News of Note
CRA considers that a momentary right to discharge a dividend payable constitutes a non-active business asset for QSBCS purposes
An individual holds the common shares of Holdco having an FMV of $1 million, and Holdco’s only asset is the common shares of Opco, also with an FMV of $1 million. $700,000 of Opco’s assets are used principally in its active business carried on primarily in Canada and $300,000 are excess cash. Stopping there, the para. (d) tainting rule in the qualified small business corporation share (QSBCS) definition would not be engaged because 100% of Holdco’s assets were qualified assets, being shares of Opco which satisfied the 24-month 50% asset test in para. (c).
Suppose, however, that, under a “purification” transaction, Opco pays a cash dividend of $150,000 to Holdco, which immediately pays a dividend in the same amount to the individual. At the instant in time in which Holdco held such cash, more than 10% of its assets would not be the qualifying assets listed in para. (d), which would apparently mean that Opco at the relevant times would now be required to satisfy a "substantially all" rather than 50% asset test, which perhaps would not be met because its excess cash assets were $150,000/$850,000, or 18%.
If such holding of the $150,000 in cash by Holdco for an instant in time would “contaminate” it under para. (d), would this problem be solved if instead Holdco declared and paid a $150,000 dividend, payable to its shareholder by a note, and then Opco declared a dividend payable through discharging the note?
CRA indicated that Holdco would be tainted if it did not satisfy the “all or substantially all” test in para. (d) “even for a short period” – but “recognize[d] that the ‘all or substantially all’ test could be met even if the 90% threshold is not satisfied, depending on the circumstances and context.” In indicating that, if the “all or substantially all” test was violated for a short period by the above transaction, the problem would not be solved through the payment-in-kind proposal, CRA stated:
Holdco has an interest in the dividend declared by Opco and … the interest in such a dividend is an "asset" for the purposes of the definition of QSBCS, regardless of whether it is recorded on the corporation's balance sheet. In particular, Holdco benefits from the dividend declared by Opco even if the amount of the dividend does not pass through Holdco because it allows Holdco to have its liabilities reduced following the payment made by Opco.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.3 under s. 110.6(1) – qualified small business corporation share – (d).
We have translated 12 more CRA interpretations
We have translated 12 further CRA interpretations released during October and September of 2002. Their descriptors and links appear below.
These are additions to our set of 2,630 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 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 |
---|---|---|---|
2002-10-11 | 28 October 2002 External T.I. 2002-0134785 F - Partitioning of Shares | Income Tax Act - Section 248 - Subsection 248(1) - Property | interest in trust is a single property even if held as units |
Income Tax Act - Section 248 - Subsection 248(20) | s. 248(20) might apply if a partition results in the issuance of whole shares | ||
Income Tax Act - Section 248 - Subsection 248(21) | s. 248(21) could apply to partitioning a share if the corporation could issue fractional shares on the partition satisfying the FMV test, and similarly for partitioning MFT units (viewed as a single property) | ||
Income Tax Act - Section 98 - Subsection 98(3) | partners not permitted to receive divided interest in shares on s. 98(3) wind-up | ||
28 October 2002 External T.I. 2002-0117595 F - REVENU EXPERT-COMPTABLE | Income Tax Act - Section 9 - Nature of Income | accountants required to individually recognize professional income earned by them as employees of an NPO corporation | |
2 October 2002 Internal T.I. 2002-0135807 F - Lumpsum Somme Forfaitaire Reg 102 / 103 | Income Tax Regulations - Regulation 103 - Subsection 103(4) - Paragraph 103(4)(c) | withholding on retiring allowance paid in periodic instalments determined under Reg. 102(1) | |
