News of Note
Paying an eligible dividend and non-eligible dividend in the same year to 2 connected corps can convert ERDTOH to NERDTOH
Email this ContentWhere, in the same taxation year, a corporation pays eligible dividends to one corporation and non-eligible dividends to a second corporation, a portion of the opening eligible refundable dividend tax on hand (ERDTOH) of the payer may be converted to non-eligible refundable dividend tax on hand (NERDTOH) to a payee.
For example, Opco, which had ERDTOH and NERDTOH balances of $38,333 and $100,000, respectively, pays an eligible dividend of $100,000 to Holdco (its sole common shareholder) and, in the same year, a non-eligible deemed dividend of $500,000 to Investco on redeeming preferred shares. These dividends generate refunds of the entire ERDTOH and NERDTOH balances totaling $138,333. There is corresponding Pt. IV tax to the payees aggregating $138,333 – but this is allocated between them pro rata to the respective dividends, i.e., Pt. IV tax of 1/6 of $138,333 (or $23,055) for Holdco; and 5/6 of $138,333 (or $115,278) for Investco.
The only ERDTOH addition is to the ERDTOH of Holdco in the $23,055 amount. No amount may be added to Investco’s ERDTOH account, because the dividend Investco received did not entitle Opco to receive an ERDTOH dividend refund. Thus, the entire Pt. IV tax of $115,278 paid by Investco is added to its NERDTOH, so that there is a loss of $15,278 of ERDTOH.
The effective conversion of ERDTOH to NERDTOH can be avoided by paying only one type of dividend in each taxation year.
Neal Armstrong. Summary of Marie-Pier Maheux, “Dividend Payment Trap: ERDTOH Converted to NERDTOH,” Canadian Tax Focus, Vol. 11, No. 1, February 2021, p. 3 under s. 129(4) - eligible refundable dividend tax on hand – subpara. (a)(ii).
CRA indicates no Indian Act exemption for CESB benefits
CRA indicated that there was no Indian Act exemption for any Canada emergency student benefit (CESB) received by a First Nation individual residing on a reserve, given that it “is not considered to be situated on a reserve as there are insufficient factors connecting this income to a reserve,” and it instead “is available to all Canadians who qualify and [is] paid from general government funds.”
Neal Armstrong. Summary of 7 December 2020 Internal T.I. 2020-0867851I7 under Indian Act, s. 87.
CRA releases the 27 October 2020 CTF Roundtable under its severed letter program
Today, the Roundtable from the October 27, 2020 CTF Annual Conference was released under CRA’s severed letter program. For your convenience, we set out a table linking to the 14 questions and to the summaries that we prepared three months ago.
Income Tax Severed Letters 3 February 2021
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
9181-4517 Québec – Quebec Court of Appeal finds that where X, Y and Z control Aco and Bco and X and Y control Bco and Cco, s. 256(2)(a) associates Aco with Cco
Unrelated individuals (X, Y and Z) constituted a group of persons controlling Aco and Bco under the Quebec equivalent of ITA s. 256(1)(b), so that Aco and Bco were associated. However, X and Y also indirectly controlled a bare majority of the common shares of Bco and also, through their holding companies, held 2/3 of the common shares of Cco. (Under the Quebec equivalent of ITA s. 256(1.2)(b), both a larger and a smaller control group can control a corporation.) Thus, Bco was also associated under the s. 256(1)(b) equivalent with Cco.
The Quebec Court of Appeal applied the rule under the Quebec equivalent of ITA s. 256(2)(a) to find that because both Aco and Cco were associated with the same corporation (Bco), Aco was associated with Cco.
Neal Armstrong. Summary of Agence du revenu du Québec v. 9181-4517 Québec Inc., 2021 QCCA 11 under s. 256(2)(a).
Eyeball Networks – Federal Court of Appeal finds that a shareholder whose shares have been redeemed has provided valuable consideration therefor by surrendering its shares
Pursuant to a conventional s. 55(3)(a) spin-off transaction, a company (“Oldco”) spun off one of its two businesses to a “Newco,” also owned by its sole individual shareholder. The spin-off was completed in the usual manner with a cross-redemption of shares between Oldco and Newco for notes, which then were set off.
The Tax Court had found that s. 160 applied on the basis that the $30M note that Oldco issued on the redemption of its shares held by Newco was valueless. This view was rejected by Noël CJ. True, at that point Oldco had divested itself of its most valuable business assets – but it held in lieu thereof Newco preferred shares to be redeemed for a $30M note owing to it by Newco, which had those assets.
The Crown itself made what might seem like the opposite argument, namely, that on the redemption by Oldco of its preferred shares held by Newco for a $30 million note, “no consideration was effectively given to Oldco in return.” (para. 65). Noël CJ stated that there indeed was consideration going the other way in the form of “Newco in turn … surrender[ing] the shares which had a corresponding $30 million value in its hands.”
The Crown also made a further argument that likely started with the insight that the same spin-off could have been accomplished (albeit, with less tax efficiency) simply by having Oldco drop the business into a Newco subsidiary and then distribute Newco as a dividend in kind – so as to clearly engage s. 160. In rejecting the Crown’s submission that the determination as to whether full consideration had been paid by Newco should be determined by the “overall result” produced by the series of transactions, Noël CJ stated that “the adequacy of the consideration given must be measured against the value of the property transferred by way of a ‘snapshot’ taken at the point in time when the transfer takes place.”
There also were pleasant-sounding dicta, including that a price adjustment clause eliminated any possible value discrepancy between the FMV of the transferred property and the consideration therefor, and that the concept of a series of transactions “only applies when one (or more) of the transactions within the series is primarily tax driven.”
Neal Armstrong. Summary of Eyeball Networks Inc. v. Canada, 2021 FCA 17 under s. 160(1), s. 248(10) and General Concepts – Effective Date.
