News of Note
Income Tax Severed Letters 10 April 2024
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The relaxation of s. 55(5)(e)(i) nonetheless may not accommodate purification butterflies
Although s. 55(5)(e)(i) deems siblings to deal at arm’s length for the purposes of the butterfly rules, on June 29, 2021 it was amended to provide an exception where the butterfly dividend was received or paid by a corporation of which a share of the capital stock “is” a qualified small business corporation share or of a family farm or fishing corporation.
It is suggested that this quoted use of the present tense signifies that the exception is allowed only to companies whose shares are QSBC shares in advance of the butterfly (although see also Interpretation Act, s. 10, and Barker v. Baxendale.) If so, a corporation owned by siblings could not undergo a purification butterfly so as to qualify as a QSBC, as it would not qualify as a QSBC at the precise time of the butterfly.
Neal Armstrong. Summary of David Carolin and Manu Kakkar, “Imperfect Timing: Subparagraph 55(5)(e)(i) Cannot Be Used in Purification Transactions,” Tax for the Owner-Manager, Vol. 24, No. 2, April 2024. p. 7 under s. 55(5)(e)(i).
Joint Committee notes anomalies in the stock buyback rules
Anomalies noted by the Joint Committee respecting the stock buy-back rules in Bill C-59 include:
- Where “Acquisitionco,” after acquiring “Targetco” (whose shares take a while to become delisted), vertically amalgamates with it, the amalgamation will not qualify as a “reorganization transaction” under para. (b) of the definition, because the equity holders of the covered entity (Acquisitionco as the holder of Targetco shares) do not receive equity of Amalco, as such equity is instead cancelled for no consideration.
- Where Targetco instead is wound-up into Acquisitionco, this may not satisfy the requirement under para. (c) of the "reorganization transaction" definition that all or substantially all of the property of Targetco be distributed to Acquisitionco, where more than 10% of Targetco's assets are debt or equity of Acquisitionco (which could have been held prior to the acquisition), since such shares or debt will be extinguished by operation of law on the wind-up rather than being "distributed" to Acquisitionco.
- Where the shareholders of Targetco are to receive a combination of cash and shares of Acquisitionco, the cash component is included in Variable B of the formula in proposed s. 183.3(2) (so that it is subject to the tax) because equity of a covered entity (Targetco) is acquired in the taxation year pursuant to a reorganization transaction described in para. (a) of that definition and a portion of the consideration received by a holder for the Targetco shares is not equity consideration described in para. (a) or (b) of the definition of reorganization transaction.
Neal Armstrong. Summaries of Joint Committee, “Subject: Proposed Part II.2 Tax – Tax on Repurchases of Equity – ‘Reorganization Transaction,’ 26 March 2024 Joint Committee Submission under s. 183.3(1) – reorganization – (b), (c), s. 183.3(2), s. 183.3(2) – B.
We have translated 8 more CRA interpretations
We have translated 2 CRA interpretations released last week and a further 6 CRA interpretations released in February of 2002. Their descriptors and links appear below.
These are additions to our set of 2,800 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Sodecia – Tax Court of Canada finds that the taxpayer had failed to establish that a notice of assessment had been mailed after its stated date
The taxpayer argued that an assessment of it dated June 8, 2017 was only mailed, at the request of its agent, about three years later, so that its Notice of Objection thereto was timely. The taxpayer’s appeal was dismissed. Affidavits (coming within s. 244(10)) of CRA employees indicated that there were no abnormalities appearing in the CRA records regarding the preparation and sending of the related batch of assessments. This established a rebuttable presumption that the assessment had been mailed on June 8, 2017. Furthermore, the taxpayer had not rebutted this presumption in light of some gaps in its evidence, including one arising out of an office move that “raise[d] the possibility that the envelope containing the Assessment was simply put aside to be dealt with at a point in time and possibly misplaced or forgotten.”
Neal Armstrong. Summary of Sodecia Canada Investments Inc. v. The King, 2024 TCC 40 under s. 244(14).
St-Joseph – Court of Quebec finds that the transformation of 2 floors of commercial building to residential use did not qualify as a “cessation” of commercial activity for QST purposes
Starting in 2002, St-Joseph incurred costs in converting the 1st and 2nd floors of a 12-storey mixed-use tower from commercial rental use into residences for rental to seniors.
