News of Note
CRA is willing to accept target benefit plans that breach the equal periodic benefit rule
Email this ContentIn October 2016 the federal government announced changes to the federal PBSA to permit federally-regulated employers to offer target benefit plans (i.e., plans somewhat like defined benefit plans, but with benefits based on affordability), and various provinces are moving in this direction as well.
CRA indicated that it currently will accept target benefit plans as long as the only rule that is violated is the equal periodic benefit rule (i.e., the benefits would be permitted to fluctuate up and down.) The Department of Finance is working on what changes to the Regulations should be made to accommodate target benefit plans, but has not landed on what these should be.
Neal Armstrong. Summary of 5 May 2017 OBA Seminar, Q.2 under Reg. 8503(2)(a).
Lumenpulse privatization contemplates cash consideration for its majority public shareholders and a share-for-share exchange for 38% of its shareholders
Under the proposed privatization of TSX-listed Lumenpulse pursuant to a CBCA Plan of Arrangement, the public shareholders would receive cash for their common shares, and the specifically-listed “Rollover Shareholders” (holding 38% of the common shares) would receive common shares of the newly-incorporated purchaser, which is an indirect subsidiary of Power Corporation of Canada. The Circular does not mention whether the “Rollover” contemplated is under s. 85 or 85.1
Neal Armstrong. Summary of Lumenpulse Circular under Mergers & Acquisitions - Mergers - Privatizations.
CRA states that using the s. 55(3)(a) redemption exception to circumvent the safe income limitation could be GAARable
The CRA position on creditor-proofing suggested that if Opco, which has no safe income and whose common shares have a nominal adjusted cost base and paid-up capital, uses cash (or other assets) to pay a dividend to its shareholder (Holdco) to fund Holdco’s purchase of real property to be rented to it, that cash dividend likely would be considered to have a tainting purpose described in s. 55(2.1)(b)(ii). Accordingly, Opco avoids s. 55(2.1)(b) by using the cash to purchase most of its common shares for cancellation. CRA was unenthusiastic, stating:
[S.] 55(3)(a) is intended to facilitate corporate reorganizations made in good faith by related persons but is not intended to accommodate the payment or receipt of dividends or transactions or events which seek to increase, manipulate or manufacture tax basis.
Thus, the application of the general anti-avoidance rule in subsection 245(2) should be queried, considering that the money given to Holdco would not come from the income that had already been taxed in Opco and that the adjusted cost base of participating shares in the capital stock of Opco would be nominal.
Neal Armstrong. Summary of 2017-0683511E5 Tr under s. 55(2.1)(b)(ii).
CRA indicates that s. 118.1(5.1) does not apply where a GRE donates a capital interest in a charitable residual trust created by will
In order for a charitable gift by a graduated rate estate gift to be included in the total charitable donations of the estate (or the deceased) under (c)(ii)(B) of the definition in s. 118.1(1) of "total charitable gifts," there is a requirement inter alia that s. 118.1(5.1) deems the gift to have been made by the estate. S. 118.1(5.1) references “property that was acquired by the estate on and as a consequence of the death.”
CRA considers that s. 118.1(5.1) does not apply where a GRE donates a capital interest, in a charitable residual trust created by will, to a qualified donee. However, this does not have much significance as:
under (c)(ii)(A) of the [same] Definition, the eligible amount of a gift of an interest in a trust could be included in the computation of the total charitable gifts of the GRE in the taxation year in which the gift is made or in any of the five subsequent taxation years [until claimed].
Neal Armstrong. Summary of 19 April 2017 External T.I. 2016-0625841E5 Tr under s. 118.1(5.1).
Pak...d – Tax Court of Canada places a heavy burden on those seeking a publication ban
A taxpayer, who was found in the Tax Court to have claimed expenses of what did not qualify as a business, then brought a motion for a publication ban of Masse DJ’s reasons for judgment on the basis that they contained information that would result in harm to himself, his family and the public.
In denying the motion, Campbell J applied the Dagenais/Mentuck tests of the Supreme Court under which courts will only grant publication bans where (i) “such an order is necessary in order to prevent a serious risk to the proper administration of justice because reasonably alternative measures will not prevent the risk,” and (ii) “the salutary effects of the publication ban outweigh the deleterious effects on the rights and interests of the parties and the public.” Respecting the second test, she stated:
In a self-assessing income tax system, it is particularly pertinent that the public have access to decisions of this Court, so that they can better ascertain the state of the law, particularly as it relates to issues which directly affect their daily activities. …
The earlier decision is now back on the Tax Court site.
