News of Note
CRA indicates that it will always ask for a safe income estimate when reviewing a proposed spin-off transaction
Email this Content2020-0861031C6 indicated that, in a spin-off by a “distributing corporation” (DC) to the “transferee corporation” (TC), CRA will monitor whether there has been an appropriate reduction in the adjusted cost base (ACB) of the shares of DC. Leaving aside safe income matters, CRA considers there to be a misalignment if the aggregate ACB of DC shares held by the taxpayer before the spin-off exceeds the aggregate ACB of the remaining DC shares held by the taxpayer after the spin-off, plus the ACB of the spin property (on the assumption that TC is wound up, resulting in the taxpayer directly holding the spin property).
However, CRA indicated that the additional ACB that may be created by the capitalization of safe income (so as to become ACB) must be taken into account. It would appear that, to be compliant, the ACB of the DC preferred shares (which will be cross-redeemed and cancelled under the spin-off), plus the direct safe income (DSI) and indirect safe income (ISI) transferred (i.e., in the case of ISI, through the transfer of shares) to TC, should at least equal the ACB of the spin property (including, where the spin property is shares, safe income that can be capitalized).
The conventional spin-off mechanics involve the creation of cross-shareholdings and a cross-redemption, resulting in the aggregate ACB of the DC shares held by the taxpayer after the spin-off equaling the aggregate ACB of the DC shares held by it before the spin-off minus the ACB of the DC preferred shares created (e.g., under a s. 51 or 86 reorg) and then cancelled under the reorganization.
A more recent interpretation (2021-0889611E5) included an example of a less conventional spin-off transaction entailing a spin-off (through a succession of steps) by Opco (a “child” of Holdco 2 and a “grandchild” of Holdco 1) of one of its properties to Holdco 1. Included is a numerically detailed account (although somewhat cryptic in places) of the computation of the transferred DSI and ISI and of what the normative reduction in the ACB of the shareholdings should be. Analogously to a conventional spin-off transaction, the steps entailed a reduction in the ACB of the Opco shares held by Holdco 2, and in the ACB of the Holdco 2 shares held by Holdco 1, in an amount equaling the cost amount of the spun property.
CRA further indicated that there potentially could be a misalignment - even where ACB equal to that of the spun property is eliminated under the spin-off steps (as occurred here) - if the spun assets had disproportionately high safe income. (On the numbers, that did not occur in this particular example.) Accordingly, “an estimate of such safe income is always necessary to fully assess the situation being ruled upon” regarding a proposed spin-off transaction.
Neal Armstrong. Summaries of 28 May 2021 External T.I. 2021-0889611E5 and of Joan E. Jung, “Changing the Analysis for a Typical Spinout,” Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 2 under s. 55(2.1)(c).
A horizontal amalgamation may cause a dividend paid to another family corporation through a trust to be subject to Part IV tax
CRA considers that a dividend received a trust in a trust taxation year and pushed out to a beneficiary under s. 104(19) is not received by the beneficiary as a dividend until the end of that year.
Suppose that on November 30, 2020, pays a dividend to its wholly-owning trust shareholder, which immediately distributes the funds to Benco (a corporate beneficiary). The next day Opco 1 amalgamates with its sister corporation (also owned by the trust).
Whether the dividend deemed under s. 104(19) to be received by Benco on December 31 is subject to Part IV tax, turns on whether, pursuant to s. 186(2), Opco 1 was controlled by Benco (and they thus were connected) on December 31. However, Opco 1 no longer existed on that date, so that Benco and Opco 1 would appear to not be connected on December 31.
Under s. 87(2.11), a new corporation arising on a vertical amalgamation is deemed to be a continuation of the predecessor parent for the purposes of applying Part IV “in respect of” that particular corporation. This may suggest that the corporate beneficiary receiving the dividend from the predecessor receives Part IV tax relief. However, be that as it may, s. 87(2.11) provides no assistance where, as here, there was a horizontal amalgamation.
Accordingly, it is suggested that the dividend paid by Opco 1 to the trust prior to amalgamation and then allocated by the trust to Benco is subject to Part IV tax.
Neal Armstrong. Summary of Stan Shadrin, Manu Kakkar and David Carolin, “Application of Part IV Tax to Amalgamations of Companies Owned by Trusts with Corporate Beneficiaries,” Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 1 under s. 87(2.11).
CRA confirms that it regards the granting of an emphyteusis as a part disposition of property rather than as a lease
CRA has confirmed its position in 2013-0487791E5 F, where it indicated (reversing 2012-0472101E5 F) that it now considered that the entering into of an emphyteutic lease represents a part disposition of property rather than something analogous to the entering into of a common law lease. Therefore, any "rents" receivable must be recognized as proceeds of disposition at the time of grant rather than as amounts which can be recognized over time as they become receivable (although a s. 40(1) reserve may be available).
Neal Armstrong. Summary of 18 November 2021 External T.I. 2021-0917841E5 F under s. 248(1) – disposition.
CRA rules that the transfer of a portion of the assets and Canadian beneficiaries from an old to a new US pension plan will not result in constructive receipt to the Canadian beneficiaries
S. 56(1)(a) generally requires the recognition of an amount received as or in satisfaction of a pension benefit. A portion of a multi-employer US defined benefit pension plan (a qualified plan under IRC s. 401(a)) was held for the benefit of Canadian-resident participants. CRA ruled that a transfer of a portion of the assets in this plan to a new plan (also qualifying under IRC s. 401(a)) established for the benefit of a portion of the beneficiaries of the old plan, including some of the Canadian beneficiaries, so that they ceased to be participants in the old plan, did not trigger any income inclusion under s. 56(1)(a).
