News of Note
CRA indicates that significant employer discretion as to stock option vesting will oust an “agreement” to acquire the shares
Email this ContentCRA considers that in order for there to be a s. 7/110(1)(d) agreement to issue shares, there must be “legally binding rights and enforceable obligations” respecting the covered shares. CRA has provided various examples illustrating the implications of this view.
For example, where under a fully discretionary stock bonus plan, the shares are issued when the employer’s discretion is exercised, the plan will not be considered to be a s. 7 plan, so that it generally will be required to qualify as a three-year bonus plan or deferred share unit plan. On the other hand, “if the eventual issuance of the shares is subject to time or other objective vesting conditions,” the share issuance will be governed by s. 7 (because there was an agreement between the time of the grant and the issuance).
A second example is where employees are granted options with FMV exercise prices but which are exercisable only upon the corporation subsequently notifying the employees of its decision on the number of options that each employee may exercise. CRA considers that the employee would not have a legal agreement to acquire the shares before receiving such notification, so that the s. 110(1)(d) deduction would not be available if the shares had appreciated over the exercise price in the interim.
A third example (similar to the second) is where a trust is established by the employer to acquire and hold shares of the employer for employees, but allocations among the employees are entirely at the discretion of the trustees – so that CRA would consider that there is no agreement to acquire the shares until such discretion is exercised.
Neal Armstrong. Summaries of 19 September 2016 Internal T.I. 2016-0641841I7 under s. 7(3)(b), s. 110(1)(d) and s. 7(2).
Income Tax Severed Letters 21 December 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Full text translations of the balance of the APFF Roundtable questions are available
The table below links to full-text translations of the balance of the APFF Roundtable questions and answers (Q.9 to Q.21) and the first three from the APFF Financial Strategies and Instruments Roundtable - as well as of the French internal technical interpretation which was released last Wednesday (reflecting minor CRA corrections to a previous version of the same interpretation).
The translations are paywalled in the usual (3 work-weeks per month) manner.
Great-West Life – Federal Court of Appeal states that the GST “financial services” definition should be applied based only on the “predominant elements” supplied
A third party (Emergis) provided automated claims processing services to Great-West Life, which administered or insured various client drug plans, so that the prescription drug claim of an employee would be processed at the pharmacy counter upon presentation of a magnetic card.
In the Tax Court below, Owen J ultimately found that the charges of Emergis to Great-West for this service were taxable under the Financial Services and Financial Institutions (GST/HST) Regulations, as they were "quintessentially administrative in nature." More interestingly, he also found that in the absence of this Regulation, the service would have been exempt as being for the payment of insurance policy claims – notwithstanding that the Emergis service entailed the provision of taxable supplies described in para. (r.4) of the financial services definition, e.g., collecting, collating or providing information. He stated that "those services do not represent the essential character or substance of the supply, which is paying drug benefits to plan members."
In the Court of Appeal, Woods JA did not comment directly on the (now, apparently ineffectual) para. (r.4) rule, but appeared to essentially agree with this general approach when she stated:
…[I]t is necessary to determine the predominant elements of the supply if it is a single compound supply. It is only the predominant elements that are taken into account in applying the inclusions and exclusions in the “financial service” definition.
Neal Armstrong. Summary of Great-West Life Assurance Co. v The Queen, 2016 FCA 316 under Financial Services and Financial Institutions (GST/HST) Regulations.
CRA considers that income from an estate residue generally can be distributed on a deductible basis provided that the executor is not directed to pay the tax thereon
CRA considers that the residue of the Estate can include income and that such income generally can be made payable to a residual beneficiary, so that such income can be deducted by the estate under s. 104(6).
However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for purposes of subsections 104(6) and 104(13).
In such a case, instead of the deduction, “the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.”
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.14 under s. 104(24).
CRA acknowledges fixing of the s. 129(6) deemed active business income rule
In contrast to a problem in the July 29, 2016 draft legislation, under recently enacted s. 129(10), where an Opco earns all its income as active business income from arm’s length third parties and pays rents to an associated “Rentco,” an appropriate sharing of the $500,000 business limit between Opco and Rentco is permitted.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.15 under s. 125(10).
