News of Note
Income Tax Severed Letters 6 June 2018
Email this ContentThis morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIBC World Markets – Tax Court of Canada finds that an ETA s. 150(1) election denied zero-rating for services provided to a parent’s non-resident branches
Administrative services provided by CIBC World Markets Inc. (WMI) to its parent (CIBC) respecting activities carried on by CIBC through its non-resident branches would have been zero-rated but for an ETA s. 150(1) election that had been made between them (which deemed services and licences of property supplied between members of the closely-related CIBC group to be exempt financial services). (Zero-rating would have generated input tax credits.) WMI made a subtle argument that although those non-resident branches were deemed non-resident persons respecting their branch activities for zero-rating purposes, they could not be members of a closely-related group to the extent of such activities.
Bocock J recognized that finding that the election denied zero-rating “renders a ‘sub-species’ of exported financial services less competitive.” Nonetheless, he found the statutory language deeming financial services following a s. 150 election to be exempt rather than zero-rate to be too emphatic and specific to accommodate what might have been the broader policy.
Neal Armstrrong. Summary of CIBC World Markets Inc. v. The Queen, 2018 TCC 103 under Schedule VI, Pt. IX, s. 1.
CRA finds that s. 75(2) does not apply to the deemed s. 104(4) capital gain arising in an alter ego trust on the life beneficiary’s death
CRA expanded on the discussion in 2017-0717831E5 by also discussing the treatment of a capital gain arising from the deemed disposition by an alter ego trust of capital property pursuant to s. 104(4) on the death of the beneficiary. CRA indicated that essentially s. 104(6) prevents a deduction to the trust for that taxable capital gain, so that it remains in the trust. Furthermore, if s. 75(2) applies, it does not attribute the gain to the beneficiary because the deemed disposition resulting from the beneficiary’s occurs at the end of that day, at which point there is not longer an individual in existence to whom the taxable capital gain can be attributed.
Neal Armstrong. Summaries of 29 May 2018 STEP Roundtable, Q.11 under s. 104(6)(b) – B – (i).
CRA confirms that an alter ego trust is entitled to a deduction for ordinary income distributions in the year of death
S. (i)(B)(I) of Element B in the formula in s. 104(6) ensures that no deduction is available to the an alter ego for any amount included in the trust’s income in the trust year ending with the death of the lifetime beneficiary because of the application of the deemed disposition rules in ss. 104(4) to (5.2). CRA agreed that, however, the alter ego trust is entitled to a deduction under s. 104(6)(b) for the amount of dividend income received by it that was made payable to that beneficiary prior to the death.
Neal Armstrong. Summary of 2 May 2018 External T.I. 2017-0717831E5 under s. 104(6)(b) – B – s. (i).
Iberville Developments – Tax Court of Canada finds that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)
All you gotta do to offset the capital gain from a property sale is run the sale through a new partnership. For example, a taxpayer with a property with an adjusted cost base and fair market value of $20 and $120, respectively, contributes the property under s. 97(2) to a newly-formed LP in consideration for units with a FMV of $120. This is a barter exchange so that on general principles, the cost of the units is $120. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $20 “shall be added” to the ACB of the partnership interest, so that its ACB is now increased to $140. The property is sold by the LP at a gain of $100, which is largely allocated to the taxpayer, and the ACB of its interest thus is increased to $240. The taxpayer can then realize a capital loss on winding-up LP that more than offsets the capital gain that was realized on the sale.
In dealing with transactions that were only modestly more complex than these, Boyle J first found that the Quebec LP had been formed several hours before the time of the drop-down transaction, at the time that the limited partnership agreement was entered into. It was at that time that the taxpayer acquired its interest in the LP, so that its cost was nil. Partnership units are an irrelevancy under the scheme of the Act. Thus, it did not matter whether the taxpayer was issued additional units on the drop down – all it continued to have was a partnership interest with a nil cost, and with an ACB as increased only as contemplated under s. 97(2)(b) (i.e., to $20 in the above example).
Even if the taxpayer had managed to have the LP formed simultaneously with the drop-down transaction, Boyle J still would not have been persuaded. It was not at all clear to him that under the scheme of the Act, the cost of the taxpayer’s interest was to be determined at the very instant of the drop-down conveyance - rather than immediately after, when s. 97(2)(b) would govern.
It is unclear whether the reasoning in this case will give rise to interpretive difficulties where there are various contributing partners and the s. 97(2) rollover is not utilized. S. 97(1) does not explicitly deal with adjustments to the cost or ACB of a partnership interest – but Boyle J nonetheless helpfully stated that “subsection 97(1) … would be the specific rule which would provide that a transferor partner’s cost of their partnership interest is fair market value.”
Neal Armstrong. Summaries of Iberville Developments Limited v. The Queen, 2018 TCC 102 under s. 97(2)(b) and s. 97(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Technical Interpretation released in August and September 2013, as fully translated by us.
These (and the other full-text translations covering all “French” Interpretations released in the last 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. You are currently in the open week for June.
CRA’s pipeline policy has not changed
In the course of confirming that its position on pipeline transactions has not changed as a result of s. 246.1 being proposed, and then being dropped, CRA referenced with approval the positions taken at STEP 2011 (2011-0401861C6), and indicated that it will continue to issue favourable rulings where the facts do not involve a cash corporation, there is a continuation of the business for at least one year, and this is followed by a progressive distribution of the corporate assets.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.10 under s. 84(2).
CRA references a checklist for determining indefeasible vesting
For purposes of the 21-year deemed disposition rule, a trust does not include a trust "all interests in which … have vested indefeasibly". In commenting on the “vested indefeasibly” concept, CRA indicated:
- although IT-449R dealt with this concept in the s. 70(9) rollover context, its comments were equally applicable to the trust definition
- the Boger Estate definition was accepted as authoritative
- the 2006 article of Catherine Brown lays out a good checklist of the questions to ask in making the determination
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.9 under s. 108(1) – trust – (g).
CRA dismisses a judicial comment that s. 70(5) is inapplicable to non-residents
In the course of dealing with a secondary issue, McKenzie stated that s. 70(5) does not apply to a non-resident person. This statement was per incuriam.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.8 under s. 70(5).
CRA indicates that a corporation with only property income does not accord excluded share status
CRA confirmed that where a corporation has no business income because it derives income from property (e.g., rental income that is property income), its shares cannot qualify as excluded shares. In particular, where both the business and service income are nil, it will not be considered to satisfy the requirement that less than 90% of its business income is from the provision of services.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.7 under s. 120.4(1) – excluded shares.