News of Note
Harvard Properties – Tax Court finds that s. 160 applied where the vendors were wilfully blind to their sale price reflecting non-payment by the purchaser of triggered asset-sale tax
Email this ContentA Calgary shopping mall was sold by Harvard Properties and the other co-owners to a third party (“Abacus”) in a share sale transaction but at a price representative the mall’s asset value and, thus, at a premium to its share-sale value. This was accomplished by transferring their co-ownership interests on a s. 85(1) rollover basis to respective Newcos (“HP Newco”, in the case of Harvard Properties) in consideration inter alia for voting and non-voting shares, followed by a sale of those voting shares to an Abacus subsidiary (NH Properties) for promissory notes for under half of the sale price. The Newcos then sold the shopping centre to a third party (Bentall), and the co-owners then sold their Newco non-voting shares to NH Properties for the balance of the purchase price (receiving, by direction, the Bentall sales proceeds), at no gain due to an ACB step-up pursuant to a stated capital increase coming out of the newly-created capital dividend accounts of the Newcos. Real estate counsel for the vendors negotiated for these transactions to all occur in one integrated interdependent closing.
Boyle J referred to the finding in Microbjo that the purpose of the arm’s length test is to render assurances that the terms reflect ordinary commercial dealings, and that there was not such assurance here, as the vendors were wilfully blind to the source of their premium and the Abacus transaction profit being a tax liability on the Newcos’ sale to Bentall “that would not be paid”. Boyle J found that the vendors and NH Properties were not dealing with each other at arm’s length on the basis both of this absence of “ordinary commercial dealings” and that the parties “clearly acted together to dictate [the] Newcos’ actions from their inception and throughout the closing of this series of transactions”.
In finding that the cash proceeds received by Harvard Properties exceeded the FMV of the Newco shares sold by it (the first element of its s. 160 assessment), Boyle J stated:
There appears to be little to no chance that any arm’s length party unrelated to these transactions would agree to accept, much less pay for, the HP Newco shares at the relevant time as the Newcos would moments in time later have no assets, no business, and the possibility of a significant liability for their roles in these transactions … .
Accordingly, s. 160 applied to the transactions in the cash amounts referenced by him, subject to a determination in still-pending proceedings as to the quantum of any unpaid tax liability of NH Properties.
Boyle J found, in the alternative, that if the series of transactions had avoided the application of s. 160, there was an abusive avoidance of s. 160 through the structuring of a supposed arm’s-length through a sale of the voting shares of the Harvard Properties’ Newco (HP Newco) before the asset sale, capital dividend and sale of the non-voting Newco shares. Furthermore, he considered that the reasonable way in the circumstances to deny the tax benefit was to treat s. 160 as applying to the extent of the shortfall in consideration given on the transfer.
Harvard Properties had been assessed under s. 160 beyond the normal reassessment period, as permitted by s. 160(2). In rejecting the taxpayer’s submission that the assessment of it in the alternative under s. 245(2) was statute-barred because it was made beyond the normal reassessment period, Boyle J stated:
[T]here is no “normal reassessment period” applicable to the application of the GAAR … . The only requirement is that GAAR be involved or taken into account in a timely and otherwise validly issued assessment under the Act.
Neal Armstrong. Summaries of Harvard Properties Inc. v. The King, 2024 TCC 139 under s. 160(1), s. 251(1)(c), s. 245(4), s. 245(2) and General Concepts – FMV - shares.
CRA rules on a pipeline transfer by an inter vivos trust of preferred shares (stepped-up under s. 104(4)(b)(ii)) for notes
A discretionary inter vivos family trust, settled almost 21 years ago, decided that it would distribute only a portion of its preferred shares of Holdco 2 (with an investment portfolio) to its two principal beneficiaries (Child 1 and Child 2), so that it would realize a capital gain on the remaining shares on the 21st anniversary.
CRA ruled on pipeline transactions in which the trust would transfer its remaining Holdco 2 preferred shares to another existing family holding company (Holdco 1) in consideration for Notes 1, 2 and 3 of Holdco 1, and then distribute (apparently, immediately) Notes 2 and 3 pursuant to s. 107(2) to Child 1 and 2, respectively and receive repayment of Note 1 to fund its capital gains tax. The trust will then be wound-up pursuant to s. 107(2) and, after [one?] year, Holdco will commence to repay Notes 1 and 2, in tranches not exceeding specified maximums.
Neal Armstrong. Summary of 2023 Ruling 2023-0986521R3 F under s. 84(2).
