News of Note
6 further full-text translations of CRA interpretations are available
Email this ContentThe table below provides descriptors and links for the Technical Interpretation released last week and for 5 of the October 2017 Financial Strategies and Instruments APFF Roundtable questions and answers, as fully translated by us.
These (and the other full-text translations covering the last 4 1/2 years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for May.
CRA accommodates the equitable division of RDTOH on sequential split-up butterflies of an investments holding company
An investment holding company (DC1) is held directly by A and his brother B (apparently, a non-resident) and by an upper-tier holding company (DC2), whose shares are held by A and B, as well as by their mother (X).
In order to accomplish a split-up of DC1’s assets amongst A, B and X,
- X’s shares are redeemed by DC2, and
- there then is a pro rata butterflying of the assets of DC1 amongst DC2 and newly-formed holding companies for A and B (TC1 and TC2, the latter, a ULC) followed by
- a s. 88(2) wind-up of DC1 into TC1, TC2 and DC2.
Preliminarily to the next set of transactions,
- DC2 pays a s. 84(1) safe income dividend to all the TCs in relation to DC2, including a second ULC (TC3) of B, in amounts sufficient to trigger a full refund of its RDTOH balance.
Next:
- There is a single-wing split-up butterfly of DC2's assets so that a pro rata portion of its two types of property is butterflied to TC1.
- X then steps back into the picture by subscribing for preferred shares of DC2.
- DC2 continues as a ULC and amalgamates with a wholly-owned ULC subsidiary of B to which he had previously transferred a portion of his [common] shares of DC2, and
- B then receives his share of Amalco’s assets first by way of a s.84(1) dividend followed by a PUC distribution, and second by way of having all of his shares redeemed.
In order to create CDA to facilitate the redemption (in Step 1 above) of X’s preferred shares in DC2, DC1 first effects a taxable drop-down of low-ACB marketable securities to a Newco subsidiary, with the resulting CDA being pushed out to DC2 under s.84(1). In addition “redeeming the … preferred shares held by Ms. X crystalizes the additional RDTOH so that it is an asset for the purposes of the butterfly, which allows for a more equitable distribution of assets on the single-wing butterfly of DC2’s assets.”
In order that the safe income dividend in Step 4 generates a full refund of the RDTOH (having regard to a deemed dividend also being paid in Step 5 to only one of the TCs) CRA agrees to there being a taxation year end immediately after Step 4.
Although the published rulings usually redact all numerical information even if it relates only to CRA policies or statutory rules rather than to the taxpayer’s situation, this ruling letter discloses that the Directorate still tolerates only a very small departure (within 1%) for meeting the test for a pro rata distribution of each type of property of the distributing corporations.
Neal Armstrong. Summaries of 2017 Ruling 2016-0674681R3 under s. 55(1) – distribution and s. 55(3.1)(a).
ENMAX – Alberta Court of Appeal finds that interest on a loan from a tax-exempt parent should be at an arm’s length rate reflecting implicit parental credit support
A wholly-owned subsidiary (ENMAX) of the City of Calgary made 10-year subordinated term loans to ENMAX power-distribution subsidiaries at interest rates mostly of 11.5% and 10.3%. Although ENMAX itself was tax exempt, the borrowing subs were required to make “Balancing Pool Payments” equivalent to the income tax that would be payable had they not been tax exempt.
The Court confirmed the Alberta Minister of Finance’s reassessments, made on the basis that the reasonable rates of interest required by s. 20(1)(c)(i) on the above respective loans was 5.42% and 5.26%, and stated:
A parent of a municipal entity is not entitled to gain an advantage over its private competitors by arranging its subsidiaries’ affairs in a way that causes a hypothetical arm’s length loan to appear riskier than it would have been had any reasonable municipal entity actually gone into the market to borrow the funds. Hence the need under the Balancing Pool Payments regime to ensure that the structure of the loan transaction is also objectively reasonable to the extent it would affect a market interest rate.
In also accepting the Minister’s submission that the hypothetical arm’s length loan (in addition to not reflecting the “junk bond” way in which the actual loan had been structured) should reflect implicit credit support by ENMAX (to whom these subs were key assets), the Court stated:
[A]ny third party lender would look at the entire corporate structure and see that ENMAX’s viability could not be separated from that of its subsidiaries. An external lender would therefore assume implicit parental support.
The Court was clear that it was significantly affected by the apparent legislative policy of the Balancing Pool Payments regime of avoiding any tax advantage to municipally-owned power companies, so that it is unclear how relevant this case is to income fund or cross-border loans.
Neal Armstrong. Summaries of Alberta v ENMAX Energy Corporation, 2018 ABCA 147 under s. 20(1)(c)(i), General Concepts – Tax Avoidance, Statutory Interpretation – Hansard, and s. 67.
The Rulings Directorate will stop gaming by taxpayers to get into the ATR queue by submitting an incomplete application
The Rulings Directorate has indicated that it will now:
- Close an ATR file where the ATR request is not properly prepared or supported with adequate representations or where the taxpayer has not responded to a request for additional information within 30 calendar days. …
The goal of this key change is to thwart taxpayers from hurriedly submitting an incomplete submission in order to get an advantageous “spot in the queue”. Once an ATR file is closed, a follow-up submission will not receive any greater priority than any other ATR requests.
