News of Note
GST/HST Severed Letters July 2020
Email this ContentThis Friday's release of two severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their July 2019 release) is now available for your viewing.
Godcharles – Court of Quebec finds that a sale of goodwill occurred between parties acting in concert given the role of a dominant player
A retirement home was co-owned by eight individuals and operated by a corporation of which they were the shareholders. The home and operating business were jointly sold for a global purchase price to a limited partnership whose owners apparently were for the most part those individuals, with the allocation of the purchase price not yet determined. This was done at the time of filing their tax returns: all of the appreciation in the sold assets over their costs was treated as being goodwill (sold by the operator) rather than appreciation in the immovable.
The sale clearly would have been a non-arm’s length transaction but for the fact that a corporation (“9084”) owned by one of the individuals (“Godcharles”) purchased all the shares of the operator from the other shareholders two days before the retirement home business sale. Without attaching any apparent significance to the purchaser being a limited partnership rather than a co-ownership, Quenneville, J.C.Q found that the sale transaction of the retirement home and the related goodwill was one between persons who were acting in concert (and, thus, not dealing at arm’s length), given inter alia that the sale of the others’ shares to 9118 was agreed to by them without knowing the price that would be paid and, more generally, that the evidence showed “that Mr. Godcharles was the sole director of all aspects of the transaction, from the purchase of the land in 2002 to the sale in 2006, with all the other plaintiffs seemingly absent from the entire negotiation.”
As this (partial) roadblock to the ARQ applying the Quebec equivalent of s. 69(1)(b) to the sale was removed, Quenneville, J.C.Q largely confirmed the ARQ assessments of the individuals for missing capital gains and recapture of depreciation in their returns (and Godcharles for receiving an ordinary dividend rather than a capital dividend from the operator). In particular, she accepted the valuation of the three-year old home by the ARQ valuator using the cost method (i.e., the costs of construction, plus a promoter’s notional profit of 5%, plus net GST/QST of 9.495%, minus notional depreciation of 4% and plus the land appreciation), with that reducing the residual amount to be allocated to the goodwill.
Neal Armstrong. Summaries of Godcharles v. Agence du revenu du Québec, 2020 QCCQ 2219 under s. 251(1)(c) and General Concepts – fair market value – real estate.
CRA indicates that there is no requirement to distribute income on a TFSA overcontribution where there has been 1% monthly tax but no advantage tax
CRA confirmed that the only adverse consequence of a TFSA over-contribution is the 1% monthly tax under s. 207.02 on the highest “excess TFSA amount” for each month (subject to such penalty tax being waived under s. 207.06(1)) – unless there is a “deliberate over-contribution,” which CRA indicated referred “to a TFSA contribution knowingly made by an individual in excess of their TFSA contribution limit, generally with a view to generating a rate of return sufficient to outweigh the cost of the 1% tax.” Although it would be a mistake to give the precise wording of a Technical Interpretation the same weight as that of a Folio, it is interesting that this constitutes a restrictive (i.e., favourable) interpretation of the statutory definition of a “deliberate over-contribution.”
CRA also confirmed that there is no requirement to remove any income or capital gains that are attributable to an excess TFSA amount, except where the 1% tax is waived or in the deliberate over-contribution situation.
Neal Armstrong. Summary of 14 July 2020 External T.I. 2020-0843071E5 under s. 207.01(1) - deliberate over-contribution.
CRA confirms that s. 60.03 permits transferring pension income to the higher-income spouse
CRA indicated that the lower-income spouse, whose fees payable to a retirement home were based on his or her net income for ITA purposes, could in accordance with s. 60.03 transfer 1/2 of the eligible pension income of such individual to the higher-income spouse.
Neal Armstrong. Summary of 29 April 2020 External T.I. 2020-0845211E5 under s. 60.03(2).
