News of Note
Maintenance rescheduled to the weekend of the 21st
Email this ContentAppropriately enough, we'll be going dark for the Solstice!
Service will not be interrupted this weekend, but instead will cease at 22:00 EST on Friday the 20th, and resume by the end of the weekend. Again, please pardon the inconvenience.
CRA now considers the FMV excess on a convertible debenture conversion to be s. 214(7) interest
In a departure from 2009-0320231C6 (which indicated that there generally will be no excess under s. 214(7) on the conversion by the original holder of a “traditional” convertible debenture), CRA stated that, where there is a conversion of a standard convertible debenture issued by a Canadian public entity (i.e., taxable Canadian corporation, resident trust or Canadian partnerships), in general there will be an excess under s. 214(7) equal to the amount by which the fair market value of the common equity received on the conversion exceeds the price for which the debenture was issued. This new position applies prospectively to convertible debentures issued after December 3, 2024.
However, CRA is still of the view that the deemed payment of interest on standard convertible debentures under s. 214(7) does not generally constitute “participating debt interest” as defined in s. 212(3).
A s. 214(7) excess received by a holder of a convertible debt who did not deal at arm’s length with the issuer would not qualify for exemption under s. 212(1)(b)(i)(A). CRA indicated that a convertible debenture issued to a non-arm’s length person prior to December 3, but with that conversion feature having not yet been exercised, would essentially be grandfathered.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.13 under s. 214(7).
CRA warns that s. 12(13)(b) has no continuity rules for common reorganization transactions
CRA planted a repeat of the similar question posed in 10 October 2024 APFF Roundtable, Q.1 in order to then be able to warn that there are no continuity rules for common reorganization transactions, such as amalgamations, s. 88(1) wind-ups or s. 85(1) rollovers in the s. 12(3)(b) flipped property rule, so that such an event or transfer starts the 365-day period in s. 12(13)(b) running again.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.12 under s. 12(13)(b).
Scheduled maintenance this weekend
Tax Interpretations will be migrating to newer hardware over the weekend, and will be inaccessible between Saturday at 20:00 EST and Sunday night. We apologize for any inconvenience.
The new system will be twice as fast as the old one, so we're looking forward to it!
CRA indicates that it will administer the GMTA in accordance with OECD administrative guidance where Finance has intimated that the GMTA will be amended to catch up
CRA indicated that as new OECD administrative guidance is released, the DST and Global Tax Section of CRA will consult with the Department of Finance to determine, on a case-by-case basis, how such guidance should be handled – whether there is a pending amendment to the Global Minimum Tax Act (GMTA) or whether CRA will apply the new guidance to inform its interpretation of the existing GMTA provisions.
CRA was provided with a particular example in this regard respecting s. 17(6) of the GMTA: A particular constituent entity (a CE) is a reverse hybrid entity in relation to its direct owner, while at the same time being fiscally transparent in relation to an indirect owner that holds the particular CE through one or more intermediaries who are also fiscally transparent in relation to the indirect owner. In the current version of the GMTA, this is addressed by allowing the income of the CE to be allocated to the indirect owner. However, the June 2024 OECD Administrative Guidance instead addressed this scenario by allowing any tax paid by the indirect owner with respect to the income of the CE to be allocated to the CE. Although proposed amendments to s. 17(6) released in August 2024 no longer allow the income of the CE to be allocated to the indirect owner, the amendments fail to provide for allocating the tax paid by the indirect owner, regarding the income of the CE, to the CE. However, it is understood that further GMTA amendments will align with the June 2024 administrative guidance.
CRA indicated that it has consulted with Finance and, in light of likely further amendments, it will administer the provisions of the GMTA to achieve what the OECD administrative guidance clarifies should be the outcome – that is, the constituent entity covered taxes paid by the upper-tier entity being pushed down to the CE.
Neal Armstrong. Summaries of 3 December 2024 CTF Roundtable, Q.11 under GMTA s. 3(1) and s. 17(6).
Income Tax Severed Letters 11 December 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that the prohibition against multiple use of the intergenerational transfer rules doe not apply to simultaneous transfers
One of the “intergenerational transfer” rule requirements, in s. 84.1(2.31)(a) or (2.32)(a), is that a previous inter-generational exception to s. 84.1 has not previously been sought. CRA was asked to address the situation where a parent, who has not previously sought out the intergenerational exception, simultaneously disposes of subject shares to two separate purchaser corporations, each wholly-owned by an adult child. CRA indicated that the s. 84.1(2.31)(a) or (2.32)(a) exception could be met on the basis that the two (or multiple) dispositions occur at the same time as part of the same genuine intergenerational transfer.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.10 under s. 84.1(2.31)(a).
