News of Note
CRA discusses the consequences of a sabbatical leave plan being offside the SDA rules
Email this ContentAfter finding that a sabbatical leave plan did not satisfy the requirements of Reg. 6801(a) as a deferred salary leave plan (for multiple reasons including the length and timing of the sabbatical leave and provision for notional employer contributions to match the salary amounts that the participating employees elected to defer), CRA went on to discuss the consequences of the leave plan being a salary deferral arrangement:
- The amount of salary that an employee deferred in a particular taxation year together with the amount of any matching notional employer contribution, would constitute a “deferred amount,” to be included in computing the employee’s income for that year pursuant to ss. 6(11) and 6(1)(a).
- The employer receives a s. 20(1)(oo) deduction for the same year as the s. 6(1)(a) inclusion.
- Amounts received by an employee during the sabbatical leave that were previously included in income as deferred amounts are (per s. 6(1)(i)) excluded from the employee’s income on such receipt.
- On the forfeiture of all notional employer contributions on the early termination of participation in the Plan, the amount of the employer contributions (previously included in the employees income) would be deductible by the employee pursuant to s. 8(1)(o). The employer, who would have previously taken a s. 20(1)(oo) deduction, would now have a s. 12(1)(n.2) inclusion. However, the lump-sum received by the employee on early termination would be excluded on receipt under s. 6(1)(i) given the previous inclusion under ss. 6(11) and 6(1)(a).
Neal Armstrong. Summaries of 23 April 2021 External T.I. 2020-0872371E5 under Reg. 6801(a) and s. 6(11).
Pavages Vaudreuil – Court of Quebec finds that an operation of washing, sorting and crushing aggregate was separate from a road construction operation
In addition to being involved in construction (maintenance of roads, streets and bridges), the taxpayer owned several natural gravel quarries and sand pits and processed sand, river gravel, crushed stone and earth for sale to third parties and for use in its construction operations. It purchased three pieces of equipment for use exclusively for the handling of materials already gathered by a cable shovel in connection with the washing, sorting and crushing of the various products.
In order for the purchases to have generated an investment tax credit for Quebec purposes, they were required inter alia to qualify as Class 29 property, i.e., they were required to have been acquired for use primarily in the manufacturing or processing of goods for sale. Under the Quebec equivalent of Reg. 1104(9)(c), “manufacturing or processing” was deemed to exclude “construction."
In finding that this exclusion did not apply because the taxpayer’s construction and processing operations were distinct, Bourgeois JCQ noted that the operations’ respective customers differed, the processing occurred at sites distinct from the situs of the construction projects, only 27% of the processed product was used in the construction operation, the two operations could have been operated independently of each other, and there was separate accounting. The appeal was allowed.
Neal Armstrong. Summaries of Pavages Vaudreuil Ltée v. Agence du revenu du Québec, 2021 QCCQ 3890 under Reg. 1104(9)(c) and Reg. 1104(9)(e).
Vocan – Tax Court of Canada finds that supplies to insurers of injury assessment reports were not GST/HST exempted
Vocan supplied assessment reports to insurance companies or law firms regarding individuals injured in motor vehicle accidents. The reports were prepared by independent-contractors assessors, who examined and tested the injured individuals at the Vocan facility.
Vocan submitted that its facility was a health care facility, being “a facility … operated for the purpose of providing medical … care,” so that its supply of the reports was exempted under Sched. V, Pt. II, s. 2 as a supply of an “institutional health care service” rendered to patients of the facility. In finding that the Vocan facility was not a health care facility, Lyons J stated that “'medical care’ is to be interpreted as being connected to the practice of medicine,” whereas the assessments activities were not medical care. Furthermore, she found that any care relationship was between the assessor and the individual, not Vocan and the individual, so that “individuals were not patients of Vocan’s facility.”
Accordingly, the supplies of the reports were not exempted.
Neal Armstrong. Summary of Vocan Health Assessors Inc. v. The Queen 2021 TCC 49 under ETA Sched. V, Pt. II, s. 2.
Income Tax Severed Letters 11 August 2021
This morning's release of four severed letters from the Income Tax Ruliings Directorate is now available for your viewing.
