News of Note
CRA states that a no-cost endorsement to a life insurance policy to add benefits could be a disposition
Email this ContentCRA did not concede that an endorsement to provide a new benefit under an exempt life insurance policy for no cost and without any underwriting requirement, to a defined set of policyholders, would not constitute a disposition, and instead stated that whether there was a disposition turned on whether the changes made were “so fundamental as to go to the root of the policy” and that “[w]here a policy is silent with respect to a particular type of change, the amending of the policy, if a material change, could result in a disposition of the existing policy and the acquisition of a new policy at law.”
Neal Armstrong. Summary of 28 September 2023 CLHIA Roundtable Q. 1, 2023-0971701C6 under s. 148(9) – disposition.
MMV Capital – Federal Court of Appeal applies Deans Knight regarding acquiring an approximate 100% interest in a Lossco with no change of de jure control
A venture capital corporation (MMV) acquired 49% of the voting common shares of the respondent while in interim bankruptcy proceedings and subscribed $1,000 for a large number of non-voting common shares giving it over 99.8% of all the common share equity. It then financed taking the respondent out of bankruptcy proceedings at a modest cost, and transferred a loan portfolio of U.S.$86 million to the respondent, effectively in consideration for secured debt and preferred shares, thereby reducing the equity interest of the five arm’s length holders of 51% of the MMV voting common shares to less than 0.01% and also permitting the use of the respondent’s non-capital losses.
In applying Deans Knight to reverse the Tax Court finding that there was no abuse of s. 111(5), Monaghan JA stated:
The object, spirit and purpose of subsection 111(5) – its rationale – is “to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders”.
As in Deans Knight, what happened here is exactly what subsection 111(5) seeks to prevent.
Regarding the respondent’s submission that the original five voting common shareholders still could have exercised their de jure control to elect a new board that would pay them dividends, she noted that MMV could at any time retract its preferred shares and demand on its loan to deplete the respondent of all its assets, so that “while their common shares provided the five original shareholders with de jure control, they had no effective way to use that control to benefit from the respondent’s losses.”
Neal Armstrong. Summary of The King v. MMV Capital Partners Inc., 2023 FCA 234 under s. 245(4).
The CRA safe income policy changes announced on 28 November 2023 are effective for taxation years commencing after that date
Today, the Canadian Tax Foundation posted the following message on CRA’s behalf regarding CRA presentation on “S. 55(2) and Safe Income - Where Are We Now?”:
Pursuant to our presentation on Safe Income at the 2023 Annual Conference on November 28, 2023, all announcements that constitute a change in position will apply prospectively to calculations of safe income for taxation years beginning after November 28, 2023.
Neal Armstrong. Summary of 4 December 2023 Canadian Tax Foundation Event Announcement under s. 55(2.1)(c).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and 6 further CRA interpretations released during July of 2002. Their descriptors and links appear below.
These are additions to our set of 2,655 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 21 1/3 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 |
|---|---|---|---|
| 2023-11-29 | 4 October 2023 Internal T.I. 2020-0837811I7 F - Suspended loss | Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(c) - Subparagraph 40(3.5)(c)(i) | suspended loss rule continued to apply when the transferee was amalgamated, then wound-up into the transferor |
| Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(a) | corporation in its 2 capacities of transferor, and continuation of transferee, was affiliated with itself | ||
| 2002-07-19 | 6 August 2002 Internal T.I. 2002-0130897 F - RECOMPENSES ES QUASI-MONETAIRES | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(l) - Subparagraph 18(1)(l)(ii) | s. 18(1)(l)(ii) applies irrespective whether the membership is an employer gift within the ITTN 25 gifts policy |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | gift cards and smart cards with spendable balances do not come within the ITTN 25 gifts policy | ||
| Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(d) | s. 67.1(2)(d) exclusion inapplicable to meal or show ticket gifts within ITTN 25 gifts policy | ||
| 9 August 2002 Internal T.I. 2002-0145817 F - TAUX DE DEDUCTION - PTPE - ANNEE 2000 | Income Tax Act - Section 38 - Paragraph 38(c) | BIL realized under s. 50 at end of year (2000) so that ½ an ABIL | |
| 2 August 2002 External T.I. 2002-0152445 F - RENTE VIAGERE ET CREDIT | Income Tax Act - Section 118 - Subsection 118(7) - Pension Income - Paragraph (a) - Subparagraph (a)(i) | an annuity that ceases upon attaining a specified age is not a “life annuity” | |
| 13 August 2002 External T.I. 2002-0121295 F - PBR DES PARTS PRIVILEGIEES | Income Tax Act - Section 43 - Subsection 43(1) | sale of preferred and retention of common partnership units entailed part disposition of single property/ different s. 43 allocation methods possible | |
