News of Note
CRA provides an example of a designated related-group entity filing a single T1134 for the group
Email this ContentRegarding the situation where Canco transferred all the shares of USco (which, in turn, wholly-owned a US LLC) to a newly-incorporated Canadian holding company (Holdco) on a s. 85 rollover basis; and then USco was wound up into Holdco before the end of the same taxation year (a June 30, 2023 year end for both Canco and Holdco), CRA indicated that since Canco and Holdco each held the USco shares directly for a portion of their 2023 taxation year, each would be a reporting entity that was required to file a T1134 for their 2023 taxation year. However, as a related group with the same year end, and using the same functional currency, they could designate one of them as their representative to file a single T1134 information return with the required information for both.
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.4 under s. 233.4(4).
CRA indicates that Foix established that s. 84(2) should be construed broadly
When asked to comment on the Federal Court of Appeal decision in Foix, which found that s. 84(2) applied to a particular hybrid sale transaction, CRA stated:
According to the broad interpretation of subsection 84(2) adopted by the Court, “transactions leading to an alleged distribution or appropriation of funds or property are to be considered as a whole in a way that is temporally flexible”. With respect to the expression “in any manner whatever’ in subsection 84(2), the Court noted that “[t]hese far-reaching words are anchored in history as they have always been part of this provision, and they faithfully reflect its anti-avoidance purpose”. Finally, the Court emphasized that when a facilitator is involved, “the distribution or appropriation of the target corporation’s funds or property can be carried out in a variety of different ways and take place through various steps that are organized so as to occur at different times”. It then added that “in the presence of an orchestrated attempt to extract surpluses without tax or at a reduced rate, the intention of Parliament requires a reading of subsection 84(2) that balances the words that are used, as an overly literal reading would defeat its anti-avoidance mission”.
[Foix] also resolved the uncertainties arising from certain decisions that taxpayers frequently invoked against the application of subsection 84(2), namely, McNichol … Descarries … and Robillard … [and] warn[ed] against the formalistic and restrictive application of subsection 84(2) put forward in those decisions.
CRA also indicated that “Foix did not express an opinion on the Tax Court of Canada's analysis in Geransky” and implied that Geransky has been overtaken by the subsequent decisions of the Federal Court of Appeal in MacDonald and Foix, which “clearly ruled that subsection 84(2) should be given a broad interpretation.”
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.3 under s. 84(2).
CRA notes that a parent may not access the intergenerational transfer rules where the parent remains a director too long, retains special voting shares or staggers dispositions
A parent wishes to access the s. 84.1(2.31) or (2.32) rules regarding a transfer of the shares of Parent Inc. (which are qualified small business corporation shares) to a holding company controlled and owned by the parent’s adult children, who have been actively engaged in the business of Parent Inc. As a result of an estate freeze, the parent now held voting preferred shares (the “Control Shares”) according voting control, as well as retractable preferred shares (the “Freeze Shares”) of Parent Inc.; and Parent’s adult children hold its voting common shares.
CRA indicated that there is no requirement in the intergenerational transfer rules that shares sold by a parent to a corporation controlled by one or more children be common shares or voting shares, so that preferred shares (such as the Freeze Shares) would not per se be excluded from the s. 84.1(2)(e) exception to the application of s. 84.1 (the “Exception”).
However, retaining the Control Shares would prevent the parent from benefiting from the Exception both because (i) they would entail the parent still controlling the subject corporation subsequent to the disposition of the Freeze shares, contrary to ss. 84.1(2.31)(c)(i) and 84(2.32)(c)(i), and (ii) they would not qualify as non-voting preferred shares as defined in ss. 84.1(2.31)(d)(i) and 84(2.32)(d)(i).
Regarding the requirements in s. 84.1(2.31)(g) or s. 84.1(2.32)(h) for a timely transfer of business “management” to the children (specified in s. 84.1(2.3)(i) to refer to the direction or supervision of business activities) CRA stated:
[W]here the parent remains a director of Parent Inc. and steps are not taken to completely and permanently cease to hold such office, within the time periods stipulated by paragraphs 84.1(2.31)(g) and 84.1(2.32)(h), including any longer period that is reasonable in the circumstances, the requirements of subparagraphs 84.1(2.31)(g)(ii) and 84.1(2.32)(h)(ii) would not be satisfied … regardless of whether the parent is the sole director or one of the directors, and regardless of whether the direction of the day-to-day activities is in the hands of the children.
Regarding where the parent sold the Freeze Shares (assumed to qualify as “non-voting preferred shares”) in three annual tranches, and retained the Control Shares until the third such sale (or, alternatively, sold them in three tranches, with the Freeze Shares), CRA noted that since the Exception, by virtue of s. 84.1(2.31)(a) or 84.1(2.32)(a), can only apply to the first disposition of shares by the taxpayer for which it is claimed, the second and third dispositions of the Freeze Shares could not qualify for the Exception. Furthermore, the Exception would not be available for the first disposition if the parent retained the Control Shares (as discussed above).
CRA indicated that if, in the case of a gradual (rather than immediate) transfer, the children’s corporation instead purchased all of the parent's shares but paid only for 20% over the following 10 years, and given that the shares sold on the first disposition were QSBCS, s. 84.1(2.32)(f)(ii) would not be satisfied because, at the end of the 10-year period, the parent would still hold a claim against the purchaser corporation having a FMV equal to 80% (i.e., over 30%) of the FMV of all of its interests held immediately before the disposition for which the Exception was claimed.