25 October 2002 External T.I. 2002-0137705 F - Butterfly | Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e) | CCRA will permit UCC to be split on a pro rata basis under s. 85(1)(e)(i) where the butterfly entails s. 85(1) drop-downs to Newco subs of DC followed by their transfers to TCs | |
4 November 2002 Internal T.I. 2002-0160697 F - REPARTITION DU PLAFOND | Income Tax Act - Section 125 - Subsection 125(5) - Paragraph 125(5)(a) | s. 125(5)(a) did not apply to a CCPC for its 2nd 2000 taxation year resulting from an acquisition of control causing it to be associated with a different CCPC | |
22 October 2002 External T.I. 2002-0162835 F - Recbles Recd. after Disp. of Farm. Bus. | Income Tax Act - Section 28 - Subsection 28(5) | income stabilization amounts that were receivable at the time of s. 85(1) drop-down of cash-method farming business were deemed to be income when subsequently received | |
30 October 2002 Internal T.I. 2002-0134077 F - ATTRIBUTION DES GAINS EN CAPITAL | Income Tax Act - Section 74.2 - Subsection 74.2(1) | indirect transfer where individuals transfer shares to their Holdcos, who transfer such shares to the individuals’ respective spouses | |
Income Tax Act - Section 74.5 - Subsection 74.5(6) | presence of indirect transfer through Holdcos for s. 74.5(1) purposes reinforced by s. 74.5(6) | ||
2002-09-27 | 24 October 2002 External T.I. 2002-0160715 F - ASSURANCE-VIE IMPOSITION AUX TROIS ANS | Income Tax Act - Section 12.2 - Subsection 12.2(3) | determination of exempt policy status within bailiwick of insurer |
18 October 2002 External T.I. 2002-0163615 F - Waiver of Capital Dividend | Income Tax Act - Section 56 - Subsection 56(2) | s. 56(2) inapplicable to waiver of capital dividend | |
17 October 2002 External T.I. 2002-0130915 F - PAIEMENT FORFAITAIRE RETROACTIF | Income Tax Act - 101-110 - Section 110.2 - Subsection 110.2(1) - Qualifying Amount - Paragraph (a) - Subparagraph (a)(i) | out-of-court settlement did not qualify | |
24 October 2002 Internal T.I. 2002-0140527 F - PENSION ALIMENTAIRE | Income Tax Act - Section 56.4 - Subsection 56.4(1) - Support Amount | no discretion as to use of cheques if required to endorse them back to the payor | |
17 October 2002 Internal T.I. 2002-0159107 F - SALAIRE PAYE D'AVANCE | Income Tax Act - Section 5 - Subsection 5(1) | good argument that an advance to be repaid out of the final pay was advance wages rather than a loan |
CRA indicates that the payment of a pre-closing dividend of significant excluded assets by the target to its parent likely would engage s. 55(2) where no safe income
A corporation resident in Canada ("Parent") owning 100% of "Target" accepts an offer from an unrelated third party ("Purchaser") to purchase all of the Target shares for $3 million, with the sale agreement specifying that assets which Purchaser does not wish to acquire ("Excluded Assets") are assigned a value of zero. The ACB of the Target shares is $3 million and the safe income attributable to them is nil.
Immediately prior to its sale to Purchaser, Target pays a dividend in kind of $250,000 (the "Dividend") to Parent by transferring an Excluded Asset to Parent.
CRA rejected a suggestion that since, whether or not the Dividend was paid, the value of the Target shares would be $3 million, and the capital gain would be nil, s. 55 could not apply, stating:
[I]t seems difficult to argue that none of the purposes of the payment or receipt of the Dividend is to significantly decrease the FMV of the shares of the capital stock of Target.
Consequently, subsection 55(2) should likely apply … .
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.2 under s. 55(2.1)(b).
CRA reverses its position that forgiveness of an old trade debt generally will be on capital account
We have provided English-language summaries of the questions posed at the November 2, 2023 APFF Roundtable and commenced to translate the written answers (one at a time), which we should finish in about a week – after which we will turn to the APFF Financial Strategies and Instruments Roundtable held on Friday, November 3.
