News of Note
CRA is deliberating on how to relax its procedures for s. 221.2 re-appropriation requests
Email this ContentCRA recognizes that, following Cybernius Medical and Pomeroy’s Masonry, it will need to change its current procedures for dealing with re-appropriation requests under s. 221.2. Those procedures have the effect of denying such requests except in quite narrow circumstances. It has started deliberating, and there will be clarity in 2018 on this issue.
Neal Armstrong. Summary of 20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.10 under s. 221.2.
CRA finds that a class-action settlement fund was required to file T3 returns
Settlement funds received by a law firm from the defendant in a class action suit are held in a settlement trust, to be applied solely for compensating class members after approval of the terms of the settlement by final Court order. In the meantime, a T5 slip is issued annually to the “law firm in trust” respecting interest earned on these funds.
CRA found that the trust was not exempt from tax on the interest income under s. 149(1)(w), which requires inter alia that the trust in question is “established as required under the laws of Canada or of a province,” stating that this was to be contrasted with the situation where the trust is set up “pursuant to a court decision facilitating the administration of the law.” It also indicated that the trustees of the trust were required to file T3 returns on the basis inter alia of s. 150(1.1), which requires the trust to file returns if tax is payable by it.
IT-129R (archived) (see also 9238487) states:
Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined.
It is unclear whether CRA did not mention this position only because the waivers requirement could not be satisfied, or because this position may have vanished due to a changed landscape including the enactment of s. 150(1.1). In any event, the answer given by CRA is much better than being required to issue T3 slips to hundreds or thousands of class members.
Neal Armstrong. Summaries of 28 June 2017 External T.I. 2017-0705431E5 under s. 149(1)(w) and s. 150(1.1)(b)(i).
Central Fund of Canada Ltd. will be converted into a mutual fund trust through a s. 132.2 merger with a “Newco” unit trust
Central Fund of Canada Limited (“CFCL”) is a mutual fund corporation holding gold and silver bullion that has an accrued gain of approximately Cdn.$1.7 billion. It is controlled by the Spicer family, who control its 40,000 common shares, and its 252M Class A shares (which have largely equivalent per-share economic rights to the Common Shares) are mostly held by the public. Before Sprott overtures commenced, its Class A shares had been trading on the TSX at a 7% discount to the underlying bullion value.
In order for Sprott to effectively purchase the Spicer management business and for CFCL to be converted into a mutual fund trust, it is proposed that under an Alberta Plan of Arrangement,
- the common shares will be sold to Sprott for cash consideration reflecting the value of their voting rights (there is no coattail),
- the shares of a “New Administrator” will be sold to Sprott for $85M in cash and 7M Sprott shares plus an earnout, and
- CFCL will be merged under s. 132.2 into a trust newly-formed by Sprott (Sprott Physical Gold and Silver Trust).
Under the exchange terms, the Common and Class A shares will be treated as having equal values, so that Sprott will only end up with 0.016% of the Trust units, i.e., it will have paid a 2900% premium for the common shares over what turned out to be their intrinsic value.
In addition to the Trust units being redeemable for cash equalling 95% of the lesser of their NAV and 5-day VWAP, larger blocks of units may be redeemed in specie, which is expected to largely eliminate the trading discount. Using bullion to redeem units in one’s capital is not a sale or other trading transaction, and the bullion held by the Trust should be capital property given that no significant bullion sales will occur. Gains realized on an in specie redemption will be allocated to the redeemed unitholder.
The Trust will be a PFIC.
Neal Armstrong. Summary of Central Fund of Canada Circular under Public Transactions – Internal S. 132.2/107.4 Mergers – MFC Conversion to MFT.
Aurora is making a capped share offer for CanniMed
The Aurora share-for-share offer for CanniMed (another TSX-listed cannabis company, 38% of whose shares have been locked up) is capped at a value per CanniMed share of $24.00, so that if there is appreciation in the Aurora shares above this cap, the exchange ratio will be reduced accordingly. This does not affect the availability of the s. 85.1 rollover.
Neal Armstrong. Summary of Aurora Cannabis Inc. Offer under Public Transactions – Mergers & Acquisitions – Unsolicited Bids.
CRA provides the new standard formulation for s. 55(2) rulings on loss consolidation structures
CRA provided the usual rulings respecting a triangular loss-shifting arrangement for the shift of non-capital losses by Parentco to its wholly-owned Profitco (including a provincial GAAR ruling) except that it did not rule that s. 12(1)(x) or 9 would not apply respecting the funding by Parentco of Newco’s preferred share dividend obligations. Perhaps none was requested. In addition, it ruled that s. 55(2) would not apply to the dividends paid by Newco to Profitco to fund the interest on the loan by Parentco to Profitco, based on a representation that:
The only purpose of both the payment and the receipt of the dividends on Newco’s Preferred Shares … is to provide a reasonable return on the Newco Preferred Shares issued by Newco to Profitco. More specifically, none of the purposes of the dividends is to reduce the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of Profitco.
