News of Note
CRA indicates that earnout payments under cost recovery method generally are not subject to Pt XIII tax
Email this ContentAt the 2005 APFF Roundtable, CRA indicated that an amount payable under an earnout feature in a sales agreement is subject to s. 212(1)(d)(v), but indicated that, in a situation where the shares are taxable Canadian property, it would not generally apply s. 212(1)(d)(v) to the TCP, assuming that the first four conditions in IT-426R, para. 2 (re use of the cost recovery method) were met.
CRA has now reaffirmed this position and indicated that it also applies where the shares that were sold were not TCP.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.10 under s. 212(1)(d)(v).
626468 New Brunswick – Federal Court of Appeal finds that safe income from asset sale was reduced by accrued, but not yet payable, taxes on the gain
An individual rolled his apartment building into a Newco in consideration for a mortgage assumption and shares with nominal paid-up capital, and then rolled those shares into a new Holdco. Following the realization shortly thereafter by Newco of a taxable capital gain and recapture of depreciation on a sale of the building, Newco increased the adjusted cost base to Holdco of its shares by effecting a series of s. 84(1) dividends (including a capital dividend) – following which the individual sold his shares of Holdco to a third party for a sale price based on the amount of cash sitting in Newco.
Webb JA (as did D’Auray J below) agreed with the Deuce Holdings finding that the safe income of Newco was reduced by the amount of corporate income tax ultimately payable by it on its gain on the building sale, notwithstanding that at the time of sale, no income taxes had yet become payable. Webb JA stated:
Both the fair market value of the shares and the portion of the resulting capital gain that would be attributable to the income earned or realized would reflect the tax liability that, although not payable immediately, would eventually have to be paid. …
This tax liability would not disappear if, as contemplated by subsection 55(2) … the shares of Tri-Holdings would have been sold immediately before the dividend in question.
Respecting the mechanics of how the pre-April 20, 2015 version of s. 55(2) operated to generate a capital gain as a result of the denial of safe income, he indicated that:
- The final s. 84(1) dividend in issue was deemed by s. 55(2)(a) to not be a dividend, so that there was no corresponding addition to the adjusted cost base of the shares of Newco for that amount under s. 53(1)(b).
- This s. 53(1)(b) ACB denial resulted in an increased capital gain on the shares’ sale to the third party.
- As this amount was reflected in the amount paid by the third party, no additional amount was to be added to the proceeds under s. 55(2)(b).
Neal Armstrong. Summary of 626468 New Brunswick Inc. v. Canada, 2019 FCA 306 under s. 55(2.1)(c), s. 55(2) and General Concepts - FMV.
CRA indicates that a transitional services agreement with an arm’s length purchaser can engage the TOSI rules
For TOSI purposes, an “excluded amount” includes (under (e)(i) of the definition) an amount, such as a dividend, that the individual does not derive directly or indirectly for the year from a “related business,” whose definition includes a business of the corporation in which the specified individual is actively (etc.) engaged. CRA indicated that this exclusion applied where the corporation in question (which presumably is paying dividends to a specified individual who was never relevantly engaged in its business) has in a previous year sold its business to an arm’s length corporation which continues to actively carry on that business – unless the source individual in question continues an active involvement in that business, for example, under a transitional services business, in which case the related business exception would not be available to the specified individual.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.9 under s. 120.4(1) – related business – (a)(ii).
Income Tax Severed Letters 11 December 2019
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Deshaies – Federal Court of Appeal criticizes the Federal Court for suggesting to CRA that it provide relief to a taxpayer
In affirming the decision below to deny judicial review of a decision of CRA to not recommend a remission order under s. 23(2) of the Financial Administration Act, Boivin JA stated:
The granting of a remission order is an exceptional measure which entails a derogation not only of the general taxation rules but also of the principle of equal treatment before the law.
The Court below, after denying relief, had added, in obiter:
Considering that the applicant likely doubly paid his taxes for the 2000 to 2003 taxation years, and considering the applicant’s mental health status during that period, the Court suggests that the CRA try to mitigate this taxpayer’s situation to the extent possible.
Boivin JA stated (at para. 7):
[These] remarks … were ill-considered. The tenor of the “Obiter” in leaving an impression that the appellant “likely” was doubly taxed and that the CRA should concern itself with this situation, not only contradicts the judgment but has the effect of creating expectations, which appear to us to be inopportune and unfortunate.
Neal Armstrong. Summary of Deshaies v. Canada, 2019 CAF 300 under Financial Administration Act, s. 23(2).
