News of Note
CRA rules on the para. (f) exclusion from disposition re a transfer for no consideration to new trust for the same special-needs minor beneficiary
Email this ContentA special-needs minor child (CC4), who was the sole beneficiary of an inter vivos trust for the child’s exclusive benefit, held non-voting Class A common shares of a holding company (Fco), with CC4’s three siblings holding the other Class A shares directly.
It was proposed that:
- the trust for CC4 exchange its Class A shares of Fco under s. 86 reorganization for newly-created non-voting, non-cumulative redeemable and retractable Class Z shares of Fco.
- Fco increases the PUC of its Class Z shares held by the trust, with the trust including the resulting taxable dividend in its income without taking a s. 104(6) deduction.
- Fco makes a PUC distribution to the trust by distributing a note of a subsidiary in an amount sufficient for the trust to pay the tax on the above taxable dividend.
- the father of CC4 settles a new trust for the exclusive benefit of CC4, with the old trust transferring its Class Z shares of Fco to the new trust for no consideration, and with the new trust not electing out of the application of para. (f) of the definition of "disposition" in s. 248(1).
- the old trust is wound up after paying its taxes, on the deemed dividend received by it, with the proceeds of the note.
Rulings included that the para. (f) exclusion from "disposition" would apply to the trust-to-trust transfer and that s. 104(4) would not apply to the new trust because of the exclusion in para. (g) of the s. 108(1) definition of "trust." Thus, regarding the second ruling, the interests in the new trust were accepted as being vested indefeasibly in the beneficiary even though the latter was presumably lacking in legal capacity.
Neal Armstrong. Summary of 2022 Ruling 2021-0904611R3 F under s. 248(1) – deposition – (f).
Des Groseillers – Supreme Court of Canada finds that s. 7(3)(a) does not override s. 69(1)(b)
An individual who donated some of his employee stock options on the shares of a public company to arm's length registered charities, claimed the $3M fair market value of the donated options for charitable tax credit purposes, but did not include any portion of the donated options in his income under the equivalent of ITA s. 7(1)(b). This reporting was accepted by in the Court of Quebec on the basis inter alia that the equivalent of ITA s. 7(3)(a) established that the stock option rules constituted a “complete code” so that the equivalent to ITA s. 69(1)(b) did not apply to deem the “value of the consideration for the disposition” received by the taxpayer to be equal to the options’ fair market value of $3M, rather than the nil proceeds in fact received.
In allowing the ARQ’s appeal, Cournoyer JCA indicated inter alia that:
- It was “telling” that the s. 69 rule did not explicitly exclude the employee stock option rules from its application, given the presence of other carve-outs from s. 69.
- The only effect of the s. 7(3)(a) rule was to give precedence to the stock option rules over any other charging provisions, and did not prevent the ARQ from applying the s. 69 deeming rule, and “in the absence of clear legislative indicia to this effect” those rules did not “constitute a code so complete and so hermetic that the application of [the s. 69 rule] is excluded."
After quoting extensively from his reasons, the Supreme Court briefly stated that “[w]e agree with Cournoyer J.A.’s view.”
Neal Armstrong. Summary of Des Groseillers v. Quebec (Agence du revenu), 2022 SCC 42 under s. 69(1)(b).
Significant changes have been made to the draft EIFEL rules
Observations on the revised EIFEL rules include:
- The amounts that would be the interest and financing revenues (IFRs) or interest and financing expenses (IFEs) of a controlled foreign affiliate (CFA) in computing its capital gain or foreign accrual property income are to be included in the taxpayer’s IFR (net of foreign accrual tax deductions) or IFE, and the FAPI of such CFA remaining after such carve-outs of the CFA’s “relevant affiliate IFR” or “relevant affiliate IFE” is simply included in the taxpayer’s adjusted taxable income (ATI) (i.e., generally the tax EBITDA amount to which the 30% deductibility limitation in s. 18.2(2) is applied).
- Furthermore, per s. 95(2)(f.11)(ii)(A), the EIFEL rules should not restrict the IFE of the CFA for the purposes of calculating its FAPI.