Neal Armstrong. Summaries of 2016 Ruling 2016-0652041R3 under s. 111(1)(a) and s. 55(2.1)(b).
CRA indicates that interest on shareholders’ borrowings to fund an interest-free corporate loan may be deductible even if the proportionate-to-shares test is not met
In S3-F6-C1, para. 1.55, CRA states:
Generally, a deduction for interest will be allowed if borrowed money is used to make an interest-free loan to a wholly-owned corporation (or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings) and the proceeds have an effect on the corporation's income-earning capacity.
CRA has now clarified its comments in the same part of the Folio on Canadian Helicopters by stating that, where the above test is not satisfied (e.g., where the loans are disproportionate to the shareholdings) then, in order to enjoy interest deductibility:
[T]he taxpayer must demonstrate that making an interest-free loan to a corporation affects the taxpayer's income-earning capacity and, therefore, that there is a sufficient link between the interest-free loan and a source of the taxpayer's income.
Neal Armstrong. Summary of November 2017 External T.I. 2017-0712141E5 F under s. 20(1)(c)(i).
CRA rules that the assumption by a partner of a debt owing to it by a partnership bumped the partner’s ACB for s. 98(5) purposes
A partnership was wound-up under s. 98(5) as a result of the limited partner transferring its interest under s. 85(1) to the general partner. Immediately before this happened, the general partner assumed a debt that was owing to it by the partnership, with the result that the debt was extinguished by operation of law.
CRA ruled that the ACB of the general partner’s interest for s. 98(5) purposes was increased by the amount of such assumed debt, and that a forgiven amount did not arise on the extinguishing of the debt.
Neal Armstrong. Summary of 2016 Ruling 2016-0651621R3 under s. 98(5).
CRA finds that a non-TCP capital loss realized on emigration was available for carryforward to offset a TCP gain
The Directorate confirmed that a non-resident may offset a taxable capital gain on the disposition of taxable Canadian property with a net capital loss that arose on a previous deemed disposition, while the taxpayer was a resident of Canada, of capital property that was not TCP. The particular situation being addressed was a Canadian corporation that realized a deemed capital loss under s. 128.1(4)(b) on the disposition of non-TCP on its emigration from Canada, and carried that loss forward for use when it subsequently disposed of TCP. The restriction in s. 111(9) did not apply because such deemed disposition occurred (barely) within the deemed stub taxation year, ending immediately before the time of its emigration, and it was still resident in Canada in that stub year.
Neal Armstrong. Summary of 24 July 2017 Internal T.I. 2017-0705801I7 under s. 111(9).
Filiatrault – Tax Court of Canada finds that there is a due diligence defence to the imposition of interest under the ETA
Smith J found that an individual, who received a permit from the Quebec Order of Psychologists which had the effect of permitting him to practise psychotherapy, was also practising psychology in light of a statement in the Professional Code of Quebec that “psychotherapy is psychological treatment.” Smith J nonetheless found that the taxpayer did not qualify as a “practitioner,” whose definition required in relevant part that the supply of psychological services be by “a person who…practises the profession of…psychology.” He found that the quoted phrase “is reserved to psychologists who are members of the Ordre des psychologues du Québec,” i.e, merely being issued a certificate by the Order did not render him a member of the psychololgists’ profession.
CRA had assessed the taxpayer for interest under ETA s. 280 for his failure to file returns for what had now been found to be a taxable activity. Smith J found that such interest was not payable because the taxpayer had established a due diligence defence, based on having consulted on the tax status of his supplies with his accountant and with professionals in his health care network.
In support for his view that a due diligence defence was available, Smith J cited a case based on a previous version of s. 280 which, on its terms, imposed a “penalty” rather than “interest,” without giving any indication that he was aware of this statutory wording change. (Finance likely instigated this amendment because it did not like a case which found that a due diligence defence was available under s. 280.) Accordingly, this aspect of his decision may be per incuriam.
Neal Armstrong. Summaries of Filiatrault v. The Queen, 2017 TCC 232 under ETA Sched. V, Pt. II, s. 1 – “practitioner,” s. 280(1).
CRA indicates that an LLC resulting from a conversion from a USLP has high inside and outside basis
CRA had previously commented that the conversion of particular USLPs into LLCs gave rise to FMV dispositions at the member and USLP level. CRA has now stated its “general view” (subject to a caveat about ruling applications being better) that the starting outside and inside basis for the new LLC also would be such FMV. CRA also adverted to its recent position that US LLPs and LLLPs generally are corporations – but it was beyond the scope of the question to comment on conversions going the other way, e.g., converting an LLP (viewed as a corporation) into an LP.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference CRA Roundtable, Q.15 (Official Response) under s. 95(2)(f).