Q.1 concerned IT-293R, para. 25, which indicates that where the forgiveness of a trade debt (i.e., a debt incurred for a deductible expense) occurs in a taxation year subsequent to that in which it was incurred, any portion of the forgiven debt that did not relate to inventory of merchandise on hand at the beginning of that taxation year of forgiveness will not be included in computing income pursuant to s. 9 and instead will be subject to the usual statutory debt-forgiveness rules.
CRA announced that this position will cease to be applicable to debts settled or extinguished on or after November 2, 2023, stating that:
There is no established principle (or rule of law) in Canadian jurisprudence that provides that the nature of a debtor's trade debt or of a debtor's gain from the forgiveness of a trade debt changes automatically merely because of the passage of time in a taxation year or a number of taxation years.
It also referred to Alco Dispensing where Bonner J found that accrued bonuses did not change their character to being on capital account when forgiven and that “it was contrary to common sense … to assert that the passage of a year end effects some sort of a magical conversion of executive compensation operations from current account transactions to capital account transactions.”
This reference to Alco Dispensing suggests that CRA may now generally presume that the forgiveness of a trade debt, irrespective of timing, will result in a s. 9 inclusion, rather than this becoming yet another one of those “question of fact” issues.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.1 under s. 9 – forgiveness.
CRA expands its positions on the mandatory disclosure rules
CRA has revised and expanded its webpage on the mandatory disclosure rules.
It has added a statement that:
Standard commercial indemnities provisions in standard client agreements or documentation, which do not contemplate a specific identified tax benefit or tax treatment would not, in and of themselves, result in a reporting obligation.
It has expanded its examples of acceptable contractual clauses, including expanding its example of public company bump covenants to those given respecting private-company bumps, and also added the following examples:
- “Indemnities or covenants to a purchaser and/or target in respect of Part III tax liabilities and other adverse tax consequences arising from dividends paid as part of a pre-closing reorganization.”
- “Standard contractual representations and indemnities with respect to the failure to deduct or withhold an amount under section 215, in an arm's length situation … “
- A standard clause in a partnership agreement providing for reasonable assistance to a partner to help resolve an audit.
- On an s. 132.2 merger, the fund manager indemnifying the trustee of the terminating fund for any liabilities that might arise in respect of the terminating fund (commercial disputes, securities law claims, etc.).
CRA states:
The contractual protection hallmark will not apply in a normal commercial or investment context in which parties deal with each other at arm's length and act prudently, knowledgeably and willingly, and does not extend contractual protection for a tax treatment in respect of an avoidance transaction.
Examples provided include tax indemnities in standard provisions such as gross-up clauses in loan or ISDA agreements, or in employment or severance agreements.
CRA has added a detailed footnote on transitional issues, stating, for instance:
If a person enters into a series of transactions that straddle the effective date of designation, the reporting requirement will be triggered with the first transaction entered into after the effective date of designation that is part of a series of transactions that is the same as, or substantially similar to one that is designated at that time by the Minister.
Neal Armstrong. Summaries of Mandatory disclosure rules – Guidance, 2 November 2023 CRA Webpage under s. 237.3(1) – reportable transaction – (a), confidential protection, contractual protection, s. 237.3(2), s. 237.4(6), s. 237.4(7), s. 237.5(1) - relevant financial statements, reportable uncertain tax treatment.
CRA releases the 2023 STEP Roundtable
CRA has released the official version of its answers at the 20 June 2023 STEP Roundtable. For convenience of reference, the table below provides links to those answers and to summaries that we prepared in June or July.
CRA publishes its list of notifiable transactions
CRA has published its list of notifiable transactions pursuant to s. 237.4(3). The wording of the list is identical to the consultation draft published by Finance on February 4, 2023, except that the transactions regarding manipulation of CCPC status have been dropped. In summarized form, the list now consists of:
- A taxpayer buys an interest in a partnership which, immediately prior thereto, had realized the gain legs on straddle transactions in FX forward contracts (with such gain allocated to the selling partner) – and with the loss legs then being realized and allocated to the taxpayer.
