News of Note

Declaration of a private company dividend immediately before an s. 128.1(4)(b) emigration of the shareholder appears to be tax-neutral

Suppose that, shortly before the emigration of a resident individual holding shares of a private corporation (Xco), Xco declared a dividend in an amount equal to the FMV of Xco’s net assets but did not pay it until after the individual became non-resident. The unpaid dividend represented a right of the individual (likely, a capital property) that was owned at the time of ceasing to be resident, so that the tax on the capital gain from the disposition thereof pursuant to s. 128.1(4)(b), plus the Part XIII tax, equals the s. 128.1(4)(b) and Part XIII tax that would have been paid by the individual had the individual emigrated before the dividend declaration.

The position in 9640475 – that s. 128.1(4)(b) would apply to tax the individual on the emigration as if the declared and unpaid dividend had been paid - appears to be incorrect. As noted, the individual is only deemed to have disposed of the right to the dividend and not to have received it.

Neal Armstrong. Summary of David M. Sherman, Bal Katlai and Kenneth Keung, “Can an Unpaid Dividend Avoid Departure Tax?”, Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 9 under s. 128.1(4)(b).

CRA discusses the GST/HST treatment of crowdfunding pledges

A Canadian corporate registrant (“X”) raises money to fund a project through a crowdfunding website from supporters around the world. By their pledging funds to support X’s project in exchange for a reward such as a copy of a product, a limited edition, or a custom experience related to the project, they thereby enter into a contract with X. The contract does not specify whether the pledge amounts are inclusive or exclusive of GST/HST.

CRA indicated:

  • If the product was essentially a digitized product to be downloaded by the supporters, CRA would regard this as a supply of intangible personal property (“IPP”).
  • If the contract did not provide any restrictions regarding the place of use of the IPP, then it would be the case that the IPP may be used in whole or in part in Canada, so that the place of supply would be in Canada (which would be relevant if there was no zero-rating under ETA Sched. VI, Pt. V, s. 10.1.)
  • If there were no restrictions regarding where the Canadian rights could be used, and X did not obtain the address of the supporter then, pursuant to s. 11 of the New Harmonized Value-Added Tax System Regulations, the provincial place of supply would then be in the specified (highest-rate) province “closest in proximity, determined in any reasonable manner, to the supplier’s business address that is most closely connected with the supply.”
  • Pursuant to s. 133, “the tax applies to any advance payment or part payment of the consideration for a supply even if, at the time payment is made, property has not in fact been transferred.”

Neal Armstrong. Summaries of 12 July 2023 GST/HST Ruling and Interpretation 174441 under ETA s. 142(1)(c)(i), s. 133, s. 223(1) and New Harmonized Value-Added Tax System Regulations, s. 11.

Income Tax Severed Letters 17 January 2024

This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA accepts the bifurcation of a gift card for GST/HST purposes between the complimentary coupon portion and the purchased gift certificate portion

A supplier issues gift cards with stipulated monetary values to purchasing customers, which they can use at its stores or at its e-commerce portal. However, to promote products or as a customer service gesture, the supplier also issues “complimentary gift cards” whose “complimentary value,” when applied by the customer, is treated by it as consideration for the goods or services supplied. Customers can purchase additions (“top-up values”) to such cards.

CRA indicated that, subject to conditions, the complimentary value of a gift card could be treated as a “coupon” for GST/HST purposes so that, in the case of a (non-zero-rated) taxable supply, the supplier could claim an ITC under ETA s. 181(3)(b) for the tax fraction of the complimentary value on the gift cards’ redemption. Those conditions principally were that:

  • The complimentary value of each gift card issued is tracked and accounted for separately from any top-up value added to the gift card.
  • The person redeeming the complimentary value is believed to be a consumer.
  • The supplier accepts the complimentary value as full or partial consideration for a supply of property or service.
  • The gift card’s complimentary value is extinguished before any top-up value is applied to a supply.

CRA went on to note that any top-up value added to the gift card would generally be considered the issuance or sale of a gift certificate for consideration and, when redeemed for a supply of property or services, would be deemed to be applied as money as described in s. 181.2.

