News of Note
CRA indicates that the s. 116 certificate limit and the purchase price can coincide even where the vendor partnership has resident partners
Email this ContentCRA’s practice of accepting a consolidated s. 116 certificate request from a partnership disposing of taxable Canadian property (rather than requiring each partner to submit the request) created in its mind a technical issue where that partnership has both Canadian and non-resident partners, namely, that the certificate limit could only be based on the interests in the partnership property (that was TCP) disposed of by the non-resident partners, whereas the potential liability of the purchaser under s. 116(5) could be based on the excess of the global purchase price (reflecting also the interests in the partnership TCP property being sold by the resident partners) over the certificate limit.
However, CRA indicated that it considered that s. 116 can be interpreted such that, in determining the amount of the s. 116(5) liability, the purchase price is only the portion that is attributable to the interest sold by the non-residents, such that the certificate limit and the purchase price would line up, and there would be no resulting s. 116(5) liability.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.4 under s. 116(5).
Income Tax Severed Letters 28 October 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that it may apply GAAR to s. 55(3)(a) spin-offs that effect a disproportionate distribution of high basis assets to the Spinco
We have uploaded summaries of the oral responses provided by CRA at the CTF Annual Roundtable to Q.1 and Q.4 to Q.9. We likely will provide summaries of the balance of the responses (including to Q. 2 and Q.3, which were discussed by CRA last) late tomorrow evening.
In Q.1, a wholly-owned subsidiary (Subco1) of Parentco effects an s. 55(3)(a) spin-off of one of its assets (all the shares of Subco2) to Newco, which is newly-formed by Parentco. If the spin-off is done in the most obvious way, the result is that the shares of Newco held by Parentco will have a pro rata ACB (based on their relative fair market value and the starting ACB of the shares of Subco1). This means that if the shares of Subco2 had a disproportionately high ACB relative to the other assets of Subco1, then on an s. 88(1) winding-up of Subco1, that high ACB would generally flow through under s. 88(1)(c) to Parentco, so that its low-ACB shares of Newco would be replaced by high-ACB shares of Subco2.
CRA indicated that the reorganization results in a misalignment between outside and inside basis, and would consider applying GAAR, because there is an undue ACB increase in the hands of Parentco that is contrary to the scheme of the Act, and, more specifically, of s. 55(2).
On the other hand, CRA indicated that it could be prepared to rule favourably on such a transaction if the transactions resulted in an increase in the ACB of the Newco shares corresponding to the ACB of the spun-off assets (the shares of Subco2). This is somewhat ironic: GAAR potentially would be applied if the spin-off is implemented in the most straightforward manner; whereas, CRA considers it to be preferable to engage in artificial steps to increase the tax basis transferred to Newco (e.g., engaging preliminarily in a “dirty” 85 exchange of the shares of Subco1 in order to isolate cost base in preferred shares.)
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.1 under s. 55(2.1)(b).
Trustees may be required to report contingent beneficiaries under Reg. 204.2(1)
Regulation 204.2(1) will require disclosure of any person who is a "beneficiary" of the trust. Propep stated obiter that a person should be regarded as a "beneficiary" throughout the Act if that person was "beneficially interested" in the trust, and stated that "[a] person who has a contingent right to the capital or income of a trust is 'beneficially interested' for the purposes of the Act." Propep was adopted in 2014-0538021C6 in interpreting s. 55(5)(e)(ii).
There is an expressed concern that, starting with the 2021 taxation year, trustees for many trusts may be required to report contingent beneficiaries.
Neal Armstrong. Summary of Kate Harris and Balaji (Bal) Katlai, “New Trust Disclosure Rules: The Unfolding of the Propep Nightmare,” Tax for the Owner-Manager,” Vol. 20, No. 4, October 2020, p. 7 under Reg. 204.2(1).
Use of partnerships to hold investment portfolios may reduce the s. 125(5.1) SBD grind
The quantum of the small business deduction (SBD) grind under s. 125(5.1) based on the adjusted aggregate investment income (AAII) for the associated group may be reduced or eliminated if the investment portfolio generating the AAII is held through a joint partnership rather than a joint investment company (Investco). For example if Mr. X owns 100% of Opco (generating active business income) and 51% of Investco (with his spouse holding the other 49%), then all of the AAII of Investco will have to be accounted for in computing the SBC grind to Opco.
