News of Note
CRA rules that providing for a partial acceleration of a forward contract did not de-grandfather it from the synthetic disposition rules
Email this ContentA monetization arrangement that was grandfathered from application of the synthetic disposition rules for deferring gain on the shareholding of a holding company (“Holdco A”) in a public company entailed a secured loan from a financial institution (“FI”) to Holdco A and a cash-settlement forward agreement between Holdco A and FI. A reference index was used in determining both the interest rate under the loan and the reference price under the forward agreement.
The synthetic disposition rules apply to agreements and arrangements entered into after March 20, 2013, and to earlier agreements or arrangements whose terms are extended after that date. CRA ruled that the index substitution would not result in the application of s. 80.6 (i.e., no loss of the deferral).
CRA ruled that amendments (represented not to give rise to a novation) to the forward agreement to provide for the right to accelerate the maturity date under the forward agreement in respect of part of the reference shares would not engage the application of s. 80.6.
Neal Armstrong. Summary of 2022 Ruling 2022-0930901R3 F under s. 80.6.
CRA treats the cancellation of escrow shares as triggering a deemed dividend
Under an agreement for the sale of the target solely for shares of the purchaser, a portion of such shares were placed in escrow at the time of their valid issuance – then were subsequently cancelled to satisfy an obligation of the vendor to repay a downward adjustment to the purchase price equal to such shares’ value (which exceeded their paid-up capital).
CRA indicated that the vendor would be deemed to have received a dividend under s. 84(3) to the extent that the amount paid by the purchaser on the cancellation of the escrow shares exceeded their PUC, and that the amount so paid would equal the amount of the downward adjustment: the vendor should be viewed as having received an amount equal to the downward adjustment on the cancellation of the escrow shares in order to satisfy its obligation to repay the overpayment of the purchase price.
The wording of the question begged the question by describing the transaction as a repayment rather than adjustment of the purchase price, but there was nothing in the wording of the response to suggest that CRA was sensitive to how the question was framed.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.3 under s. 84(3).
CRA confirms that it generally will not provide advance guidance on TCP status
CRA confirmed that it does not offer a program to confirm, before the transfer of property (or an audit), whether it is taxable Canadian property, so that a purchaser may consider that it needs to withhold under s. 116 where there is uncertainty as to whether the purchased property is TCP. Although Rulings will not make determinations of fair market value or of facts, it could be contacted for a pre-ruling consultation, in response to which it could provide a view on its ability to rule or not, and on what information would be expected from the taxpayer.
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.2 under s. 116(5).
CRA elaborates slightly on its policy re annual reversing loans by an LP to its limited partners
We have published a page setting out the questions posed at yesterday’s CRA Roundtable at the Annual CTF Conference together with abbreviated summaries of CRA’s oral responses.
Q.1 repeated CRA’s now well-known position (announced at the 2022 APFF Roundtable, Q.5) accommodating the making of loans by a limited partnership to its limited partners to avoid negative ACB gains that would have arisen by making the same payments as draws. In addition to summarizing its 5 conditions for the APFF-announced policy to apply, CRA made some short oral editorial comments in relation to the 1st and 4th conditions, that perhaps shed further light on their interpretation. These two conditions are laid out below, together with a paraphrase of the two related oral comments in bold:
1. The loan should not be made in satisfaction of a return of contributions of capital of the partner. (This position is meant to permit only the distribution of profits.) …
4. The loan should be made primarily for the purpose of avoiding a deemed gain under s. 40(3.1) that would be realized by the partner at the end of the partnership’s fiscal period, and that would solely be due to the timing difference between the addition in, and deduction from, the calculation of the ACB of the partnership interest related to the partner’s share of the partnership-adjusted income, and the distributions to the limited partner in respect of the period on their side. (This administrative position enables the partner to enjoy the income being earned during the year because of the technical mismatch between the timing of the income inclusion and the distributions.)
Neal Armstrong. Summary of 29 November 2022 CTF Roundtable, Q.1 under s. 40(3.1).
