News of Note
Laprairie – Tax Court of Canada finds that a settlement agreement did not trench on the taxpayer’s right to direct how his non-capital loss should be applied
Email this ContentA group settlement reached in respect of the appeals of a large group of taxpayers including the taxpayer allowed a deduction of losses in a specified amount for their 1995 and 1996 taxation year, allowed interest expense claims for various periods and allowed “any consequential claims by [the taxpayers] for the carryforward or carryback of any losses resulting from the reassessments set forth above.” Without further communication with the taxpayer, the Minister carried back the resulting non-capital loss of the taxpayer to his 1992 and 1993 taxation years. The taxpayer objected on the basis that this carryback was done without giving him a choice as to the application of the loss, and that he wanted the loss applied to years under appeal, i.e., 1997 and 1998.
In allowing the taxpayer’s appeal, Wong J noted that “the starting point is that it is the taxpayer’s choice as to the application of available non-capital losses” and found that there was nothing in the wording of the settlement that took away this right of direction of the taxpayer.
Neal Armstrong. Summary of Laprairie v. The King, 2024 TCC 149 under s. 169(2.2).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in April of 2001. Their descriptors and links appear below.
These are additions to our set of 3,017 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 ½ 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 |
|---|---|---|---|
| 2001-04-27 | 10 April 2001 External T.I. 2001-0078035 F - RAP PERSONNE DIVROCEE | Income Tax Act - Section 146.01 - Subsection 146.01(1) - Regular Eligible Amount - Paragraph (f) | divorced individual was eligible notwithstanding ownership during their marriage of home by ex-spouse |
| 12 April 2001 External T.I. 2000-0050655 F - ASSURANCE MUTILATION/INVALIDITE | Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (h) | disability benefits under a policy providing life and accidental death and dismemberment insurance could be non-taxable | |
| Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | personal injury amounts received pursuant to life insurance policy not added to CDA | ||
| 23 March 2001 Internal T.I. 2000-0056097 F - Roulement interne | Income Tax Act - Section 84 - Subsection 84(1) | s. 84(1) deemed dividend where individual’s low-PUC common shares are exchanged with the corporation for high-PUC preferred shares and there is an s. 85(1) agreed amount at FMV | |
| 17 April 2001 External T.I. 2000-0056455 F - AVANTAGE IMPOSABLE-EMPLOYE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | the distribution of employer shares to employees as beneficiaries of a discretionary trust is a s. 6(1)(a) benefit if it has the slightest connection to their employment | |
| 2 February 2001 Internal T.I. 2000-0058127 F - Convention d'émission d'actions
follow-up in 2001-007939 F
|
Income Tax Act - Section 7 - Subsection 7(2) | s. 7(2) could apply if shares were held by the employer for later acquisition by the employee | |
| 19 April 2001 Internal T.I. 2001-0069067 F - PENSION ALIMENTAIRE ACCORD ECRIT | Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount | submitted documents were not a written agreement |
Magren – Federal Court of Appeal finds it an abuse of the capital gains system to recognize a capital gain increment to a CDA account when there was no net change in economic position
The taxpayers were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (CDAs), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.
In very general terms, the following steps were significant elements of the series of transactions:
- Grenon’s RRSP transferred its units of FMO to a newly-formed unit trust (“TOM”) in exchange for units of TOM representing close to 100% of the issued and outstanding TOM units.
- The taxpayers acquired such FMO units from TOM in consideration for issuing $161M in promissory notes.
- The public transferred their units of FMO (the “public FMO units”) to a new unit trust (“FIF”), that was intended to be the replacement public vehicle for FMO, in exchange for units of New FIF.
- The taxpayers acquired the public FMO units for $115M in promissory notes.
- FMO realizing $226M in capital gains on one of the internal steps.
- After various steps to clean up the structure, FMO distributed essentially all its assets (being some FIF units and promissory notes) to the taxpayers, and treating this as a distribution of the capital gains realized by it in 5 above.
- The units of FMO were repurchased by FMO for nominal consideration. The appellants had full (FMV) cost for their FMO units when acquired in steps 2 and 4, and the capital gains distribution in step 6 did not reduce the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)(I). Accordingly, such repurchases resulted in the realization of largely offsetting capital losses (and, in light of the distribution of the increase to their CDAs arising in step 6, also resulted in negative CDAs.)