| Income Tax Act - Section 248 - Subsection 248(1) - Property | preferred and common partnership units were single property | ||
| 6 August 2002 External T.I. 2002-0130735 F - DISPOSITION D'UN PERMIS | Income Tax Regulations - Schedules - Schedule II - Class 14 | licence to operate a seniors home was eligible capital property whereas related agreements with Ministry (that after a point were not automatically renewable) were Class 14 property | |
| 2002-07-05 | 31 July 2002 External T.I. 2002-0153135 F - FRAIS JUDICIAIRES | Income Tax Act - Section 60 - Paragraph 60(o.1) | amounts incurred by retiree association in suing pension fund not deductible under s. 60(o.1) unless incurred as agent for retirees |
CRA jettisons the concept of safe income on hand and revises positions on computing safe income
In a presentation regarding its forthcoming paper on s. 55(2) and safe income, CRA indicated that it is no longer applying the concept of safe income “on hand.” Thus, in CRA’s view, while the “fundamental question is still the same”, there should no longer be the two-stage inquiry dictated by the Federal Court of Appeal in Kruco, namely, that income of the corporation as modified by s. 55(5) is first computed, and then the amount of that income that is still “on hand” is determined by looking at cash outflows following the computation. Instead, there will now be a single-stage inquiry as to how much of the corporation’s income as so computed contributed to the gain on the shares.
Also, contrary to Kruco and CRA’s previous acceptance thereof, CRA now considers that phantom income does not contribute to a capital gain on shares.
Given the significant departure from well-established administrative positions and the pending detailed position paper, such pronouncements will presumably apply prospectively (as with previous changes in position regarding Kruco) to avoid negatively impacting taxpayers that relied on such positions in planning their affairs. One might add that, in light of the lack of significant changes in the wording of s. 55(2.1)(c) from that applied in Kruco, Kruco is likely still good law unless the Court of Appeal subsequently determines that it was “manifestly wrong” (see Chen).
Further CRA comments included:
- In a change from its previous position that all contingent liabilities and reserves reduce safe income. CRA now considers that contingent liabilities or reserves reduce safe income only if they reduce or have the potential to reduce the income of the corporation on their materialization, so that there is no immediate effect on safe income if they are capital in nature.
- Rather than refundable taxes only being included in income when received, CRA now considers that the portion of refundable taxes that will be reimbursed due to a payment of a dividend before the end of the taxation year will be considered to be a reduction of such taxes paid or accrued (so that the potential safe income is reduced only by the net amount).
- When a corporation realizes the accrued gain, on a property that it had acquired on a rollover basis in consideration for preferred shares, on disposing of that property, that gain is now considered to contribute to the gain on those preferred shares, so that such gain is to be included in the safe income of the preferred shares.
- In situations where Holdco wholly owns a distributing corporation (Opco) and assets of Opco are spun-out to a transferee corporation (Newco) that is also owned by Holdco, the general formula for the split of the direct safe income (DSI) between Holdco and Newco is as follows:
- DSI on the shares of Newco: DSI of Opco prior to reorganization X net cost amount of the assets transferred to Newco / total net cost amount of the assets of Opco prior to the reorganization
- DSI on the shares of Opco after the reorganization: DSI of Opco prior to the reorganization X net cost amount of the assets retained by Opco / total net cost amount of the assets of Opco prior to the reorganization
- In a one-wing split-up butterfly wherein a portion of the assets of a corporation (DC) owned by Holdco1 and Holdco2 is spun-off to Holdco2, there could be a resulting misalignment of basis (including safe income that could be capitalized), so that Holdco1 could simply sell the shares of DC without any negative implications and Holdco2 could sell the assets it received with an increased ACB. However, where the reorganization is a bona fide split-up between arm’s length persons, there is no requirement to allocate safe income based on the formula.
- CRA then provides detailed examples showing how safe income and ACB should be allocated where there is a transfer (or successive transfers) of property on a rollover basis between related corporations, so as to avoid a misalignment of basis including safe income that could be capitalized.
- For instance, CRA indicated that where there was a spin-off of ½ of the assets of Opco to Newco, entailing a transfer of ½ of the shares of Holdco’s shares of Opco to Newco, it might be necessary for less than ½ of the ACB of the shares of Holdco in Opco to be transferred to Newco.
Neal Armstrong. Summary of CRA Update on "S. 55(2) and Safe Income - Where Are We Now?" under s. 55(2.1)(c).