Neal Armstrong. Summaries of 31 July 2023 GST/HST Interpretation 217772 under ETA s. 181(1) – coupon, and s. 181.2.

The interposition of a Middleco in a spin-off transaction can put it back onside s. 55(3)(a)

Suppose that Opco is owned on an 85-15 basis by two arm’s-length shareholders, Aco and Bco. If Opco wishes to spin off the real property used in its active business to a Newco owned in the same proportions by Aco and Bco, the s. 55(3)(a) exception will not be available since Bco, which is not related to either Opco or Newco, has a significant increase in its interest in Newco occur contrary to s. 55(3)(a)(ii) and (v).

Instead suppose that there is a preliminary step under which Aco and Bco transfer their shares of Opco to newly-incorporated Middleco on an s. 85(1) rollover basis. Then, Opco spins off the real estate to a Newco incorporated by Middleco. Done this way, the spin-off would come within the s. 55(3)(a) exception given, inter alia, the relieving effect of the rule in s. 55(3.01)(g). See also 2015-0570021E5 F.

­­­­­­­­­­­­­­­­­­­­­­­­Neal Armstrong. Summary of David Carolin, Manu Kakkar and Boris Volfovsky, “Tax Alchemy and Paragraph 55(3.01)(g): Converting a 55(3)(b) Divisive Reorganization into a 55(3)(a) Related-Party Butterfly,” Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 7 under s. 55(3.01)(g).

We have translated 6 more CRA interpretations

We have translated 6 further CRA interpretations released during May of 2002. Their descriptors and links appear below.

These are additions to our set of 2,694 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 21 3/4 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2002-05-24 6 June 2002 External T.I. 2002-0133895 F - entreprise de placement determinee Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business recapture from sale of a rental business qualified as business income that was not from a specified investment business, notwithstanding no employees in that year after the sale
Income Tax Act - Section 13 - Subsection 13(1) recapture is treated as income from the business in which the depreciable asset was used
27 May 2002 External T.I. 2002-0135605 F - DIVISION 6208(1)a)(iii)(A) du Règlement Income Tax Regulations - Regulation 6208 - Subsection 6208(1) - Paragraph 6208(1)(a) - Subparagraph 6208(1)(a)(iii) meaning of “other property” informed by s. 248(1) meaning of “property”
10 June 2002 External T.I. 2002-0138885 F - Redemption of Preferred Shares Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) s. 55(3)(a) applicable to redemption by Opco of preferred shares held by father’s holding company where Opco’s common shares held by his children or their Holdcos
4 June 2002 External T.I. 2002-0141435 F - Disposition of Shares Income Tax Act - Section 248 - Subsection 248(1) - Disposition exchange of voting common for voting pref and non-voting common is a disposition
Income Tax Act - Section 85 - Subsection 85(1) exchange of voting common for voting pref and non-voting common eligible for s. 85(1) election
12 June 2002 External T.I. 2002-0143325 F - REGIME DE CONGE A TRAITEMENT DIFFERE Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(a)(ii) combined application of 33 1/3% limit where 2 SDAs
Income Tax Regulations - Regulation 6801 - Paragraph 6801(a) - Subparagraph 6801(a)(iii) where 2 SDAs, combined application of reduction under Reg. 6801(a)(iii)(A)
24 May 2002 Internal T.I. 2002-0130667 F - REGIME PRESTATION EMPLOYES Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement discussion of transitional rules re expansion of SDA rules effective February 26, 1986
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(g) amounts received by retiring employee under EBP even if elected not to receive
General Concepts - Payment & Receipt amounts “received” under EBP if unrestricted right to receive

GST/HST Severed Letters July/August 2023

This afternoon's release of six severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their July and August 2023 releases) is now available for your viewing.

