News of Note
CRA indicates that the distinction between the provision of services and property under the split income rules will be informed by the rationale of the safe harbour exclusions
Email this ContentThe definition of an excluded share under the split income rules requires inter alia that less than 90% of the business income of the corporation be from the provision of services. CRA declined to address the distinction between the provision of services and property respecting a short list of businesses, e.g., selling life insurance or providing investment products, and instead commented:
[I]n most cases, the distinction between whether income is from the provision of services or is other income should be clear. In cases of uncertainty, we will be prepared to provide guidance as required based on a review of all of the relevant circumstances and our understanding of the rationale for the safe harbour exclusions.
Neal Armstrong. Summaries of 8 May 2018 CALU Roundtable, Q.6, 2018-0745871C6 under s. 120.4(1) – excluded share – (a)(i) and (c).
CRA confirms that the mere granting by a corporation of security for a bank loan to a shareholder did not engage the B2B loan rules
In 2017-0690691E5 F, a 50% limited partner (Ms. X) funded her investment in an LP jointly owned with her husband through a $3M bank loan that was secured by a pledge to the bank of a $3M term deposit of the bank held by a corporation (Corporation B) equally owned by her and her husband. In finding that the back-to-back loan rules in s. 15(2.6) et seq. deemed her to owe $3M to Corporation B, CRA indicated that:
- Ms. X had an amount outstanding ($3M) to an “immediate funder” (the bank),
- an amount (the $3M term deposit) was owing by the immediate funder to an “ultimate funder” (Corporation B), and
- "the condition in clause 15(2.16)(c)(i)(B) would be satisfied" (e.g., the $3M loan was permitted to remain outstanding because the term deposit was outstanding).
CRA was subsequently asked about a variation of these facts in which, rather than the $3M term deposit being used, the bank was granted a right to encumber one of Corporation B’s properties. CRA confirmed that in this situation, s. 15(2.16)(c)(i) would not apply, i.e., there no longer were back-to-back amounts owing. Respecting whether the specified right rule in s. 15(2.16)(c)(ii) applied, CRA stated that this would require a comprehensive review, but noted that:
If, under the arrangement between the parties, the bank can only exercise its right to encumber in order to secure payment of Ms. X’s $3M shareholder debt (for example, by placing a lien on the encumbered property to ensure that Corporation B cannot dispose of it without the bank’s consent), then the exception in parentheses would be met and the right to encumber would not constitute a specified right.
Neal Armstrong. Summary of 8 May 2018 CALU Roundtable, Q.1, 2018-0745491C6 under s. 15(2.16)(c).
Income Tax Severed Letters 4 July 2018
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Béliveau – Tax Court of Canada finds that insurance benefits received by an ill dental surgeon to cover her practice expenses were taxable receipts
The taxpayer, a self-employed dental surgeon, received benefits totalling over $600,000 under three Great-West policies during a two-year period of illness. Two of the policies provided coverage for her monthly general professional expenses, and the third policy, styled as professional sickness insurance, provided monthly amounts in the event of her illness. The taxpayer considered that there was no significant distinction between the third policy (replacing lost income) and the first two policies (covering business expenses). In affirming the Minister’s assessment, which treated the amounts paid out to the taxpayer under the first two policies as s. 9 income, Favreau J stated:
The surrogatum principle … is applicable [under which] the tax treatment of sickness insurance benefits depends on what such benefits are intended to replace being, in this case, the general expenses of carrying on the dental clinic.
He went on to indicate that the premiums under the two policies (which the taxpayer had not deducted in computing her income) were deductible.
Neal Armstrong. Summaries of Béliveau v. The Queen, 2018 CCI 87 under s. 9 – compensation payments and s. 18(1)(a) - income-producing purpose.
9118-5322 Québec – Tax Court of Canada indicates that transmitting purchaser new home rebate forms to CRA (or the ARQ) is imperative to the claiming by the builder of the rebate amount
Lafleur J indicated that a builder cannot deduct from net tax for the amount of new housing rebates credited to its home purchasers in a reporting period unless it submits the signed prescribed forms of the purchasers to the ARQ (or CRA, as applicable) in that month. Here, the builder not only failed to transmit the signed forms as required by ETA s. 254(5)(a), but also failed to get the forms signed by the purchasers on a timely basis as required under s. 254(4)(c).
Neal Armstrong. Summary of 9118-5322 Québec Inc. v. The Queen, 2018 CCI 96 under ETA s. s. 254(5)(a).
MacDonald – Federal Court of Appeal effectively affirms George Weston, and finds that the existence of a hedge does not turn on intention
An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. Starting about seven years later, he started closing out the forward at a loss. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.
In finding that the taxpayer’s losses under the forward were realized on capital account, Noël CJ stated:
[A]n intention to hedge is not a condition precedent for hedging. It suffices that the person concerned owns assets exposed to market fluctuation risk when the derivative contract is entered into and that the contract has the effect of neutralizing or mitigating that risk.
Mr. MacDonald was not an “accidental hedger”. He was aware of the hedging effect which the Forward Contract would have on the BNS shares … .
After noting that George Weston dealt with a hedge of asset ownership rather than of transactional risk (and before agreeing with the Crown that George Weston was “dispositive” of the case before him), he stated:
A risk arising from ownership is equally capable of being hedged and there is no reason why the established rule that hedging gains or losses are treated the same way as the assets being hedged for tax purposes, should not apply… .
Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128 under s. 9 – capital gain v. income – futures/forwards/hedges.
Pomerleau – Federal Court of Appeal finds that GAAR applied to converting soft ACB (generated from crystallizing the capital gains deduction) into pseudo-hard ACB under s. 53(1)(f.2) for use in extracting surplus
To simplify the facts somewhat by ignoring transactions in which the taxpayer accessed tax attributes of his sister, the taxpayer wanted to extract $2M from a family corporation, and was willing to do so on a basis that resulted in him receiving a deemed dividend of $1M provided that he was able to extract the other $1M tax free by using the previous step-up of the ACB of the shares of him (and his sister) to $1M using the capital gains deduction. The “hard” ACB and paid-up capital of the shares was nominal, so that the full $2M would have been deemed to be a dividend if he had simply transferred the shares to a new Holdco for cash proceeds of $2M.
Instead, he transferred the shares to a new holding company (P Pom) under s. 85(1) in consideration for high ($1M) basis Class G shares and low basis Class A shares, and redeemed the Class G shares. Most of the proceeds were deemed to be a dividend, and there was a largely matching capital loss that was denied under s. 40(6) and added to the ACB of his Class A shares under s.53(1)(f.2). He now could transfer the bumped Class A shares of P Pom to Holdco, taking back high PUC shares of Holdco, which he promptly redeemed for $2M free of additional tax, or so he thought.
CRA’s assessment of a deemed dividend under s. 245(2) effectively treated the ACB of the shares that were transferred to Holdco as not having been stepped-up under s. 52(1)(f.2). In agreeing with this assessment, Noël CJ stated:
The object and spirit of this provision, or its rationale, is to prevent amounts which have not been subjected to tax to serve in extracting surplus of a corporation free of tax. Subsection 84.1(2) proceeds with this goal in targeting amounts which, while forming part of the ACB of the shares concerned, have not been subjected to tax and have been excluded in the computation of the paid-up capital of new shares. To this end, subparagraph 84.1(2)(a.1)(ii) requires going beyond the ACB of the shares concerned – or of the shares for which they are substituted – and enquiring as to the source of the funds which constituted them in order to ascertain if they were subjected to tax. …
This rationale was circumvented by the plan implemented by the appellant. Of the amount of $1,993,812 that he withdrew, $994,628 represented amounts as to which no income tax had been paid.
After noting that the application of s. 84.1 could have a punitive effect on an inter-generational transfer of a business, he stated:
That situation, if it presented itself in the context of an analysis made under the GAAR, could possibly lead to an interpretation which prevented a punitive application of section 84.1. That situation, however, is not before us.
Neal Armstrong. Summary of Pomerleau v. The Queen, 2018 CAF 129 under s. 84.1(2)(a.1)(ii).
CRA indicates that an emigration-year return generally cannot be opened up more than 6 years later to allow a FTC for foreign tax imposed on a subsequent sale
Where a Korean immigrated to Canada while holding appreciated Korean real property and then emigrated from Canada 10 years later after it had further appreciated, thereby realizing a capital gain from its deemed disposition under s. 128.1(4)(b), he would be potentially eligible under s. 126(2.21) to claim a Canadian foreign tax credit for Korean taxes that become become payable on a subsequent sale respecting the gain that accrued in Canada, provided that this credit is assessed within the extended reassessment period of six years following the emigration year. However, the Korean property might be sold more than six years later. Can this period be extended by filing a waiver with CRA?
CRA, in clarifying its comments in 2016-0660421E5, indicated that it generally would not accept a waiver beyond this six-year period, but that, as a limited exception to this proposition:
[I]f any of the circumstances to support the deduction under subsection 126(2.21) of the Act (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) of the Act, it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.
Neal Armstrong. Summary of 11 October 2017 External T.I. 2016-0673171E under s. 126(2.21).
Tusk Exploration – FCA finds that Part XII.6 tax (effectively double-taxation) was payable on CEE purportedly renounced on a look-back basis to NAL shareholders
Tusk Exploration, a Canadian exploration company, unsuccessfully argued that it was not subject to Part XII.6 tax on Canadian exploration expenses that it had purported to renounce under the look-back rule - but which were now admittedly not eligible for look back because the flow-through share investors were non-arm’s length – because the reference in Part XII.6 to CEE that it “purported” to renounce under the rule referred only to expenses which had been validly rather than invalidly renounced under the look-back rule.
The Part XII.6 tax was also argued to be a proxy for interest, and the non-arm’s length shareholders were assessed interest on their denied CEE claims for the look-back year, resulting it what was argued to be a double interest imposition. After referring to the s. 69(1) example, Webb JA stated:
[T]he potential for double taxation exists in the ITA when transactions are completed between parties who do not deal with each other at arm’s length.
Neal Armstrong. Summaries of Tusk Exploration Ltd. v. Canada, 2018 FCA 121 under s. 211.91(1) and s. 248(28).
Our translations of CRA interpretations now go back 5 years
The table below provides descriptors and links for the Technical Interpretation released last week and for five Interpretation released in July 2013, as fully translated by us.
These (and the other full-text translations covering all French-language Interpretations released in the last 5 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 July.