News of Note
CRA rules on pipeline involving creation of high PUC common shares
Email this ContentCRA ruled on post-mortem pipeline transactions with somewhat unusual mechanics, i.e., the Newco will not issue notes or preferred shares to the company whose shares were stepped up on death (Holdco), and Newco and Holdco might amalgamate only after some of the earnings of Holdco have been stripped.
In particular:
- S. 51 is used to convert the estate’s stepped-up shares of Holdco into high ACB (and low PUC?) preferred shares, with the estate then subscribing a (presumably nominal) amount for voting common shares of Holdco.
- A portion of the Holdco shares are redeemed in order to distribute the capital dividend account of Holdco and generate a capital loss for effective carryback under s. 164(6).
- The estate transfers its high ACB/lower PUC prefs of Holdco to Newco under s. 85(1) in consideration for high ACB/high PUC shares of Newco.
- After a stipulated period (perhaps a year), Newco effects a PUC distribution on its Class A shares by distributing 8 non-interest bearing promissory notes to the estate with staggered maturity dates, with the first one occurring the next day (and the last one 2 years later?)
- After a specified passage of time, Newco and Holdco will amalgamate.
- At an appropriate juncture (which apparently could occur before the amalgamation), the estate will distribute to its beneficiaries the above promissory notes which had not yet been repaid, as well as the common shares of Newco or Amalco.
Neal Armstrong. Summary of 2019 Ruling 2019-0835131R3 F under s. 84(2).
CRA recognizes that an individual and their registered plans can constitute multiple beneficiaries under the 150 MFT beneficiary test
Reg. 4801(b) requires a mutual fund trust to have at least 150 beneficiaries each holding one block of units with an aggregate fair market value of at least $500. CRA indicated that where an individual, her TFSA, her RRSP and her spouse’s RRSP (to which she had contributed) each held a block of units, they would be considered to be four beneficiaries for these purposes. It stated:
There is no requirement to look through the registered plan trust.
It also noted:
Notwithstanding our general view described above, we note that the CRA has previously applied … GAAR … in situations where mutual fund trust status was artificially achieved to facilitate abusive tax avoidance.
Neal Armstrong. Summary of 8 June 2020 External T.I. 2019-0822901E5 under Reg. 4801(b).
Income Tax Severed Letters 9 September 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that landlords should apply ETA 232 to CECRA rent reductions
After describing the CECRA (COVID rent assistance) program, CRA noted:
- The forgivable loan made by CMHC is an exempt supply – no GST/HST is payable to the CMHC.
- The landlord should issue a credit note for the rent reduction in conformity with s. 232 so that, inter alia, it will not be required to remit GST/HST on the pre-reduction amounts.
Further points made by CRA (unrelated to CECRA):
- services of osteopathic manual practitioner (other than an osteopathic physician) are not exempted from GST/HST
- the new 20% B.C. sales tax on certain vapour products is not a “prescribed provincial levy,” so that GST is levied not only on the sale price but also on that sales tax
- after noting that it prevailed in Patterson Dental, CRA stated:
The CRA’s existing policy regarding the application of the GST/HST to drugs that are mixed substances or solutions is consistent with the decisions of the Courts.
Neal Armstrong. Summaries of Excise and GST/HST News - No. 108 September 2020 under ETA s. 123(1) – financial service - (c), s. 232(3)(a), Sched. V. Pt. II, s. 1 – practitioner, s. 154(2)(b), and Sched. VI, Pt. I, s. 2(e).
Valovic – Tax Court of Canada finds that shareholders’ services were not consideration for dividends received by them for s. 160 purposes
An electrician and his spouse provided their services as electrician and administrator to their equally-owned corporation, and received dividends and salary. In rejecting their submission that, for s. 160 purposes, the annual dividends were paid for equivalent consideration, being a portion of their services, Monaghan J noted that decisions of the FCA/TCC “accepted and endorsed the view expressed in Neuman that dividends relate to shareholding and rejected the argument that there was consideration for the dividends.”
Neal Armstrong. Summary of Valovic v. The Queen, 2020 TCC 101 under s. 160(1)(e)(i).
Reference re S. 6 of the Time Limits and Other Periods Act – Federal Court of Appeal finds that s. 6 did not trench on orders made under the Federal Courts Rules
In a letter dated September 1, 2020 addressed to the Federal Court, the Attorney General stated his position that s. 6 of the Time Limits and Other Periods Act (COVID-19), which suspended retroactively all “time limits…established by or under an Act of Parliament” during the March 13-September 13 period, ousted all “orders and directives issued” by the Courts concerning time limits or setting deadlines. The reaction of Noël C.J. was instantaneous. On September 3, he issued the following direction pursuant to Rule 54:
The Court directs that the Attorney General’s position concerning the interpretation and effect of section 6, in so far as it extends to the time limits under the Rules and orders made thereunder, is incorrect in law and should not be followed. The Federal Courts Rules, S.O.R./98-106 and this Court’s Practice Directions, judgments, orders and directions remain in full force and effect.