Monaghan JA found that the transactions could have accomplished their professed commercial objectives without the taxpayers’ involvement. In particular, their involvement entailed acquiring the FMO units at a high cost in steps 2 and 4, being allocated a capital gain by FMO in step 6 so as to generate a CDA increase which could then be distributed, and having their high cost FMO units redeemed in Step 7 so as to generate an offsetting capital loss - so that their only purpose was to generate a CDA account that could be distributed to their parents.
After noting that Triad Gestco had found that “the capital gain system … [is] aimed at taxing increases in ‘economic power’” rather than only “an arithmetic difference”, Monaghan JA stated that “[t]he appellants had neither an economic gain nor an economic loss; there was absolutely no change in their economic power as a result of their participation in the FMO reorganization” and “[a]s in Triad Gestco … avoidance transactions frustrated the object, spirit and purpose of the capital gain and capital loss provisions in the Income Tax Act.”
Neal Armstrong. Summaries of Magren Holdings Ltd v. Canada, 2024 FCA 202 under s. 245(1) – benefit, s. 245(4), s. 245(2), s. 104(6), General Concepts – Ownership, Sham.
CRA indicates that more than one parking space potentially may be part of a condo “housing unit”
A taxpayer acquired a condominium unit and one parking space in 2017 for personal use, then acquired a second parking space on separate title in 2020 in the same building complex for personal use. The first parking space was sold along with the condo and subsequently the second parking space was sold separately. In finding that a portion of, or all of, the gain realized on the disposition of the parking spaces may be exempt pursuant to s. 40(2)(b), CRA indicated:
- the first parking space was a component of the housing unit (i.e., the condo).
- the holding of the second space on separate title and its sale to a different purchaser did not preclude it from being part of the housing unit.
CRA did not address the question of how to apply the s. 40(2)(b) formula to a sale of the second parking space, e.g., the formula was applied in the individual’s 2023 return to a sale of the condo and first parking space, then the second space was sold in 2024.
Neal Armstrong. Summary of 15 July 2024 External T.I. 2023-0990221E5 under s. 54 – principal residence.
CRA provides an unredacted schedule for repayment of a pipeline note
CRA ruled on a pipeline transaction for a testamentary spousal trust, following the death of the spouse, under which it distributed its common shares of the portfolio company to its two individual residuary beneficiaries under s. 107(2) and sold its preferred shares of the company to a Newco set up by those beneficiaries in consideration mostly for a note, and they transferred their common shares of the portfolio company to Newco on a s. 85 rollover basis. After at least one year, the portfolio company was to be wound up into Newco and then the note was to be “gradually repaid over a period of at least two years after the wind-up”. The ruling letter then stated:
For greater certainty, Newco will pay down no more than 25% of the principal amount of the Note by 3 months following the winding-up, no more than 50% of the principal amount of the Note by 6 months following the winding-up, and no more than 75% of the principal amount of the Note by 9 months following the winding-up.
Neal Armstrong. Summary of 2023 Ruling 2023-0980101R3 under s. 84(2).
CRA’s illustration shows recapture being realized with no disposition
An elaborate CRA example illustrates how lush tax credits and CCA can result in recapture of depreciation, even where there is no disposition.
A non-CCPC Canadian corporation acquires solar equipment for $10,000,000 in 2024 for immediate use in generating electricity as an input in its manufacturing operation in Nova Scotia. In its 2024 federal and provincial returns:
- It accesses the accelerated investment incentive property (“AIIP”) rules (based on satisfying Reg. 1104(4)) to claim CCA of $7,500,000 (i.e., the actual capital cost grossed-up to $15,000,000 and multiplied by the 50% Class 43.2 rate);
- It claims and receives the Nova Scotia Capital Investment Tax Credit (“NS CITC”) of 25% of the $10,000,000 capital cost, or $2,500,000;
- It claims and receives the Clean Technology Investment Tax Credit (“Clean Tech ITC”) pursuant to s. 127.45, which is calculated as 30% of the capital cost, as reduced by the NS CITC, viewed as government assistance that it can “reasonably be expected to receive” (albeit, not until it has filed for and received an entitlement certificate by the filing-due date);
- It claims an Atlantic Investment Tax Credit (“AITC”) pursuant to s. 127(9) of $750,000, being 10% of the capital cost, again reduced to $7,500,000 by the NS CITC “government assistance”.
In 2025, the capital cost of the property will have been reduced (pursuant to s. 13(7.1)(e)) by the two federal tax credits claimed and (pursuant to s. 13(7)(f)) by the NS CITC “assistance” claimed, i.e., to $4,500.000. Pursuant to s. 13(1), if the CCA previously claimed ($7,500,000) exceeds the capital cost ($4,500,000), the difference is recognized as recapture of depreciation (of $3,000,000).