- Per s. 95(2)(f.11)(ii)(D), where a portion of a taxpayer’s IFE for a taxation year is denied under s. 18.2(2), the same proportion of a CFA’s relevant affiliate IFE is similarly denied for purposes of computing its FAPI for the relevant taxation year – but, unlike the treatment of restricted IFE (which may be carried forward to a subsequent year depending on the availability of excess capacity), the denied deduction for purposes of computing FAPI of a foreign affiliate apparently cannot be carried forward.
- “Earnings” under para. (b) of the Reg. 5907 definition (essentially, FAPI recharacterized as active business income) is unaffected under the revised EIFEL rules.
- Given the potential to carry forward losses from pre-EIFEL years, taxpayers may be required to determine what their hypothetical IFE and IFR, as well as other ATI adjustments would have been, respecting all pre-regime loss years.
- The EIFEL revisions have removed the requirement that cumulative unused excess capacity could only be transferred between eligible group corporations that have the same functional currency – and transfers of capacity respecting a “fixed interest commercial trusts” (e.g., most REITS) can now be made.
- Like the previous version, where the designated amount exceeds the cumulative unused excess capacity by even $1, the entire transfer election apparently is invalidated.
- Unlike the previous version, all interest received or receivable from nonresident corporations is included in IFR.
Neal Armstrong. Summaries of EY, “Revised EIFEL proposals,” Tax Alert 2022 No. 43, 10 November 2022 under s. 18.2(1) - relevant affiliate interest and financing expenses, interest and financing revenues, adjusted taxable income – B - (h), s. 18.2(4), s. 95(2)(f.11)(ii)(A), s. 95(2)(f.11)(ii)(D), Reg. 5907 – earnings – (b), s. 18.21(1) – group ratio, s. 18.21(2)(a).
Income Tax Severed Letters 16 November 2022
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an election deadline cannot be extended through the back door under the s. 220(2.1) waiver provision
Interest paid in 2011 and 2012 by a foreign affiliate (USOpco) of Canco to an LLC that was held by Canco through a subsidiary US partnership (USP) of Canco could only be recharacterized as active business income for purposes of being excluded from the FAPI computation of USP if USP was deemed by ss. 93.1(5) and (6) to have a qualifying interest (QI) in USOpco. Ss. 93.1(5) and (6) could only apply to such interest if, pursuant to the coming-into-force (CIF) provision for ss. 93.1(5) and (6) (which otherwise applied only to the 2013 and subsequent taxation years), it could be considered that the taxpayer (USP) had “elected[ed] in writing” and timely “file[d] the election with the Minister” to have ss. 93.1(5) and (6) apply to those earlier years. In rejecting Canco’s position that USP (which otherwise never made the election), should be treated as having made the election by virtue of Canco not reporting any FAPI of USP from the interest, the Directorate indicated that:
- Canco’s filing position did not constitute notice to CRA that the election was made.
- No extension for making the election could be allowed under s. 220(3.2), as the CIF provision was not listed in Reg. 600.
- It was “Rulings’ view that allowing subsection 220(2.1) to waive a taxpayer’s requirement to file an election not listed in Regulation 600 would negate the specific intention of Parliament in limiting late elections to only those that are prescribed in [Reg.] 600” – and, in any event, the CIF provision was not a provision of the Act itself, as required by s. 220(2.1).
Accordingly, ss. 93.1(5) and (6) did not apply in respect of the interest payments.
Neal Armstrong. Summary of 21 September 2021 Internal T.I. 2019-0807491I7 under s. 93.1(5), s. 220(3.2) and s. 220(2.1).