Income Tax Severed Letters 23 September 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Hansen – Tax Court of Canada finds that CRA could not open up years where an individual annually purchased, occupied, improved and sold a home
An individual in the concrete pouring or foundation repair business sold five homes in succession over a six-year period after having occupied and improved them. D’Auray J found that the first three sales were statute-barred given that the taxpayer had relied on advice from his accountant that he was eligible for the principal residence exemption. For the two latter sales that were within the normal reassessment period, the gains were on income account given that he dealt with those houses “in a business-like way: he selected newly built homes that would be easier to sell, leveraged his construction industry experience to make improvements that would attract future buyers and picked homes in desirable markets.”
No gross negligence penalty was applicable, again, given his reliance on his accountant’s advice. D’Auray J also in passing noted the presumption in Mensah that the benefit of the doubt in s. 163(2) penalty matters should be given to the taxpayer.
Neal Armstrong. Summaries of Hansen v. The Queen, 2020 TCC 102 under s. 152(4)(a)(i), s. 9 – capital gain v. profit – real estate, and s. 163(2).
CRA finds that Reg. 5901(2)(b)(ii)(A) does not taint a siloed dividend paid by FA to Canco1 even though another Canco holds other FA shares through an LP
Canco1 owns 100% of the Class A shares, and a limited partnership (LP) with partners (including Canco 2) at arm’s length with Canco1 owns 100% of the Class B shares, of a foreign affiliate (FA) respecting Canco1 and 2. FA pays a dividend to Canco1 on the Class A shares. Could Canco1 elect under Reg. 5901(2)(b) to have the dividend received by it treated as paid out of pre-acquisition surplus of FA (i.e., treated as an ACB reduction)?
Although there was textual ambiguity on the point, CRA found (with some assistance from the Explanatory Notes) that the Reg. 5901(2)(b)(ii)(A) requirement, that no member of LP (i.e., Canco 2) be a corporation that is otherwise eligible to elect under Reg. 5901(2)(b)(i), was only applicable where such LP in fact was receiving a dividend that otherwise could be elected upon to reduce the ACB of shares.
However, the Reg. 5901(2)(b)(ii)(A) tainting of a dividend by FA to Canco1(and Canco 2) would apply if FA had only one class of shares and a dividend was paid on a pro rata basis to both Canco1 and LP.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.7 under Reg. 5901(2)(b)(ii).
CRA indicates that that “US EIP” payments received under the CARES Act are not income from a source
A permanent resident of Canada receiving “US EIP” payments under the CARES Act, being a refundable tax credit for U.S. citizens and U.S. resident aliens that is recaptured if adjusted gross income reaches certain thresholds was not taxable thereon given that:
The amount is considered an advanced payment of a 2020 refundable tax credit, and therefore is likely not income from a source under the Income Tax Act.
Neal Armstrong. Summary of 31 August 2020 Internal T.I. 2020-0851811I7 under s. 3.
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,273 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA finds that circular transactions to effect a s. 212.3(9)(b)(ii) PUC reinstatement abused that provision
Canco (wholly-owned by NRco) acquired all the shares of FA1 for $100, thereby effecting a reduction of the paid-up capital (PUC) of the common shares of Canco by $100.
In order to reinstate that PUC under s. 212.3(9)(b)(ii), Canco has another newly-formed non-resident subsidiary (“New FA2”) use the $100 proceeds of a daylight loan to capitalize a new non-resident sub of it (“New FA3”) with common shares, and sell those New FA3 common shares to FA1 for a $100 promissory note. The reinstatement (which CRA indicated “arguably occurred") is effected by FA1 making a capital distribution of the New FA3 shares to Canco. The daylight loan can now be repaid by Canco contributing the New FA3 common shares to New FA2 under s. 85.1(3), and New FA3 being liquidated into New FA2.
Turning to GAAR, CRA noted the circular nature of the transactions, and concluded that the series of transactions resulted directly or indirectly in a misuse or abuse of the scheme of s. 212.3 in general and s. 212.3(9) in particular.
Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.6 under s. 212.3(9)(b)(ii).