News of Note
CAE – Tax Court of Canada finds that an unconditionally repayable loan with a 2.5% yield was government assistance
Email this ContentCAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.
Were the amounts government assistance? Ouimet J agreed with CAE that the arrangement was a loan. However, he then interpreted Immunovaccine as establishing that the relevant test was whether the agreement with Industry Canada was an “ordinary commercial agreement.” He found that this test was not satisfied given that the yield on the loan to Industry Canada of 2.5% was a third of the interest that CAE would have borne on an unsecured commercial loan and that the loan lacked normal commercial covenants. As the amounts were government assistance, the amounts received or receivable in each year were excluded from qualifying expenditures for investment tax credit purposes by s. 127(18), the amounts so received were not deductible in computing income by virtue of s. 37(1)(d) and (without duplication) the amounts so receivable were includible in income under s. 12(1)(x).
Neal Armstrong. Summary of CAE Inc. v. The Queen, 2021 CCI 57 under s. 127(9) – government assistance and s. 37(1)(d).
CRA was not unreasonable in not recommending remission where taxpayers realized stock option benefits on stock that became worthless
The taxpayers realized stock option benefits, and then the stock became worthless somewhat later without their having exercised. In finding that it was not unreasonable of the CRA to conclude that no remission of the tax, interest and penalties should be recommended, Southcott J noted the CRA findings that the taxpayers had sufficient home equity to pay the liabilities, and “that the potential for a sudden decline in value after acquiring shares is a known risk” - and then further indicated that “it was within [CRA’s] discretion to be influenced significantly by the public interest in collection of taxes.”
Neal Armstrong. Summary of Anderton v. Canada (Attorney General), 2021 FC 788 under Financial Administration Act, s. 23(2).
CRA indicates that the safe income of common shares acquired on a s. 88(1) wind-up is averaged with that of directly-purchased common shares
A Canadian corporate taxpayer (“Parent”) had held a majority of the common shares of an indirect Canadian subsidiary (“Subsidiary”) for some time through a wholly-owned direct subsidiary (“Holdco”), and recently acquired the balance of the common shares of Subsidiary directly.
CRA ruled that upon a s. 88(1) winding-up of Holdco (so that the two shareholdings were combined in Parent’s hands), the safe income on hand attributable to the historical shareholding would be averaged across all of the common shares held by Parent immediately following the winding-up.
Parent then effects a “dirty s. 85” exchange of its common shares of Subsidiary for new common shares and preferred shares with a cost equaling their redemption amount, and then has a cash dividend paid on the common shares and has the preferred shares redeemed for cash. CRA ruled that the pref redemption would not reduce the safe income on hand attributable to the common shares – noting in its summary that this was because there was no inherent gain on such pref.
Neal Armstrong. Summary of 2020 Ruling 2020-0854091R3 under s. 55(2.1)(c).
Income Tax Severed Letters 15 September 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Sprott Physical Uranium Trust will hold uranium directly and in corporate form as a closed-end (non-MFT) trust
The Sprott Physical Uranium Trust was formed in April 2021 to acquire all the common shares of Uranium Participation Corporation (“UPC”), an OBCA corporation, under a Plan of Arrangement. UPC held over US$600 million in uranium through a Bermuda subsidiary, which will be wound-up under s. 88(3). The Trust has now issued a Short Form Base Shelf Prospectus for the further issuance of units by it, which will continue to be listed on the TSX.
As it is a closed-end trust (presumably with an eye to not triggering corporate tax), the Trust does not qualify as a s. 108(2)(a) unit trust or as a mutual fund trust. However, in order to avoid a deemed disposition on its 21st anniversary, it is directed in its trust agreement to become a unit trust before then.
It does not expect to be subject to SIFT tax, on the basis that the Uranium held by it and UPC will not be non-portfolio property. It and UPC do not expect to dispose of uranium except to fund administrative expenses, so that the uranium is expected to be capital property.
Neal Armstrong. Summary of 10 August 2021 Short Form Base Shelf Prospectus of Sprott Physical Uranium Trust under Commodity Funds – Metals Funds.
We have published 11 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 10 translations of CRA interpretation released in January, 2007 and December 2006. Their descriptors and links appear below.