CRA rules on a hybrid pipeline transaction involving an interim loan to fund terminal return taxes, and PUC distributions rather than note repayments out of the Amalco
CRA ruled on what it called a “hybrid” pipeline transaction involving a corporation that held only marketable securities under which:
- The estate exchanges the common shares of the Corporation on a s. 85(1) rollover basis for new Class A common shares and redeemable retractable preferred shares of the Corporation.
- The Corporation’s CDA is accessed by electing under s. 83(2) on an increase in the stated capital of the preferred shares.
- The Corporation redeems the preferred shares in consideration for a note, designates a portion (based on its GRIP account) of the resulting deemed dividend as an eligible dividend and reports a resulting capital loss, which is carried back under s. 164(6).
- The Estate then transfers the Class A Common Shares to a “Newco” formed by it in consideration for Newco common shares.
- The Corporation makes a loan to Newco, which makes a stated capital distribution on its common shares to fund income taxes owing under the deceased’s terminal return.
- At least 12 months later, the Corporation and Newco amalgamate and, thereafter, Amalco makes stated capital distributions at a rate not exceeding 25% per quarter of the initial aggregate paid-up capital of the Amalco common shares.
Neal Armstrong. Summary of 2021 Ruling 2020-0874851R3 under s. 84(2).
CRA position accommodating extracting cash on an amalgamation may facilitate surplus stripping
2018-0785921E5 and 2017-0696821E5 indicate that where there is a distribution of cash and shares to shareholders of predecessor corporations pursuant to an amalgamation, the conditions of s. 87(1)(c) will be met, while the receipt of the non-share consideration will preclude s. 87(4) from applying, so that such shareholders will realize a capital gain or loss based on the value of the shares and cash received from Amalco.
This suggests that surplus of a corporation can be extracted on its amalgamation as cash or other non-share consideration. S. 84(2) risk can be minimized by continuing to operate the businesses of the predecessors and taking the non-share consideration as a note that is drawn down over time.
Neal Armstrong. Summary of Kenneth Keung and Balaji Katlai, “CRA Essentially Approves Surplus Stripping by Amalgamation,” Canadian Tax Focus, Vol. 11, No. 3, August 2021, p. 1 under s. 84(2).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in June and May, 2007. Their descriptors and links appear below.
These are additions to our set of 1,662 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 ¼ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2007-06-15 | 29 May 2007 Internal T.I. 2006-0217401I7 F - 110(1)d): Moment de la conclusion de la convention | Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(d) - Subparagraph 110(1)(d)(ii) - Clause 110(1)(d)(ii)(A) | where options previously granted were not exercisable until an employer “Exercise Notice,” the stock option agreement was made at such notice time |
| Income Tax Act - Section 7 - Subsection 7(5) | not giving exercise notice to employees who are not shareholders (so that they cannot exercise their options) may engage s. 7(5) | ||
| 2007-06-08 | 30 May 2007 External T.I. 2006-0218101E5 F - Interaction entre 125.4(1) et 256(1.2)c) | Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(c) | s. 256(1.2)(c) does not affect the determination of de facto control |
| Income Tax Regulations - Regulation 1106 - Subsection 1106(2) | s. 256(1.2)(c) does not inform the definition of prescribed taxable Canadian corporation | ||
| 28 May 2007 External T.I. 2007-0219801E5 F - Paiement de soutien aux enfants | Income Tax Act - Section 74.1 - Subsection 74.1(2) | child assistance payment is transferred to a minor child is subject to s. 74.1(2) attribution | |
| 4 June 2007 Internal T.I. 2007-0229251I7 F - Montants reçus pour aide personnelle à domicile | Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit | no income to parental caregiver in situations similar to Pellerin | |
| 9 May 2007 External T.I. 2006-0189931E5 F - Renonciation à une fiducie par un conjoint | Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | renunciation of interest in spousal trust not a disposition to the family beneficiaries | |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition | extinguishment of trust interests on their renunciation is a disposition of the renounced interest, but resulting variation of trust to accelerate distribution entitlements is not | ||
| Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a) | variation of spousal trust, following renunciation by spouse, to accelerate distribution entitlement of residuary beneficiaries would not engage s. 104(4) until distribution | ||
| Income Tax Act - Section 70 - Subsection 70(6) | variation of spousal trust, following renunciation by spouse, to accelerate distribution entitlement of residuary beneficiaries would not deny s. 70(6) rollover | ||
| 5 June 2007 Internal T.I. 2007-0237291I7 F - Disposition d'une police d'assurance-vie | Income Tax Act - Section 148 - Subsection 148(7) | s. 148(7) applicable to gift of policies by partners to a limited partnership | |
| 30 May 2007 External T.I. 2006-0200271E5 F - Bien agricole et résidence principale | Income Tax Act - Section 40 - Subsection 40(4) | s. 45(3) election did not extend time that farm house was a principal residence, once the occupant went to nursing home | |
| Income Tax Act - Section 45 - Subsection 45(3) | no change of use when occupant of residence moved into a nursing home | ||
| Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) | principally references over 50% of use | ||
| 11 May 2007 External T.I. 2006-0214351E5 F - Transfert d'un droit de propriété | Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b) | where duplex co-owned by husband and wife, the one unit occupied by them can be designated as a principal residence – but this changes when daughter moves into the 2nd unit | |
| Income Tax Act - Section 248 - Subsection 248(1) - Property | an occupied unit in a co-owned duplex can be designated as a principal residence | ||
| 2007-06-01 | 24 May 2007 External T.I. 2006-0209081E5 F - Withholding Source Deductions - Trustee Fees | Income Tax Act - Section 248 - Subsection 248(1) - Office | fees if trustees of REIT based partly on the number of meetings they attended were from an office |
| Income Tax Regulations - Regulation 100 - Subsection 100(1) - Remuneration | fees received by REIT trustees including per-meeting fees were salary and wages subject to source deductions and T4 reporting | ||
| 2007-05-25 | 22 May 2007 External T.I. 2007-0228611E5 F - Crédit pour la création d'emplois pour apprentis | Income Tax Act - Section 127 - Subsection 127(9) - Eligible Apprentice | year means 12 months/”contract” for apprentice can be the collective agreement |
4431472 Canada – Federal Court sets aside a CRA decision not to reassess on the basis that it was unclear whether it was a final decision
A Canadian corporation (“443 Inc”) filed its tax returns on the basis that distributions received by it from a trust were distributions of fee income (the “GAM fees”). However, it changed its view and filed amended returns for those years requesting that CRA reassess and issue refunds based on the GAM fees not being income from a source. CRA did not reassess those returns.
Subsequently, CRA assessed the sole individual shareholder of 443 Inc. on the basis that the GAM fees were includible in his income under s. 56(2). He appealed those reassessments to the Tax Court.
443 Inc. sought judicial review of a decision whereby the Minister appeared to make a “final” determination not to proceed with the processing of the amended tax returns of 443 Inc. Pamel J set this decision aside on the basis that it in fact was unclear whether what was decided was (1) an outright refusal to exercise the Minister’s discretion to reassess 443 Inc, so as to issue the requested refunds, or (2) a “finalization” of her earlier proposal to postpone her decision on processing the amended returns until the issue as to whether the GAM fees were income was judicially determined.
In explaining the significance of the distinction between these two alternatives, Pamel J had earlier noted the statement in IT-335R2 regarding s. 56(2) that “it is normally the … CRA … practice not to assess the same income twice." He indicated that if indeed the Minister had made a final determination not to reassess (i.e., the 1st alternative), so that the effect was to clearly impose double taxation (i.e., inclusion of the GAM fees in the hands both of 443 Inc. and its shareholder), “the reasonable corollary decision would be for Minister to take a consistent position in respect of [the shareholder’s] appeal of his reassessments” (i.e., it would be “reasonable” for the Minister to reverse the s. 56(2) reassessments for those years.
Pamel J stated that he would “not order that the matter be returned to the CRA for redetermination at this time,” so that, for the time being, the matter was left to the parties to see if a resolution was possible.
