News of Note
CRA considered that s. 55(2) did not apply to dividends paid only for asset protection and QSBC-status purposes, and that safe income was allocated between 2 classes of participating shares pro rata to their dividend entitlements
Email this ContentTwo unrelated individuals hold a portion of their equal investments in Opco in the form of equal direct common shareholdings and the balance through an equally owned Holdco, which holds Class X shares of Opco that are entitled to receive a proportion of the earnings of Opco and are redeemable for an amount equal to that proportionate amount of such undistributed earnings plus their nominal issuance price.
CRA was guardedly amenable to the proposition that dividends paid on the Class X shares could be considered to be paid only for purposes of asset protection and eliminating excess liquidity that could prejudice this status of the common shares as qualified small business corporation shares.
If it were necessary to rely on the safe income safe harbour, CRA applied the Robertson rule that “income will be attributable to a particular class of shares in the same ratio in which each class would be entitled if all earnings of the corporation, but not share capital, were to be distributed,” so that the safe income earned or realized annually following the issuance of the Class X Shares could be proportionately allocated based on the number of shares of each class. If safe income was lower than the earnings, the Class X shares would bear a pro rata portion of the deficiency (even if the share terms purported to limit the distribution and redemption entitlement of the Class X shares to X% of the safe income).
Neal Armstrong. Summaries of 6 April 2017 External T.I. 2016-0658841E5 Tr under s. 55(2.1)(b) and s. 55(2.1)(c).
CRA finds that payment of family-law debt out of a TFSA to the surviving spouse could occur as a survivor payment
The definition of “survivor payment” in s. 207.01(1) - exempt contribution – para. (b) references a payment to the survivor directly or indirectly out of the former TFSA as a consequence of the deceased’s death. The exempt contribution can be contributed by the survivor to his or her own TFSA.
CRA considered that this requirement can be satisfied where the TFSA property is used for the payment of family-law debt of the deceased (e.g., obligations for support or under a separation agreement) to the surviving spouse, given the effect of the 248(23.1)(a) deeming rule.
CRA also indicated, similarly to 2016-0679751E5 F, that in light inter alia of s. 248(8)(a), a payment could be considered to be made to a surviving spouse directly or indirectly out of the former TFSA as a consequence of the deceased’s death where an executor in his discretion chooses to satisfy a legacy of specific property (in this case, of the residue of the estate, which included the family residence) by retaining the proceeds from the sale of the residence and instead paying an equivalent amount out of TFSA property.
Neal Armstrong. Summary of 6 June 2017 External T.I. 2015-0617331E5 Tr under s. 207.01(1) - exempt contribution – para. (b).
Woessner - Tax Court of Canada orders the removal of taxpayer’s counsel since a law partner of the firm likely would be called as a witness
Campbell J granted the Crown’s motion to remove the Shea Nerland firm as counsel of record on the taxpayer’s appeal of the denial of his losses from a software “investment” since it appeared likely that a current Shea Nerland partner and a former associate at the firm would be called as witnesses by the Crown and/or the taxpayer’s counsel. She stated:
The degree to which Shea Nerland appears to be immersed in the promotion and management of the alleged tax shelter scheme and the likely importance of the testimony of Mr. Nerland and Mr. Mamdani, necessitate an order for the removal of Appellant counsel and the law firm in order to maintain the reputation of the administration of the judicial system and to avoid the appearance of impropriety to the public.
Neal Armstrong. Summary of Woessner v. The Queen, 2017 TCC 124 under Tax Court of Canada Rules (General Procedure), s. 31(2).
CRA considered that exploring a placer jade deposit did not qualify as CEE
Para. (f) of the Canadian exploration expense definition refers to exploring a Canadian “mineral resource,” which is defined to include a “base or precious metal deposit” and “a mineral deposit in respect of which the Minister of Natural Resources has certified that the principal mineral extracted is an industrial mineral contained in a non-bedded deposit.”
The Minister of Natural Resources advised CRA that nephrite (a type of jade) to be extracted from the in-situ deposits on the subject property was an industrial mineral contained in non-bedded deposits – but excluding placer nephrite deposits, which were considered to fail the quoted test. Apparently, this means that CRA considers that claims containing minerals other than bedded (i.e., stratified) deposits are not necessarily non-bedded deposits.
CRA itself considered that the placer nephrite deposit also did not qualify as a “base or precious metal deposit.”
CRA also noted that the exploration expenses in question might be incurred near existing mines, in which case they could be denied CEE treatment on that basis as well
Neal Armstrong. Summaries of 16 June 2017 External T.I. 2016-0674541E5 under s. 248(1) – mineral resource and s. 66.1(6) - Canadian exploration expense – para. (f).