Neal Armstrong. Summary of Pak...d v. The Queen, 2017 TCC 83 under Charter s. 2(b).
Fink – Attorney General is ordered to answer questions respecting remission relief to other taxpayers re set-off of capital losses against s. 7 benefits
The taxpayer sought judicial review of a CRA decision not to recommend a remission order to effectively permit the taxpayer to use a capital loss realized on a subsequent disposition of shares acquired under a stock option plan to offset part of the s. 7 benefit recognized on exercise of his options. De Montigny JA upheld an order below requiring the Attorney General to answer questions posed by the taxpayer respecting remission orders that had been granted to taxpayers in allegedly similar circumstances, except that those employees had been involved in an employee stock purchase plan rather than an employee stock option plan. Such information was not protected from disclosure under s. 241 as it related to administration or enforcement of the ITA.
Neal Armstrong. Summaries of Canada (Attorney General) v. Fink, 2017 FCA 87 under ITA s. 241(3)(b) and Financial Administration Act, s. 23(2).
CRA indicates that the right of the bare owner of property, subject to a usufruct in favour of a surviving spouse, to dispose of his bare ownership does not preclude a spousal trust
The will of the Quebec deceased bequeathed the usufruct of rental property to his spouse and the bare ownership to his adult child, thereby giving rise to a deemed trust under s. 248(3) (the “Trust”), and a mooted spousal trust. CRA stated:
[W]here the will provides that no person other than the deceased's spouse or common-law partner may, before death, receive any part of the income or capital of the Trust or otherwise obtain the use thereof… the fact that the will does not prevent the bare owner from disposing of his or her right should not, in and of itself, cause the condition in subparagraph 70(6)(b)(ii) to not be met.
Neal Armstrong. Summary of 20 April 2017 External T.I. 2016-0672501E5 Tr under s. 70(6)(b)(ii).
CRA finds that an appraisal increment increased a corporation’s retained earnings for Part I.3 purposes
S. 181.2(3)(a) provides that a corporation’s capital includes its retained earnings, which s. 181(3)(b)(i) requires, in the case of most corporations, to be determined in accordance with generally-accepted accounting principles.
On the initial application to it of accounting standards for private enterprises ("ASPEs") on January 1, 2011, a corporation revalued its assets (from their book value under “old” Canadian GAAP) to fair value, and increased its retained earnings accordingly. CRA found that since this increase accorded with ASPEs, such increase also increased the corporation’s capital under s. 181.2(3)(a).
Neal Armstrong. Summary of 2 May 2017 External T.I. 2016-0663781E5 Tr under s. 181(3)(b)(i).
CRA effectively gives a checklist for determining whether LLLP legislation provides for a corporation
A secondary assessing position of a TSO was that a Delaware LLLP, which had been wound-up, had been a corporation for ITA purposes. In the course of confirming this characterization, the Directorate provided a detailed listing of the relevant provisions of the Delaware legislation (the DRULPA), as well as summarizing the (unexceptional) features of the partnership agreement. This listing might be a useful checklist when confirming the portability of the CRA position respecting Delaware and Florida LLPs and LLLPs to other jurisdictions.
The Directorate went on to note that since it had recently determined to provide grandfathering relief re the application of its position to existing LLPs and LLLPs (see 2017 IFA Roundtable, Q.3), it recommended against treating this LLLP as having been a corporation.
Neal Armstrong. Summary of 13 February 2017 Internal T.I. 2015-0587691I7 under s. 96.
CRA provides illustration of the SBD-denial rule in s. 125(1)(a)(i)(B)
SellCo A and SellCo B sell all of their fishing catch to BuyCo, although BuyCo purchases the majority of its fish from unrelated parties. K owns 65% of BuyCo, K’s brother owns 100% of SellCo A and K’s son owns 100% of SellCo B. CRA confirmed that under the new s. 125(1)(a)(i)(B) rule, the income of the SellCos will not be eligible for the small business deduction, except to the extent that Buyco assigns some of its business limit to them, given that their income is not substantially derived from sales to arm’s length persons or untainted partnerships.
Neal Armstrong. Summary of 20 April 2017 External T.I. 2016-0679721E5 under s. 125(7) – specified corporate income.