The CRA tags also mentioned Art. XVIII of the Canada-US Treaty, which effectively seems to indicate that even if the amounts transferred directly between the old and new plan were somehow regarded as pensions paid to the Canadian beneficiaries, they would not be subject to Canadian tax if they would not have been subject to US tax if such beneficiaries had been US residents (such transfers indeed were exempt under the Code).
CRA also accepted a representation that the administration of the old plan for the benefit of the Canadian residents was exempted from the resident’s arrangement rules in ss. 207.6(5) and (5.1) by virtue of satisfying the prescribed contribution conditions in Reg. 6804 relating to foreign plans maintained by foreign non-profit organizations, and that the same would apply regarding the Canadian participants and related assets transferred to the new plan.
Neal Armstrong. Summary of 2021 Ruling 2021-0876671R3 under s. 56(1)(a)(i).
Income Tax Severed Letters 5 January 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that a co-purchaser of a new rental property can qualify for the new residential rental property rebate (NRRPR), even if his co-purchaser does not
Two unrelated individuals (Individual 1 and Individual 2) agreed to purchase a new condo unit for rental purposes from the builder. However, due to second thoughts, Individual 1 did not close the purchase, so that the condo unit and title thereto were acquired only by Individual 2.
In finding that Individual 2 was entitled to claim the new residential rental property rebate (NRRPR), CRA stated:
[I]n a situation where a group of persons is applying for the NRRPR … [e]ach person would be treated separately … [so that] if one person does not meet all the eligibility requirements, it will not preclude the other person(s) from qualifying for the rebate … .
Cheema, which focused only on who were the named parties to a purchase agreement, may be causing questions that, pre-Cheema, might have seemed straightforward.
Neal Armstrong. Summaries of HST 11 August 2021 GST/HST Interpretation 184857 under ETA s. 256.2(3) and s. 123(1) - recipient.
Christen – Federal Court finds that a voluntary disclosure planned before, but made after, the audit notification could be considered non-voluntary - but annuls the CRA rejection anyway
In May 2015, the plaintiff authorized her law firm to represent her in making a voluntary disclosure of her Swiss assets, and in the summer and fall of 2015, various documents were collected and organized to this end. However, on September 25, 2015, CRA sent a letter to the plaintiff indicating that her 2005 to 2014 taxation years were under audit regarding a failure to declare foreign property. A voluntary disclosure filing made by the plaintiff about four weeks later was rejected by the first and second CRA decision makers on the basis that it was not voluntary.
Walker J found that this decision did not represent an unreasonable exercise of Ministerial discretion under s. 220(3.1). She agreed that it would have been “inequitable and unreasonable” for a voluntary disclosure to have been rejected as being non-voluntary if made one minute after communication of an audit, but noted that this was not the situation before her, stating that “there is an important distinction between the date information is actually disclosed under the VDP and the date the taxpayer makes the decision to investigate the making of a disclosure.”
However, the (second) decision under review was annulled given that the involvement of the first decision maker in the process for the second review decision “was not minimal.” The decision was remitted to the Minister for a fresh determination by an agent with no involvement with the previous decisions.
Neal Armstrong. Summary of Christen v. Canada (Agence du revenue), 2021 CF 1440 under s. 220(3.1).
Our translations of CRA Interpretations go back over 16 years
We have published a further 10 translations of CRA interpretation released in January, 2006 and December, 2005. Their descriptors and links appear below.
These are additions to our set of 1,869 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 16 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are curently in the "open" week for January.
CRA applies Zomaron to find that fees for marketing credit/debit card processing services to merchants likely were GST/HST exempt
In finding that the “Contractor” (a sales agent) very well might be generating GST/HST exempt “arranging for” fees from the “Company” (a member of a payments network) for marketing the services of the Company to prospective merchants for the processing of credit and debit cards of the merchants’ customers, and completing the merchants’ applications online for submission to the Company for electronic approval, CRA stated:
There is indication that the Contractor has direct involvement and effort in the provision of the Company’s supplies of financial services made to merchants under the merchant agreement. The Contractor has some autonomy to recommend fees and rates to the Company with respect to the merchant agreements. There appears to be a significant degree of reliance by both the Company and the merchant on the Contractor in concluding the merchant agreement and the information substantiates the Contractor’s intention of effecting a supply of a financial service.
This interpretation is similar to 15 June 2021 GST/HST Ruling 196187, and both are based on an acceptance of Zomaron.
Neal Armstrong. Summary of 17 August 2021 GST/HST Interpretation 207227 under ETA s. 123(1) - financial service – para. (l).
CRA indicates that the Treaty Other-Income Articles generally accord Canada the full right to impose Part I tax on CERB payments made to a resident of the other Treaty country
After noting that payments (“CERB Payments”) made pursuant to the Canada Emergency Response Benefit Act (the “CERB Act”) to a non-resident individual were required by ss. 56(1)(r)(iv.1) and 115(1)(a)(iii.22) to be included in computing the taxable income earned in Canada of the non-resident, CRA indicated that the “Other Income” Article of an applicable Treaty will generally apply to the payments and that, similarly to federal employment insurance compensation, it is CRA’s view that the CERB Payments constitute income arising in Canada, so that Canada generally has the right to tax CERB Payments without restriction.
CRA further noted that pursuant to the non-Double-Taxation Article of the relevant Treaty, the non-resident’s country of residence “will be required to provide relief from double taxation either in the form of a credit or of a deduction for the Canadian income taxes paid or accrued in respect of CERB Payments”.
Neal Armstrong. Summaries of 9 July 2021 Internal T.I. 2021-0893981I7 under s. 120(1) and Treaties – Income Tax Conventions – Art. 15, Art. 24.