News of Note
CRA indicates that the 10% of votes and FMV tests for excluded share status can be satisfied on a collective basis
Email this ContentOne of the tests for share of a specified individual to be “excluded shares” is that the specified individual own shares of the corporation representing 10% or more of the fair market value of all its shares and 10% or more of the voting rights. CRA stated that these two tests can “be applied at the shareholder level (i.e., based on the aggregate of all classes of shares so owned) versus on each specific class of shares owned by the specified individual” so that, for example, these test would be satisfied if the individual held non-voting common shares representing 20% of the corporation’s equity FMV and special voting shares carrying 20% of the votes but having a nominal FMV.
Neal Armstrong. Summary of 21 August 2018 External T.I. 2018-0771811E5 under s. 120.4(1) – excluded share – (b).
CRA finds that interest on an interspousal loan cannot be paid with a promissory note
Where a loan is made to a spouse at the prescribed interest rate, s. 74.5(2) requires that each year’s interest be “paid” by January 30 of the following year. Although in other contexts, CRA accepts that a promissory note can be issued and accepted as payment of an amount, CRA considers that the context and purpose of the income attribution rules:
favour a more restrictive interpretation of the word "paid", according to which the issuance of a note, although irrevocable, unrestricted and payable on demand, does not satisfy the requirement provided for in those [provisions].
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.10 under s. 74.5(2).
CRA notes factors considered in deciding to backdate an HBP withdrawal
S. 146.01(2)(d) provides that for purposes of the home buyer plan rules in s. 146.01, a withdrawal from an RRSP made by an individual in January of a year “or at such later time as is acceptable to the Minister” is deemed to have been made at the end of the preceding year. When asked what factors CRA would consider in exercising this discretion, CRA mentioned, as the most likely:
- whether the RRSP balance at December 31, 2017 is sufficient to cover the subsequent RRSP withdrawal
- “the dates on which the amounts required for withdrawal were contributed” and
- “the reasons for the withdrawals being made over a period that straddled two calendar years” (e.g., a February closing)
Furthermore:
HBP participants who withdraw over more than one year will generally be contacted by the CRA to confirm details of their participation.
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 146.01(2)(d).
CRA illustrates the effective date of the passive income rules
New s. 125(5.1)(b), which eliminates the business limit of a Canadian-controlled private corporation if it or associated corporations had significant passive income (a.k.a. “aggregate investment income”) in their taxation years ending in the preceding calendar year, is stated to apply to taxation years that begin after 2018. This means that a calendar CCPC with an associated corporation (BCo ) with a November 30 year end must account, in its 2019 taxation year, for its own passive income for the preceding 2018 calendar taxation year and for the passive income of BCo for its year ending on November 30, 2018.
Neal Armstrong. Summary of 20 September 2018 External T.I. 2018-0771871E5 under s. 125(5.1)(b).
Income Tax Severed Letters 24 October 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Laval Technopole – Court of Quebec applies the traditional common law tests of Crown agency to determine whether companies were agents of Canadian municipalities
Various companies in Quebec whose function it was to promote commercial development, or cultural, sporting or tourist activities, in their respective municipalities, were found to be subject to a higher rate of employer health tax because they were an agent (“organisme mandataire”) of a Canadian municipality.
Notwithstanding that this was a Quebec case, Quenneville JCQ determined this question by essentially applying the common law function and control tests for determining crown agency (referencing “the nature and degree of control that the Crown exercises over the entity”). She noted that the municipalities themselves considered that they controlled the companies, in most cases a majority of the company’s board was named by the municipality or chosen from among a list proposed by the municipality (para. 58)), their budgets were approved by the municipal Councils, they received much of their financing from the municipalities and their activities were integrated with those of the municipalities. Quenneville JCQ stated:
It is important to emphasize that it is not actual control which must be considered, but rather the potential for the municipality to exercise such control.
Neal Armstrong. Summary of Laval Technopole v. Agence du revenu du Québec, 2018 QCCQ 6352 under s. 212(3) – fully exempt interest - (a)(iii).