Income Tax Severed Letters 12 July 2017
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Diktakis – Tax Court of Canada finds that a taxpayer and her two years old half-sister were related
ITA s. 251(6)(a) indicates that siblings are related. Smith J found that a taxpayer was related to a two year old child who was the result of relations between the taxpayer’s father and a woman who was not his spouse or common-law partner. Accordingly, the taxpayer might have been entitled to the new housing GST rebate if she could have established (which she did not) that her half-sister and that child’s mother had been the first occupants of a new condo that had been acquired by the taxpayer.
In this regard, Smith J noted the oddity of a two-year old child satisfying the occupying-the-new-home requirement in the rebate provisions. However, he referred to s. 158 of the Civil Code of Quebec, which provided that “an act that may be performed by a minor alone may also be validly performed by his representative,” and then found that the acts of the child (i.e., home occupation) could be performed by her representative (the mother).
Neal Armstrong. Summaries of Diktakis v. The Queen, 2016 TCC 262 under ETA, s. 254(2)(g).
Six further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of the French technical interpretation released last week, of two (APFF) Roundtable item released on January 14, 2015 and of three technical interpretations released on January 7, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 30 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
CRA states that whether aluminium shingles were a fixture turned on their purpose
New aluminum shingles with an electric cable (the “Equipment”) were attached over existing asphalt shingles on the portion of a roof immediately beneath existing solar panels, so as to melt snow accumulations, which otherwise would hinder the functioning of the solar panels. In order for the Equipment to qualify as Class 43.2 property, it could not be “part of the building,” i.e., it could not be a fixture.
CRA stated that this turned on the question of “whether an article is attached to another property to effect a permanent and substantial improvement of that other property or to enable [its] more complete enjoyment.” In then applying this test, it stated:
Here, the intention to install the Equipment is to resolve a problem caused by the deficient operation of the solar panels. Thus, the fact that the Equipment is necessary for the proper operation of the photovoltaic equipment during the winter period and that its main function is to support the solar panels (with any benefits to the building being negligible), may support the inclusion of its capital cost to Class 43.2… .
Neal Armstrong. Summary of 16 May 2017 External T.I. 2016-0670661E5 under Class 43.1.
Binder Capital – Federal Court finds that it lacks the jurisdiction to overturn CRA’s decision not to extend s. 129(1) refund-claim deadline
In 1057513, Webb JA found that a corporation was ineligible for dividend refunds for various years because it did not file the returns claiming the dividend refunds within three years of the taxation year-ends in question as required under s. 129(1).
Binder Capital sought extension of the three-year deadline on the basis of extenuating circumstances explaining its delay in filing returns, and submitted that the discretion accorded to the Minister under s. 220(3) to extend a return-filing deadline impliedly accorded the Minister the discretion to extend the s. 129(1) 3-year deadline. In denying this request, CRA applied its position in 2011-0426331E5 that:
Although subsection 220(3) of the Act provides the Minister with the discretion to extend the time for making a return of income, this discretion does not extend to the filing deadline in subsection 129(1) of the Act… Subsection 220(3) does not alter or affect whether a corporation has factually filed its return of income within the period required under the Act.
In dismissing Binder Capital’s application to overturn this decision, Campbell J stated:
[W]hether the Minister’s discretion applies to s. 129 is a jurisdictional question with respect to an interpretation of the ITA which is not within this Court’s authority to decide.
Given the findings in 1057513, this effectively seems to indicate that the s. 129(1) claim-deadline cannot be extended even where there are extenuating circumstances explaining the delay.
Neal Armstrong. Summary of Binder Capital Corp v. Canada (National Revenue), 2017 FC 642 under s. 129(1).
Grant – Tax Court of Canada finds that the six-month CRA filing “requirement” in s. 227.1(2)(c) is merely directory
Smith J confirmed the finding in Kalef that the appointment of a trustee in bankruptcy did not cause an individual to cease to be a director notwithstanding that the directors were no longer in control.
He also applied Kyte and Moriyama to find that the stipulation in s. 227.1(2)(c), that CRA first make proof of its claim within six months of a bankruptcy before assessing a director under s. 227.1, was merely “directory.” Accordingly, an alleged failure to satisfy s. 227.1(2)(c) did not invalidate the s. 227.1 assessment.
Neal Armstrong. Summaries of Grant v. The Queen, 2017 TCC 121 under s. 227.1(4) and s. 227.1(2)(c).