CRA announces that no bare trust returns are required for the 2024 taxation year
On October 29, 2024, CRA updated its webpage on bare trust reporting to state:
Updated 2024 Tax year: As announced in the Tax Tip issued October 29, 2024, the Canada Revenue Agency (CRA) will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust) for the 2024 tax year, unless the CRA makes a direct request for these filings. This is a continuation of the exemption from the trust reporting requirements that was issued for bare trusts for the 2023 tax year.
Neal Armstrong. Summary of CRA Webpage, New reporting requirements for trusts and bare trusts: T3 returns filed for tax years ending after December 30, 2023, updated on 29 October 2024 under s. 150(1.2).
CRA indicates that having equipment owned separately from the services business in which its product is used could permit it to qualify as Class 53 property
Equipment was acquired by a corporation (“Aco”), wholly-owned by a dental surgeon, to manufacture dental restorative products for use as part of its dental services. Alternatively, the surgeon could incorporated a second wholly-owned corporation (“Bco”) to acquire the equipment and sell, to Aco, the dental restorative products it manufactured using the equipment.
CRA indicated that the first alternative did not satisfy the requirement, for the equipment to qualify as Class 53 property, that it be used in the manufacturing or processing of goods for sale – as the goods (the dental restorative products) instead were used in providing a dental service.
Under the second alternative, assuming that there indeed was a sale of the manufactured products by Bco to Aco under the governing provincial law, the equipment could qualify as Class 53 property to Bco assuming that the other Class 53 requirements were satisfied.
Neal Armstrong. Summary of 29 May 2024 External T.I. 2019-0819561E5 F under Schedule II - Class 53.
CRA confirms that it generally does not consider a benefit to be conferred as a result of a bona fide interest-free intercorporate loan
Regarding whether an interest-free loan between two corporations owned by different shareholders gives rise to a taxable benefit under s. 15(1) or 246(1), CRA first stated:
[S]ubsection 15(1) could apply to the extent that it is established that a benefit is conferred by a particular corporation (“Aco”) on, for example, an individual who does not deal at arm's length with, or is affiliated with, a shareholder of Aco or its contemplated shareholder. That said, our Directorate does not generally consider that a benefit is conferred under subsection 15(1) in the context of a bona fide inter-corporate loan made in the ordinary course of the corporations' business. … Subsection 15(1) could apply, for example, if at the time the loan is made by Aco, the other corporation (“Bco”) is unable to repay the loan and/or provide reasonable security, with the result that the value of Aco would be impaired [see Vine Estate].
Turning to s. 246(1), CRA stated:
[T]o the extent that it were determined that the shareholder of Bco and/or Bco would not have an interest in Aco (and, among other things, that the shareholder of Bco and/or Bco would not be shareholders or contemplated shareholders of Aco), it would appear that the last condition for the application of subsection 246(1) [regarding income inclusion if a direct payment] would not be satisfied. On that basis, subsection 246(1) would be inapplicable … .
CRA also indicated, if the loan was not bona fide, the applicability of s. 56(2) should also be considered.
Neal Armstrong. Summaries of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.1 under s. 15(1) and s. 246(1).
CRA indicates that vacant land which previously had been rented-out did not qualify as a “former business property” for s. 44 purposes
CRA indicated that a property, which apparently was sold by the taxpayer because it could no longer be rented out to third parties, did not qualify as a “former business property” for purposes of the replacement property rollover in s. 44, stating that property which “is vacant but would otherwise earn rent, would not qualify.”
Neal Armstrong. Summary of 26 July 2024 External T.I. 2024-1014761E5 under s. 248(1) – former business property.
Chad – Tax Court of Canada finds that the presumption that commercial activity is in pursuit of profit and, thus, a source, was rebutted where there was no real interest in generating profit
In order to generate a targeted loss of $22 million for use in his 2011 taxation year, Chad agreed to pay a fee of $240,000 to a UK foreign exchange (FX) trading firm (Velocity) to enter into straddle trades (quite similar to those in Paletta) in which he would enter into contracts both for the purchase and sale of US dollars, such that he was close to fully hedged and then, near to the year end, closed out whichever of the “long” or “short” contracts were in a loss position. These trading activities, when completed in 2012, resulted in a net profit to Chad of $6,200.
