News of Note
CRA rules on split-up butterfly that avoids Pt IV tax circularity by a subsequent wind-up of the distributing corporation
Email this ContentCRA has provided rulings on a simple butterfly for the split-up of a CCPC distributing corporation (DC) with cash, and investment assets, between the respective newly-incorporated transferee corporations (the TCs) for three siblings and their respective family trusts. DC has ERDTOH and NERDTOH balances.
After the creation of cross-shareholdings between DC and the three TCs using the usual plumbing, and the redemption for notes of the prefs held by DC in each TC, the shares held by the TCs in DC are not redeemed, as this would result in Part IV tax circularity issues. Instead, the TCs close off their first taxation years and then, on the following day or so, the TC notes are distributed by DC to the respective TCs on a s. 88(2) winding up of DC.
DC is not to be dissolved until it has received and distributed, on a pro rata basis, the dividend refund.
The standard rulings included that the extinguishing of the notes by operation of law on their distribution to the debtors (the TCs) does not engage s. 80.
Neal Armstrong. Summary of 2020 Ruling 2018-0772291R3 F under s. 55(1) – distribution.
Goldman – Tax Court of Canada finds that s. 160(1) did not apply to a transfer to an individual qua trustee of a valid oral trust
The taxpayer was designated as the beneficiary of her mother’s RRSP, but was orally told by her mother that this was occurring on the condition that she was to use those proceeds to pay various bills and estate-related expenses and divide the remainder equally with her two sisters.
Graham J found that, on this basis, the taxpayer had received the net proceeds of the RRSP under a trust. This trust was a separate person from its trustee (the taxpayer), so that such transfer gave rise to a s. 160(1) liability only to that trust rather than to the taxpayer. CRA could have assessed the taxpayer regarding this s. 160(1) liability under s. 159(3) (the taxpayer had not applied for a s. 159(2) certificate before distributing the trust funds). However, CRA had failed to do so. Thus, before getting to the next point, she had no liability under s. 160(1).
That point was that there was an indirect transfer from her mother to her for s. 160(1) purposes respecting the transfer to her of her share of the residue of the trust and regarding her appropriation of other trust funds including the payment out of such funds of legal fees relating to this tax dispute. However, s. 160(1) did not apply to her charging executor’s fees and paying them out of the trust funds.
Neal Armstrong. Summaries of Goldman v. The Queen, 2021 TCC 13 under s. 160(1), s. 104(2), s. 159(3) and Rule 49(1).
We have translated 9 more CRA Interpretations
We have published a further 9 translations of CRA interpretation released in February and January, 2009. Their descriptors and links appear below.
These are additions to our set of 1,409 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 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 March.
Villa Ste-Rose – Federal Court of Appeal finds that interest and penalties on a late-filed GST return should be computed after netting rebate claims against the gross GST payable
A company that was not registered for GST purposes was required to self-assess itself under ETA s. 191(3) for GST on the fair market value of an assisted-living facility constructed on its behalf. It filed the required return in this regard 9 months’ late. With that return, it also included rebate claims which were higher than the s. 191(3) tax. CRA accepted the GST payable and rebate amounts, but assessed interest and penalties under ss. 280 and 280.1, calculated on the gross GST amount, which it effectively treated as having been owing for the full 9-month period.
D’Auray J below had considered this approach to be unfair and anomalous, since if the company had instead lain in the grass and been assessed by CRA for the unreported GST, CRA would have been required under s. 296(2.1) to allow the (more than) offsetting unclaimed rebate amounts, so that no interest or late-filing penalties could have been assessed. Leblanc JA agreed, stating:
[I]t would be incongruous, to say the least, if provisions purporting to assist a taxpayer caused more harm to a well-meaning taxpayer than to a less well-meaning one … . This cannot be the result that Parliament intended … .
Accordingly, he found that the "amount" referred to in ss. 280 and 280.1 on which the interest or late-filing penalty was to be calculated “can only represent, in circumstances such as these, the amount of tax actually owed by the taxpayer” (i.e., the tax as reduced by the taxpayer’s rebate entitlement). He confirmed the reversal by D’Auray J of the interest and penalty assessment.
Neal Armstrong. Summaries of Canada v. Villa Ste-Rose Inc., 2021 CAF 35 under ETA s. 280(1), s. 228(6), s. 256.2(3) and Statutory Interpretation – Resolution of Ambiguity.
Ouellette – Court of Quebec finds that the quick (re)building and sale of three successive residences was eligible for the principal residence exemption
A couple (one of them, a carpenter), who successively substantially renovated or built, and sold, three homes, with the sales occurring over a four-year period, realized capital gains eligible for the principal residence exemption on such sales, rather than fully taxable business profits. Lachapelle JCQ accepted that each sale had occurred for personal reasons rather than as build-and-sell adventures in the nature of trade:
- The first residence was sold as a result of the increasing noise and congestion attributable to a nearby quarry and campsite
- They sold the second residence (designed by them) because they determined that it was too small to host family members
- They sold the third residence because they wanted to move closer to the family of one of them in Montreal.