Adboss – Tax Court of Canada strikes the Minister’s pleading of an assumption that a company’s “controlling mind and management” was in Canada as a mixed statement of fact and law
The Minister’s reply, to the taxpayer’s appeal of an assessment of it to deny zero-rating of taxable supplies made by it to a mooted non-resident (“Lowfroc”) on the basis that Lowfroc was a resident of Canada, pleaded “assumptions” including that Lowfroc was incorporated in Cyprus, that the taxpayer had no correspondence with any Lowfroc-connected persons in Cyprus and that “at all material times, the controlling mind and management of Lowfroc was in Canada.” Lafleur J found that the quoted phrase referenced the jurisprudential test of “central management and control,” and further noted that the “location of the ‘central management and control’ of a corporation … is actually the legal test that must be applied to determine the residency of a corporation.” In explaining the decision to strike under Rules 53(1)(a) (“delay … fair hearing”) and (c) (“abuse of … process”), she stated:
[B]ecause the Appellant will have to speculate as to the facts underlying the conclusion of mixed fact and law of the Minister that the “controlling mind and management” of Lowfroc was in Canada, and because the Appellant therefore cannot be properly prepared for and proceed with discoveries, this will prejudice or delay the fair prosecution of the appeal and constitutes an abuse of the Court’s process.
Neal Armstrong. Summary of Adboss, Ltd. v. The King, 2022 TCC 125 under Rule 53(1)(c).
1410109 Ontario – Tax Court of Canada finds that a “gratuity” that was required to be paid was subject to HST
The contract of an incorporated banquet hall with its event customers stipulated: “All Pricing is Subject to 13% HST and 15% Gratuities.” Before agreeing with the position of the Minister that the “gratuity” was part of the consideration for the supply under the contract, Bocock J referred inter alia to U.K jurisprudence that
[V]oluntary gratuities are not subject to VAT because voluntary gratuities are: ‘[N]o part of the contract that the customer should pay a charge for service … .’
He dismissed the taxpayer’s appeal, on the basis that the gratuities were not voluntary, stating:
Subsection 133(b) combined with subsection 138(a) … suggests that tips included in an agreement are part of the overall supply of prepared meals, which is subject to HST. …
The ETA defines “consideration” as “any amount that is payable for a supply by operation of law.” The almost mandatory tip is enforceable by operation of contract law whereas a voluntary tip is not “consideration” because it is not payable by operation of law… .
Neal Armstrong. Summaries of 1410109 Ontario Ltd. v. The King, 2022 TCC 141 under ETA – 123(1) – consideration.
We have translated 8 more CRA severed letters
We have published translations of a ruling and interpretation released by CRA last week and a further 6 translations of CRA interpretations released in April and January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,279 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 |
|---|---|---|---|
| 2022-11-09 | 18 May 2022 Internal T.I. 2018-0788761I7 F - Amortissement – Travaux sur un bien loué et F&T | Income Tax Regulations - Regulation 1102 - Subsection 1102(5) - Paragraph 1102(5)(a) - Subparagraph 1102(5)(a)(iii) | rendering of an empty shell suitable for manufacturing constituted substantially changing its nature |
| Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(b) | property does not satisfy the “solely” test in Class 8(b) where it was necessary for the proper functioning of the building | ||
| Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | cost of installing property part of that property’s cost | ||
| Income Tax Regulations - Regulation 1102 - Subsection 1102(4) | to be improvements or alterations to leasehold interest, property acquisitions must be assimilated to landlord’s property | ||
| General Concepts - Ownership | leasehold improvements are assimilated to the landlord’s property unless the lease specifies otherwise | ||
| Income Tax Regulations - Regulation 1102 - Subsection 1102(5) | building shell was a building or structure/ addition refers to extension of structure | ||
| 2021 Ruling 2021-0916821R3 F - Continuance corporation from CBCA to Co-operative | Income Tax Act - Section 86 - Subsection 86(1) | application of s. 86 reorganization rule to a continuance from the CBCA to a Co-operatives Act | |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition | continuance from the CBCA to a Co-operatives Act did not entail disposition of assets, but s. 86 applied at the shareholder level | ||
| 2004-04-30 | 28 April 2004 Internal T.I. 2004-0071331I7 F - Régime d'investissement coopératif du Québec | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(k) | listed assistance does not include a deduction from taxable income |
| 2004-04-23 | 15 April 2004 Internal T.I. 2004-0062451I7 F - Résidence principale | Income Tax Act - Section 54 - Principal Residence - Paragraph (c) | no need to file form for principal residence portion of disposed-of property if it was fully exempted |