Church of Atheism of Central Canada – Federal Court of Appeal finds that refusal to register a Church of Atheism did not contravene the Charter
The Church of Atheism of Central Canada, whose application for charitable registration had been denied, unsuccessfully submitted that the common law test governing the advancement of religion as a head of charity was invalid as contrary to ss. 2, 15, and 27 of the Charter. Rivoalen JA stated:
[S]ection 2 of the Charter protects the rights of the appellant’s members to practise their beliefs in Atheism and the Minister cannot interfere with the practice of these beliefs … . However … the Minister’s refusal to register the appellant as a charitable organization does not interfere in a manner that is more than trivial or insubstantial with the appellant’s members ability to practise their atheistic beliefs. The appellant can continue to carry out its purpose and its activities without charitable registration … .
Neal Armstrong. Summaries of Church of Atheism of Central Canada v. Canada (National Revenue), 2019 FCA 296 under Charter. s. 2 and ITA s. 149.1(1) – charitable organization – (a).
CRA reaffirms that income derived from a prior year’s sale of an excluded business is not excluded from the TOSI rules
ABC Co., which was wholly-owned by a family trust, of which Mr. and Mrs. A are beneficiaries, carried on a trucking business in which both were actively engaged on a regular, continuous and substantial basis throughout the many years of operation. The proceeds of the sale of this business in 2018 were used to establish an investment business in which only Mrs. A is active.
In finding that the excluded business exception under the split income rules will be unavailable to Mr. A, CRA indicated that any taxable dividends received by him are considered to be derived directly or indirectly from such investment business – so that, since he is not actively engaged in that business, such amounts will not be “derived directly or indirectly from an excluded business” of Mr. A “for the year.” Effectively, this is a finding that such amounts are not derived indirectly from the former trucking business, even though the proceeds of the sale thereof indirectly gave rise to such dividends. Consequently, the taxable dividend received by Mr. A in, say, 2019 are subject to TOSI unless another exception applies.
A more detailed response to the same question was provided in 2019-0792001E5 F.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.8 under s. 120.4(1) – excluded amount – (e)(ii).
Markou – Federal Court of Appeal finds that Quebec and ROC donations have similar requirements for a donative (impoverishing) intent
Ontario and Quebec taxpayers had engaged in the same leveraged donation program which Maréchaux had found did not give rise to any “gifts” for charitable credit purposes, even for the cash portions. In Markou, Paris J found that “donative intent in civil law, as in common law, is always an essential element of a gift, even a partial gift,” whereas here “there was just one interconnected transaction and no part of it can be considered a gift that was given in expectation of no return.” In dismissing the appeal, Noël CJ stated that this finding:
...necessarily flows from … the loan agreements which made each of the appellants’ entire donation conditional on the loan being approved by the lender.
As “no part of [the interconnected transaction] can be considered a gift that the appellant[s] gave in the expectation of no return” … [i]t follows that there was no gift whether the matter is considered from a common law or a civil law perspective. …
He also stated:
[W]here a person anticipates receiving tax benefits that exceed the amount or value of an alleged gift, the donative intent is necessarily lacking. Impoverishment being an essential element of a gift under both the civil law and the common law, the purported gift constituted by the cash contribution would fail on this account as well… .
Neal Armstrong. Summaries of Markou v. Canada, 2019 FCA 299 under s. 118.1(1) – total charitable gift and General Concepts – Stare Decisis.
CRA finds that shares distributed out of an inter vivos trust on an active individual’s death were received as a consequence of death for s. 120.4(1.1)(b)(ii) purposes
An individual (Mr. X) had been actively engaged in a business of a corporation (Investco). CRA found that where a discretionary inter vivos trust provided, on his death, for the distribution of Investco common shares to Mr. X’s adult children, s. 120.4(1.1)(b)(ii) deemed a specified individual (one of such children) who received a dividend on such shares to have also been actively engaged etc. in the Investco business for the same five years, so that such dividend qualified in her hands as being from an excluded business. S. 120.4(1.1)(b)(ii) was so engaged on the basis of a CRA position that that property received from an inter vivos trust, the terms of which unconditionally require that it distribute the property to the individual on the death of another person, can be considered as property acquired by the individual as a consequence of that person’s death. (Regarding GAAR where s. 120.4(1.1)(b)(ii) has been engaged, CRA looks for a sufficient connection between the deceased person and the property that is being distributed, and the specified individual, to support the application of the s. 120.4(1.1)(b)(ii) deeming rule.)
However, if it instead was preferred shares of Investco that Mr. X bequeathed to his children, and the inter vivos trust at all relevant times held the common shares of Investco, s. 120.4(1.1)(b)(ii) would not apply to a dividend paid, following Mr. X’s death, on those common shares to the trust and distributed by it to the children.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.7 under s. 120.4(1.1)(b)(ii).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in April 2011, including 3 items from the 2010 APFF Roundtable. Their descriptors and links appear below.
These are additions to our set of 1,023 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.