News of Note
The Joint Committee notes that the draft tax debt avoidance rules should be more narrowly focused
Email this ContentA few comments of the Joint Committee on the draft s. 160(5) rules targeting schemes to avoid liability for tax debts and the associated penalty provisions in s. 160.01 are noted below:
The use of the "one of the purposes” test in s. 160(5)(a)(ii) establishes too low a threshold, and should be re-framed as “one of the main purposes."
The reference in s. 160(5)(a)(ii) to a test of it being reasonable to consider that one of the purposes of the transaction or series was “to avoid … liability … for an amount payable under this Act” also sets too low a threshold and should be re-framed to refer to a demonstrable current or future anticipated tax debt of the transferor that would otherwise be avoided, determined at the beginning of the applicable series of transactions. Otherwise, the rule could apply, for example, to:
- An individual who makes a contribution to her spouse’s RRSP to protect against future liabilities of that contributor and to reduce (i.e., “avoid”) the transferor’s tax liability for that year - and two years later, that individual becomes liable for a tax debt under s. 160 as a result of a dividend from a controlled corporation.
- A Holdco, which was set up to hold Opco for general creditor-proofing reasons, receives a dividend out of Opco’s safe income in 2022 and then, unexpectedly, Opco is unable to pay its 2023 tax liability in 2024.
The rule under s. 160(5)(c) (deeming there to be a net property transfer to the current or future tax debtor under s. 160(1)(e)(i)) is deficient in that it should:
- include the benefit of substituted property for the consideration received, and any property received by the transferor by virtue of the ownership of such property (otherwise than as proceeds of disposition),
- refer to valuation at end of the series rather than throughout the series,
- not be adversely engaged due to FMV fluctuations from external factors such as stock market trading or FX fluctuations, and
- not be engaged where there is a cancellation of the debt or other securities received that represents a payment for value.
For example, there should not be considered to be a deemed depletion of value if:
- Shares of a corporation (Holdco) purchased for FMV consideration by the future tax debtor from the non-arm’s length (NAL) seller become worthless as part of the series due to a dividend-in-kind by Holdco to such future tax debtor of all its assets (i.e., shares of Opco); or
- The tax debtor assigns a note, equaling the FMV of assets sold by it to the NAL purchaser, to that purchaser’s parent, for FMV consideration, followed by a cancellation of that debt on a s. 88(1) wind-up.
The exclusion in the s. 160.01(3) penalty rule for clerical or secretarial services is too narrow – “it is entirely possible that a person may be more significantly involved in, for example, documenting the transaction, but without understanding the avoidance aspects of the plan as a whole (such as a corporate lawyer or valuator with no tax expertise)."
The reference in s. 160.01(2) to “every person who engages, participates in, assents to or acquiesces in section 160 avoidance planning” is too broad, and should be refocused to apply to those who devise and promote the plan or scheme.
Neal Armstrong. Summary of Joint Committee, “Avoidance of Tax Debts,” 5 April 2022 Joint Committee Submission under s. 160(5)(a)(ii), s. 160(5)(c), s. 160(1)(c), s. 160.01(3) and s. 160.01(2).
We have translated 11 more CRA severed letters
We have published translations of 3 CRA severed letters released last week and a further 8 translations of CRA interpretation released in March and February, 2005. Their descriptors and links appear below.
