon could incorporated a second wholly-owned corporation (“Bco”) to acquire the equipment and sell, to Aco, the dental restorative products it manufactured using the equipment.
CRA indicated that the first alternative did not satisfy the requirement, for the equipment to qualify as Class 53 property, that it be used in the manufacturing or processing of goods for sale – as the goods (the dental restorative products) instead were used in providing a dental service.
Under the second alternative, assuming that there indeed was a sale of the manufactured products by Bco to Aco under the governing provincial law, the equipment could qualify as Class 53 property to Bco assuming that the other Class 53 requirements were satisfied.
Neal Armstrong. Summary of 29 May 2024 External T.I. 2019-0819561E5 F under Schedule II - Class 53.
CRA confirms that it generally does not consider a benefit to be conferred as a result of a bona fide interest-free intercorporate loan
Regarding whether an interest-free loan between two corporations owned by different shareholders gives rise to a taxable benefit under s. 15(1) or 246(1), CRA first stated:
[S]ubsection 15(1) could apply to the extent that it is established that a benefit is conferred by a particular corporation (“Aco”) on, for example, an individual who does not deal at arm's length with, or is affiliated with, a shareholder of Aco or its contemplated shareholder. That said, our Directorate does not generally consider that a benefit is conferred under subsection 15(1) in the context of a bona fide inter-corporate loan made in the ordinary course of the corporations' business. … Subsection 15(1) could apply, for example, if at the time the loan is made by Aco, the other corporation (“Bco”) is unable to repay the loan and/or provide reasonable security, with the result that the value of Aco would be impaired [see Vine Estate].
Turning to s. 246(1), CRA stated:
[T]o the extent that it were determined that the shareholder of Bco and/or Bco would not have an interest in Aco (and, among other things, that the shareholder of Bco and/or Bco would not be shareholders or contemplated shareholders of Aco), it would appear that the last condition for the application of subsection 246(1) [regarding income inclusion if a direct payment] would not be satisfied. On that basis, subsection 246(1) would be inapplicable … .
CRA also indicated, if the loan was not bona fide, the applicability of s. 56(2) should also be considered.
Neal Armstrong. Summaries of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.1 under s. 15(1) and s. 246(1).
CRA indicates that vacant land which previously had been rented-out did not qualify as a “former business property” for s. 44 purposes
CRA indicated that a property, which apparently was sold by the taxpayer because it could no longer be rented out to third parties, did not qualify as a “former business property” for purposes of the replacement property rollover in s. 44, stating that property which “is vacant but would otherwise earn rent, would not qualify.”
Neal Armstrong. Summary of 26 July 2024 External T.I. 2024-1014761E5 under s. 248(1) – former business property.
Chad – Tax Court of Canada finds that the presumption that commercial activity is in pursuit of profit and, thus, a source, was rebutted where there was no real interest in generating profit
In order to generate a targeted loss of $22 million for use in his 2011 taxation year, Chad agreed to pay a fee of $240,000 to a UK foreign exchange (FX) trading firm (Velocity) to enter into straddle trades (quite similar to those in Paletta) in which he would enter into contracts both for the purchase and sale of US dollars, such that he was close to fully hedged and then, near to the year end, closed out whichever of the “long” or “short” contracts were in a loss position. These trading activities, when completed in 2012, resulted in a net profit to Chad of $6,200.
In finding that these trading activities did not constitute a source of income to Chad, so that the 2011 losses (and the fee) were non-deductible in computing his income, Sommerfeldt J indicated that Paletta had found that “Stewart did not do ‘away with the pursuit of profit as a prerequisite for the existence of a business’” and concluded:
While the “assumption underlying the test in Stewart is that a commercial activity is undertaken for profit,” [Stackhouse, at para. 103] … the documentary evidence calls that assumption into question … .
The documentary evidence … does not give any indication that Mr. Chad … intended, in conducting the FX Activities, to achieve a profit/loss amount great enough to offset the $240,000 fee, which was a significant expense … . Thus … the intention of Mr. Chad … in implementing the Trades, was not to earn a profit … .
Ironically, the Crown argued that the fee had been paid by Chad for the agreement of Velocity to generate the $22 million loss and not for its trading activities. If this argument had succeeded, it would imply that the fee was not an expense of the trading activities which, without that “expense,” generated a profit, i.e., that there indeed was a source of (actual) income.
Neal Armstrong. Summaries of Chad v. The King, 2024 TCC 142 under s. 3(1) – business, and General Concepts - Sham.
Income Tax Severed Letters 30 October 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states sale by 2 equal shareholders of 1/3 of each’s shares to a 3rd unrelated person might not entail an acquisition of control; similarly where 1 of 4 equal shareholders is redeemed
A, B and C were three unrelated individuals. A and B, who were the sole and equal (common) shareholders of Opco, each sold 1/3 of their shares to C, for FMV consideration.
Would a new group (A, B and C) be considered to have acquired control of Opco, or would CRA consider that the group formed by A and B still controlled the corporation?
CRA indicated:
- The CRA position is that the shareholders of a private corporation are rebuttably presumed to act in concert to control the corporation (the “control group presumption”).