- A trust (“Old Trust”) that is approaching its 21st anniversary transfers its property under s. 107(2) to a resident corporate beneficiary (“Holdco”) which is held by “New Trust” - or that is held by non-resident beneficiaries of Old Trust, where the distributed property is not described in any of ss. 128.1(4)(b)(i) to (iii).
- Alternatively, Old Trust and Holdco hold shares of Opco, with Holdco in turn held by New Trust, and Opco redeems its shares held by Old Trusts for a note, with Old Trust allocating the resulting s. 84(3) dividend to Holdco on an s. 112(1)-exempt basis.
- A debtor is assigned into bankruptcy, its debt is settled with no “forgiven amount” arising due to the exception in (i) of the definition, and the debtor then files a proposal resulting in the bankruptcy being annulled.
- One of the following transactions is engaged in, and the taxpayer takes the position that the “attribute trading” rules in s. 256.1 do not apply because the “one of the main reasons” or “one of the reasons” tests in ss. 256.1(2), (4) or (6), respectively, is not satisfied:
- Aco acquires shares of Lossco so as to exceed the 75% of FMV threshold but without an acquisition of control;
- Profitco and a person not dealing at arm’s length with it (Aco) acquire shares of Lossco such that Profitco (which does not control Lossco) would satisfy the 75% of FMV threshold if the acquisition of Lossco shares by Aco was ignored; and
- Lossco acquires Profitco.
- A relevant non-resident in respect of a taxpayer (NR1) enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
- Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.
Neal Armstrong. Summary of 1 November 2023 CRA Webpage, "Notifiable transactions designated by the Minister of National Revenue" under s. 237.4(3).
Income Tax Severed Letters 1 November 2023
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA revises its tests for determining the location of the employer establishment to which the employee reports in the context of remote work
Regarding the determination of the location of the establishment of the employer for purposes of applying source deductions pursuant to Reg. 102(1), effective January 1, 2024 CRA’s policy will be that an employee will be considered to report for work at an establishment of the employer if:
- Where a “full-time remote work agreement” is in place, the employee can be reasonably considered “attached to an establishment of the employer”; or
- The employee physically reports for work at the establishment, which can include a temporary establishment such as a construction site (but not generally an employee home office) and with there now being no minimum amount of time for this test to be engaged [see previously, 2015-0620821I7].
CRA generally will consider there to be a full-time remote work agreement where the employer directs or allows employees to perform their employment duties full-time (100%) remotely, i.e., not at any employer establishment.
The primary indicator to determine if an employee can reasonably be considered "attached to an establishment of the employer" is whether the employee would physically come to work to carry out duties at that establishment, were it not for the full-time remote work agreement. Furthermore, for employees who physically reported to an establishment of the employer immediately before entering into a full-time remote work agreement, that establishment is considered to be the one to which they would be reasonably considered to be attached, unless the employees' circumstances or the nature of their duties have changed.
CRA also provides a list of secondary indicators as to the "attached to an establishment of the employer" test.
Neal Armstrong. Summary of CRA Webpage, “Determine the province of employment (POE)” 6 October 2023 under Reg. 102(1).
CRA further extends the filing deadline for initial UHT returns to 30 April 2024
On March 27, 2023, CRA announced that no interest and penalties would be imposed on owners who otherwise would have been required to file an underused housing tax return for their 2022 year on April 30, 2023, provided the return was filed or the UHT paid by October 31, 2023. Today (on October 31, 2023), CRA issued a Press Release stating:
The Minister of National Revenue announces that owners affected by the Underused Housing Tax (UHT) will have until April 30, 2024, to file their returns for the 2022 calendar year without being charged penalties or interest.
… Consequently, the Canada Revenue Agency will waive the application of penalties and interest for any late-filed UHT returns and for any late-paid UHT payable for the 2022 calendar year, provided the return is filed and the UHT is paid by April 30, 2024.
Neal Armstrong. Summary of 31 October 2023 Press Release, “Government of Canada extends deadline for homeowners to file their Underused Housing Tax return” under UHTA, s. 48(1).