These are additions to our set of 1,996 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2022-04-06 | 2017 Ruling 2017-0696791R3 F - Reduction of PUC/capital | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest on money borrowed by Subco for distribution of share-capital account to its parent is deductible if the Subco property continues generating business incomeAmended and supplemented by 2017-0696792R3 F |
| Income Tax Act - Section 51 - Subsection 51(1) | s. 51(1) will apply where convertible note, that was issued as boot, will be converted to sharesAmended and supplemented by 2017-0696792R3 F | ||
| 2019 Ruling 2017-0696792R3 F - Internal reorganization | Amending and supplementing 2017-0696791R3 F | ||
| 7 January 2022 External T.I. 2020-0866751E5 F - CEWS and government financial assistance | Income Tax Act - Section 125.7 - Subsection 125.7(4) | government assistance based partly on payroll levels would not be qualifying revenue if normal accounting practice would be to contra payroll expense | |
| Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Revenue | government assistance that under normal accounting practice was applied to reduce recorded expenses would not be qualifiying revenue | ||
| 2005-03-11 | 3 March 2005 External T.I. 2004-0096371E5 F - Revenu tiré d'un emploi et 110(1)f)(iii) | Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(f) - Subparagraph 110(1)(f)(iii) | no special tests under s. 110(1)(f)(iii) for determining whether the individual is self-employed |
| 2005-03-04 | 7 February 2005 External T.I. 2004-0101421E5 F - Subsection 111(5.1) | General Concepts - Fair Market Value - Other | depreciable assets’ value inferred from the share purchase price |
| Income Tax Act - Section 111 - Subsection 111(5.1) | FMV of assets should be established on a push-down basis from the share purchase price, but can be allocated based on an appraisal | ||
| 28 February 2005 Internal T.I. 2004-0103991I7 F - Remboursement de frais de scolarité | Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) | agreement of employer to pay tuition would have been taxable under s. 6(3) if a benefit | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | payment of tuition fees conditional on a return to extended employment was not a taxable benefit | ||
| 28 February 2005 External T.I. 2004-0104121E5 F - Détermination du statut de résidence | Income Tax Regulations - Regulation 2607 | individual working in Ontario but visiting Quebec family home twice monthly likely was resident in Quebec | |
| 7 February 2005 External T.I. 2005-0111431E5 F - Death of a Taxpayer - Deduction of CCDE | Income Tax Act - Section 66.2 - Subsection 66.2(2) | CCDE balance cannot be deducted in terminal return or by estate | |
| Income Tax Act - Section 70 - Subsection 70(5.2) | no s. 70(5.2) deduction where CCDE balance arose “through” a partnership | ||
| 23 February 2005 External T.I. 2004-0093921E5 F - Déménagement d'un employé-Paiement de frais | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | payment of house-hunting fee for new hire was non-taxable | |
| 2005-02-25 | 17 February 2005 External T.I. 2004-0091811E5 F - Exemption pour résidence principale | Income Tax Act - Section 54 - Principal Residence | separate municipal addresses not determinative that basement occupied by son and ground floor occupied by mother were two housing units |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (a) | where residence held by son and mother in equal co-ownership is 2 units each occupied separately, each could technically access the exemption for only a ¼ interest | ||
| 17 February 2005 External T.I. 2004-0104331E5 F - Indemnisation et autres paiements | Income Tax Act - Section 5 - Subsection 5(1) | portions of settlement payment that compensated for lost vacation credits and reimbursed for psychotherapy and medication costs were taxable under s. 5(1) |
The Joint Committee notes difficulties with the proposed reportable and notifiable transaction rules
Observations or recommendations of the Joint Committee on the reportable transaction rules in s. 237.3 as they would be revised by the February 4, 2022 package of draft amendments, and on the new notifiable transaction rules in draft s. 237.4, include:
- The proposals should take into account that some of the advisors involved in reportable or notifiable transaction may not be aware of the aspects of the planning giving rise to a reporting obligation, or whether the transactions end up being implemented.
- The change of the “avoidance transaction” test to refer to “one of the main purposes” of the transaction or series (rather than using a “primarily” test for a transaction) means that, for example, having a small safe income dividend (representing an acceptable tax benefit) as part of a series would render all transactions in the series avoidance transactions – so that the presence of only one hallmark would engage a reporting requirement.
- The fee hallmark could potentially be engaged by “value” billing, contingency work (which is common in non-“aggressive” areas such as SR&ED filings) and fees based on the number of taxpayers (for example, an accounting firm may bill for the preparation of T2057s on a per-transferor basis), especially given the “to any extent” language in that hallmark description.