Among other changes mentioned, there is targeted to be “a meeting with taxpayers to be held no later than within four weeks of receipt of an ATR request.”
Neal Armstrong. Summary of 5 December 2017 Roundtable, 2017-0734831C6 - 2017 TEI – Q. B5 under s. 152(1).
CRA illustrates the results of selling an inherited resource property
CRA provided a simple example of the application of the resource taxation rules to an individual who acquired, as the beneficiary of an estate and as his sole Canadian resource property, an oil and gas property having a fair market value of $1.0M and then, a number of years later, sold the property for $1.5M to a third party, thereby generating a full income inclusion under s. 66.2(1) of $0.5M minus the selling cost incurred by him.
Neal Armstrong. Summary of 23 March 2018 External T.I. 2018-0739741E5 under s. 66.2(1).
Campbell – Federal Court discloses that a foreign bank consented to provide information respecting foreign transactions of Canadian residents pursuant to a CRA requirement
The taxpayer sought to add a copy of the record in a different court file to the record in his own case, in which he had applied to have a requirement issued to him under s. 231.1(1) set aside on the basis that it was issued as part of a criminal investigation of him. Before denying this request, Grammond J indicated that the other file entailed:
… an application for leave to impose a requirement on Citibank [NA] to disclose information regarding transactions involving Cayman National Bank and unnamed residents of Canada. It was granted on consent. … [I]nformation provided by Citibank as a result of this requirement brought Mr. Campbell’s situation to the attention of the CRA.
Neal Armstrong. Summary of Campbell v. Canada (Attorney General), 2018 FC 412 under s. 231.1(1).
CRA finds that the payment of group accident plan premiums by an employer for its benefit gave rise to taxable benefits
S. 6(1)(e.1) imputes a taxable benefit where premiums under a group sickness or accident insurance plan are paid by the employer unless the plan provides for the payment of a periodic income payment that is taxable under s. 6(1)(f). CRA considers that a “group” plan means a plan that has two or more insured employees, and that the s. 6(1)(e.1) benefit arises even if the plan is in place primarily to benefit the employer (e.g., the plan covers loss in a high-risk country, thereby making it easier to request employees to travel there.)
Neal Armstrong. Summary of 12 June 2017 Internal T.I. 2016-0679291I7 F under s. 6(1)(e.1).
CRA rules on the use of surety bonds rather than LCs to secure SERP benefits
A Company determined that, rather than securing a non-registered supplemental employee retirement plan (“SERP”) for its senior employees using letters of credit, there would be lower fees to instead arrange for surety bonds to be delivered to the trustee for the security arrangements by insurance companies. In addition, “surety bonds will not reduce the Company’s borrowing capacity (in contrast to LOCs).”
This entails essentially following the same arrangements as where LCs are used. Every time a surety bond is required to be issued, renewed or replaced, the Company will be required to pay the surety fee to the trustee under a new trust, and the Company will make a corresponding payment to the Receiver General equal to the surety fee on account of the refundable tax payable under Part XI.3. The trustee will, in turn, pay the surety fee to the insurance company for such issuance, renewal or replacement of a surety bond.
CRA ruled that the amounts paid to the trustee by the Company and the amounts remitted to the Receiver General by the Company, will constitute contributions made to the retirement compensation arrangement, and will be deductible by the Company to the extent permitted by s. 20(1)(r) for the taxation year in which they are made.
Neal Armstrong. Summary of 2018 Ruling 2017-0720901R3 under s. 207.5(1) – refundable tax – para. (a).
Van Steenis – Tax Court of Canada finds that “return of capital” distributions by a mutual fund reduced the unitholder’s deductible interest
Graham J agreed with CRA’s position (in e.g., 2003-000082) that returns of capital received by a unitholder in a REIT or other mutual fund trust give rise to a change in the current use of the funds under the still-outstanding loan of the unitholder that had funded the units’ purchase. Thus, a taxpayer who had borrowed $300,000 to buy MFT units and received “return of capital” distributions totaling $200,000 over the following eight years (most of which were used for personal purposes) thereby lost over half of his interest deductions by the end of this period.
Graham J considered that it truly accorded with the scheme of the Act to characterize trust distributions in excess of the s. 104(13) income distributions as being returns of the unitholder’s capital, stating:
Subparagraph 53(2)(h)(i.1) reduces the unitholder’s adjusted cost base in the fund by the amount of capital distributed to him or her. … The fact that distributions of capital are not treated as income until they exceed the amount of a unitholder’s investment clearly indicates that Parliament viewed distributions of capital as being returns of the unitholder’s own investment.
The contrary viewpoint would emphasize the artificiality of treating such distributions, which are effectively deemed to be capital distributions only for capital gains computation purposes, as being truly a return of the investor’s capital (whose units might have an increasing rather than diminishing NAV.) Presumably, there would have been a different result if the borrowed funds had been used instead to invest in a public real estate company paying the same distributions (treated under s. 82(1) as 100% income), and which had not yet bothered to convert to a REIT because it was still fully sheltered (i.e., no taxable income).
Neal Armstrong. Summary of Van Steenis v. The Queen, 2018 TCC 78 under s. 20(1)(c)(i).
Income Tax Severed Letters 25 April 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.