News of Note
CRA accommodates using manufacturer’s per-kilometre electricity use standard in meauring the operating cost of an electric car
Email this ContentWhere an electric vehicle used for business purposes or in the course of employment is charged at home and there is no electricity meter specific to the vehicle, CRA is amenable to using the per-kilometre electricity standard provided by the manufacturer in determining the annual electricity cost of the vehicle.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.5A under s. 6(1)(e) and s. 13(21) – undepreciated capital cost – A.
Income Tax Severed Letters 2 November 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA affirms Penn Ventilator doctrine
In S3-F6-C1, para. 1.65, CRA accepts that, in accordance with Penn Ventilator, interest on a note issued in order to repurchase common shares may be deductible. When asked whether A.P. Toldo has changed this view, CRA stated:
The Court in A.P. Toldo suggested that the decision in Penn Ventilator should be applied narrowly. However, it is our view that those comments were obiter and somewhat ambiguous. Accordingly, A.P. Toldo has not caused us to change our position.
Neal Armstrong. Summary of 31 May 2016 Internal T.I. 2016-0638241I7 under s. 20(1)(c)(ii).
CRA confirms right of GREs to carry forward donations for five years
CRA confirmed that a charitable gift can be included in the calculation of total charitable gifts of a graduated rate estate or a former GRE for the taxation year in which the donation was made or in the five taxation years following that of the donation.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.6 under s. 118.1(1) – total charitable gift – s. (c)(ii).
CRA indicates that a right to find a 3rd party purchaser for another’s shares is not a s. 251(5)(b)-style right
Ss. 256(1.4) and 251(5)(b) reference a right (including a contingent right) to, or to acquire, shares and a right to cause a corporation to redeem shares. There is not considered to be such a right where the shareholders’ agreement for a corporation carrying on a franchised operation (“Franchisee”) specifies that in the event that the individual manager of Franchisee (who holds 50% of Franchisee’s commons shares) departs, the other 50% common shareholder (the Franchisor) has the mandate to find an third party to purchase the manager’s shares.
The question also asked (somewhat innocently of corporate law) about the treatment of a clause in the shareholders’ agreement providing that the Franchisee would automatically repurchase the manager’s shares in the event of his departure. CRA referenced a previous ruling “that a person does not generally control the triggering of an event where a corporation is obliged to redeem or purchase shares of its capital stock held by a shareholder convicted of defrauding the corporation,” but was reluctant to answer this question without more facts and analysis, and also appeared to indicate that s. 251(5)(b)(ii) could be engaged by a right to cause shares to be redeemed that did not arise until the occurrence of a triggering event that was beyond the person’s control.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.7 under s. 256(1.4)(a) and s. 251(5)(b)(ii).
CRA’s policy on employees’ purchases of discounted merchandise excludes condos and shareholders
In Guide T4130, CRA indicates that the sale of “merchandise” by an employer will not give rise to a benefit from employment in a wide range of specified circumstances. CRA is unwilling to extend this policy to condos rented by an employer to an employee at its “costs,” nor does the T4130 policy extend to shareholders.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.8 under s. 6(1)(a) and s. 15(1).
CRA accepts that a farm house used more than 50% by farming employees is an active business asset
CRA will accept that a farm house is an active business asset for purposes of the definitions of “qualified small business corporation share,” “share of the capital stock of a family farm or fishing corporation” and "interest in a family farm or fishing partnership" if it is used more than 50% by farming employees who are providing their services in that capacity rather than as shareholder (or partner).
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.9 under s. 110.6(1) - “qualified small business corporation share.”
CRA considers an estate to own its property
One of the tests for a property to qualify as a qualified farm or fishing property of an individual is that for the previous 24 months it was owned by the individual, a personal trust from which the individual acquired the property or a parent. CRA considers that during the period that a farm is held by an executor, it is the estate (viewed as a personal trust) that owns the trust, and that the 24-month test will be satisfied where the individual acquired the farm from the estate which in turn received the farm from the individual’s parent who had owned it for the balance of the 24 months.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.10 under s. 110.6(1.3)(a)(i).
CRA considers that the stipulated rights of lessee should be valued for SBC and QSBCS purposes
Although CRA considers it to be irrelevant whether, under GAAP, a lease is capitalized by a lessee as a capital lease, it considers that the rights of a lessee specified in its lease are property whose fair market value (if any) should be taken into account in determining whether the lessee is a small business corporation or whether its shares are qualified small business corporation shares – so that if the leased property is used principally in a Canadian active business, this will help towards satisfying those definitions– and, conversely, if it is not.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.11 under s. 248(1) – small business corporation.
CRA response implies that pipeline transactions and the like should use an amalgamation rather than wind-up
A, who holds 50% of the (common) shares of Opco (having a nominal ACB and PUC), accomplishes a sale of a portion of his shares to the other 50% shareholder (B) by B rolling his shares into a wholly-owned Newco, Newco paying the cash purchase price with proceeds of a bank borrowing and then amalgamating with Opco.
CRA acknowledged that it was unlikely that s. 84(2) applied given that the amalgamation by itself would not produce a “winding-up, discontinuance or reorganization” of Opco’s business. However, it could not be clear on this point in the absence of more information, viz.:
information regarding the nature of the business carried on by Opco, the composition of the assets of Opco (for example, the level of liquidity), the magnitude of the surplus of the corporation or the time within which the loan from the financial institution and the note due to Mr. B would be repaid by Amalco.
CRA indicated, without much further comment, that whether s. 84.1 applied turned on the factual question whether there was arm’s-length dealing.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.12 under s. 84(2).