- The draft exclusion in s. (c)(i)(B) from the contractual protection hallmark should be revised in various listed respects to clarify that the typical provisions in a share or asset sale agreement - where the vendor provides indemnities related to pre-closing taxes or tax attributes, or covenants for assistance in the event of disputes with third parties (including disputes regarding tax outcomes expected to apply to the purchaser) - will come within the exclusion.
- Under the Quebec notifiable transaction rules, a newly designated transaction need only be reported after the later of 120 days of publishing the transaction in the Quebec Gazette and 60 days after the day the Minister of Revenue of Québec determines that the obligation to disclose begins. A similar “later of” concept should be employed federally and, given that many taxpayers operate in Québec, consideration should be given to coordinating deadlines.
- It is unclear whether transactions need to be reported as notifiable transactions on a recurring basis and whether the sample list of notifiable transactions describes transactions that may provide tax benefits over a period of time – for example, would a transaction whereby CCPC status was lost before 2022 need to be reported because refundable taxes on investment income were avoided for subsequent years?
- Given that a series of transactions can encompass many years (much longer than the 45-day notifiable-transaction reporting window) and some of the examples (e.g., avoidance of deemed dispositions of trust property) deal with series where some steps may occur well into the future or not at all, an advisor may not know that there is a notifiable transaction until all the transactions in the series are completed and well after the reporting deadline.
- In particular, the taxpayer, advisors and promoters might be required to report before a series is completed. i.e., for some series, before they can know that there is a notifiable transaction.
Neal Armstrong. Summaries of Joint Committee, “Reportable Transaction and Notifiable Transaction Proposals,” 5 April 2022 Joint Committee Submission under s. 237.3(5), s. 237.3(1) - advisor, - avoidance transaction, - – reportable transaction - (a), - (b), - (c)(i)(B), s. 237.3(4), s. 237.4(4), s. 237.4(3), s . 237.4(5) and s. 237.3(9).
CRA rulings on interest deductibility appear to relate to a share capital account distribution out of accumulated profits
CRA ruled that interest on money used by a subsidiary (shortly after an amalgamation) to make a share capital account distribution in cash to its parent would be deductible in computing its income provided that its property continued to be used by it for the purpose of gaining or producing income from its business. Although the ruling letter is heavily redacted, the lack of emphasis on the subsidiary’s PUC, the emphasis on the accounting treamtment of the transaction and a supplementary letter ruling on the dollar amount of the subsidiary’s accumulated profits at the time of the amalgamation suggest that the distribution was regarded as coming, at least to some extent, out of the subsidiary’s accumulated profits rather than PUC.
Neal Armstrong. Summary of 2017 Ruling 2017-0696791R3 F and 2017-0696792R3 F under s. 20(1)(c)(i) and of 2017 Ruling 2017-0696791R3 F under s. 51(1).
CRA indicates that government assistance based partly on payroll levels would not be qualifying revenue if normal accounting practice would be to contra payroll expense
Eligible entities received annual governmental financial assistance based, in whole or in part, on their labour expenditures. Were these qualifying revenues for CEWS purposes?
After stating that this was a question of fact, CRA indicated (in light of the “normal accounting practices” rule in s. 125.7(4)) that if the normal accounting practice of the entities was to apply the amounts to reduce their payroll (or other) expenses, they would not be qualifying revenues.
Neal Armstrong. Summary of 7 January 2022 External T.I. 2020-0866751E5 F under s. 125.7(4).
The Joint Committee recommends that the draft bare trust reporting requirement be scrapped
The Joint Committee noted that the required filing under draft s. 150(1.3) of returns for bare trusts will be burdensome including identifying whether a name can be assigned to the arrangement (when none may exist), identifying how to respond to requests for information which may be inapplicable, the need (in the case of a paid preparer) to get a client to sign and return a T183 form and perhaps also obtain a client engagement letter – for perhaps not much benefit (the required reporting will not provide any meaningful information regarding the trust property).