Neal Armstrong. Summaries of 10 October 2024 APFF Roundtable, Q.2 under s. 84(2.32)(c)(i), s. 84.1(2.3)(i), s. 84(2.32)(a), and s. 84.1(2.32)(f)(ii).
CRA confirms that there are no reorganization continuity rules to avoid triggering a flipped property gain from a disposition upon completion of a reorganization
The remaining answers in English translation have been added to our 2024 APFF Roundtable page.
A "flipped property" essentially refers to a Canadian housing unit (or the right to acquire one), which is owned or held by a taxpayer for less than 365 consecutive days prior to its disposition, subject to a narrow list of exceptions set out in s. 12(13)(b). CRA confirmed that there are no continuity rules for common reorganization transactions, such as amalgamations, s. 88(1) wind-ups or s. 85(1) rollovers, so that such an event or transfer starts the 365-day period running again – so that, for example, it would not help that a housing unit had been held for many years by a predecessor of Amalco, if Amalco promptly disposes of the unit.
When asked whether, for example, a seniors’ residence was a “housing unit” [“un logement”], CRA stated that it was considering the scope of this expression and consulting with Finance.
Since a gain from the disposition of a flipped property is deemed to be from an adventure in the nature of trade, which is included in the definition of "active business carried on by a corporation" in s. 125(7), CRA considers that such gain (realized by a CCPC with fewer than six full-time employees) would be eligible for the small business deduction.
Neal Armstrong. Summaries of 10 October 2024 APFF Roundtable, Q.1 under s. 12(13)(b) and s. 125(7) - active business carried on by a corporation.
Most of the October 10, 2024 APFF Roundtable is now available in English
We have uploaded our summaries of the first 13 questions posed at the 10 October 2024 APFF Federal Roundtable held in Gatineau together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers. The remaining four questions and answers will be added within a few days, perhaps tomorrow evening.
Income Tax Severed Letters 16 October 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in July and June of 2001. Their descriptors and links appear below.
These are additions to our set of 2,972 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 23 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
MELP – Tax Court of Canada finds that a Canadian agent’s services were not zero-rated since they were partly performed in Canada
MELP was found to be performing its services to Canadian patients who underwent bariatric surgery at the surgical unit in Mexico of a Mexican company (“LIMARP”) as agent for LIMARP given that their conduct implied an agency arrangement. Accordingly, MELP was not subject to GST/HST on the ½ portion of the patient fees that it collected as agent for LIMARP.
However, its own fees (collected by deduction from the fees collected by it from the patients before remittance to LIMARP) were not zero-rated under s. VI-V-5 given that that the services which MELP performed on behalf of LIMARP (including a wide range of various pre-operation and post-operation services) were in significant part performed in Canada. Thus, services performed by LIMARP through its agent were performed in part in Canada, so that their place of supply was deemed under s. 142(1)(g) to be in Canada, contrary to the requirements of s. VI-V-5(b) that the zero-rated agency services be in respect of supplies made outside Canada (and, for similar reasons, neither s. 142(2)(g) or 143 deemed their place of supply to be outside Canada.)
Neal Armstrong. Summaries of MELP Enterprises Ltd. v. The King, 2024 TCC 130 under ETA s. 306, s. VI-V-5(b), V-II-1 – “institutional health care service and s. 143(1).
CRA finds that a non-resident cruise ship stopping at Canadian ports was carrying on business in Canada
A non-resident cruise line company sells cruises (including cruises with stops at Canadian ports) to customers around the world, including sales in Canada through independent third-party Canadian sales agents, and does not have a presence in Canada otherwise than through its ships (e.g., its only employees in Canada are crew members). CRA found that the company was carrying on business in Canada. CRA provided an example of a ship with 3,000 customers accompanied by 1,275 employees, with such employees working a total of 10 days in Canada. It stated that, in this light, the activities carried on in Canada were significant and related to the company’s main business line. Furthermore, there was the extensive marketing in Canada.
Neal Armstrong. Summary of 10 August 2023 GST/HST Interpretation 183417 under ETA s. 240(1).
CRA indicates that if an agreement for the supply by a resident of IPP (e.g., copyright) has no stated restrictions on where the IPP may be used, the supply is wholly in Canada
A Canadian resident agrees with a non-resident (ACo) that, in consideration for royalty payments, the resident will upload books and designs created by him or her to the ACo platform, which ACo customers can then choose to receive in electronic form or print off or (in the case of the designs) have them printed on products acquired by them from ACo.
CRA found that the place of supply of all such supplies by the resident (being supplies of intangible personal property) was in Canada, indicating that, for purposes of ETA s. 142(1)(c) (generally indicating that a supply of IPP is made in Canada if it may be used in whole “or in part” in Canada), if there were no restrictions on where the IPP could be used in the written agreement (as was the case here), “the supply will be deemed to be made in Canada regardless of if it is actually used in Canada.”
However, CRA noted the potential availability of zero-rating under Sched. VI, Pt. V, s. 10 or 10.1.
Neal Armstrong. Summary of 3 November 2023 GST/HST Ruling 245549 under ETA s. 142(1)(c).