Neal Armstrong. Summary of 4431472 Canada Inc. v. Attorney General of Canada 2021 FC 812 under s. 164(1).
Gélinas – Court of Quebec finds that a Montreal site qualified as a special work site for a 3 ½ year project
The taxpayer, who had purchased a house in Richmond, Quebec in 1999 to reside there with his family, worked for his employer (“GPH”) as a project engineer regarding the construction or expansion of factories. Although normally, on such projects, the client of GPH would pay the accommodation costs of the GPH employees who worked on the project, that was not the case for a project for one of the clients in the Montreal area (about 90 minutes from Richmond), which started in 2014 and lasted for 3 ½ years.
GPH agreed to cover the costs of an apartment in the Montreal area, which the taxpayer’s wife and son moved into, but not their daughter. GPH also paid the taxpayer an allowance of $25 per day for travel to clients and restaurant expenses, plus $37.50 for each trip between the Longueuil apartment and the Richmond house.
In finding that these amounts were not includible in the taxpayer’s income pursuant to the Quebec equivalents of ITA ss. 6(6)(a)(i) and (b)(i), Lapierre JCQ stated:
[T]he fact that the wife and one of the children of the couple also lived in the Longueuil apartment is not very important … .
… Mr. Gélinas returned to his Richmond home frequently, either on weekends or at least once a month for maintenance and insurance requirements. In addition, Mr. Gélinas maintained his relationships with health care professionals in Richmond or its immediate area, and continued to maintain other activities of his personal life there.
Neal Armstrong. Summary of Gélinas v. Agence du revenu du Québec, 2021 QCCQ 4841 under s. 6(6)(a)(i).
Deans Knight – Federal Court of Appeal finds that the object and spirit of s. 111(5) is abused on an arm’s length acquisition of “actual” (albeit, not de jure) control of a Lossco
The non-capital losses of $90M, and other tax attributes of the taxpayer, were effectively sold to arm’s length investors pursuant to transactions under which:
- The existing shareholders of the taxpayer exchanged their shares for shares of a “Newco” (“New Forbes”) under a Plan of Arrangement
- A private company “facilitator” (Matco) entered into an “Investment Agreement” with the taxpayer and New Forbes pursuant to which Matco (principally in consideration for $3M in cash) acquired a debenture of the taxpayer that was convertible into shares representing 79% of its equity shares but only 35% of its voting shares.
- The taxpayer then transferred its assets (including the proceeds of issuing the debenture) and its liabilities to New Forbes.
- Matco then identified a mutual fund management company which wanted to effect a public offering of shares of the taxpayer and use the proceeds (of $100M) for a new bond trading business to be carried on in the taxpayer.
- The subscription price for the newly-issued common shares under this offering caused the securities of the taxpayer held by New Forbes and Matco to appreciate which, in the case of Matco, effectively was its fee.
- New Forbes sold its remaining shares of Lossco to Matco for a pre-agreed price of $0.8M.
Woods JA set the stage by stating:
[I]t must be remembered that the GAAR is intended to supplement the provisions of the Act in order to deal with abusive tax avoidance. I see nothing inconsistent with the conclusion that the object, spirit and purpose of subsection 111(5) takes into account different forms of control even though the text of the provision is limited to de jure control.
In finding that Mateo acquired “actual control” (albeit, not de jure control) of the taxpayer, she indicated that the Investment Agreement provided “severe restrictions on the actions” that New Forbes and the taxpayer could take including prohibiting the taxpayer from “engag[ing] in any activity other than related to a Corporate Opportunity” (e.g., the offering) and required that “New Forbes shall use commercially reasonable efforts to satisfy (or cause the satisfaction of) its obligation to cooperate with Matco in the implementation of a Corporate Opportunity” (para. 101).
As “the Investment Agreement resulted in New Forbes and the Respondent handing over actual control of the Respondent to Matco,” there was an abuse of s. 111(5), and the tax benefit of the taxpayer’s tax attributes were properly denied by CRA.
Neal Armstrong. Summary of Canada v. Deans Knight Income Corporation, 2021 FCA 160 under s. 245(4).