News of Note

The taxpayer acquired mortgage debt owing by an insolvent developer from the bank at a discount, and then, two years later, purchased the related real estate lot at a judicial auction held pursuant to foreclosure proceedings for a purchase price substantially less than the amount owing under the debt. He was unable to sell the lot.

After finding that the taxpayer had acquired the mortgage debt as part of an adventure in the nature of trade, Sommerfeldt J turned to the question of whether a loss had been realized on the foreclosure process in 2011, given that, as part of those proceedings, the taxpayer received a deficiency judgment for the unpaid amount of the debt (the “Post-Auction Debt”). In concluding that there had been no disposition of the debt, he found that of the “four fundamental terms of a debt obligation, i.e., the identity of the debtor, the principal amount, the amount of interest and the maturity date” identified in General Electric Capital, “the only term that was significantly different in respect of the Post-Auction Debt … was the amount of interest.”

However, Sommerfeldt J nonetheless concluded that the above finding had virtually no impact on his concurrent finding that most of the dollars truly at issue had been realized as a loss as a result of the foreclosure. The key passage appears to be the following:

[S]ubparagraph (b)(i) of the [s. 248(1)] definition of “disposition” … states that “‘disposition’ of any property … includes … any transaction or event by which, … where the property is a … mortgage, … the property is in whole or in part redeemed, acquired or cancelled….” … Thus, by reason of the foreclosure and the judicial sale, the Mortgage was cancelled. By reason of the cancellation of the Mortgage, Mr. Leonard was deemed to have disposed of the Mortgage in 2011.

Accordingly, he appeared to consider that the definition of disposition had the effect of deeming the mortgage security to be a separate property from the debt that it secured.

Sommerfeldt J found, in light of the insolvency of the developer, that it was reasonable to allocate 99.9% and 0.1% of the purchase consideration to the mortgage and the debt, respectively and that “to achieve symmetry” the proceeds should also be allocated in those proportions. Accordingly, the taxpayer sustained a significant loss on his disposition of the mortgage as a result of the foreclosure proceedings, notwithstanding that there was no disposition of the underlying debt.

Summaries of Leonard v. The Queen 2021 TCC 33 under s. 18(1)(b) – capital loss v. loss – debt, s. 248(1) – disposition, s. 171(1), s. 9 – timing, and General Concepts – Evidence.

It is CRA’s policy to consider that a settlement payment made to an RRSP or RRIF respecting an actionable loss suffered by it will not be treated as a contribution to the plan, nor as such a contribution or a taxable benefit to the annuitant if the damages are paid to the annuitant but are paid over to the plan by the later of the year end and six months after receipt.

When so asked, CRA confirmed that this position applied with modification to TFSAs, RESPs and RDSPs. First, there will be no adverse tax consequences where a settlement payment is made to a TFSA, RESP or RDSP either directly, or indirectly by the holder, subscriber or beneficiary returning the payment to the plan within the timeframe applicable to the RRSP policy. As for the treatment if the settlement payment was instead retained by the holder etc.:

• In the case of a TFSA, the settlement payment would not be taxable as TFSA distributions are not taxable.
• If the payment is received by a holder of an RDSP who is not the beneficiary, the payment would not be a disability assistance payment (DAP) and therefore would not be included in income under s. 146.4(6), but would give rise to an advantage (as discussed below) – whereas if the payment is received by the beneficiary of the plan, the payment would be a DAP and would be included in the beneficiary’s income under s. 146.4(6).
• If the settlement payment was made to the subscriber of an RESP, the payment would be an accumulated income payment (AIP) and would be included in the subscriber’s income under s. 146.1(7.1). As an AIP, it might also be subject to additional tax under Part X.5.

Regarding the advantage rules under ss. 207.01(1) and 207.05:

• Provided that the settlement payment is made on arm’s length terms to compensate for the actual damages suffered by the registered plan, the payment would not give rise to an advantage.
• There would be no advantage where a settlement payment is made to the controlling individual of a registered plan and not returned to the plan – except that if the settlement payment is made to an RDSP holder who is not the beneficiary, the payment would be a registered plan strip (as defined in s. 207.01(1)) and therefore an advantage under para. (d) of the advantage definition (because the exclusion from the registered plan strip definition for TFSAs and for amounts included in income would be inapplicable).

Neal Armstrong. Summaries of 25 February 2021 Internal T.I. 2020-0865641I7 under s. 146(8), s. 207.01(1) – unused TFSA contribution room – (b) – D, s. 207.01(1) – registered plan strip, and s. 146.1(7.1).

Example 1 in Policy Statement P-051R2 indicates that a non-resident lessor (with a leasing business outside Canada) is considered to be carrying on business in Canada by virtue of a sale-leaseback transaction under which it purchases a conveyance from a resident registrant, with delivery under the sale agreement and under the lease-back to the resident (who will use the conveyance partly in Canada) occurring in Canada, notwithstanding no other significant connecting factors to Canada.

ETA s. 179(9), which took effect in 2017, appears to deem this transaction to be subject to the drop-shipment rules, so that the resident is deemed to have sold the conveyance to the non-resident outside Canada, if the non-resident is not registered (so that such supply is not subject to GST/HST), and is deemed to have provided a drop-shipment certificate to the non-resident (so that the resident is subject to tax if it does not use the conveyance in commercial activity). When asked about the impact of s. 179(9), CRA stated that it “reviewed the leasing examples in P-051R2 and has determined that the introduction of new subsection 179(9) … does not impact the rationale or carrying on business conclusions in those examples.”

Although CRA did not discuss this response, there seems to be an element of circularity involved. If CRA indeed considers that the non-resident was carrying on business in Canada, it should have been registered (and, if not, CRA would register it retroactively.) Since the s. 179(9) drop shipment rule only applies where the non-resident is not registered, therefore, it does not apply. If CRA instead started with the proposition that s. 179(9) deemed the non-resident to no longer have any significant transactional connection with Canada, then it could have reached the opposite conclusion.

When also asked about a variation on this example where the equipment is purchased by the non-resident from a third party (rather than the Canadian company) and is leased by the non-resident to the Canadian company, which exports the conveyance immediately after taking possession under the lease in Canada, CRA stated that this also did not change its conclusion that the non-resident is carrying on business in Canada.

Neal Armstrong. Summaries of 27 February 2020 CBA Roundtable, Q.24 under ETA s. 240(1) and s. 179(9).

In flash loans of cryptocurrency (which may occur in order for the borrower to arbitrage between different cryptocurrencies), the loan and its repayment occur at exactly the same time. This is because the loan advance of the cryptocurrency is contingent on the repayment occurring in the same block. Since either all of the steps are to be competed (i.e., added to the blockchain) or none, the loan and repayment simultaneously occur on such completion.

Thus, there is an issue as to whether compensation payable to the lender is deductible to the borrower under s. 20(1)(c) (if it is considered to have received the loan on capital account), given that there is no period of time over which interest could accrue.

Ian Caines, “Very-Short-Term Crypto Loans,” Canadian Tax Focus, Vol. 11, No. 2, May 2021, p.3 under s. 20(1)(c)(i).