News of Note
CRA indicates that the s. 73(1) rollover can apply to a sale for cash proceeds at a gain over ACB
Email this ContentAfter having previously settled an alter ego trust, the settlor sells non-depreciable capital property to the Trust for cash proceeds exceeding the property’s adjusted cost base. CRA indicated that such receipt of cash sale proceeds would not preclude the s. 73(1) rollover from applying – and that the answer would not change if the settlor subsequently gifted the cash proceeds to an adult child.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.12 under s. 73(1).
CRA indicates that the s. 73(1) rollover applies to non-jointly contributed property of a spouse to a joint spousal trust, and that s. 75(2) does not apply to 2nd-generation income
CRA confirmed that once a joint spousal or common-law partner trust is created with a contribution of jointly-owned property by an individual and the individual’s spouse or common-law partner, a subsequent contribution to that trust can be made solely by one of the spouses or partners and still be eligible for the s. 73(1) rollover.
Where each spouse/partner is a discretionary capital beneficiary such that s. 75(2) applies to both, CRA went on to indicate that s. 75(2) does not apply to second-generation income, because this income is not earned on property that was contributed to the trust, or property substituted therefor. For example, if the property received by the trust from a person is cash, and that cash is deposited by the trust into a bank account, the interest on the initial deposit would attribute to that person; but any interest earned on the interest left to accumulate in the bank account would not attribute.
Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.11 under s. 73(1.01)(c)(iii) and s. 75(2).
Jackman – Tax Court of Canada finds that the use of corporate yacht for marketing involving socializing did not generate a shareholder benefit
The individual shareholder of a corporation (“C.A.B.”), that owned a marina on Vancouver Island, used a 36-foot yacht to stay at other marinas and at boat shows, where he would mingle socially with the boaters and promote the use of the C.A.B. marina (as well as operating a promotional booth, when at a boat show). Personal use (e.g., taking friends or family out for whale watching) was only occasional, and Boyle J found that the personal use was around 5%, so that the charge paid by the taxpayer for such personal use of $18,000 per annum was reasonable. There was no shareholder benefit.
Boyle J stated:
Once it is established that business marketing activities were bona fide and primarily undertaken for business purposes, and that the expenses were themselves reasonable, it does not matter that the marketing involves socializing with clients, potential clients and/or other persons or entities relevant to its business.
Boyle J appeared to be critical of Crown counsel for not having conceded after the evidence was in, stating:
Even after the evidence was all before the court, unchallenged even as to credibility, this appeal carried on into its second day for argument. This all appears to have been driven by one or more CRA officials who did not attend for any of the evidence. It is the Department of Justice that represents the respondent Her Majesty the Queen. CRA is not Justice’s client in a solicitor-client relationship.
Neal Armstrong. Summary of Jackman v. The Queen, 2022 TCC 73 under s. 15(1).
Soulliere – Federal Court of Appeal finds that an incorporating director’s resignation was invalidated because he was not replaced
The taxpayer was named as the sole incorporating director of an Ontario corporation, and a few weeks later he submitted a written resignation as director without any replacement director having been appointed, as required by s. 119(2) of the OBCA, so that such resignation was invalid. However, the taxpayer submitted that there had been a deemed appointment of a replacement pursuant to s. 115(4) of the OBCA (so that s. 119(2) did not nullify his resignation). S. 115(4) provided:
Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act.
In rejecting this submission, Gleason JA stated, inter alia:
On its plain meaning, a deeming provision does not constitute an “election” or “appointment” … .
[T]hose who are deemed to be directors by virtue of subsection 115(4) of the OBCA may often be unaware that they have been deemed to hold that office. If incorporating directors were allowed to resign before the first meeting of the corporation’s shareholders where permanent directors are elected, the person deemed to be a director could well be unaware of their fiduciary obligations to the corporation and the steps mentioned in subsection 117(1) of the OBCA [respecting the appointment of the continuing directors] may not be completed.
Accordingly, the taxpayer’s appeals from assessments under ITA s. 227.1 and ETA s. 323 was dismissed.
Neal Armstrong. Summary of Soulliere v. Canada, 2022 FCA 126 under s. 227.1(4) and Statutory Interpretation - Consistency.
St. Benedict Catholic Secondary School Trust – Federal Court of Appeal finds that a taxpayer is precluded from changing previous CCA claims
The taxpayer, over the course of its 1997 to 2003 taxation years, claimed capital cost allowance and generated non-capital losses. When CRA denied the carryforward of these losses to the taxpayer’s 2014 to 2016 taxation years (they had expired), the taxpayer claimed that it incurred a terminal loss in 2017 that could be carried back to those years. This terminal loss was computed by reversing a portion of CCA claims it had made in its 1997 through 2003 taxation years (so as to reduce the losses in those years to nil), and adding these amounts to the undepreciated capital cost of the property it had disposed of in 2017.