CRA elaborates that Reg. 105 applies to amounts paid to a non-resident for services rendered in Canada including through a Canadian subcontractor
Regarding the situation where a Canadian taxpayer (CanCo) engages a non-resident (NRCo) to provide services to be rendered in Canada, with NRCo subcontracting part of the services rendered to CanCo in Canada to another corporation (SupplierCo), CRA noted that its previous position had been that the reimbursement of an expense would not be subject to Reg. 105 withholding based on the finding in Weyerhaeuser that that Reg. 105 applied only to an amount that is remuneration for services rendered that had the character of income in the hands of the recipient.
However, CRA’s new position was that, in the above situation, the amounts paid for services rendered in Canada (other than the reimbursement of certain out-of-pocket costs, such as, apparently, the travel expenses in Weyerhaeuser) would indeed have the character of income in the hands of NRco. The fact that NRco enters into a further agreement with the Supplierco does not alter the character of the payment to NRco, so that Reg. 105 would apply to the full amount received by such non-resident contractor irrespective of whether the subcontractor was a Canadian resident who was fully subject to Canadian tax.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.9 under Reg. 105(1).
CRA interprets s. 55(2)(b) so as to avoid circularity
Canco repurchased its shares held by its parent (which have an ACB and PUC of $100) for $1,000, thereby producing a deemed dividend of $900 which, in turn, is deemed by s. 55(2) to be proceeds of disposition to the parent.
The questioner suggested that there is some circularity in the drafting of s. (j)(i) of the definition of "proceeds of disposition" in s. 54 and s. 55(2)(b), namely:
- s. (j)(i) of the definition of “proceeds of disposition” reduces the proceeds of disposition otherwise received ($1000) by the amount of any dividend deemed to be received under s. 84(3) “except to the extent the dividend is deemed by paragraph 55(2)(b) to be proceeds of disposition of the share”
- s. 55(2)(b) deems the dividend to be proceeds of disposition of the share that is redeemed “except to the extent that the dividend is otherwise included in those proceeds.”
Could there be one $900 capital gain on the disposition without s.(j)(i) of the definition of proceeds of disposition applying, and a second one under s. 55(2)(b)?
Perhaps the concern was that the exclusion in s. 55(2)(b) for a “dividend” otherwise included as proceeds did not apply because, at the end of the day, there was no $900 “dividend” which was included in the $1,000 proceeds.
CRA also was somewhat mystified by the question, and indicated that it did not read these provisions as creating circularity – but indicated that, in any event, if such a possibility did exist, it would take a purposive approach to avoid an absurd result. Accordingly, there would be only one capital gain ($900).
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.8 under s. 55(2)(b).
CRA indicates that an 11% estate beneficiary becomes a specified shareholder of the deceased’s corp. concurrently with its deemed acquisition under ss. 88(1)(d.2) and (d.3)
The estate of an individual who, on death, wholly-owned Aco, included a charity entitled to 11% of the Estate. The Estate will implement a standard post-mortem pipeline, entailing the Estate’s transfer of the Aco shares to Newco (formed by it), followed by the winding-up (or amalgamation) of Aco.
Under s. 88(1)(c)(vi), a bump will be denied if property distributed to the parent (Newco) on the winding-up, or “substituted property”, is acquired by a “specified shareholder” (other than a “specified person”) of the subsidiary (Aco) “at any time during the course of the series and before control of the subsidiary was last acquired by the parent.”
However, s. 88(1)(d.3) will deem control of Aco to have been acquired by the Estate immediately after the death from a person with whom the individual dealt at arm’s length; and pursuant to s. 88(1)(d.2), control of Aco by Newco will be deemed to have been acquired at the time of such deemed acquisition by the Estate.
CRA indicated that it would apply ss. 88(1)(d.2) and (d.3) on the basis that the deemed acquisition of control of Aco by the Estate occurs concurrently with the acquisition of shares of Aco by the Estate and, accordingly, it would not consider the charity to be a specified shareholder of the subsidiary (Aco) prior to the deemed acquisition of control of the subsidiary by the Estate.
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.7 under s. 88(1)(d.2).