News of Note
CRA is reviewing the scope of the concept of settlement of property on an inter vivos trust for GST purposes
Email this ContentOn Friday, CRA provided its written responses to most of the questions posed to it at the March 8, 2018 CBA Commodity Taxes Roundtable. In our Roundtables Section, we provide the complete text of these written responses together with summaries of the questions posed. The complete text of the questions posed will be posted on the Canadian Bar website in due course for the CBA Section members.
S. 268 of the ETA provides that where a person “settles” property on an inter vivos trust, the person is deemed to have made and the trust is deemed to have received a supply by way of sale of the property for consideration equal to the amount determined under the ITA to be the proceeds of disposition of the property.
CRA indicated that where X settles a trust and then, some years later, contributes (to use a neutral word) further property to the trust, s. 268 will be considered to apply to that subsequent property contribution. However, CRA is still reviewing the issue of whether s. 268 would apply if Y subsequently contributed to the trust, i.e., if is “currently reviewing the issue of whether contributions made by another person (such as Y in the question) would fall within the meaning of the term ‘settles’.”
Neal Armstrong. Summary of 8 March 2018 CBA Commodity Taxes Roundtable, Q.2 under ETA s. 268.
BMO – Tax Court of Canada finds that former s. 39(2) extended to (and carved out) FX gains on s. 39(1) dispositions
BMO used a tower structure for a U.S.$1.4 billion financing of its U.S. subsidiaries in which a subsidiary Nevada LP of BMO applied third-party borrowings made by it (or by BMO and contributed to the LP) to subscribe for common shares of an NSULC subsidiary, which acquired shares in an LLC, which lent the U.S.$1.4 billion to the U.S. subsidiaries. When the tower was unwound approximately five years later, the CRA position would have been that the FX loss realized by the LP on winding up the NSULC would have been reduced under the s. 112(3.1) stop-loss rule by the dividends paid during the five years on the NSULC shares - so that such loss would only partially offset the FX gain realized by BMO (directly and “through” the LP) on repayment of the U.S.$1.4 billion third-party borrowing. However, BMO had forestalled this result by instead having the NSULC pay its dividends as preferred share stock dividends. CRA accepted that this worked technically, but applied the general anti-avoidance rule on the basis that it was an abusive avoidance of s. 112(3.1).
Graham J found that there was no “tax benefit,” so that GAAR did not apply, because the loss of the LP on the disposition of the NSULC shares was not a loss from the “disposition of a share” as required by s 112(3.1) and instead was deemed by s. 39(2) to be a loss from the “disposition of currency.” Thus, he found that the pre-August 2011 version of s. 39(2) extended to dispositions of capital property, rather than being restricted to the settlement of foreign-currency obligations. Points made by Graham J included:
- Unlike s. 39(3), s. 39(2) stated that it applied “notwithstanding” s. 39(1), which was explained by s. 39(2), unlike s. 39(3), extending to dispositions (s. 39(1) turf) rather than only to obligation settlements.
- S. 39(2) went on to deem the capital gains and losses thereunder to be from the disposition of foreign currency – which presumably was motivated by a concern that they otherwise would be considered to have the character of any property that was actually disposed of.
Neal Armstrong. Summary of The Bank of Montreal v. The Queen, 2018 TCC 187 under s. 39(2).
Laliberté – Tax Court of Canada that the Cirque du Soleil’s bearing most of the $41.8M cost of a space trip for its controlling shareholder gave rise to a shareholder benefit
The founder and controlling shareholder of Cirque du Soleil was found to have received a taxable benefit under s. 15(1) (or alternatively, under s. 246(1)) equal to approximately 90% of the $41.8 million cost of sending him on a trip to the international space station in September and October 2009, given that the cost was borne by his family holding company and then largely passed through to the top operating company in the Cirque du Soleil group (whose CFO refused to deduct it for corporate income tax purposes). Boyle J stated:
I do recognize that the Cirque du Soleil promotional business-related activities in which the Appellant participated while on his trip were most probably more valuable having been from space than had they been from anywhere on earth. For that reason I could conclude that an allocation in the range of 0 to 10% of the cost of the space trip would be a reasonable charge to Cirque du Soleil. … [T]he remaining 90% of the cost of the trip, being $37.6 million, was the amount of the benefit conferred on and enjoyed by M. Laliberté.
…[T]here is a difference between a business trip which involves or includes personal enjoyment aspects, and a personal trip with business aspects, even significant ones, tacked on.
Neal Armstrong. Summary of Laliberté v. The Queen, 2018 TCC 186 under s. 15(1).