- At the 1984 CTF Roundtable, Q.42, regarding the same situation, CRA indicated that the two original shareholders would still be in a position to control the corporation after the disposition of the shares, but that to the extent that the two original shareholders would cease to act in concert to control the corporation, the disposition of the shares could result in the acquisition of control of the corporation. CRA now further commented that that it would be reasonable to consider there to be an acquisition of control by a group of which C was a member if A or B withdrew from control of Opco and that this “could also be the case if, after the disposition of the shares, it was determined that A, B and C formed a group of persons that controls Opco.”
In another fact pattern, A to D (four unrelated individuals) each held 25% of the shares (being common shares) of Opco. Would the repurchase by Opco of D’s shares result in an acquisition of control of Opco?
CRA indicated that such repurchase would result in an acquisition of control by a group consisting of the three remaining shareholders unless the control group presumption could be rebutted by demonstrating, for instance, that control of Opco was exercised by the same group before and after (e.g., by the group consisting only of A to C).
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.17 under s. 251.2(2)(a).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in June of 2001. Their descriptors and links appear below.
These are additions to our set of 2,984 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2001-06-08 | 10 May 2001 Internal T.I. 2001-0065677 F - SIGNIFICATION DE "MOMENT DONNÉ" | Income Tax Act - Section 6 - Subsection 6(21) | choice of time to calculate the loss is generally that of the taxpayer |
| 28 May 2001 Internal T.I. 2001-0066147 F - ALIMENTS - MACHINES DISTRIBUTRICES | Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(c) | s. 67.1(2)(c) exception would apply to food and beverages sold by employer through vending machines | |
| 31 May 2001 External T.I. 2001-0066215 F - Clause de survie | Income Tax Act - Section 70 - Subsection 70(6) | 30- or 60-day survivorship clause in will does not preclude application of s. 70(6) | |
| 1 June 2001 Internal T.I. 2001-0066297 F - CREDIT EQUIVALENT - PENSION ALIMENTAIRE | Income Tax Act - Section 118 - Subsection 118(5) | legal determination would be required as to whether a subsequent agreement which purported to eliminate a support obligation for a child under a court order, had that effect | |
| 22 May 2001 Internal T.I. 2001-0083987 F - EMPLOYEUR PAYE IMPOT POUR EMPLOYÉ | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | employers’ reimbursement of employees’ reassessments for participating in employer’s scheme were a taxable benefit | |
| 18 May 2001 External T.I. 2000-0040405 F - Revenu protégé - options | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | ACB increase to options as a result of s. 52(1) reduced the safe income otherwise allocable to the shares acquired on the options’ exercise | |
| Income Tax Act - Section 52 - Subsection 52(1) | s. 15(1) benefit on stock option grant added to options’ cost under s. 52(1) |
CRA reiterates prior positions on the new GAAR
CRA reiterated some prior guidance on its interpretation of the GAAR following the introduction of s. 245(4.1), including:
- its affirmation in 2024-1008251I7 of IC88-2 and IC88-2S1;
- as per 2023-0987941I7, it will continue to rule on pipeline-type post-mortem transactions that meet its conditions, but not re plans similar to the example provided in the Explanatory Notes re surplus stripping (Example Jane) or similar plans where an individual shareholder of a corporation proposes to undertake non-arm's length transactions, one of the principal purposes of which is to establish an ACB in order to extract retained earnings; and
- as per 2024-1016011E5, it will not generally apply the current GAAR to transactions solely intended to crystallize pre-June 25, 2024 capital gains.
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.16 under s. 245(4).
CRA indicates that payment of trust-related professional fees by a trustee or beneficiary prior to (rather than after) trust settlement does not engage s. 75(2)
CRA indicated that the payment of trust-related professional fees by a trustee or beneficiary prior to trust settlement does not engage s. 75(2), whereas such payments following the settlement “could be considered a contribution or transfer made indirectly to the trust by that other person and could, depending on the circumstances, result in the application of subsection 75(2).”
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.15 under s. 75(2).
CRA considers that losses from a business of Holdco providing admin services to Opco likely would disappear following an acquisition of control and their amalgamation
Holdco, a CCPC, had accumulated non-capital losses (NCLs) arising from the management services it had rendered over the years (i.e., the services of its employee providing administrative services) to its wholly-owned manufacturing subsidiary, Opco. Immediately after an acquisition of control of Holdco by Buyco, Holdco and Opco amalgamated, so that the same services of the employee now occurred within Amalco.
In finding that the NCLs accumulated by Holdco likely could not be deducted in computing Amalco's taxable income in light of the ss. 87(2.1) and 111(5) restrictions, CRA stated:
[O]n the limited basis of the facts submitted … it would be reasonable to consider that the business that generated the losses, namely the management services business that was carried on by Holdco prior to the acquisition of control … ceased to be operated after the amalgamation. This conclusion is based in particular on … the management activities performed by the Amalco employee [being] intended solely to support the corporation in the manufacturing field, and … not in themselves represent[ing] the carrying on of a business. …
Regarding the factual variation where Amalco had two divisions: one carrying on the manufacturing business; and the second division for management services, including those previously rendered by Holdco to Opco, CRA stated:
[C]reating two divisions with a separate financial statement for the management services and manufacturing businesses would not change our conclusion … that it would be reasonable to consider that the management services business that was carried on by Holdco ceased to be carried on after the amalgamation of Holdco and Opco.
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.14 under s. 111(5)(a).