Neal Armstrong. Summary of Ouellette v. Agence du revenu du Québec, 2020 QCCQ 8765 under s. 9 – capital gain v. profit – real estate.
CRA states that a DSLP cannot be used as a pre-retirement vehicle
One of the requirements for qualification as a deferred salary leave plan (“DSLP”), contained in Reg. 6801(a)(v), is that the employee be required to return to regular employment after the DSLP leave of absence for a period of not less than the leave period. CRA confirmed that this condition would be violated if a plan was initiated for the employee to go on paid leave between the end of the DSLP leave period and the scheduled commencement of the employee’s retirement. Furthermore, the employer would be required to wind up the DSLP on a taxable basis to the employees, generally within 60 days of becoming aware that the DSLP rules would not be met.
Neal Armstrong. Summary of 8 December 2020 External T.I. 2020-0869961E5 under Reg. 6801(a)(v).
CRA makes a further COVID-related extension of the period for carrying forward unused HCSA credits
In 2020-0846751E5, CRA noted that health care spending accounts (“HCSA”) that comply with IT-529 generally provide that the HCSA can permit the carry-forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months, so as to not disqualify the HCSA from the exemption in s. 6(1)(a)(i) for private health services plans (“PHSPs”). CRA further announced in 2020-0846751E5:
In these extraordinary [COVID] circumstances, a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, could temporarily permit the carry forward of those unused credits for a … period of up to six months [which] would generally … not, in and of itself, disqualify the HCSA from being a PHSP. [emphasis added]
In generally extending these periods, CRA now stated:
In light of the severity of the second wave of the COVID-19 pandemic, the CRA will allow a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15, 2020 and March 16, 2021, to temporarily carry forward those unused credits for a period of up to 12 months. … However, since a HCSA must involve a reasonable element of risk to qualify as a PHSP, it is our view that any further extension of the temporary carry-forward period beyond 12 months, would likely disqualify the HCSA from being a PHSP. [emphasis added]
Neal Armstrong. Summary of 26 January 2021 External T.I. 2020-0857841E5 under s. 248(1) - private health services plan.
Income Tax Severed Letters 24 February 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA releases an example showing how the CEWS affects the SR&ED proxy method
CRA has published a webpage which confirms that the CEWS (wage subsidy) received by a corporation regarding the salaries of its employees engaged in SR&ED is government assistance that reduces both the pool of deductible SR&ED expenditures, and its qualified SR&ED expenditures for investment tax credit purposes. It also provides an example of how the government assistance provisions in ss. 127(18) and (19) interact in this context with computing the qualified expenditures under either the “traditional” or the proxy method (i.e., claiming a permitted arbitrary proxy for the amount of certain SR&ED overheads, rather than claiming their actual amount.)
In the example, the corporation’s lead engineer (Sarah) spends all of her time for a 12-week period directly engaged in an SR&ED project and does non-SR&ED work for the rest of the year. The only relevant overhead expense is the salary of her administrative assistant (Jamaal), who spends 30% of his time during the same period tracking the SR&ED project costs and its progress.
Under the proxy method, the corporation’s qualified expenditures include only Sarah’s (not Jamaal’s) salary for the period, but are grossed-up by the 55% prescribed proxy amount, and that total is reduced by all and 30%, respectively, of the CEWS received by the corporation in relation to their respective salaries for that period. Thus, the CEWS for Jamaal that relates to his 30% SR&ED overhead time is in effect deducted from the notional proxy amount.
Neal Armstrong. Summary of “Guidance: How the Canada emergency wage subsidy affects SR&ED claims” 19 February 2021 CRA Webpage under s. 37(8)(a) and s. 127(19).
Bank of Montreal – Tax Court of Canada awards pre-settlement offer legal costs at more than the party and party rate in order to encourage timely settlement offers
The Crown agreed that BMO was entitled to substantial indemnity costs of $450,069 for the legal costs incurred by BMO after it had made a settlement offer (over seven months before the Tax Court hearing), but argued that BMO was entitled to receive costs only at the meagre Tariff rate for its legals incurred before then. This was based on Rule 147(3.1), which provided that a party receiving substantial indemnity costs following a settlement offer is entitled to party and party costs to the date of service of the settlement offer.
Graham J instead awarded pre-offer costs of 35% of BMO’s actual such costs of $684,471. He considered that being more generous in this regard accorded with the policy of encouraging settlement offers to be made at least 90 days before the hearing even in circumstances where substantial legal costs had already been incurred. Otherwise:
A party who made an offer within the [90 day] time limits would be rewarded for making the offer but, at the same time, punished for not having made it sooner.
Neal Armstrong. Summary of Bank of Montreal v. The Queen, 2021 TCC 3 under Tax Court of Canada Rules (General Procedure), s. 147(3.1).