| 2004-01-23 | 14 January 2004 External T.I. 2003-0046131E5 F - Convention de retraite - dépositaire | Income Tax Act - Section 207.6 - Subsection 207.6(2) | employer is deemed custodian under s. 207.6(2) |
| Income Tax Act - Section 248 - Subsection 248(1) - Retirement Compensation Arrangement | life insurance company can be a custodian | ||
| 2004-01-16 | 9 January 2004 External T.I. 2003-0049195 F - Winding Up or a Contractor Subco | Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(e.1) | s. 88(1)(e.1) would permit parent to step into shoes of sub re s. 12(1)(a) inclusion and s. 20(1)(m) reserveIdentical to 2003-00491950 |
| 9 January 2004 External T.I. 2003-0047341E5 F - Coût indiqué - Biens étrangers | Income Tax Act - Section 54 - Adjusted Cost Base | distribution of shares out of MFT and exchange for new MFT units would reset the ACB/ cost amount | |
| 9 January 2004 External T.I. 2003-00491950 F - Winding Up or a Contractor Subco | Income Tax Act - Section 9 - Timing | exclusion of contract holdbacks and unapproved invoices from construction contractor’s income is unaffected on s. 88(1) wind-up and flows through to parent | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) | deferred revenue of construction contractor would not be triggered on its s. 88(1) wind-up and parent would be put to claiming any available new s. 20(1)(m) reserve |
CRA indicates circumscribed acceptance of using average exchange rates
When and for what length of period is it acceptable to use an average exchange rate? CRA responded:
[F]or purposes of determining a taxpayer's income, the CRA will generally accept the use of an average exchange rate over a given period of time (e.g., annual, quarterly or monthly) to convert amounts arising from foreign currency transactions, if all of the following conditions are met:
the amounts (as determined in foreign currency) are relatively stable and evenly distributed over the given period
the amounts arising in the particular period are sufficiently frequent that they do not distort income
the relevant exchange rate does not fluctuate significantly over the period; and
the chosen approach is used consistently from year to year.
… As a general rule, the CRA will not accept the conversion of a gain or loss on the disposition of a capital property using an average exchange rate. … Consequently, the daily exchange rate for the particular dates should be used to determine, in Canadian dollars, the adjusted cost base ("ACB") of such property and any proceeds of disposition from its disposition.
Thus, CRA did not indicate any general accommodation for computing capital gains from a stock portfolio with a large volume of transactions using an average exchange rate.
Neal Armstrong. Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.3 under s. 261(1) – relevant spot rate – (a), s. 39(1.1) and s. 40(1)(a)(i).
CRA finds that property added to a building shell for it to function for housing an M&P operation did not qualify as Class 29 property
The taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13.
In order to so qualify, such property (before it could be assimilated to Class 29 property) needed to come within the description of a Class 8(b) property (i.e., "tangible property attached to a building and acquired solely for the purpose of (i) servicing, supporting, or providing access to or egress from, machinery or equipment [or] (ii) manufacturing or processing") and not a Class 1(q) property (a building or other structure including component parts). Although the Directorate agreed with the taxpayer that a property which otherwise was a Class 13 (leasehold) property (because at common law the improvements became part of the property of the landlord) could qualify as a Class 8 property, it went on to indicate that the above alterations to the Shells, assuming that they constituted leasehold improvements rather than acquisitions of property that had been agreed to stay separate from the lessor's property, would be sufficient to deem the taxpayer’s such leasehold improvements to be a building or other structure under Reg. 1102(5)(a)(iii), which applies to "alterations to a leased building or structure that substantially changed the nature of the property." It stated:
[A]lterations to a property materially change its nature where the property has no particular purpose before the work is carried out but does have a particular purpose after the work is carried out.
Conversely, it considered that the above alterations to the Shells could not qualify under Class 8(b), stating:
Generally, property is not acquired solely for supporting machinery or equipment and/or to manufacturing or processing for the purposes of paragraph (b) of Class 8 if it is necessary for the proper functioning of the building, such as the walls, roof and electricity of or for a building. …
Neal Armstrong. Summaries of 18 May 2022 Internal T.I. 2018-0788761I7 F under Reg. 1102(5), Reg. 1102(5)(a)(iii), Sched, II, Class 8(b) and s. 13(21) – UCC – A.