News of Note

This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their March and April 2023 release) is now available for your viewing.

Mr. A owned farmland and farmed it for his chief source of income. Under his will, the farmland was devised to his daughter who did not farm it and sold it more than 24 months after his death. CRA found that this timing of her sale would not preclude the conditions in ss. 110.6(1.3)(a)(i) and 110.6(1.3)(a)(ii)(A) from being satisfied,

Regarding s. 110.6(1.3)(a)(i), it required that the farmland have been owned for the period of at least 24 months immediately preceding the determination time (the daughter’s disposition) by one or more of the specified persons or partnerships such as her, her father and his estate. Here, since the farm was owned continuously by Mr. A, his estate and his daughter for a period of at least 24 months immediately preceding the daughter’s disposition, this test was satisfied.

S. 110.6(1.3)(a)(ii)(A) was satisfied because Mr. A had met the active farming and gross revenue tests for a period of at least two years. It did not matter that he was not the person who owned the property at the determination time, nor during the prior 24 months.

Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.15 under s. 110.6(1.3)(a).

An inter vivos Canadian resident trust pays an amount equal to its net taxable capital gains for the year to a Canadian private corporation that is a beneficiary and designates that amount pursuant to s. 104(21). CRA indicated that a valid s. 104(21) designation would result in that amount being deemed to be a taxable capital gain realized by the corporation even though the non-taxable half of the gains was distributed instead to other beneficiaries. However, by virtue of the wording of s. (a)(i.1) of the capital dividend account definition, there would be no addition to the corporation’s CDA – whereas there would be such an addition if both portions of the capital gains were distributed to the corporate beneficiary.

The addition to the corporation’s CDA would be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation, given that the s. 104(21) designation cannot be made before the end of the trust’s taxation year.

Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.12 under s. 89(1) – CDA – (a.1).

The taxpayers, who were holding companies for partnerships that had recently agreed to sell their farmlands to third parties, were approached by an independent third party (WTC), who proposed that they transfer their partnership interests on a rollover basis to respective Newcos which, after the closing of the farmland sales and after WTC had taken brief de facto control of those subsidiaries and purported to generate “tax shelter” for them, would be sold by the taxpayers to WTC for cash sales prices that reflected a premium over the cash sales proceeds from the farmland sales. Such premium reflected a sharing (on a 46/54 basis) of the purported (but bogus) elimination by WTC of the Newco’s tax liability from the sale.

S. 160 clearly applied to the extraction of the cash by WTC from Newcos in order to fund its payment of the purchase price to the taxpayers. At issue was whether the payment of those cash proceeds by WTC, in turn, to the taxpayers also occurred pursuant to a transaction between persons not dealing at arm’s length, so that there could be a further s. 160 tax debt transfer to the taxpayers. In so finding, Noël C.J. stated:

[B]ecause they were splitting amounts earmarked to pay a tax liability that was bound to become a tax debt rather than their own money, the resulting split does not provide the assurance that it reflects an ordinary commercial dealing between parties acting in their separate interests. Specifically, the tension that provides that assurance did not exist to the extent that it would had the parties been dealing with their own money. …

Further, once the respondents were swayed to buy into WTC’s plan by the thought of turning an unexpected profit out of their crystallized tax liability through what they viewed as a risk-free exercise, they became the instruments through which WTC, acting as the sole mastermind, would lay its hands on the $1.3 million [equal to the tax liability], isolate it with the remaining cash in the subsidiaries and share it with the respondents in the proportion that it imposed.

Accordingly, each taxpayer was liable for the tax debt of the respective Newco to the extent of the purchase price received by it in excess of the after-tax value of the assets of the Newco (i.e., for an amount equaling 46% of Newco’s tax debt).

However, Noël C.J. rejected the Crown’s argument that GAAR should be applied to make each taxpayer liable for all of the respective tax debt of the Newco. He found no reversible error in the Tax Court’s finding that the taxpayers “did not undertake the transactions in order to avoid the application of subsection 160(1)”.

Neal Armstrong. Summaries of Canada (The King) v. Microbjo Properties Inc., 2023 FCA 157 under s. 160(1), s. 160(5) and Statutory Interpretation – Interpretation Act, s. 45(2).