Income Tax Severed Letters 30 November 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Brown – Federal Court of Appeal finds that the higher Stewart hurdle for an activity with a “personal element” is not engaged merely by a personal reason for the activity
The taxpayer (Mr. Brown, a lawyer) together with his wife (an artist) formed a numbered company to operate a new art gallery. However, when his wife took ill a few months after the opening, Mr. Brown began to provide significant management services, and agreed with the company that he would do so in consideration for a management fee equal to 20% of the amount by which the gallery’s annual revenue exceeded $100,000. For the three years in issue, no fee was generated, and he claimed significant non-capital losses for those years.
In reversing the Tax Court and in finding that the non-capital losses were deductible, Webb JA noted that, under Stewart, the test of whether “the activity is being carried out in a commercially sufficient manner to constitute a source of income” was only engaged “if there is a hobby or personal element to the activity in question,” and stated:
… Mr. Brown’s decision to provide these management services as a result of his wife’s inability to continue to manage the gallery, does not mean that there is a personal or hobby element to his management services activity … .
A person’s personal motivation or reason for conducting an activity cannot, in and of itself, result in there being a personal or hobby element to the activity. It is possible to find a personal reason why any person is carrying on a particular activity. …
Neal Armstrong. Summary of Brown v. Canada, 2022 FCA 200 under s. 3(a) – business source.
CRA treats a broker’s waiver of commission as an inducement payment
Normally, on the purchase by a client of a GIC of a bank, the bank would receive the face amount of the GIC (say, $21,000) and pay a broker a commission of 0.75% (or $157.50). However, where the broker waived the commission, the client would acquire the GIC for $20.842.50.
One might think that the client thus acquired the GIC at a cost of $20.842.50. and would thereby realize a capital gain of $157.50 on maturity.
However, CRA instead characterized the arrangement as one under which the client invested $21,000 in the GIC, of which $20.842.50 came from the client’s own funds and $157.50 came from the commission received by the broker from the bank which it applied to the payment of the balance of the client’s GIC – so that the cost of the GIC to the client was $21,000.
After indicating that the latter amount might otherwise be included in the client’s income under s. 12(1)(x), CRA noted that (assuming the GIC was capital property), the client could make the s. 52(2.1) election to apply the s. 12(1)(x) amount to reduce the ACB of the GIC to $20.842.50.
Neal Armstrong. Summary of Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.10 under s. 12(1)(x).
We have translated 6 more CRA severed letters
We have published a translations of a ruling released by CRA two weeks ago and a further 5 translations of CRA interpretations released in January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,290 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 18 ¾ 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 |
|---|---|---|---|
| 2022-11-16 | 2021 Ruling 2021-0907591R3 F - Post-mortem Pipeline | Income Tax Act - Section 84 - Subsection 84(2) | pipeline transactions (coupled with s. 88(1)(d) bump) for which the deceased had claimed a capital gains deduction |
| Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) - Subparagraph 84.1(2)(a.1)(ii) | promissory notes issued on pipeline limited by previous s. 110.6(2.1) deduction | ||
| 2004-01-23 | 14 January 2004 Internal T.I. 2004-0054711I7 F - Choix en vertu du paragraphe 12(2.2) | Income Tax Act - Section 12 - Subsection 12(2.2) | s. 12(1)(x) assistance included in Year 1 income, then reversed by reassessment when s. 12(2.2) election is made in Year 2 return respecting the related Year 2 expenditure |
| 2004-01-09 | 23 December 2003 External T.I. 2003-0014655 F - article 125.5
Also released under document number 2003-00146550.
|
Income Tax Act - Section 248 - Subsection 248(1) - Taxpayer | province is a “taxpayer” exempt from tax |
| Income Tax Act - Section 125.5 - Subsection 125.5(1) - Eligible production corporation - Paragraph (d) | exclusion under para. (d) applies where there is indirect control by the province | ||
| 18 December 2003 External T.I. 2003-0021195 F - Etablissement Stable en Ontario
Also released under document number 2003-00211950.