CRA confirms the modified connected contributor rules applicable to pre-2000 non-resident contributions to a mooted s. 94 trust
Whether s. 94 applied to two factually non-resident trusts with beneficiaries who were the resident children of a non-resident contributor (Mr. X) turned on whether all the contributions by Mr. X were made at a “non-resident time.” CRA noted that a special version of this test applied to contributions made before June 23, 2000. That test (which Mr. X satisfied) was that he was non-resident in Canada for the period commencing 18 months before the trust year end for the year of the contribution and ending 60 months after the contribution. As all the contributions were pre-June 23, 2000 contributions that satisfied this test, the trusts were not caught by s. 94.
Neal Armstrong. Summary of 26 July 2018 Internal T.I. 2018-0768281I7 under s. 94(1) – non-resident time.
CRA indicates that a partner assignment of its specified partnership business limit may be amended within the statute-barring period
CRA confirmed that its position - that an associated group of Canadian-controlled private corporations can file amended T2 Schedule 23s providing an amended business limit allocation agreement provided that this does not change the amount allocated to any associated corporation for a taxation year for which a reassessment is statute-barred – also essentially applies to an amended assignment of a partner’s specified partnership business limit.
Neal Armstrong. Summary of 5 April 2018 Internal T.I. 2017-0728581I7 under s. 125(3.2)(d) and s. 125(8)(c).
Income Tax Severed Letters 12 September 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Joint Committee comments on the new trust-reporting rules, 2-tier partnership losses, cross-border surplus stripping and tracking interest rules
The Joint Committee has submitted that the exceptions in draft ss. 150(1.2)(a) to (n), for the required expansion of trust reporting, are too narrow. For example, there should be an exception for trusts whose principal purpose is to secure arm’s length sale-agreement covenants, and the apparent requirement for lawyers to file a tax return disclosing inter alia the client name and trust amount re a client-specific trust is contrary to s. 8 of the Charter (see Chambre des Notaires).
Under the revised at-risk amount rules for multi-tier partnerships, there will be no ability to carryover unutilized limited partnership losses. A loss of a lower-tier partnership that exceeds an upper-tier partnership’s amount at risk in that lower-tier partnership is denied forever. This seems harsh, and alternatives are suggested that would not be overly complex.
Proposed s. 212.1(6)(b), which applies a look-through rule for the purpose of having s. 212.1 apply on a disposition by a partnership or trust, is overly broad as it looks through corporations. For example, when the non-resident seller (NRco) sells its interest in a partnership owning USco which owns Canco representing only 20% of the fair market value of the USco shares, s. 212.1 would appear to apply to the “sale” of the underlying Canco shares.
Where foreign investment funds are structured as corporate umbrella funds (i.e., with each sub-fund of the corporation being a separate investment fund for commercial and regulatory purposes), it is quite possible that there would only be a few Canadian investors in a particular Canadian-dollar sub-fund (with the manager typically hedging the sub-fund’s non-Canadian assets back to the Canadian dollar), so that the Canadian investor’s shares may very well be tracking interests. Making the s. 95(12) election may not be an adequate solution as the sub-fund may still be a controlled foreign affiliate to the electing Canadian investor if the sub-fund hedges its non-Canadian dollar exposures back to the Canadian dollar, since the Canadian dollar class or series will be seen as a separate tracked interest from the other interests in the sub-fund. Accordingly, such electing Canadian investors, holding a relatively small number of shares of the sub-fund, but more than 10% of the shares of the Canadian dollar class or series of the sub-fund, may be caught by the tracking interest rules.
Neal Armstrong. Summaries of Joint Committee 10 September 2018 Submission on the July 27, 2018 Legislative Proposals Released July 27, 2018 under s. 150(1.2), s. 163(6), s. 96(2.1)(f), s. 212.1(6)(b) and s. 95(12).
The proper operation of the s. 94.2(3) rule to avoid double taxation from a non-resident commercial trust requires a purposive reading
Paragraph 94(2)(k.1) catches a situation where a non-resident contributes to a non-resident trust for the purpose of paying benefits to employees for services rendered to a Canadian corporation. For example, a non-resident member of a multinational group funds a non-Canadian trust in order for the trust to buy shares of the publicly-traded parent, with the trust then transferring those shares under a share award plan to group employees including potentially employees of a Canadian subsidiary. Thus, such a trust can be deemed to be resident in Canada notwithstanding the absence of a contribution by a Canadian resident.
