News of Note
CRA rules on a split-up reorganization where, on the numbers, a butterfly was unnecessary
Email this ContentFollowing the death of the father, his preferred shares of a CCPC (“Opco”), that held only cash as a result of having sold all its marketable securities, were distributed by his estate to his three beneficiaries (his three children), and then Opco was divided equally between the three holding companies for the three children’s families, each holding 1/3 of the Opco common shares.
This was not accomplished pursuant to a butterfly. Instead, Opco was wound up into the three Holdcos pursuant to s. 88(2), thereby giving rise, to some extent, to deemed dividends pursuant to ss. 88(2)(b) and 84(2).
The taxpayers represented that each dividend arising under ss. 88(2)(b) and 84(2) will not significantly reduce the capital gain that, but for that taxable dividend, would have been realized on a disposition of a share of Opco at FMV immediately before such dividend. On this basis, CRA ruled that s. 55(2) would not apply.
Neal Armstrong. Summaries of 2020 Ruling 2020-0840631R3 F under s. 55(2.1)(b) and s. 88(2)(b).
CRA indicates that the payment of damages, for breach of reps, by the parent following a triangular amalgamation would not preclude satisfaction of s. 87(4) or (1)
We have provided a summary of the Roundtable held today (online) at the Canadian Tax Foundation Annual Conference.
Q.1 dealt with a triangular amalgamation under which a subsidiary of Parent amalgamated with Target and the Target shareholders received shares of Parent. S. 87(4) requires that such shares be the only consideration received by the Target shareholders “on the amalgamation.”
CRA noted that any payments made by Parent to the Target shareholders for any breaches of representations or warranties would normally be made well after the amalgamation, and would not be viewed as consideration for shares paid on the amalgamation, so that s. 87(4) could still be satisfied– and it also would not be problematic if the compensation was paid by Parent in the form of issuing additional shares. Post-amalgamation damages payments also would not be problematic regarding satisfaction of the condition in s. 87(1)(a).
Suppose that, to address a potential indemnity payment going in the other direction, some of the Parent shares issuable to the Target shareholders are placed in escrow. If no claim arises during the stipulated period, the shares are released from escrow. If an indemnity claim is made by Parent, Parent repurchases shares, having a value equaling the claim amount, for $1 and cancels them, with only the balance of the shares, if any, being released from escrow.
CRA indicated that it would consider the amount paid for the repurchased shares for s. 84(3) purposes to be the claim amount, so that a deemed dividend could arise.
Neal Armstrong. Summaries of 25 November 2021 CTF Roundtable, Q.1 under s. 87(4) and s. 84(3).
Iris Technologies –Federal Court of Appeal discusses respective roles of Tax Court and Federal Court in reviewing CEWS claims
CRA, which had taken the view that Iris Technologies in fact had not experienced a significant decline in its qualifying revenues during COVID, denied Iris’ CEWS (wage subsidy) claims – initially on the basis of exercising its discretion under s. 164(1.6), which provides that the Minister, before the time for filing the taxpayer’s return for the year, “may refund to the taxpayer all or any part of the [deemed CEWS] overpayment” arising under s. 125.7(2). Iris then made a judicial review application to the Federal Court in which it sought inter alia an order requiring payment of its claimed CEWS amounts.
Rennie JA discussed the relative roles of the Tax Court and the Federal Court in a matter such as this:
Whether there is an “amount” that is “deemed” to be an overpayment [under s. 125.7(2)] is not discretionary. It is determined according to the statutory formula, and it is for the Tax Court to ensure that the formula was correctly applied. If, following the Tax Court determination there is, in fact, an overpayment which the Minister refuses to refund, the Federal Court has jurisdiction to review the refusal to refund the overpayment. Iris’ application is, in this sense, premature. The Minister has a discretion to refund, but it is contingent on the existence of an overpayment under the ITA. Whether the Minister erred in determining that there was no overpayment is to be adjudicated in the Tax Court; whether the Minister erred in refusing to refund an overpayment is for the Federal Court to decide. …
Rennie JA went on to find that in substance Iris’ application was a challenge to the Minister’s determination, reflected in the subsequent notice of determination, that Iris had not generated a CEWS (deemed overpayment) amount under s. 125.7(2), and found that Iris’ judicial review application should be struck.
Neal Armstrong. Summaries of Canada (Attorney General) v. Iris Technologies Inc. 2021 FCA 223 under s. 164(1.6), s. 244(9) and General Concepts – Evidence.
Income Tax Severed Letters 24 November 2021
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Newave – Federal Court states that allegations of procedural fairness at the audit stage can be addressed at the objection or appeal stage
After a lengthy audit, CRA concluded that the “business” of the applicant (Newave) consisted of generating fraudulent input tax credit claims. CRA proposed to deny those claims and gave Newave 30 days to respond (subsequently extended to 60 days).
Counsel demanded that all documents reviewed or relied upon by CRA be disclosed in order that it could make “fulsome” representations before any reassessments were made. CRA refused after the 60-day period, and shortly thereafter reassessed. A few days before the reassessments, Newave applied for judicial review, challenging CRA’s previous decision not to provide disclosure and additional time for submissions and, a day after the reassessments, made a further application challenging CRA’s decision to issue the reassessments. Newave also sought a stay of any collection action by CRA and of deregistration of Newave, both pending the disposition of the applications for judicial review.