CRA finds that the suspended loss rules continued to apply when the transferee was amalgamated, then wound-up into the transferor
Aco disposed of its shares of Cco (the “Subject Shares”) at a loss to a wholly-owned subsidiary of Aco (Bco). On a triangular amalgamation of Bco and Cco, Aco became the sole shareholder of Amalco. S. 40(3.5)(c)(i) deemed Amalco to own the Subject Shares for as long as it was affiliated with the transferor (Aco). Amalco was then wound-up into Aco pursuant to s. 88(1).
CRA rejected Aco’s argument that on the winding-up, Amalco ceased to be affiliated with the transferor (Aco) so as to trigger the suspended loss pursuant to s. 40(3.4)(b)(i).
CRA indicated that by virtue of s. 87(2)(g.4), Aco was considered following the winding-up to be a continuation of Amalco, and to own the Subject Shares and, given that under s. 251.1(4)(a), a person is affiliated with itself, Aco as the transferor continued to be affiliated with the person (Aco as the continuation of Amalco) who was the deemed owner of the Subject Shares.
Neal Armstrong. Summary of 4 October 2023 Internal T.I. 2020-0837811I7 F under s. 40(3.5)(c)(i).
CRA indicates that an RSU award as signing bonus or inducement to move, or as an award for a current performance accomplishment. might not engage the SDA rules
2020-0864831I7 found that full-value restricted share units (“RSUs”) granted early in the calendar taxation year of the employer (the “Grant Year”) were considered to be in respect of services in the previous year, so that such award came within the salary deferral arrangement (SDA) definition, and would not be excluded under para. (k) of the SDA definition if the RSUs were settled in the third year after the Grant Year, i.e., more than three years after the end of the year in which the services had been rendered. In further commenting on this position, CRA now stated:
In tandem with our general and longstanding presumption that a grant of full-value RSUs are in respect of the grantee’s past services, the relatively short passage of time between Canco’s fiscal year end and the Grant Date increased the likelihood that the grant of RSUs would be in respect of past services rendered by the grantee in the year prior to the Grant Year.
However, CRA acknowledged that, notwithstanding this presumption, a grant of full-value RSUs could be considered to be solely in respect of services rendered after the grant date (i.e., only for future services), giving as potential examples, a signing bonus, and a bonus for a current employee agreeing to an overseas assignment.
CRA also indicated that even a grant of full-value RSUs relating to past services might not engage the SDA rules, for example, potentially a grant made in recognition of a performance accomplishment (such as a large sale) that occurred earlier in the Grant Year.
Neal Armstrong. Summary of 7 March 2022 External T.I. 2021-0895571E5 under s. 248(1) – SDA and SDA, para. (k).
CRA indicates that deemed interest on an FX-denominated stripped coupon should be translated on a daily basis
What exchange rate should be used under s. 261 where a taxpayer holds a stripped coupon denominated in a foreign currency on which interest is deemed under Reg. 7000(2)(b) to accrue throughout the year (if the taxpayer, e.g., a corporation, is described in s. 12(3)) or throughout the year up to the anniversary date in that year (if the taxpayer, generally, an individual, is described in s. 12(4))?
CRA noted that such interest accrues on a daily basis and appeared to indicate that the interest accruing on each such day is to be translated at the relevant spot rate for that day. One suspects that most accountants will continue to use average exchange rates.
Neal Armstrong. Summary of 3 November 2023 APFF Financial Strategies Roundtable, Q.10 under s. 261(2)(b).
Income Tax Severed Letters 29 November 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that income distributions from RDSPs and TFSAs are “other income” under the Canada-US Convention, but that RRSP/ RRIF payments are “pensions” under Art. XVIII
CRA indicating that the reduced rate of 15% under Art. XXII:2 of the Canada-U.S. Convention may be applied to amounts distributed to U.S. residents from TFSAs, RDSPs and RESPs that were constituted as trusts (where such payments would have been income if the recipient had been resident) since such payments were not dealt with in any other Article of the Convention, and thus qualified as "other income."
In contrast, CRA indicated that Art. XXII:2 was not relevant to amounts paid out of RRSPs and RRIFs given that such amounts, including lump sum payments, constituted “pensions” as defined in Art. XVIII, i.e., they were payments "under a superannuation, pension or other retirement arrangement" and, thus, were not “other income” under Art. XXII. However, for such “pensions” to be eligible for the reduced withholding under Art. XVIII:2 of 15%, they also were required to qualify as "periodic pension payments" which, by virtue of the definition of that term in s. 5 of the Income Tax Conventions Interpretation Act, excluded inter alia a payment made from an RRSP before its maturity.
Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.9 under Treaties – Income Tax Conventions, Art. 18, Art. 22.