In finding that these trading activities did not constitute a source of income to Chad, so that the 2011 losses (and the fee) were non-deductible in computing his income, Sommerfeldt J indicated that Paletta had found that “Stewart did not do ‘away with the pursuit of profit as a prerequisite for the existence of a business’” and concluded:
While the “assumption underlying the test in Stewart is that a commercial activity is undertaken for profit,” [Stackhouse, at para. 103] … the documentary evidence calls that assumption into question … .
The documentary evidence … does not give any indication that Mr. Chad … intended, in conducting the FX Activities, to achieve a profit/loss amount great enough to offset the $240,000 fee, which was a significant expense … . Thus … the intention of Mr. Chad … in implementing the Trades, was not to earn a profit … .
Ironically, the Crown argued that the fee had been paid by Chad for the agreement of Velocity to generate the $22 million loss and not for its trading activities. If this argument had succeeded, it would imply that the fee was not an expense of the trading activities which, without that “expense,” generated a profit, i.e., that there indeed was a source of (actual) income.
Neal Armstrong. Summaries of Chad v. The King, 2024 TCC 142 under s. 3(1) – business, and General Concepts - Sham.
Income Tax Severed Letters 30 October 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states sale by 2 equal shareholders of 1/3 of each’s shares to a 3rd unrelated person might not entail an acquisition of control; similarly where 1 of 4 equal shareholders is redeemed
A, B and C were three unrelated individuals. A and B, who were the sole and equal (common) shareholders of Opco, each sold 1/3 of their shares to C, for FMV consideration.
Would a new group (A, B and C) be considered to have acquired control of Opco, or would CRA consider that the group formed by A and B still controlled the corporation?
CRA indicated:
- The CRA position is that the shareholders of a private corporation are rebuttably presumed to act in concert to control the corporation (the “control group presumption”).
- At the 1984 CTF Roundtable, Q.42, regarding the same situation, CRA indicated that the two original shareholders would still be in a position to control the corporation after the disposition of the shares, but that to the extent that the two original shareholders would cease to act in concert to control the corporation, the disposition of the shares could result in the acquisition of control of the corporation. CRA now further commented that that it would be reasonable to consider there to be an acquisition of control by a group of which C was a member if A or B withdrew from control of Opco and that this “could also be the case if, after the disposition of the shares, it was determined that A, B and C formed a group of persons that controls Opco.”
In another fact pattern, A to D (four unrelated individuals) each held 25% of the shares (being common shares) of Opco. Would the repurchase by Opco of D’s shares result in an acquisition of control of Opco?
CRA indicated that such repurchase would result in an acquisition of control by a group consisting of the three remaining shareholders unless the control group presumption could be rebutted by demonstrating, for instance, that control of Opco was exercised by the same group before and after (e.g., by the group consisting only of A to C).
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.17 under s. 251.2(2)(a).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in June of 2001. Their descriptors and links appear below.
These are additions to our set of 2,984 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 ¼ 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 |
|---|---|---|---|
| 2001-06-08 | 10 May 2001 Internal T.I. 2001-0065677 F - SIGNIFICATION DE "MOMENT DONNÉ" | Income Tax Act - Section 6 - Subsection 6(21) | choice of time to calculate the loss is generally that of the taxpayer |
| 28 May 2001 Internal T.I. 2001-0066147 F - ALIMENTS - MACHINES DISTRIBUTRICES | Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(c) | s. 67.1(2)(c) exception would apply to food and beverages sold by employer through vending machines | |
| 31 May 2001 External T.I. 2001-0066215 F - Clause de survie | Income Tax Act - Section 70 - Subsection 70(6) | 30- or 60-day survivorship clause in will does not preclude application of s. 70(6) | |
| 1 June 2001 Internal T.I. 2001-0066297 F - CREDIT EQUIVALENT - PENSION ALIMENTAIRE | Income Tax Act - Section 118 - Subsection 118(5) | legal determination would be required as to whether a subsequent agreement which purported to eliminate a support obligation for a child under a court order, had that effect | |
| 22 May 2001 Internal T.I. 2001-0083987 F - EMPLOYEUR PAYE IMPOT POUR EMPLOYÉ | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | employers’ reimbursement of employees’ reassessments for participating in employer’s scheme were a taxable benefit | |
| 18 May 2001 External T.I. 2000-0040405 F - Revenu protégé - options | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | ACB increase to options as a result of s. 52(1) reduced the safe income otherwise allocable to the shares acquired on the options’ exercise | |
| Income Tax Act - Section 52 - Subsection 52(1) | s. 15(1) benefit on stock option grant added to options’ cost under s. 52(1) |