News of Note
The Rulings Directorate has a services standard of providing an ATR within about 4 ¼ months, excluding delays for taxpayer information
Email this ContentSome points made by Costa Dimitrakopoulos (the new Director General) and Lori Carruthers on the Directorate's ATR service include:
- The Directorate’s services standard is for 85% of Advance Tax Ruling requests to be resolved within 90 business days of receipt of all essential information (or, it would appear from other remarks, within 90 business days of receipt of the request, but excluding the days that the ball is in the representative’s court to provide missing information). The Directorate met its service standard in 2015-16 (at 87%), but fell short this last year (at 78%). (90 business days equates to about 4 ¼ months.)
- Over the last five years, the Directorate has been experiencing a steady decline in ATRs except for an unexpected upswing in 2015-2016. In 2012-2013, it had about 175, and in 2016-2017, about 129.
- The Directorate provides input on draft legislation to Finance during drafting sessions.
- The Directorate’s most significant discovery when it reviewed the ATR programs of other countries was that some countries will not give ATRs on their anti-avoidance rules, and this became a significant topic of discussion in the Directorate’s external and internal consultations. The upshot was that the Directorate will continue entertaining ATR requests on the anti-avoidance rules including the impending MLI principal purpose test.
- External consultations revealed that the pre-rulings consultation service was not being used very much, primarily because it requires much of the same information as an ATR request, and also because it is not available on a no-names basis.
- The next revision to the Information Circular will include a draft template for ruling requests and also guidelines respecting rulings on questions of fact, and refusals to rule where there is no uncertainty.
Neal Armstrong. 20 November 2017 CTF Conference - Costa Dimitrakopoulos and Lori Carruthers on "Advance Tax Rulings - 2017 and Beyond."
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for six French technical interpretations released last week and in April 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA explains why it has appealed Cameco
CRA has appealed Cameco, where the Court dismissed CRA’s application to question 25 corporate employees in the course of an audit, noting that this would essentially amount to a discovery process without the related procedural safeguards.
CRA considers that the audit process is necessarily and generally a broader process than the discovery process, because the former is directed at determining what the taxpayer did in order to come to an accurate assessment of tax, whereas in tax litigation, there is an attempt to narrow and focus on the issues still in dispute. Although for the Cameco audit, 25 interviews seems like a lot, in the context of a large transfer pricing matter, the taxpayer should have offered 5 or 10.
Neal Armstrong. Summary of 20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA, Q.12 under s. 231.1(1)(d).
CRA is deliberating on how to relax its procedures for s. 221.2 re-appropriation requests
CRA 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).