An investment in foreign commercial trusts can be subject to imputed interest inclusions under s. 94.1 if “one of the main reasons” for the investment was a significant tax reduction (as described). However:
Many if not all of the foreign commercial trusts ... encountered in practice are ones that are managed by a foreign manager that does not offer a similar product in Canada, and indeed many of these trusts distribute all or substantially of all of their investment income currently. As a result, reduction of Part I tax will typically not be one of the main reasons for a Canadian taxpayer, or its controlled foreign affiliate, investing in such foreign commercial trusts.
If s. 94.2 applies to deem a resident beneficiary to earn foreign accrual property income from the non-resident commercial trust, the s. 94.2(3) rule is intended to apply to avoid double taxation by providing for a deduction in computing the trust’s FAPI allocable to the affected beneficiary equal to that portion of FAPI that is included in the beneficiary’s income under s. 104(13). However, it is necessary to read this rule in a purposive manner in order to make it work given that the operation of s. 104(13) dovetails with the s. 104(6) rule, which references an amount of income “that the trust claims” – whereas “it could be expected that such a trust will not file a Canadian tax return and will not be expressly claiming any deductions under the Act.”
Neal Armstrong. Summaries of Michael N. Kandev and Matias Milet, "Foreign Trusts", 2017 Annual CTF Conference draft paper under s. 94(2)(k.1), s. 94.1(1)(b) and s. 94.2(3).
5551928 Manitoba – B.C. Supreme Court rectifies the amount of an erroneously calculated capital dividend
A private company made the common mistake of declaring a capital dividend in an amount that assumed an addition to its capital dividend account for a disposition of eligible capital property, even though such addition would not occur until year end. Branch J found in light of the resolution’s wording (which referenced the intention to declare the dividend in the amount of the corporation’s CDA) and statements deposed as to the directors’ intentions that
there was a definite and ascertainable agreement between the directors to effectively “clean out” the petitioner’s capital dividend account.
As the Fairmont test for rectification thus was met, he granted an order to rectify the resolution to reduce the declared dividend by the erroneous amount.
Neal Armstrong. Summary of Re 5551928 Manitoba Ltd., 2018 BCSC 1482 under General Concepts – Rectification.
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in March 2013, as fully translated by us.
These (and the other full-text translations covering all of the 645 French-language Interpretations released in the last 5 1/2 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-03-20 | 5 December 2012 Internal T.I. 2012-0451331I7 F - Déductibilité de frais juridiques | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees | legal expenses incurred to minimize responsibility under guarantee were not connected to operations which were necessary or incidental to the earning of income |
| Income Tax Act - Section 60 - Paragraph 60(o) | sales tax disputes not covered; expenses start running from audit review | ||
| 5 July 2012 Internal T.I. 2010-0388551I7 F - Fiducie - retour de sommes | Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(6) | Foisy test of mental element accepted | |
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) does not apply to an estate freeze as the corp does not own its treasury shares issued to the trust | ||
| Income Tax Act - 101-110 - Section 105 - Subsection 105(1) | income distributed to daughter-in-law who in fact was not a beneficiary includible in her income under s. 105(1) but not deductible by trust under s. 104(6) | ||
| Income Tax Act - 101-110 - Section 104 - Subsection 104(13) | capital gain distributed by family trust to children and purportedly lent by them to their parents (also beneficiaries) was instead included in the parents’ income under s. 104(13) | ||
| 31 January 2013 Internal T.I. 2012-0466641I7 F - Réduction du coût en capital d'un bien | Income Tax Act - Section 13 - Subsection 13(7.1) | reduction for Quebec M&P ITC occurs in year following incurring of the eligible expenses | |
| 25 September 2012 Internal T.I. 2011-0409281I7 F - Papier commercial - Obligations XXXXXXXXXX | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss | compensating clients for half their loss was currently deducible, whereas purchasing securities at original cost was its cost | |
| Income Tax Act - Section 54 - Adjusted Cost Base | acquiring client securities at the clients' cost rather than their lower FMV was reflected in portfolio manager's cost | ||
| 2013-03-13 | 7 January 2013 External T.I. 2012-0460021E5 F - Remboursement de cotisations à un club | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | where “membership in a fitness centre allows the employee to meet … specific conditions [of employment,” the test of “more than 50% … to the employer's advantage” may be met |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(l) | denial applies to fitness centre fees, irrespective of benefit to employer | ||
| 8 February 2013 External T.I. 2012-0464131E5 F - Transfert de propriété | Income Tax Act - Section 248 - Subsection 248(1) - Disposition | determination of disposition date is assisted by IT-170R |