St-Joseph argued based on the QSTA equivalent of ETA s. 141.1(3)(a) that it had incurred the costs “in connection with the … termination of a commercial activity” of it, so that such costs were deemed to have been incurred in the course of its commercial activity. In rejecting this submission, and in confirming the denial of input tax refunds, Lachapelle JCQ stated (at paras. 93, 103, TaxInterpretations translation):
[T]he intention of St-Joseph was that the work carried out on the first and second floors of the Building was to adapt the building for residential or lodging use of individuals. …
The Court concludes that the concept of the cessation of an activity does not include the transformation of the activity.
Neal Armstrong. Summary of St-Joseph Immobilier Inc. v. Agence du revenu du Québec, 2024 QCCQ 766 under ETA s. 141.1(3)(a).
CRA indicates that CPP and OAS payments are treated as pensions and social security payments under the Canada-Italy Treaty
Regarding the receipt by an individual resident in Italy of periodic CPP and OAS benefit payments, CRA found that:
- Art. 18(2) of the Canada-Italy Treaty limits the tax on Canadian-source pension income (including CPP) to the lesser of 15% of the total such income exceeding $12,000 and the amount of tax (referred to as the “as-if-resident” or “AIR” amount) that a resident of Canada would pay on that income.
- Art. 18(3) of the Treaty limits the tax on OAS income to the AIR amount (with the result that “[i]n most cases, that rate of tax is 25% in accordance with subsection 212(1).”)
Neal Armstrong. Summary of 6 April 2023 Internal T.I. 2022-0929731I7 under Treaties – Income Tax Conventions – Art. 18.
CRA finds that an information exchange agreement between one of Canada’s treaty partner’s and its overseas territory did not render the latter a “designated treaty country”
The territorial scope of the income tax Treaty between Country A and Canada specified that the term “Country A” did not encompass its overseas territory (“Sub-jurisdiction A”). However, Country A then entered into a bilateral agreement with Sub-jurisdiction A for the exchange of information between their competent authorities for the carrying out of Country A’s obligations under its tax treaties or comprehensive tax information exchange agreements (“TIEAs”).
In finding that Sub-jurisdiction A would not be considered a “designated treaty country” under Reg. 5907(11), CRA first noted that such provision clearly provides that a designated treaty country does not include any territory to which the relevant tax treaty or TIEA does not apply, and then stated:
[S]uch [subsequent] agreement will not, by itself, extend the territorial scope of the Canada - Country A tax treaty to Sub-jurisdiction A. The territorial scope of a tax treaty must be determined in accordance with the terms of the treaty and international law.
Neal Armstrong. Summary of 1 March 2023 External T.I. 2023-0990821E5 under Reg. 5907(11).
TD Bank – Federal Court finds that s. 227(4.1) attaches to proceeds of the deemed trust property when paid to an unsecured creditor, which lacks a purchaser for value defence
TD Bank received all of the net proceeds of the sale of the business of its customer (the “Debtor”) in repayment of the Debtor’s unsecured overdraft with the Bank. Regarding CRA’s subsequent claim for the amount of unremitted source deductions of the Debtor at the time of the overdraft repayments, the Bank took the position that the s. 227 deemed trust ceased to apply once the money was conveyed by the Debtor to it, and noted that the s. 227(4) and (4.1) language referred explicitly only to secured, not unsecured, creditors.
Southcott J found that where a tax debtor conveys money that has been subject to a s. 227 deemed trust to an unsecured creditor, such money represents proceeds of trust property so as to engage the application of s. 227(4.1), by whose terms “the proceeds of such property shall be paid to the Receiver General…”.
The Bank also took the position that it could rely on the bona fide purchaser for value defence to defend against the deemed trust claim. Southcott J accepted that it was sufficient to come within the referenced equitable doctrine that the Bank, although not literally a “purchaser,” had provided value to the Debtor through the overdraft reduction. However, he stated that “it would be inconsistent with Parliament’s intent in enacting the deemed trust provisions to afford unsecured creditors recourse to the bona fide purchaser defence” so that this defence was excluded as a matter of statutory interpretation.
Neal Armstrong. Summary of Canada v. The Toronto-Dominion Bank (TD Canada Trust), 2024 FC 441 under s. 227(4.1).
Income Tax Severed Letters 3 April 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.