We have translated 6 more CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretation released in May and April, 2009. Their descriptors and links appear below.
These are additions to our set of 1,380 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 3/4 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for February.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2021-01-27 | 22 June 2020 External T.I. 2020-0848721E5 F - SSUC - Entité déterminée et institution publique | Income Tax Act - Section 149 - Subsection 149(1.1) | example of application of s. 149(1.1) |
| 2009-05-08 | 5 May 2009 Internal T.I. 2009-0311211I7 F - Impôt payable par ailleurs en vertu de la Partie I | Income Tax Act - Section 117 - Subsection 117(1) | "tax otherwise payable under this Part" under s. 127(1) includes corporate surtax |
| 2009-05-01 | 23 April 2009 External T.I. 2008-0301241E5 F - Fiducie d'invest. à participation unitaire-75(2) | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) | CRA could extend IT-369R, para. 10 to avoid ACB reductions to unit trust units where s. 75(2) applies |
| Income Tax Act - Section 248 - Subsection 248(28) | doubtful that s. 248(28)(a) can be applied to preclude ACB grind | ||
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) generally not applied to commercial unit trust where single class of units subscribed for on FMV terms | ||
| 22 April 2009 Internal T.I. 2009-0312261I7 F - Étude de faisabilité | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense | expenses of optimizing manufacturing operations including of related shelving and other equipment purchases were on income account | |
| 2009-04-24 | 16 April 2009 External T.I. 2008-0294631E5 F - Interaction between 55(2) and 186(1) | Income Tax Act - Section 55 - Subsection 55(2) | application of s. 55(2) does not affect amount of assessable dividend for Pt. IV tax purposes |
| 25 March 2009 External T.I. 2008-0300401E5 F - Fiducie en faveur de soi-même - prêt sans intérêt | Income Tax Act - Section 75 - Subsection 75(2) | Howson applied to find that non-interest bearing loan by individual to his alter ego trust not subject to s. 75(2)/no contribution if individual pays trust taxes following a s. 104(13.1) election | |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(13.1) | s. 104(13.1) election generally available where no s. 75(2) application, which is not engaged by the individual’s payment of trust-level taxes | ||
| Income Tax Act - Section 56 - Subsection 56(4.1) | s. 56(4.1) inapplicable to NIB loan made by individual to his alter ego trust | ||
| General Concepts - Payment & Receipt | individual pays trust taxes when he receives trust distributions net of such taxes |
Prairies Tubulars – Federal Court finds that requiring payment of duties before they could be appealed was not unconstitutional
Prairies Tubulars challenged the constitutionality of provisions of the Special Import Measures Act (the “Appeal Payment Provisions”) which required it to pay all outstanding duties before proceeding with the SIMA’s appeal procedure. It relied inter alia on Trial Lawyers, 2014 SCC 59, holding that court hearing fees violated s. 96 of the Constitution Act, 1867 where, absent adequate exemptions, they were so high so as to subject “litigants to undue hardship, thereby effectively preventing access to the courts”, and Uber Technologies, 2020 SCC 16, finding that an arbitration clause (requiring the driver to pay a $14,500 USD administration fee and to attend arbitration in the Netherlands) was contrary to the rule of law and public policy because it effectively denied the driver access to the dispute resolution process.
Before dismissing the application, Ahmed J stated:
[L]egislation may be inconsistent with section 96 … if it creates financial obstacles that impose undue hardship on potential litigants … . However, in light of the Applicant’s gross earnings … I am not persuaded … that the Appeal Payment Provisions cause it undue hardship.
… Trial Lawyers is distinguishable … because the Appeal Payment Provisions are remedial, not punitive. Anti-dumping duties are not costs that increase with the length of an appeal, but are rather proportionate to the margin of dumping and returnable to the importer if they are ultimately successful upon redetermination or appeal.
Neal Armstrong. Summary of Prairies Tubulars (2015) Inc. v. Canada (Border Services Agency), 2021 FC 36 under Constitution Act, 1867, s. 96.
CRA indicates that payments to compensate for a break in pensionable services are treated as payments from an unregistered pension plan
A collective bargaining agreement provided that where a retired employee had a break in service due to a workplace injury, that retiree would receive the additional pension benefits that would have been provided to that individual under the employer’s registered pension plan had there been such pensionable service under the plan during the break.
CRA characterized such payments as being made from an unregistered plan (so that they would be ineligible for pension income splitting under s. 60.03 or the pension credit under s. 118(3)), but as includible in the retiree’s income under s. 56(1)(a)(i).
Neal Armstrong. Summary of 22 December 2020 External T.I. 2020-0849291E5 under s. 56(1)(a)(i).
DRI Healthcare Trust is expecting to make significant annual dry income distributions of its pharmaceutical royalty income
DRI Healthcare Trust, which will be a mutual fund trust trading on the TSX, will establish a wholly-owned Irish subsidiary to acquire a portfolios of pharmaceutical royalties, either directly or through purchasing the LP units and general partner of Delaware partnerships holding such royalties. It expects to make cash distributions that are significantly lower than its income (which will be mostly in the form of FAPI) and will distribute the resulting “dry income” through making additional unit issuances, which will then be promptly consolidated to get back to the initial number of units. Given the offshore situs of its assets, it will not be subject to SIFT tax.
The Treaty between Ireland and the U.S. (where most of the royalties may be sourced) is expected to reduce the U.S. withholding tax rate on such royalties to nil. The PFIC rules will apply.
Neal Armstrong. Summary of 25 Janaury 2021 DRI Healthcare Trust preliminary base prep prospectus under Offerings – REIT, Trust and LP Offerings – Foreign Asset Income Funds and LPs.