Suncor – CRA abandons attempt to impute a hedging contract between Petro-Canada and an indirect UK subsidiary
When an indirect UK subsidiary of Petro-Canada acquired another UK company with an interest in a North Sea oilfield, Petro-Canada effectively locked in the price of oil in relation to this acquisition by entering into a forward contract with Morgan Stanley and Deutsche Bank respecting a specified quantity of 28,000 barrels of oil per day for a 3.5 year period under which it would be required to make cash payments to the counterparties if the price of oil went up, and conversely if the price of oil went down. The price of oil went up so that it incurred monthly cash payments totaling US$287 million in the first few months of the contract, and closed out all of its post-2007 obligations in November and December 2007 for a settlement payment of US$1.72 billion.
CRA did not deny the resulting 2007 loss to Petro-Canada of Cdn.$2.02 billion, but instead applied s. 247(2)(c) to include Cdn.$2.02 billion in the 2007 income of Petro-Canada as an imputed reimbursement to Petro-Canada by its UK subsidiary of the settlement payments (and assessed a s. 247(3) penalty for failure to prepare contemporaneous documentation in connection with the imputed reimbursement.) This was a difficult assessing position to support because, in fact, there was no hedging contract between Petro-Canada and its UK subsidiary to adjust under s. 247(2)(c).
The case has now been settled on the basis of CRA abandoning its position.
Neal Armstrong. Summary of Suncor Energy Inc. (as successor to Petro-Canada) v. The Queen, 2014-4179(IT)G: Notice of Appeal filed on 21 November 2014; Reply dated 13 April 2015; Answer filed on 10 July 2015; Partial Consent to Judgement dated 21 November 2016; and Judgment dated 5 December 2016; See also Suncor Press Release dated 5 December 2016 “Suncor Energy successfully resolves $1.3 billion tax dispute with Canada Revenue Agency.”
594710 B.C. Ltd. – Tax Court of Canada finds that GAAR did not apply to the sale to a lossco of partner corps with pending condo sale profit allocations
Income account treatment of the profits realized by a condo-project limited partnership was avoided through the corporate partners of the LP paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders, followed by a sale by the Holdcos of the corporate partners to a public company with substantial resource pools. The income of the LP for the year in which the condo sales had occurred was allocated to this public company following the winding up into it of the corporate partners.
Rossiter CJ rejected CRA’s GAAR challenge, which was based on GAAR being applied to the Partnercos' avoidance of an allocation to them of the condo profits, then to the Holdcos' avoidance of the application to them of s. 160 respecting what should have been Partnerco tax liabilities. He found that, at the Partnerco level, there was no abuse of s. 111(5), which dealt with loss trading, not profit trading. Nor was there an abuse of the partnership income allocation provisions of ss. 103 and 96 – it was totally conventional that close to 100% of the income of the LP was allocated to the corporation (the loss pubco) which was the limited partner at the partnership year end.
Turning to the alleged avoidance of s. 160, he acknowledged that the transactions entailed an indirect transfer of property from the LP to the Holdcos from a s. 160 perspective, but did not consider that there had been any receipt of property on other than FMV terms. However, he considered that if he were wrong on this mechanical valuation point, the transactions would have entailed an abuse of s. 160.
Neal Armstrong. Summaries of 594710 B.C. Ltd. v. The Queen, 2016 TCC 288 under s. 245(4), s. 245(2), s. 160.
CRA indicates that draft s. 13(42)(a) operates to avoid double taxation on an arm’s length sale of a Class 14.1 property where a NAL transferor previously claimed a capital gains exemption
Where, prior to 2017, an addition to a taxpayer’s CEC was reduced based on a non-arm’s length transferor realizing a gain for which the capital gains exemption was claimed, there will be an upward adjustment under draft s. 13(42)(a) based on this amount where there is an arm’s length sale after January 1, 2017 of what now is a Class 14.1 property – so that effectively (unlike a previous version of the draft legislation) a double recognition of capital gain would appear to be avoided.
Neal Armstrong. Summary of 9 November 2016 External T.I. 2016-0664451E5 under s. 13(42)(a).
CRA considers that the comparison of the Treaty method for allocating non-resident pilot income to the domestic (s. 115(3)) method should be done on an annual basis
S. 115(3) allocates 100%, 50% or 0% of the employment income of a non-resident pilot from a flight based on whether both, one out of two, or none of the touchpoints were in Canada. CRA, of course recognizes, that a Treaty resident can instead rely on the methodology under Art. 15 of the Treaty if that produces a more favourable result. However, CRA considers that the test of which method is more favourable should be done on a year-by-year basis, i.e., “a non-resident pilot must use either subsection 115(3) of the Act or the treaty methodology to allocate income from all of the flights occurring in a particular taxation year.”
Neal Armstrong. Summary of 7 September 2016 External. T.I. 2014-0559751E5 under s. 115(3).