These are additions to our set of 1,714 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 14 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA rules on a s. 55(3)(a) spin-off that includes a s. 86 exchange of identical shares
CRA ruled on the s. 55(3)(a) spin-off by DC (held by three siblings through holding companies and, in turn, holding three Opcos as well as three Landcos, one of them 50% owned by a third party) of the three Landcos to newly-formed TC held by the same holding companies. This ruling letter departed somewhat from the expected.
First, although no s. 86 ruling was given, the letter described a preliminary s. 86 reorganization to create the DC special shares that could then be transferred on a s. 85(1) rollover basis by the Holdcos to TC. The s. 86 reorganization entailed an exchange of the old common shares (and old special shares) for “new” common shares and the new special shares, with the new common shares apparently having the same attributes as the old common shares. For s. 86 to apply, all the old shares must be disposed of. CRA has indicated (e.g., in 2013-0495821C6 and 2004-0092561E5) that there has been no disposition if the “new” common shares have the same attributes as the old. Accordingly, it is common for there to be some change in the share attributes, e.g., amending the old shares immediately before the exchange so that they have two votes per share (2014-0558831R3) or according the new shares an explicit right to receive quarterly financial statements (2013-0491651R3). Is this sort of thing now unnecessary?
Second, there is a representation, that:
TC does not intend to sell or otherwise transfer any of the assets it will receive in the course of the Proposed Transactions.
This does not appear to be a requirement for a s. 55(3)(a) spin-off. Was this offered up by the taxpayer, or did Rulings insist on it?
Neal Armstrong. Summary of 2020 Ruling 2020-0854401R3 under s. 55(3)(a).
CRA indicates that the adoption of IFRS 9 means that loan impairment amounts for ITA and GAAP purposes will differ
In essence, the s. 20(1)(l) reserve for doubtful loans for a money-lending business of a financial institution takes into account, as a key component, 90% of the reserve or allowance for impairment determined in accordance with GAAP. IFRS 9, which replaced IAS 39 effective after 2018, introduced an “expected credit loss” (ECL) framework for the recognition by financial institutions of credit losses, which are determined as the sum of the amounts determined under the following three stages:
- Stage 1: An allowance to recognize ECLs resulting from default events that are possible within 12 months from when a loan is originated or purchased as well as existing loans with no significant increase in credit risk since initial recognition.
- Stage 2: An allowance to recognize ECLs for loans for which there have been significant increases in credit risk since initial recognition and the credit risk is not considered low.
- Stage 3: An allowance for credit-impaired loans where events have occurred to cause impairment.
CRA stated:
In order to determine the amount of an impaired loan reserve that may be deductible by a financial institution the Act requires that each loan must be specifically identified as being impaired and that impairment must be measurable on a loan by loan basis. A reserve set up to provide for possible loan losses with no evidence of impairment would be a reserve for a contingency, and subject to the prohibition in paragraph 18(1)(e) … .
Thus, CRA considers that the IFRS 9 approach starts recognizing a loss at too early a stage rather than measuring impairment on a loan by loan basis.
Neal Armstrong. Summary of 19 July 2021 External T.I. 2020-0869172E5 under s. 20(1)(l)(ii)(D).
CRA finds that a sale of corporate properties at a deliberate undervalue to corporations wholly-owned by the two respective equal shareholders could engage s. 56(2)
X and Y (unrelated individuals), who each wholly-owned operating corporations ("ACo" and "BCo"), also equally owned XYZCo, which built and sold two condominiums to ACo and BCo at a mutually agreed price that they knew to be below fair market value.
After the usual caveats about questions of fact, CRA indicated that if indeed this was the mutual back-scratching arrangement that it appeared to be, the sales likely were non-arm’s length transactions to which s. 69(1)(b) would apply. Furthermore, assuming that this should be characterized as a situation where X and Y were directing the conferral of a benefit on their respective corporations that would have been taxable to them under s. 15(1) if received directly, then s. 56(2) could apply to include the known FMV deficiencies in their respective incomes.
Neal Armstrong. Summaries of 1 June 2021 External T.I. 2020-0865201E5 F under s. 251(1)(c) and s. 56(2).
Income Tax Severed Letters 8 September 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.