Duval – Quebec Superior Court indicates that it has jurisdiction to consider requests for judicial review of ARQ refusals to reassess consequentially on a federal reassessment

The Quebec taxpayers did not object to ARQ reassessments that denied ½ of their claimed business loss for 2010 – but then successfully appealed to the Tax Court similar federal reassessments of that year. They then requested (years after the period for objecting to the earlier ARQ reassessments had expired) that the ARQ reassess their 2010 taxation years in light of the favourable Tax Court judgment (and CRA assessments to implement it) pursuant to s. 1010.0.2 of the Taxation Act (Quebec). S. 1010.0.2 provides that, notwithstanding the expiration of the period to file objections, the Quebec Minister may, within one year of a federal reassessment “make a reassessment for the sole purpose of taking into account elements that may be considered to relate to that assessment or reassessment.”

The taxpayers applied to the Qubec Superior Court for judicial review of the ARQ’s refusal to reassess. Paradis JCS rejected the ARQ position that the Quebec Superior Court lacked the jurisdiction to entertain the judicial review application because the matter came within the exclusive jurisdiction of the Court of Quebec (to which appeals from ARQ reassessments are made). He indicated inter alia that the effect of the ARQ position was that a taxpayer would be required to resort to the Quebec objection procedures as a prerequisite to any reassessment by the Quebec Minister pursuant to s. 1010.0.2, whereas s, 1010.0.2 contained no such precondition for its application.

Neal Armstrong. Summary of Duval v Agence du revenu du Québec, 2023 QCCS 4739 under Federal Courts Act, s. 18.5.

CRA finds that trailer commissions which are temporarily paid by an MFT to an OEO dealer for it to fund rebates to client MFT unitholders are s. 12(1)(x) inclusions to the MFT

S. 12(2.1) deems an amount received by a beneficiary of a trust as an inducement in respect of activities of the trust, or as a reimbursement or other assistance in respect of an expense of the trust, to have been received in that regard by the trust (so as to potentially engage the application of s. 12(1)(x) at the trust level).

A ban was imposed, effective June 1, 2022, on order execution only service dealers (“OEO Dealers”), i.e., dealers not making a suitability determination before arranging for a client to invest in a mutual fund, from being paid trailer fees by a mutual fund or its manager. However, there is a temporary exemption (e.g., until May 31, 2025) from this prohibition in order to facilitate the OEO Dealers in paying a rebate of such amounts to their clients who held their investment in the mutual fund prior to June 1, 2022, or who transferred their mutual fund units into OEO Dealer accounts on or after June 1, 2022 (an “OEO Rebate”). The Directorate stated:

[W]here an OEO Rebate is paid by an OEO Dealer to a unitholder in a trust, in the [above] circumstances … it is likely that the OEO Rebate would be considered to be in respect of the activities of the trust or in respect of an expense of the trust. In the result, subsection 12(2.1) would likely be considered to apply and the amount of the OEO Rebate included in the income of the trust pursuant to paragraph 12(1)(x).

Neal Armstrong. Summary of 8 September 2023 Internal T.I. 2023-0987091I7 under s. 12(2.1).

The increase in the AMT exemption will increase the tax-free level of dividends which an individual can receive

Two benefits of the increase in the AMT exemption from $40,000 to $173,205 going from 2023 to 2024:

  • In 2023, a Canadian individual taxpayer with income of $55,000 that consisted solely of eligible dividends would not be subject to federal tax, but would be subject to AMT on eligible dividends in excess of $55,000 until the regular net federal tax payable exceeded the minimum amount – whereas for 2024 and subsequently, income consisting only of eligible dividends will not generate AMT at any income level.
  • A taxpayer in 2024 will be able to receive tax-free eligible dividends of up to $71,780 for federal purposes, which is an increase of $16,780 compared to 2023. Taking into account provincial income tax, there is also an increase in all the provinces (also from $55,000 to $71,780 in Ontario, Alberta, B.C. and Saskatchewan, and a smaller increase, and from lower levels, for other provinces.)

Jay Goodis and Evan Crocker, “Alternative Minimum Tax and Eligible Dividends,” Tax for the Owner-Manager, Vol. 12, No. 3 January, p. 5 under s. 127.51.

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