News of Note
We have published a further 6 translations of CRA interpretations released in July, 2011. Their descriptors and links appear below.
These are additions to our set of 981 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¼ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for October.
|Bundle Date||Translated severed letter||Summaries under||Summary descriptor|
|2011-07-29||6 July 2011 Internal T.I. 2010-0357461I7 F - CII RS&DE||Income Tax Act - Section 127 - Subsection 127(8.3)||proportionate ITCs allocated to specified member in proportion to capital can then be reallocated under s. 127(8.3) to non-specified member|
|27 June 2011 External T.I. 2009-0350501E5 F - Gains et pertes sur change étranger||Income Tax Act - Section 39 - Subsection 39(2)||s. 39(2) gain or loss on USD-denominated purchase arises between acquisition and payment date|
|Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a)||s. 39(2) gain or loss does not affect CDA until year end|
|18 July 2011 External T.I. 2010-0370561E5 F - Location avec option d'achat||Income Tax Act - Section 49 - Subsection 49(1)||where lease is coupled with bargain purchase option, a portion of the rents must be allocated to option proceeds|
|General Concepts - Substance||lease is a lease in the absence of sham|
|Income Tax Act - Section 68||where lease is coupled with bargain purchase option, a portion of the rents must be allocated to option proceeds|
|26 May 2011 External T.I. 2010-0354921E5 F - 212(1)d)(vi) - Exemption redevance droit d'auteur||Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(vi)||there now is a blanket exemption for all royalties (including lump sum advances for performances of a play) respecting copyright|
|2011-07-22||11 July 2011 External T.I. 2010-0367021E5 F - Cotisations excédentaires au REER||Income Tax Act - Section 204.2 - Subsection 204.2(1.2)||a taxable RRSP withdrawal reduces undeducted RRSP premiums and, as a result, the cumulative excess amount in respect of RRSPs|
|Income Tax Act - Section 204.1 - Subsection 204.1(2.1)||s. 204.1(2.1) tax ceases when, at the end of the month, there is no cumulative excess amount in respect of RRSPs|
|13 July 2011 External T.I. 2011-0400951E5 F - Alinéa 73(1.01)b) - régime de séparation de biens||Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(b)||s. 73(1.01)(b) can apply to a transfer occurring pursuant to an ancillary agreement|
CRA states that shares subscribed for out of a joint bank account should not be treated as having been funded by a passive spouse in applying the reasonable return TOSI exception
An individual (Spouse B) who, quite unlike Spouse A, was not involved in the business of Opco, received distributions of s. 104(19) dividends from a discretionary family trust following their declaration and payment by Opco to Holdco, and by Holdco to that trust. These dividends could not qualify in Spouse B’s hands as being from excluded shares, and CRA also found that they could not qualify under the “reasonable return” exception in the “excluded amount” definition for exclusion from split income, notwithstanding that all the shares of Opco originally had been issued to Spouse A for cash subscription proceeds that came out of a joint bank account of Spouses A and B.
[A]lthough the cash used to fund Spouse A’s initial share investment … was stated to be from cash that came from a joint account … the legal form of these transactions strongly suggests that Spouse B has not made any direct or indirect contribution of property to Opco. …
[T]aking an overly broad interpretation that a specified individual has made an indirect financial contribution to a business such that the reasonable return exception in subparagraph (g)(ii) of the definition of excluded amount would apply to prevent the amount from being split income would appear to frustrate the underlying tax policy of the TOSI rules.
Neal Armstrong. Summary of 7 August 2019 External T.I. 2019-0814161E5 under s. 120.4(1) - reasonable return.
A PhD purchased software from a promoter entity in 2003 for $7,000 and immediately donated it to a registered charity, and was issued a tax receipt for $42,000. In confirming CRA’s reduction in the gift amount to $7,000, Owen J applied the dictum in Nash that “where the dates of acquisition and disposition are very close in time, barring evidence to the contrary, the cost of acquiring the asset will likely be a good indicator of its fair market value.”
Neal Armstrong. Summary of Miller v. The Queen, 2019 TCC 204 under s. 118.1(1) – total charitable gift.
Comments of the Joint Committee on the June 17, 2019 draft stock option legislation include:
- Both (i) the denial of the s. 110(1)(d) deduction for benefits respecting “non-qualified securities” and (ii) the granting of a corresponding employer deduction under s. 110(1)(e) should apply respecting agreements to sell or issue securities entered into after 2019, rather than the first change coming into force on January 1, 2020 – and the continuity rule in s. 7(1.4) should apply for such purposes.
- The conditions for the s. 110(1)(e) deduction should be relaxed to permit the stock option issuer (e.g., a resident or non-resident parent) to differ from the deducting employer, to permit the employer not to be a specified person, and to require that the specified person status of the issuer be tested only at the time of grant – but s. 110(1)(e) should not permit multiple employers to each take the deduction.
