News of Note
The concepts of NAL dealings/lien de dépendance may have evolved since Swiss Bank
Email this ContentAfter discussing the concept of parties dealing at arm’s length and its judicial treatment , including the concepts of acting in concert, and then of captive interest, that surfaced in the two levels of decision in the Swiss Bank case, and how subsequent courts dealt with these concepts, the authors conclude:
[T]he interpretation of Swiss Bank by later jurisprudence has given different meaning to the determination of whether parties are dealing at arm's length than what was intended by the Exchequer Court, or even the Supreme Court. Justice Thurlow looked to see whether A and B acted in concert without separate interests to test whether they were NAL with C, not with each other, but the CRA and most courts seem only interested in applying the acting in concert test bilaterally. The SCC decision in Swiss Bank is predominantly cited for the test it rejected, and almost never for the test it put forward (i.e., captive interest). This has been coupled with a deemphasis of the word "dealing" in the arm's length determination, with a resolute focus on what the relationship is between the parties. However, once a refrain is repeated often enough it tends to take on a life of its own, meaning that even with tenuous origins, the "acting in concert" test as it currently stands is likely here to stay.
Neal Armstrong. Summary of Matias Milet and Emily Gilmour, “A Discordant Jurisprudence: What does it Mean to be ‘Acting In Concert’?,” International Tax (Wolters Kluwer CCH), No. 118, June 2021, pp. 1-7 under s. 251(1)(c).
Mariani – Supreme Court of Ontario orders a new trial regarding claiming wedding expenses as business expenses
The trial judge convicted the individual accused and the corporation he owned (“MMFL”), of making a false statement and tax evasion in relation to both personal and corporate income tax returns. In particular, MMFL paid and claimed as a business expense a significant portion ($60,000) of the costs of the wedding of the son of the individual accused as a business expense. Before ordering a new trial, Nakatsuru J found that the trial judge had misapprehended the evidence in finding that there was no evidence of business associates of the accused having been invited to or attending the wedding.
Neal Armstrong. Summary of Mariani. v The Queen, 2021 ONSC 4731 under s. 239(1)(a).
1455257 Ontario – Federal Court of Appeal notes that CRA cannot arbitrarily reject an s. 152(4)(b)(i) extension request and that s. 160 extends to post-transfer interest
The validity of a s. 160 assessment of the taxpayer turned in part on whether the affiliate from which the taxpayer had received a transfer of property in 2003 should be regarded as having had its taxable income for 2000 reduced by a portion of its non-capital loss for 2002 that the affiliate had not claimed because the taxpayer and the affiliate had not found out about that additional loss until 2011, when the taxpayer made an ATIP request following the s. 160 assessment of it.
The taxable income of the affiliate for 2000 had arisen as a result of a 2005 settlement which had reduced a 2001 non-capital loss (and, thus, reduced the loss carryback to 2000), thereby leaving 2000 unsheltered. Noël C.J. confirmed the finding below that the affiliate had failed to request the carryback of the 2002 loss on a timely basis which, in light of the six-year extension for such requests under s. 152(4)(b)(i), implied a request deadline (which was not met) of August 13, 2007, i.e., six years after the original assessment of the 2000 year.
In this regard, he stated that, had such a request been made:
The Minister’s decision to give effect to such a [s. 152(4)(b)(i)] request is arguably discretionary given the use of the word “may” in subparagraph 152(4)(b)(i) but even then, this discretion would have to be properly exercised. A request made pursuant to subparagraph 152(4)(b)(i) cannot be arbitrarily refused.
Noël C.J. also agreed with the Tax Court’s rejection of the taxpayer’s submission that given that the word “pour” used in the French version of s. 160(1)(e)(ii) was narrower than “in respect of” used in the English version, s. 160 did not extend to interest that had accrued on the tax payable subsequent to the 2003 transfer date, stating (at paras. 46-47):
The phrase “in respect of” is broad and all encompassing … and the word “pour” in the French text can have a similarly broad meaning. …
It can be seen that both texts can be read so as to capture interest that accrues on the transferor’s liability from the year of the transfer onwards. This aligns with the purpose of subsection 160(1) which is to allow for the collection of “the total of all amounts” that the transferor is liable to pay under the Act without any distinction as to the makeup of these amounts … and without any time limitation. …
Neal Armstrong. Summaries of 1455257 Ontario Inc. v. The Queen 2021 FCA 142 under s. 152(4)(b)(i), s. 111(1)(a) and s. 160(1)(e).
CRA indicates that the holding on death of an insurance tracking share would not prevent the underlying policy’s CSV being attributed for ss. 70(5) and (5.3) purposes to the common shares
In a variation on the situation described in the preceding post, the shareholder of a wholly-owned corporation acquires for $1 a special share that is redeemable for $1 at the discretion of the corporation and that entitles the holder to receive a dividend equaling the death benefit under a policy on the shareholder’s death. The corporation then purchases the policy, pays the premiums and is the beneficiary. At the shareholder’s death, he holds all of the common shares and the special share.
CRA indicated that it appeared that the overall value of the corporation that would be attributed to the special share immediately before the death would be nominal. Accordingly, the value of the common shares immediately before the death would take into account almost the entire cash surrender value of the life insurance policy.
Neal Armstrong. Summary of 19 May 2021 CLHIA Roundtable Q. 5, 2021-0884301C6 under s. 70(5.3).
