News of Note

We have uploaded all of the CRA severed letters (e.g., Technical Interpretations, Rulings and Roundtable items) released by the Income Tax Rulings Directorate under its severed letter program, which commenced in April 1993.

These will continue to be open access. However, our translations of the French-language interpretations and Roundtable items, and our summaries of severed letters, will continue to be subject to the standard paywall (currently, 3 working weeks per month).

It is part of our process to format severed letters which we upload, e.g., indenting quoted passages, highlighting and linking titles, indenting subparagraphs, italicizing case citations and correcting the occasional situation where the text runs off the side of the page. Due to the volume of the recently-uploaded letters, this editing process will take a number of months.

A Canadian citizen who was a U.S. long term resident under the U.S. expatriation rules was deemed for Code purposes to receive a taxable distribution of his entire interest in his IRA (the “Deemed Distribution”) immediately before his relinquishing of his green card and returning to Canada. When he then made an actual withdrawal of those amounts (the “Withdrawal”) in order to contribute them to his RRSP, they were not subject to further U.S. income tax.

In policy terms, the RRSP contribution should have generated a s. 60(j) deduction – but did not. The Withdrawal did not qualify as an “eligible amount” for s. 60.01 purposes because it was the amount of the Deemed Distribution (not the Withdrawal) that was included in the indiviual's income under s. 56(12) and s. 56(1)(a)(i)(C.1). Conversely, the amount of the Deemed Distribution also was not an “eligible amount” as it was not a “payment received” for the purpose of s. 60.01.

This anomaly has been pointed out to Finance.

Neal Armstrong. Summary of 29 October 2018 External T.I. 2018-0750411E5 under s. 60.01.

An employee, who worked two weeks out of every four at a norther diamond mine, received an allowance of 4.5% of his salary to help him to pay the costs of transportation between his New Brunswick residence and the Edmonton site for boarding or deboarding his flights to and from the mine. Masse DJ found that the allowance was includible in the employee's income under s. 6(1)(b), because it was not excluded under s. 6(6) for three alternative reasons:

• The s. 6(6)(b) exclusions were not available on substantive grounds because he regarded the travel between home and Edmonton as something separate from travel to and from the special work site (s. 6(6)(b)(i)) or remote location (s. 6(6)(b)(ii)). [This seems odd as presumably there could have been an exempt allowance if the employee instead had received a larger allowance to make it on his own steam all the way to and from the remote work site.]
• The employer had not provided a TD4 certifying that the s. 6(6)(b)(i) exclusion was available. After referencing the jurisprudence on s. 8(10), Masse DJ found that it was necessary for the taxpayer to demonstrate that the employer had been acting unreasonably in not providing the certification - and in fact its refusal was reasonable, as the “Allowance of 4.5% of salary was arbitrary and bore no resemblance at all to the actual costs involved in travelling between the Appellant’s principal residence and Edmonton.” [He earlier noted that the employee’s actual travel costs were approximately double the allowance amount. The fact that there was no provision like s. 8(10) requiring an employer certification seemed to help the taxpayer’s rather than the Crown’s position.]
• “The travel between New Brunswick and Edmonton, AB were essentially personal in nature since he chose to maintain his principal place of residence in another province. It has long been established that expenses related to travel from one’s residence to one’s work site are personal expenses.” [S. 6(6) states that it applies notwithstanding s. 6(1) and, therefore, overrides this jurisprudence.]

Neal Armstrong. Summary of McEachern v. The Queen, 2018 TCC 232 under s. 6(6)(b).

An individual shareholder holding shares of a Canadian controlled private corporation (Opco) with a nominal adjusted cost base and a fair market value of say $10M potentially could use s. 84.1 on a sale of his shares to a third-party for cash in order to generate and receive a capital dividend as well as generating a dividend refund. For example, he could:

1. do a drop-down of half of his Opco shares to a wholly-owned Newco on a s. 85(1) rollover basis
2. have Newco do a dirty s. 85(1) exchange of its Opco shares with Opco for new Opco shares, thereby realizing a $5M capital gain and additions to its capital dividend account and refundable dividend tax on hand account
3. sell in two equal tranches his remaining Opco shares to Newco in consideration for two $2.5M notes, thereby generating, under s. 84.1:
   
   1. a $2.5M capital dividend; and
   2. a $2.5M taxable dividend (generating a dividend refund)

Since he and Newco have high basis in the Opco shares, the sale to the purchaser can now close without further gain being realized.

Issues to be addressed in this planning include:

• It would appear that CRA now accepts that a s. 83(2) election can be made on a s. 84.1 dividend.
• However, CRA might challenge the proposition that a s. 84.1 dividend can generate a dividend refund.
• S. 129(1.2) could apply to deny the dividend refund if one of the main reasons for step 3(b) was to obtain a dividend refund
• Re GAAR, what arguably is the Lipson doctrine, that a specific anti-avoidance provision should not be used to generate a tax benefit, is bothersome (see also Satoma)

Speaking of GAAR, it would appear that continuing a CCPC under foreign corporate law in order to avoid the high corporate rate on investment income is not abusive given inter alia that the scheme of the Act is to make it hard to be a CCPC rather than going in the opposite direction – and furthermore, the Department of Finance turned its mind to extending the refundable tax regime to non-CCPC private corporations in July 2017, but so far has not moved on this.

Neal Armstrong. Summaries of Anthony Strawson and Timothy P. Kirby, “Vendor Planning for Private Corporations: Select Issues,” 2017 Conference Report, (Canadian Tax Foundation), 11:1-28 under s. 110.6(2.1), s. 123.3, s. 84.1(1), s. 83(2), s. 129(1) and s. 129(1.2).