He explained:
Were it otherwise, confusion and potential harm—surely not desired by Parliament—would result. For example, orders requiring a proceeding to be prosecuted urgently on shortened time limits to further the public interest and to avert some harm or prejudice would be invalidated with retroactive effect. …
Beyond this, construing section 6 as allowing Parliament to unilaterally interfere with the management and governance of ongoing proceedings would invade a core judicial function … . Where possible—and it is possible here—section 6 should be given a meaning that is respectful of judicial independence and obeys constitutional imperatives.
Presumably, the Tax Court will take a similar view that s. 6 does not prevent it from controlling its own proceedings.
Respecting the scope of s. 6, Noël C.J. noted that it did extend the time periods for starting proceedings in the Federal Court, for example s. 27(2) of the Federal Courts Act (the time limit for bringing appeals) and ss. 18.1(2) and 28 thereof (the time limit for bringing an application for judicial review).
Neal Armstrong. Summary of Reference re Section 6 of the Time Limits and Other Periods Act (COVID-19) (CA), 2020 FCA 137 under Time Limits and Other Periods Act (COVID-19), s. 6.
Larkin – Tax Court of Canada permits a geologist with no current income to deduct various expenses documented only in spreadsheets
A retirement-age geologist with decades of successful experience as a prospector, entrepreneur and inventor, worked on a number of unsuccessful projects in and around his 2011 taxation year, e.g., seeking to apply novel techniques for exploiting graphite or nickel projects, and unsuccessfully bidding on an oil sands property and then a kerogen property, without generating any business revenue in his 2011 year.
Masse DJ nonetheless found that the taxpayer was carrying on business, stating:
… He certainly could demonstrate better business practices and I note that his record keeping leaves much to be desired but I still conclude that he conducted his activities with a level of commerciality sufficient to constitute a business. …. His ventures have seen prior successes and he … is continuing to pursue similar opportunities in hopes of repeating his prior success.
Although the taxpayer’s expenses were only documented in his spreadsheets (he did not provide any invoices, receipts etc.), Masse DJ allowed a significant portion of the claimed expenses – but disallowed others, for example, only allowing the expenses of the taxpayer’s cell phone but not his two land lines (stating that “it is more reasonable to dedicate one telephone … for business use.”)
Neal Armstrong. Summary of Larkin v. The Queen, 2020 TCC 98 under s. 3 – business source/reasonable expectation of profit.
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,262 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/2 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 September.
CRA increases the presumptively reasonable overtime or travel meal allowance from $17 to $23
CRA today announced that it:
has increased the amount that employers can use to determine whether an overtime meal or allowance, or the meal portion of a travel allowance is taxable, from $17 to $23. The CRA has also increased the rate at which transport employees and other individuals can claim meal expenses, using the simplified method (a flat rate per person), from $17 to $23 per meal. These increases are effective immediately and retroactive to January 1, 2020.
Neal Armstrong. Summary of “Canada Revenue Agency increases flat rate amount for meal claims, and reasonable amount for meal benefits and allowances” 3 September 2020 CRA Press Release under s. 6(1)(b)(vii).
Mamdani Family Trust – Tax Court of Canada finds that a taxable dividend was to be valued at its pre-tax amount for s. 160 purposes
An inter vivos family trust received over $3.5 million in taxable dividends from a wholly-owned Canadian private corporation (“Global”) at times that Global had unpaid income tax liabilities. The Trust unsuccessfully submitted that “the amount of income tax payable by the transferee” should be taken into account for the purposes of valuing the amount of such dividends for s. 160(1)(e)(i) purposes.
Sommerfeldt J indicated that he was bound to reject this argument by Gilbert, which had found that, for s. 160(1) purposes, where the transferred property is a dividend, the amount transferred is “the amount that the Minister could have seized in the hands of the corporation had the transfer not been effected” and that the tax consequences of the dividend to the transferee were irrelevant. He went on to indicate that, even in the absence of Gilbert, he would not have been convinced by the evidence of the taxpayer’s valuation expert given inter alia that “if a corporation has declared a dividend, the dividend belongs to the holder of the share on which the dividend was declared, such that the corporation is not in a position to sell that dividend to someone else” – so that the usual test of what the property could sell for was simply inapplicable.
Neal Armstrong. Summary of Mamdani Family Trust v. The Queen, 2020 TCC 93 under s. 160(1)(e)(i).