Neal Armstrong. Summary of 21 October 2024 External T.I. 2024-1027501E5 under Reg. 1100(2)(A), s. 127(9) – government assistance and s. 13(1).
Income Tax Severed Letters 27 November 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that a high deposit rate provided only to those opening up FHSA accounts associated with a Canadian bank does not trigger advantage tax
As a promotional incentive to induce individuals to open FHSAs with a trust company owned by a Canadian Sched. I bank, the bank will offer to pay a high rate of interest on deposits of such FHSAs made with it, i.e., an interest rate in excess of that paid on any other types of accounts associated with the bank.
CRA ruled that the high interest rate paid on such deposits will not constitute an “advantage” as defined in s. 207.01(1), on the basis that the exception in (a)(v) of that definition will be met – which, in approximate terms, refers to an incentive offered in a normal commercial or investment context to “a broad class” of arm’s length persons where it is reasonable to conclude that none of the main reasons for the program is to access the registered plan exemption for “any amount in respect of the plan.”
Neal Armstrong. Summary of 2023 Ruling 2023-0979811R3 under s. 207.01(1) – advantage – (a)(v).
The Joint Committee notes that adjusted taxable income for EIFEL purposes may have to be computed iteratively where non-capital losses are being used
Comments made by the Joint Committee to CRA (the ILBD) primarily on EIFEL interpretive or administrative matters included the following:
- Although there are many instances in which a family trust could be treated as the ultimate parent of a private Canadian group, a consolidated audit is rarely done at the family trust level – and preparing financial statements would entail significant complications, e.g., accounting for direct ownership by family members in the parent company as minority interests; CRA should consider relief through permitting the uppermost corporation in the group to be treated as the ultimate parent.
- Given that the group ratio is calculated for a consolidated group for a “relevant period”, where a corporation was incorporated or acquired, or disposed of, during a year, will it be eligible for the group ratio where its financial results are included in the consolidated financial statements for the portion of the year that it is an eligible group entity?
- Schedule 130 should accommodate taxpayers that become subject to the EIFEL rules being able to recognize a balance of cumulative unused excess capacity (CUEC) without the need for amending the three preceding tax returns.
- The calculation and application of non-capital losses where the EIFEL limitations are engaged (including a potential iterative computation under para. (h) or (i) of element B of the “adjusted taxable income” (ATI) definition) was summarized as follows (with these points being illustrated in numerical examples), with requested confirmation of CRA’s agreement:
i. A non-capital loss from another taxation year that was not used to reduce taxable income to zero when determining ATI and the IFE [interest and financing expense] denial ratio for the year, may be used to further reduce taxable income for a denial for IFE under subsection 18.2(2), a partnership IFE add-back under paragraph 12(1)(l.2) or an adjustment for relevant affiliate IFE under subclause 95(2)(f.11)(ii)(D)(I), or subclause 95(2)(f.11)(ii)(D)(II) that created additional taxable income following the EIFEL computations;
ii. Where the amount of the loss claimed in the circumstances described in (i) above results in an iterative adjustment to ATI under either of paragraphs (h) or (i) of ATI; to the extent of embedded EIFEL attributes as described in variable J of paragraph (h) or to the extent of the 25% of the additional non-capital loss claimed against the IFE denial in the case of a specified pre-regime loss under paragraph (i) of ATI; the ATI will be increased and the IFE denial reduced. This will occur on an iterative basis until the amount of the IFE denial equals the amount of the loss from the other year that is needed to bring taxable income to zero.
iii. Despite the fact that no tax (or a lower amount of tax) is payable in the circumstances described in (i) above, the arising RIFE [restricted IFE] may be carried forward and recovered as a deduction in computing taxable income in a future year, where there is either excess capacity in the year or a transfer of CUEC received from an eligible group entity; and
iv. In the circumstances described in (iii) above, any RIFE recoverable in a future year in excess of the taxable income, will result in a non-capital loss for the year in which the RIFE is recovered.
Neal Armstrong. Summaries of Joint Committee, “Summaries of Feedback on the EIFEL Administration”, 2 November 2024 Joint Committee Submission to the International and Large Business Directorate, under s. 18.21(1) – ultimate parent, relevant period, s. 18.2(1) – CUEC, ATI - B - (h).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in May and April of 2001. Their descriptors and links appear below.
These are additions to our set of 3,011 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 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).