News of Note
CRA rules that substituting the index used in a monetization arrangement 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.
As a result of the discontinuance of the reference index, it will be replaced for such purposes by a similar index.
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) - and also provided a tentative opinion “that there is a reasonable argument that Holdco A could lose the benefit of the transitional relief to the extent that the assignment of the Monetization Agreement would have the effect of novating it.”
Neal Armstrong. Summary of 2021 Ruling 2021-0880641R3 F under s. 80.6.
CRA confirms strict requirements for s. 94(1) “electing contributor” and “electing trust” elections
The s. 94(1) definition of “electing contributor” permits a resident contributor to elect to have income of the s. 94 trust attributed to the contributor. This definition stipulates that the election must be made in writing “on or before the contributor’s filing due date for the first taxation year of the contributor for which the election was to take effect” (the “initial year”).
CRA confirmed that this language requires that the election be filed on or before the filing due date of the contributor for the initial year - even if the personal return of the contributor was filed after such due date. CRA considers that it does not have the discretion to allow a late-filing. If the contributor misses the deadline for a particular year, this does not preclude the contributor from filing this election for a subsequent taxation year, which would then become the initial year.
The s. 94(1) definition of “electing trust” permits a trust to elect to be a separate trust in respect of its :non-resident portion.”
CRA indicated that as long as the election is filed with the trust’s income tax return for its first taxation year throughout which it is deemed to be resident in Canada and in which it holds property that is part of its non-resident portion, the election would not be considered to be filed late even if the trust return for that year is filed late. Conversely, where the election is not included with the income tax return as filed, the election is considered late, with no Ministerial discretion to allow a late-filing of the election.
Neal Armstrong. Summaries of 15 June 2022 STEP Roundtable, Q.3 under s. 94(1) - “electing contributor” and “electing trust”.
CRA confirms that it is required to allow unclaimed rebates when assessing under s. 296 without first requiring the receipt of rebate applications
CRA confirmed the proposition that in assessing a person’s net tax under s. 296, it was required to allow any valid but unclaimed rebate claims of the person irrespective of whether the normal rebate application period has expired or not yet expired – and is revising its Audit Manual to further clarify this point.
Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.9 under ETA s. 296(2.1).
Triskelion – Tax Court of Canada leaves open the argument that days cannot be counted twice under the 183-day test for a services PE under the Canada-US Treaty
A U.S.-resident corporation provided 198 days of consulting services in Canada in 2015 and 54 days in 2016 respecting a 12-month Canadian construction project commencing in March 2015. Spiro J found that the taxpayer had a “services” permanent establishment in Canada in 2016 under Art. V(9) of the Canada-U.S. Tax Treaty, which referenced a test that “the services are provided in [Canada] for an aggregate of 183 days or more in any twelve-month period with respect to the [Canadian project]” – so that there was a services PE based on the taxpayer’s Canadian services provided during the 12-month period ending in March 2016.
Spiro J rejected the taxpayer’s argument, that the Minister had “counted 183 of the 198 days during which the Appellant provided consulting services in Canada in 2015” so “that the Minister was entitled to carry over only 15 days from her 2015 computation in determining whether the Appellant had a ‘deemed services PE’ in Canada for its 2016 taxation year,” on the basis of that there was no indication in the record that the taxpayer’s 2015 taxation year had been assessed - and went on to state that “the Court … makes no comment on whether such an argument might prevail on a different evidentiary record.”
Neal Armstrong. Summary of Triskelion Projects International Inc. v. The Queen, 2022 TCC 63 under Treaties – Income Tax Conventions – Art. 5.
Collins Family Trust – Supreme Court of Canada finds that courts cannot exercise their equitable jurisdiction to cure unintended tax consequences
A plan for the tax-free distribution of funds of family companies to family trusts entailed transactions that were intended to cause s. 75(2) to attribute substantial dividends, paid by the family companies to the trusts, to family holding companies so that the s. 112(1) intercorporate dividend deduction applied. However, Sommerer unexpectedly found that s. 75(2) did not apply to sales of property for their FMV (an element of the plan). CRA assessed the trusts on the basis that they had received taxable distributions from the operating companies.