CRA confirms that the CSV of a life insurance policy could reasonably be fully allocated on the death of a common shareholder to the holder of a tracking share
The taxpayer wants the proceeds of the universal life insurance policy on his life paid on his death to his adult child, rather than to his spouse, who is the one under his will to inherit his common shares of the private corporation (the “Corporation”) that will be the policyholder and beneficiary.
To this end, the Corporation issues for $1 a special non-voting share (the “insurance share") to the child that is non-participating except for an entitlement to a dividend (to be declared only after the taxpayer’s death) equaling the policy death benefit payable under the policy. The share also is retractable by the holder before the taxpayer's death, for the policy’s cash surrender value (“CSV”), but with payment deferred until the Corporation’s receipt of the death benefit, and is retractable by the holder (and redeemable by the Corporation) after the Corporation’s death for any excess of the death benefit over the dividend declared.
S. 70(5.3) indicates that, for purposes inter alia of s. 70(5), the fair market value of a share of the deceased shall be determined as if the fair market value (immediately before the death) of a policy on the deceased’s life was its cash surrender value (“CSV”).
CRA confirmed that, regarding the narrow issue of the FMV of the common shares immediately before the death of the taxpayer, given that the insurance share was retractable by the holder immediately before the death for the CSV, it would not be unreasonable to allocate the policy CSV to the insurance shares – so that the value of the common shares would not take the policy CSV into account.
Neal Armstrong. Summary of 19 May 2021 CLHIA Roundtable Q. 4, 2021-0884291C6 under s. 70(5.3).
Income Tax Severed Letters 14 July 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a separated common-law couple can do a s. 55(3)(a) spin-off from their jointly owned Opco within the first 90 days of their separation
A common-law couple, on the 85th day after they started living separate and apart due to a relationship breakdown, carried out a split-up of the business corporation jointly owned by them (i.e., a spin-off of half the business to a Newco owned by one of them) in reliance on the s. 55(3)(a) exception from s. 55(2). After the 90th day, they were no longer deemed under the s. 248(1) “common-law partner” definition to be common-law partners and, thus, ceased to be related.
CRA indicated that this did not retroactively cause them to not be related for purposes of applying the tests in ss. 55(3)(a)(i) to (v) to the split-up reorganization of a few days earlier.
Neal Armstrong. Summary of 29 March 2021 External T.I. 2020-0839571E5 under s. 55(3.01)(a).
CRA indicates that a s. 149(1)(n) corp. must construct rather than purchase its low-rental housing projects
S. 149(1)(n) exempts the income of a
limited-dividend housing company (within the meaning of … section 2 of the National Housing Act), all or substantially all of the business of which is the construction, holding or management of low-rental housing projects.
It might seem obvious that “or” means “or,” so that a low-rental housing project that was purchased rather than constructed, could qualify. However, CRA noted that the s. 2 definition of limited-dividend housing company referred to “a company incorporated to construct, hold and manage a ‘low-rental housing project’” and whose articles limited its dividend rate to 5% or less. Thus, a company that purchased rather than constructed the project would not qualify.
CRA also noted that it would appear that a project could qualify as a “low-rental housing project” (also defined in the National Housing Act) if the company rented the project units to a registered charity which, in turn, sublet the units to low-income families - although it would want to consult with the CMHC before concluding on this issue.
Neal Armstrong. Summary of 22 February 2021 External T.I. 2020-0848221E5 under s. 149(1)(n).
Bill C-208 has botched drafting, and will be substantially re-written
Bill C-208 generally provides that an individual selling qualified small business shares or shares of a family farm or fishing corporation to a corporation controlled by the individual’s children or grandchildren who are at least 18 years of age will benefit from capital gains treatment rather than receive a s. 84.1 deemed dividend provided that such purchaser does not dispose of those shares for at least 60 months.
Given that the children or grandchildren are only required to control (rather than have a substantial equity stake in) the purchaser, this lends itself to “high-octane surplus strips” in which individual owners of a small business corporation can use the capital gains exemption to extract cash from the business, while still retaining virtually all of the equity and upside in the business.
Other anomalies include:
- The purported numerical formula limitation on the s. 110.6(2) or (2.1) capital gains deduction (based inter alia on the level of the corporation’s taxable capital employed in Canada) in s. 84.1(2.3)(b) is "meaningless" and has no application because it is stated to apply only for the purposes of s. 84.1(2)(e).
- Furthermore, the math in the formula is wrong – even if it were effective, it would only eliminate the deduction at taxable capital levels of $510 million, not $15 million.
- There is nothing preventing the children or grandchildren from selling their shares of the purchaser within 60 months, or the subject corporation from selling its business.
The June 30, 2021 Finance press release (made one day after the passage of Bill C-208) effectively indicated that, sometime later this year, the Bill C-208 relief will be retroactively repealed and yet-to-be-determined new provisions will take effect on January 1, 2022. Allan Lanthier sets out in some detail what might be approximately expected in the new legislation.
Neal Armstrong. Summary of Allan Lanthier, “Tax relief for family business transfers: A legislative fiasco” – Part I, Canadian Accountant, 8 July 2021 and Part II, Canadian Accountant, 9 July 2021 under s. 84.1(2)(e).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in September, 2007. Their descriptors and links appear below.
These are additions to our set of 1,622 full-text translations of French-language severed letters (mostly, Roundtable items and Technical Interpretations) of the Income Tax Rulings Directorate, which covers all of the last 13 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.