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Income Tax Regulations - Regulation 400 - Subsection 400(2) | an office with only incidental functions will not constitute a fixed place of business | |
| Income Tax Regulations - Regulation 400 - Subsection 400(2) - Paragraph 400(2)(b) | Ontario sales office was not a deemed PE since general authority to contract was at the Quebec administrative office | ||
| 15 December 2003 External T.I. 2003-0182855 - Fiducie pour Loi au Quebec
Also released under document number 2003-01828550.
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Income Tax Act - Section 248 - Subsection 248(3) - Paragraph 248(3)(e) | meaning of “a right as a beneficiary in a trust” is found in s. 248(25) | |
| General Concepts - Ownership | sole beneficiary of Quebec trust is the beneficial owner of its property | ||
| Income Tax Act - Section 73 - Subsection 73(1.02) - Paragraph 73(1.02)(b) - Subparagraph 73(1.02)(b)(ii) | no change in beneficial ownership on transfer of property to self-benefit Quebec trust | ||
| Income Tax Act - Section 75 - Subsection 75(2) | policy is for s. 75(2) application not to result in double taxation | ||
| 23 December 2003 External T.I. 2003-0008145 F - TRANSFERT ENTRE EX-CONJOINT
Also released under document number 2003-00081450.
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Income Tax Act - Section 248 - Subsection 248(23) | deemed transfer to spouse before divorce where property was subject to matrimonial regime to which s. 248(3) applied, so that no need to rely on being in settlement of matrimonial rights | |
| Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(b) | property transferred in settlement of rights arising out of marriage also includes property transferred in settlement of rights arising out of a matrimonial regime | ||
| Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | one-sided adjustments under ss. 69(1)(b) and (a) |
CRA considers that a gift by will of a capital interest in a charitable remainder trust can be claimed only by the GRE, not the deceased
CRA confirmed that where an individual has by will made a gift to a qualified donee of the capital interest in a charitable remainder trust (“CRT”), such capital interest is not considered for purposes of s. 118.1(5.1) to have been acquired by the graduated rate estate (“GRE”) on or as a consequence of the individual's death, so that s. 118.1(5.1) is unavailable to permit a donation credit to be claimed in the T1 return of the deceased for the year of death or the preceding year, and so that it is only the GRE which will be able to claim such credit for the taxation year in which the gift is in fact made or for any of the five subsequent taxation years.
In this regard, CRA noted that s. 118.1(5.1) requires that “the subject matter of the gift is property that was acquired by the estate on and as a consequence of the individual's death or is property that was substituted for that property,” and then stated:
A capital interest in a CRT provided by will is created after the taxpayer's death, and after the GRE has acquired the deceased's property as a consequence of the death. The CRT acquires the property from the GRE while the subject of the gift to the qualified donee is a capital interest in the CRT.
The capital interest in the CRT is not an asset acquired by the GRE, nor is it an asset substituted for one or more assets acquired by the GRE.
Neal Armstrong. Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.9 under s. 118.1(5.1) and s. 118.1(5)(b).
CRA confirms that a spouse of a deceased RRIF annuitant must be still alive at the time of a payment out of the RRIF in order for the designated benefit rules to apply
When asked to explain its position that s. 146.3(6.2) cannot operate to exclude value of a deceased’s RRIF from his income and include that amount in the income of his surviving spouse or common-law partner (”Spouse”) or her estate where the Spouse was not alive at the time of the payment of the amounts in question out of the RRIF of the deceased, CRA indicated that such an amount could not qualify under either para. (a) or (b) of the “designated benefit” definition in s. 146.3(1).
Regarding para. (a), the joint designation referred to therein was required to be made jointly by the deceased annuitant's legal representative and the Spouse, and could not be made with the deceased Spouse's legal representative.
In order for para. (b) to be satisfied “the amounts must be paid directly to the Spouse” and not to the Spouse’s estate.
In sum, the Spouse must be alive at the time the amounts are paid to the Spouse or, if applicable, at the time the joint designation is made.
Neal Armstrong. Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 146.3(1) – designated benefit.