Before allowing the appeal and dismissing the trusts’ petition, and in finding that the principle in Fairmont Hotels and Jean Coutu - that a “court may not modify an instrument merely because a party discovered that its operation generates an adverse and unplanned tax liability” - was not limited to situations of requested rectification and applied as well to the equitable remedy of rescission, Brown J stated:
… Fairmont Hotels and Jean Coutu bar a taxpayer from resorting to equity in order to undo or alter or in any way modify a concluded transaction or its documentation to avoid a tax liability arising from the ordinary operation of a tax statute. … While a court may exercise its equitable jurisdiction to grant relief against mistakes in appropriate cases, it simply cannot do so to achieve the objective of avoiding an unintended tax liability.
Neal Armstrong. Summaries of Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26 under General Concepts – Rectification and Rescission, and s. 220(1).
CRA indicates that a clause suspending the right of the life beneficiary to income on bankruptcy would not satisfy s. 73(1.01)(c)(ii)
One of the requirements to be a qualifying transferee described in s. 73(1.01)(c)(ii) regarding the s. 73(1) rollover is that the trust’s settlor "is entitled to receive all of the income of the trust that arises before the individual’s death.” CRA indicated that this condition would not be satisfied where the trust deed provided for the suspension of the individual’s right to demand distribution of the trust income in the event of the individual’s bankruptcy, even if this clause was never triggered.
Neal Armstrong. Summary of 30 March 2022 External T.I. 2017-0737181E5 F under s. 73(1.01)(c)(ii).
CRA indicates that it will accept that an election is filed with a return even if the return is filed late
An alter ego trust can effectively elect under s. 104(4)(a)(ii.1) to have the 21-year deemed disposition rule apply, rather than having the deemed disposition occur upon the death of the taxpayer who created the trust. CRA indicated, given that this provision requires that the election be made in the trust’s “return of income … for its first taxation year,” that it will accept an election filed under s. 104(4)(a)(ii.1) only if it is made in the trust’s return of income filed for its first taxation year - regardless of whether that return is filed on time or late.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.2 under s. 104(4)(a)(ii.1).
CRA releases the official version of the 2021 APFF Financial Strategies and Instruments Roundtable
After having published its official versions of most of the (regular) 2021 APFF Roundtable questions the previous week, CRA has now published the official version of 11 of the 12 questions comprising the 2021 APFF Financial Strategies and Instruments Roundtable. We did not notice any substantive changes from the preliminary answers given by it in October 2021. At that time, we provided our translations of those answers, but only summaries of the questions. We are now providing full-text translations of the questions as well.
Q.2 (regarding the treatment of a gift in Quebec of a part interest in an insurance policy to a charity) still has only the preliminary answer.
For your convenience, the Table below links to the translated questions and to our summaries thereof.
CRA indicates that the s. 104(21.2) formula requires proportionate allocations of QSBCS gains
We have uploaded a copy of the questions posed at today’s 2022 STEP Roundtable and summaries of the CRA responses.
In response to Q.1, CRA indicated that the effect of the formula in s. 104(21.2) is to require a proportionate allocation of gains of a discretionary personal trust from the disposition of qualified small business corporation shares so that, for example, if it realized capital gains in the year from both public company shares and QSBC shares, it would be precluded under the formula from allocating a disproportionate share of its capital gains distributions for the year to one of its beneficiaries (who had unused capital gains deduction room) as a distribution of QSBCS gains, and from allocating a disproportionate share of its “ordinary” capital gains distributions to the other beneficiary, who no longer had access to the deduction.
Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.1 under s. 104(21.2).
Income Tax Severed Letters 15 June 2022
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.