After dismissing the stay applications, Little J went on to grant the Crown’s application to strike out the applications. Regarding the first application, he stated:
[T]he real goals of the applicant’s first Notice of Application were not to remedy alleged procedural fairness concerns, but instead were to halt and attempt to control CRA’s reassessment process. … In substance, the content of the pleading is an attempt to interfere with the Minister’s statutory duty to assess. …
[A]ny allegations about procedural fairness at the audit stage can be remedied at the objection or appeal stage… .
Before also allowing the motion to strike the second application, he stated:
[T]he second Notice of Application is an improper challenge to the Reassessments in the guise of a judicial review application. Any such attack on the merits of the Reassessments, or the facts and law on which they are based, must be done under the processes in the Excise Tax Act… .
Neal Armstrong. Summary of Newave Consulting Inc. v. Canada (National Revenue), 2021 FC 1203 under Federal Courts Act. s. 18.5.
Wang – Tax Court of Canada finds that a quick sale of a residential property following its occupation was not made by a “builder” for ETA purposes
The sale of a residential unit by its “builder” is generally subject to GST/HST. That term generally includes an individual who acquired the property as an adventure or concern in the nature of trade.
The taxpayer sold a newly-constructed townhouse a few months after she acquired possession. Bocock J gave “determinative weight” to such sale being a result of a change in personal circumstances: she was single when she had signed the agreement for the construction of the townhouse a number of years previously; and the sale was prompted by her plan to move to the US to join her then fiancé.
Neal Armstrong. Summary of Wang v. The Queen, 2021 TCC 86 under ETA s. 123(1) – builder.
CRA finds that an unoccupied property was not a qualifying property for CEWS purposes
An eligible entity signed a pre-construction lease for new office space several years ago and then, after moving in, was unsuccessful in subleasing its previous space due to the COVID-19 pandemic. For Canada Emergency Rent Subsidy (“CERS”) purposes, was the unoccupied property a “qualifying property,” whose definition generally requires the real property to be used by the eligible entity in the course of its ordinary activities?
CRA noted that:
- Ensite found that property was used in a business if it was employed and risked in the business such that the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations.
- Glaxo Wellcome found that the word “use” connotes actual utilization for some purpose, not holding for future use.
CRA concluded:
[G]iven that the office space was unoccupied since the eligible entity moved to a new office … the old office space would likely not be considered to be used in the ordinary activities of the eligible entity. This is because it does not appear to be employed and risked in the ordinary activities of the eligible entity, and is merely waiting to be subleased.
Neal Armstrong. Summary of 20 September 2021 Internal T.I. 2021-0883531I7 under s. 125.7(1) – qualifying property.
CRA indicates that licences of real estate by a municipality are GST/HST-taxable
A registrant (Aco) provides various municipalities with a program of installing something (“X”), whose description is redacted, in their public spaces, pursuant to agreements that confer on it the right to so use those lands, and require it to make payments to each such municipality, which it funds out of a portion of the sponsorship payments it receives from local businesses.
Before concluding that the amounts paid to each municipality were consideration for a taxable supply, CRA noted that:
- ETA s. 146(e) deems the supply by a municipality of a right to enter or access municipal property to be made in the course of a commercial activity unless the supply is specifically exempted.
- S. 20(l) of Sched. V, Pt. VI excludes the supply of such rights from the licence exemption in s. 20(c).
- The exemption in Sched. V, Pt. VI, s. 25 for supplies of real property made by various public service bodies does not extend to such supplies by a municipality.
Neal Armstrong. Summary of 25 May 2021 GST/HST Ruling 204710 under s. 146(e).
We have published 11 more translations of CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 10 translations of CRA interpretation released in June and May, 2006. Their descriptors and links appear below.
These are additions to our set of 1,817 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 15 ½ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA applies Zomaron to an ISO earning participation commissions for signing up merchants for payment processing
The Taxpayer, an independent sales organization, agrees to solicit merchants on behalf of an “acquirer” in order that the acquirer may make exempt supplies to the merchant (under a separate agreement) for the processing of credit and debit card payments for the merchant’s customers within a payments networks. In finding that the fees generated to the Taxpayer (mostly computed as a percentage of the total credit card sales volume generated) very well may be GST/HST exempt “arranging for” financial services, CRA stated:
There is indication that the Taxpayer has direct involvement and effort in the provision of the acquirer’s supplies of financial services made to merchants under the merchant agreement. The Taxpayer has some autonomy within [the Agreement …] to recommend fees and rates to the acquirer with respect to the merchant agreements. There appears to be a significant degree of reliance by both the acquirer and the merchant on the Taxpayer in concluding the merchant agreement and the information substantiates the Taxpayer’s intention of effecting a supply of a financial service.
The above reasoning is reminiscent of the analysis in Excise and GST/HST News - No. 109, June 28, 2021, which concluded with the statement:
The CRA will only apply the Zomaron decision to supplies made by an ISO/MSP if the same fact situation exists.
“Same” includes “similar.”
Neal Armstrong. Summary of 15 June 2021 GST/HST Interpretation 196187 under ETA s. 123(1) – financial service – para. (l).