It is recommended that proposed s. 150(1.3) not be enacted and that beneficial ownership information be obtained some other way – for instance, requiring the beneficial owners, when they file tax returns of their own, to provide beneficial ownership information respecting the bare trust arrangements on those returns would be more efficient.
If the answer to this is “no,” then at least CRA might provide a streamlined T3 form specifically for bare trust arrangements, addressing only the Reg. 204.2 information.
Also linked on our Joint Committee page are the Joint Committee submissions on reportable and notifiable transactions and on the tax debt avoidance rules in the February 4, 2022 draft legislation along with a CBA submission focused on privilege issues raised by the reportable and notifiable transactions, and a CPA Canada submission on the uncertain tax treatment rules contained in the same package.
Neal Armstrong. Summary of Joint Committee, "Reporting Requirements for Trusts", 5 April 2022 Joint Committee Submission under s. 150(1.3).
CRA indicates that s. 52(1) applied to give full basis to a member receiving a distribution-in-kind of RPP property
CRA indicated that where surplus from a registered pension plan trust was distributed as an in-kind distribution to a member, the resulting inclusion of the distributed property’s FMV in the member’s income pursuant to s. 56(1)(a)(i) meant that such amount was deemed to be the cost of the property to the individual pursuant to s. 52(1).
Neal Armstrong. Summaries of 22 December 2021 External T.I. 2021-0914081E5 under s. 52(1) and s. 149(1)(o).
Income Tax Severed Letters 6 April 2022
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on the non-application of s. 55(4)
A family company (DC) controlled by father and that engaged in leveraged investing will spin off a portion of its share portfolio to respective transferee corporations (TCs) largely owned by the respective three adult children of father but with father retaining voting control. Largely because all the corporations will be related through the continuing control of father, CRA ruled that the s. 55(3)(a) exception applied, so that there was no need to strictly comply with the butterfly rules. CRA also ruled that s. 55(4) will not apply (which would have applied if it could reasonably be considered that one of the main purposes for father subscribing for special shares of the TCs was to cause them to continue to be related to DC so as to engage the s. 55(3)(a) exception), presumably in light of a representation that father will continue to have high-level involvement in the TCs’ investing activities.
Another aspect related to a family discretionary trust shareholders of DC whose trustees had the authority to appoint beneficiaries out of a wide range of persons including persons dealing at arms’ length with father. A representation was given that no such authority had been exercised - and that the trust has not acquired property from any such potential beneficiary or a person with whom such person does not deal at arm’s length (there’s no harm in giving a rep where no one could figure out what it means?)
Neal Armstrong. Summary of 2021 Ruling 2020-0874961R3 under s. 55(4).
Westcoast Energy – Federal Court of Appeal confirms that an employer was not entitled to ITCs for the GST/HST on reimbursed employee health care services
Westcoast reimbursed (through Manulife as its agent) employees who had incurred various health care services – including some which were GST/HST-taxable, namely, acupuncture, massage therapy, naturopathy and homeopathy services. On appeal, Westcoast submitted, contrary to the finding below, that the employees should be considered to have consumed or used the services “in relation to activities of [Westcoast]” so as to generate ITCs under s. 175(1)(c).
Stratas JA agreed with the Tax Court below that ExxonMobil, which had held under the similar wording of s. 174 that “property or services which are intended by the employer for the exclusive personal use of the employees and which lend themselves to such a use bear no relationship with the employer’s activities,” also applied here in the context of s. 175, such that if “an employer reimburses for a service or property that is for the exclusive personal use of employees, the employer will not enjoy the deeming effect of subsection 175(1).” Accordingly, no ITCs were generated to Westcoast under s. 175.
Neal Armstrong. Summaries of Westcoast Energy Inc. v. Canada, 2022 FCA 57 under ETA s. 175(1)(b) and s. 170(1)(b)(ii).