News of Note

Under s. 125(5.1), the business limit is reduced on a straight-line basis if the total of the taxable capital of the Canadian-controlled private corporation in question and of associated corporations exceeds $10 million. CRA confirmed that any assignment of a CCPC’s business limit under s. 125(3.2) to another corporation can only occur after its business limit has first been ground under s. 125(5.1). There was no explanation as to why this question might have practical significance.

Neal Armstrong. Summary of 25 January 2018 External T.I. 2017-0709241E5 under s. 125(5.1).

Although we commented on most of the answers provided at the 2017 Annual CTF CRA Roundtable at the time, for convenience the table below provides brief descriptors for the final published CRA responses as well as links to those responses and our summaries thereof.

Although s. 93.1 provides a look through rule where Canadian corporations hold significant indirect interests in foreign corporations “through” a partnership, their ability under s. 93.1(2) to claim a deduction under s. 113(1) (e.g., for an exempt surplus distribution) is based on the relative fair market value of their partnership interest rather than the share of the dividend that in fact is distributed to them under the terms of the partnership agreement. This can result in a portion of the dividend not being deductible under s. 113 where the Canadian corporations hold units with differing dividend-sharing attributes, e.g., where the partnership has preferred and common units.

Neal Armstrong. Summary of Karthika Ariyakumaran and Michael Spinelli, "Holding a Foreign Affiliate Through a Partnership," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.14 under s. 93.1(1).

When Oxford Properties was sold to an OMERS subsidiary, the purchaser first negotiated that Oxford would drop various properties down into LPs on a s. 97(2) rollover basis, with those partnership interests subsequently being bumped under s. 88(1)(d) (which, in 2001, did not prohibit bumping interests in partnerships holding appreciated buildings). After the acquisition, those bumped costs were then pushed down onto the cost of interests in property-specific LPs (which had been formed following the acquisition), by winding-up the upper-tier LPs under s. 98(3) and using the s. 98(3)(c) bump. After the three-year s. 69(11) period, some of the property-specific LPs were then sold to tax exempts.

Noël CJ reversed the findings of D’Arcy J that these transactions did not abuse ss. 97(2) and 100(1). Respecting s. 97(2), he stated that “the only reason why Parliament would preserve the tax attributes of property that is rolled into a partnership is to allow for the eventual taxation of the deferred gains and latent recapture,” so that a series of transactions that instead ensured “that deferred gains and recapture will never be taxed frustrates the object, spirit and purpose of subsection 97(2).” Somewhat similarly, he stated, respecting s. 100(1):

Parliament wanted tax to be paid on the latent recapture which would otherwise go unpaid on a subsequent sale of the depreciable property by the tax-exempt purchaser.

Given this, the inevitable conclusion is that the object, spirit and purpose of subsection 100(1) was frustrated by the result achieved in this case as the latent recapture in the depreciable property … will forever go unpaid.

Most interestingly, he found that the same broad brush that was applied in determining that the transactions were abusive insofar as they avoided recognition in taxable hands of recapture should also be applied to determine that GAAR should be applied only to recognize a taxable capital gain (effectively under s. 100(1)) equal to that recapture (of $116M) and not a taxable capital gain equal to the accrued capital gain on the buildings of $21M and the accrued capital gain on the land of $11M – i.e., “the Crown cannot have it both ways” and be able to apply s. 100(1) in a technical manner once, on broader grounds, it had been found to be abused. In this regard, he stated:

[F]ailure to recognize a cost that has been actually incurred but which would disappear on a vertical amalgamation or a partnership dissolution goes against the integrity of the capital gains system because it allows for the subsequent realization of a capital gain in circumstances where there has been no economic gain.

Neal Armstrong. Summaries of The Queen v. Oxford Properties Group Inc., 2018 FCA 30 under s. 245(4), s. 69(11), s. 88(1)(d) and s. 171(1).