CRA finds a tainting effect of the payment by a spousal trust of premiums on its policy on the lives of the children
In various interpretations, CRA has indicated that the fact that a spousal trust, holding a policy on the life of the spouse, paid the premiums, had the effect of tainting the trust for s. 70(6) rollover purposes. CRA has now confirmed that the same tainting occurs where a spousal trust, holding a life insurance policy on the lives of the children of the trust (who are the residuary beneficiaries of the trust on the death of the spouse), pays the policy premiums.
Neal Armstrong. Summary of 5 October 2018 APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 70(6)(b)(ii).
Finance is reviewing the interaction of the Class 14.1 transitional, and s. 85(1) rollover, rules
An individual transfers a directly-held pharmacy business to a wholly-owned Newco in 2017. On January 1, 2017, the cumulative eligible capital (CEC) account of $1.5 million, reflecting a previous purchase price for goodwill of $2 million, was transferred to Class 14.1 resulting in an undepreciated capital cost (UCC) balance of $1.5 million. The FMV of the goodwill at the time of the drop-down in 2017 is $2.2 million. The s. 85(1) elected amount is $1.5 million to avoid recapture. However, the shares received by the individual in exchange therefor would have a cost only of $1.5 million, whereas if the drop-down had occurred in 2016, it could still have occurred on a rollover basis with an elected amount of $2.0 million (i.e., 4/3 of the CEC balance), thereby giving rise to a cost of the same shares to the individual of $2 million.
After discussing the general policy behind the Class 14.1 transitional rules, Finance commented on this $500,000 cost discrepancy:
Subsections 13(38) and (39) and their interaction with other rules, including subsection 85(1), are the subject of a review by the Department of Finance Canada in order to ensure that the tax consequences of a rollover under subsection 85(1) are appropriate for the transferor and the transferee of property.
Neal Armstrong. Summary of 5 October 2018 Financial Strategies and Instruments Roundtable, Q.6 under s. 13(38).
CRA indicates that a dividend paid out of disability proceeds to fund purchase by survivor’s holdco might not have s. 55(2.1)(b) purpose
Opco is held equally by two unrelated individuals directly and through their respective Holdcos and, on the disability of one, Opco receives disability insurance proceeds and pays them as a special dividend to the healthy shareholder’s Holdco to fund the purchase by it of the other’s Holdco. CRA stated that there were insufficient facts to say much. However, it noted that in the circumstances described in 2015-0613821C6 it could give rulings on the application of the s. 55(2.1)(b) purpose test, and then stated:
Although in certain circumstances the dividend paid by Opco to the holding corporation of the active shareholder may not be considered to have any of the purposes described in paragraph 55(2.1)(b), that determination can only be made after a review of all the facts of a particular situation.
In commenting on the same scenario, Finance made very general comments, such as “The purpose of the payment or receipt of a dividend is determined according to the facts relating to the series of transactions or events of which the payment and receipt of the dividend is a part.”
Neal Armstrong. Summary of 5 October 2018 Financial Strategies and Instruments Roundtable, Q.5 under s. 55(2.1)(b) and of Finance response to Q.5 under s. 55(2.1)(b).
CRA finds that net rental income distributed by a spousal trust were excluded amounts given previous direct involvement of deceased husband
A spousal trust for Jocelyne (“Trust”) holds five commercial rental properties (generating $250,000 in annual rents, which had been managed by her deceased husband). Is the income generated by Trust and distributed to Jeanne subject to the tax on split income (TOSI) where the Trust investments are managed by Jocelyne’s son Julien?
CRA noted that there is a specific inclusion under s. (c)(ii)(D ) of “split income” for net rental income where a source individual (Julien) is actively engaged on a regular basis in the activities of Trust, irrespective of whether the rental income was property income or business income – but then went on to indicate that the distributed rental income likely would be excluded amounts (and, therefore, not subject to TOSI) under s. 120.4(1.1)(c)(ii) given that the deceased husband had carried on the rental operation directly rather than through a source individual, so that it could not have constituted a related business in respect of him.
CRA answered eight TOSI questions at the two 2018 APFF Roundtables. Honest, this is the last.
Next up: does s. 55(2) apply to an extraordinary dividend paid out of proceeds of an illness policy (Q.5); and why do the s. 85(1) rollover rules not work properly for Class 14.1 property transfers (Q.6)?
Neal Armstrong. Summary of 5 October 2018 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 120.4(1) – split income - (c)(ii)(D) and s. 120.4(1.1)(c)(ii).