- A successor rule should be added to permit s. 110(1)(e) to apply following a reorganization.
- The vesting year definition in s. 110(0.1) is part of the system for placing a numerical limit on the number of options that can become exercisable in a particular vesting year. Para. (b) of that definition, which utilizes the intractable concept of when vesting may reasonably be expected to occur, should instead provide for deemed ratable vesting over the term of the option.
- It is inappropriate for D(ii) of the numerical limit formula in s. 110(1.31) to include the FMV of securities to be issued under earlier options where they were non-qualified securities.
- Also, under that formula, the $200,000 limit is applied to the first options granted having a particular vesting year, therefore producing a blocking effect even when they become uneconomic (i.e., under water). Where a subsequent option is granted having a lower exercise price, the specified person should be able to designate the securities issuable under the earlier option to be non-qualified securities in order to cleanse the securities issuable under the subsequent option.
- Furthermore, where an option is cancelled or replaced (including under s. 7(1.4) or 110(1.7)), the securities which were to be issued under such option should be considered to be options not described in D(ii).
- Requiring same-day written notification (in s. 110(1.9)(a)) can be impracticable – at least 30 days should be allowed.
It is suggested that CRA’s interpretation of s. 40(3.5(c)(i) (which can prevent the release of a suspended loss):
appears to be driven by a policy goal that suspended losses should not be released as a result of a winding up that is not subject to Canadian tax (either because the winding up qualifies for Canadian tax deferral or because the parties to the winding up are outside the reach of the Canadian tax system).
CRA's expansive interpretation of s. 40(3.5)(c)(i) (in, e.g., 2017-073715117) interprets "merger or combination" as including a winding-up, and the reference to "the corporation formed" on a merger combination as including a shareholder of a wound-up corporation. It is suggested that this interpretation renders ss 40(3.5)(c)(ii) and (iii) redundant. Based on this and other considerations, including the French version - which effectively refers to an “amalgamation” rather than the somewhat broader term “merger” (which nonetheless is not cognate with a winding-up) – it is suggested that s. 40(3.5)(c)(i) applies to Canadian amalgamations and similar foreign reorganizations, in which two or more companies merge to form a single corporate entity (such as foreign mergers described in subsection 87(8.1).).
Even if a winding up could be considered a "merger" or "combination," it would not result in the “formation” of a corporation.
Furthermore, CRA considers that a s. 40(3.5)(c)(i) merger or combination can include the winding-up of a corporation into multiple shareholders. In addition to being linguistically untenable, this interpretation effectively forces CRA to apply the stop-loss rule in ways not contemplated by its language.
For example, Canco, which owns FA3 directly and (as to the other 50% shareholding) through FA1, has a suspended loss when it drops its directly-held 50% shareholding of FA3 into FA2. CRA considers that s. 40(3.5)(c)(i) prevents the release of this suspended loss when FA3 is wound-up into (i.e., “merged” with) FA2 and FA1.
But what if Canco then sells FA1 to a third party? CRA apparently would consider FA1 to continue to own 50% of the FA3 shares, suggesting that the sale of FA1 could release 50% of the suspended loss. However, there is no support for such an approach in the words of the provision.
Neal Armstrong. Summaries of Ian Bradley and Jonathan Bright, “The Stop-Loss Rules and Corporate Reorganizations – Interpretive Challenges,” Canadian Tax Journal, (2019) 67:2, 383-410 under s. 40(3.5)(c)(i) and Statutory Interpretation - Interpretation Act, s. 33(2).
Although we discussed most of the items in the 2019 STEP Roundtable in June, we are providing the Table below, including our descriptors and links to our summaries, for convenience of reference.
On a per capita basis, the IRS has about 1/5 the number of CRA employees.
When asked about how much FATCA information had been transmitted to the IRS and what its response was, CRA stated:
As of April 1, 2019, the CRA had sent over 700,000 records to the … IRS … under the [FATCA program] for the 2017 tax year. Apart from standard automated notifications to identify file and record level errors, no further information has been requested by the U.S. with respect to this data.
Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 17, 2019-0798711C6 under s. 266(1).
CRA indicated that when the CPP/EI Rulings Division provides a ruling on whether a worker is an employee or an independent contractor in relation to an employer/services recipient, “it does not automatically send a referral to the Trust Accounts Examination Division.” It only does so “in specific situations and solely to ensure compliance from the employer,” for example “If the ruling changed the employment status of the worker from self-employed to employee.”
Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 15, 2019-0798351C6 under s. 5(1).
We have published a further 6 translations of CRA interpretations released in September, August and July, 2011. Their descriptors and links appear below.
These are additions to our set of 975 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for October.