In finding that such CCA claims could not be treated as having been revised, Webb JA indicated that the “administrative practice [in IC 84-1] is not binding on this Court, nor can it amend the Act, noted that “Nassau Walnut … drew a distinction between an election and a designation” and found that “the comments in Nassau Walnut with respect to an election, and the inability of a taxpayer to change an election absent a specific provision in the Act permitting such a change, are applicable in this case.” He further stated:
If the Trust is permitted to revise its earlier claims for CCA, this would defeat the purpose chosen by Parliament of having non-capital losses only available for a particular period of time. Having chosen to claim the amounts of CCA as it did in each of the years, the Trust must accept the consequences that flow from having made those choices. The Trust is attempting to revive non-capital losses that it cannot otherwise claim by converting these non-capital losses into a terminal loss in 2017.
Neal Armstrong. Summary of St. Benedict Catholic Secondary School Trust v. Canada, 2022 FCA 125 under s. 13(21) - UCC – E.
We have translated 9 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 8 translations of CRA interpretations released in October and September of 2004. Their descriptors and links appear below.
These are additions to our set of 2,134 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 17 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that a GRE’s taxation year terminates early when it is wound up
CRA noted that s. 249(1)(b) defines the taxation year of a graduated rate estate (GRE) to be the period for which the accounts of the estate are made up for purposes of assessment under the Act and that this paragraph, when combined with s. 249(5), causes the taxation year to cease when the period of accounts ends – which CRA considers to occur when the GRE is wound up or terminated. For non-GREs, s. 249(1)(c) provides that the taxation year is the calendar year. Thus, in CRA's view, winding up any other type of trust will not accelerate its year end.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.10 under s. 249(1)(b).
Procon Mining – Tax Court of Canada finds that shares which were acquired as part of a mining contract business were capital property
A mining contractor subscribed for shares of junior mining companies as an inducement to be awarded mine development work and as an investment. It argued that because it acquired the shares in order to generate business income, therefore, they were acquired on income account.
Boyle J thought this was almost backwards from the correct test, which he articulated as:
Inventory is a property acquired or produced for resale. All property held to produce income from the business other than inventory is capital property.
Losses realized on the shares after the companies failed to proceed with the mines were capital losses - which were denied, because they were "superficial" (i.e., suspended) losses.
Neal Armstrong. Summary of Procon Mining & Tunnelling Ltd. v. The Queen, 2022 TCC 71 under s. 18(1)(b) – capital loss v. loss.
Carvest Properties – Federal Court of Appeal confirms that the relevant valuation unit in an apartment building for ETA s. 191(1) self-assessment purposes was each rental unit
The company (“Carvest”) constructed a 137-unit building in London, Ontario, for purposes of renting the units. Nonetheless, it registered each of the units under the Condominium Act in order to avoid paying property taxes at a commercial-building rate. The Tax Court had found that Carvest was required under s. 191(1) to self-assess HST on the FMV of each “condo” unit as each unit was occupied by its tenant, rather than self-assessing under s. 191(3) on the FMV of the whole building when the first tenant moved in (or on substantial completion, if later). Furthermore, it accepted that the best method for valuing condo units was comparable sales of condo units, and rejected the cost plus 6% method proposed by Carvest (in light inter alia of difficulties in allocating common-area costs to the individual units.) However, the resulting per-unit value was to be reduced by a 6% “absorption discount” to reflect the effect on the market of absorbing the sale of 137 condo units over a 16-month period.
Monaghan JA found that the Tax Court had made no reversible error. Among other submissions, she rejected the Carvest suggestion “that the proper approach is to first determine the value of the property and then decide which part of section 191 applies—subsection 191(1) or 191(3)” and stated:
I disagree. [C]onsistent with Nash … the first step is to identify the property to be valued [i.e., each “condo” unit].
Neal Armstrong. Summary of Carvest Properties Limited v. Canada, 2022 FCA 124 under ETA s. 191(1).
CRA indicates that s. 15(2) applies separately to accrued and unpaid interest on a shareholder loan, but s. 80.4(2) does not apply to such interest
CRA indicated that where a corporation with calendar taxation years makes an interest-bearing loan to its individual shareholder, and the accrued interest is still unpaid at the end of the following year, s. 15(2) will apply separately to such accrued interest amount (to include it in the individual’s income) regardless of whether the loan principal amount was also included in the individual’s income under s. 15(2).
Although on a literal reading, there also might be imputed s. 80.4(2) interest on such unpaid interest amount, CRA stated that "accrued interest such as …Interest in th[is] Particular Situation does not meet the meaning of ‘debt’ in the context of a textual, contextual and purposive interpretation of subsection 80.4(2),” so that no such imputation would occur whether or not the loan was repaid before the end of the corporation’s second taxation year.
Neal Armstrong Summaries of 25 February 2022 External T.I. 2020-0873761E5 F under s. 15(2) and s. 80.4(3)(b).