However, if the investment portfolio instead is held in a partnership that is owned by a 51/49 basis by respective holding companies for Mr. and Ms. X, only 51% of the AAII of the partnership will be included in computing the SBD grind of the Opco of Mr. X.
Neal Armstrong. Summary of Stan Shadrin, Alex Ghani and Josh Harnett, “Corporate Partnership May Avoid the Paragraph 125(5.1)(b) Grind,” Tax for the Owner-Manager,” Vol. 20, No. 4, October 2020, p.4 under s. 125(5.1).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in December, 2009. Their descriptors and links appear below.
These are additions to our set of 1302 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¾ 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 November.
Healius – Federal Court of Australia, Full Court finds that lump sum payments made to lock-up doctors at medical centres effectively controlled by the payer were capital expenditures
A subsidiary (“Idameneo”) of an Australian public company provided medical centre facilities and services to doctors in consideration for 50% of the fees generated by them. In order to induce a doctor to join one of the medical centres operated by it, it would typically pay a lump sum in the range of $300,000 to $500,000 to the doctor in consideration for the doctor’s promise to conduct his or her practice from the medical centre for a specified period of around five years, along with an exclusivity covenant. The taxpayer entered into 505 such agreements in the four years that were assessed.
The Full Court reversed the primary judge, and found that Idameneo paid the lump sums as capital expenditures, stating that in each case, it was securing the “lasting protection for the goodwill of the [medical] Centre” and that it was “maintaining the structure of its business” by “ensuring it had in place the commitments that it needed to operate its business.”
The Court went on to state that “[i]f all that Idameneo had done was to set up the Centres and then secured practitioners as customers to occupy the Centres and pay for services then term contracts with upfront lump sum payments might indeed be seen to be analogous to those made in BP Australia,” where it was found that securing five-year agreements of gas stations to serve as BP gas stations did not give rise to an enduring benefit. However, here it was instead found that Idameneo’s “business activity was not focussed upon selling services to practitioners, it was focussed upon running the Centres and attracting patients,” so that the payments enhanced the goodwill of and built up the structure of Idameneo’s own business.
Neal Armstrong. Summary of Commissioner of Taxation v Healius Ltd [2020] FCAFC 173 under s. 18(1)(b) – capital expenditure v. expense - current expense v. capital acquisition.
Saunders – Tax Court of Canada treats award to CRA employees for being unfairly denied overtime hours as taxable
Three CRA collections employees were awarded a lump sum by the Public Service Labour Relations and Employment Board pursuant to their grievance for having been unfairly denied the right to work overtime hours. They described the conduct of the assistant director in connection with their complaints as harassing, and claimed that the award constituted damages for personal injury and violation of their rights under their collective agreement, and should be treated as a personal injury award that was non-taxable under s. 81(1)(g.1).
After referring to the Tsiaprailis surrogatum principle, Wong J dismissed the appeal, stating:
[T]he compensation award - based on an agreed number of hours - replaced the remuneration the appellants would have received had they been offered and in turn accepted overtime work. Those amounts would have been taxable as employment income at first instance.
Neal Armstrong. Summary of Saunders v. The Queen, 2020 TCC 114 under s. 81(1)(g.1).
Swift – Tax Court of Canada references the Coates test that a builder is not required to self-assess on building a home for his own occupation even where there may be a secondary resale intent
Over a 23-year period, an individual, who through a wholly-owned company (“TSC”) carried on a small construction business, bought and sold five homes in the Victoria, B.C. area. The fourth property was bought as a vacant lot in October 2009, commenced to be occupied by him and his family a year after a home had been erected and was sold three years later due to financial pressure on the taxpayer resulting from a business downturn.
Sommerfeldt J accepted the individual’s testimony that the fourth property “was… intended to be occupied as a residence, i.e., for personal enjoyment” and “as his dream home” and found that there was no adventure (or business). Accordingly, Sommerfeldt J found that the individual had not constructed that property as a builder and, in particular, not as part of an adventure in the nature of trade or in the course of a business, so that the individual was not required to self-assess under s. 191(1) upon substantial completion and occupancy.
Sommerfeldt J then considered the exception in ETA s. 191(5), which provides that an individual builder is not required to so self-assess where “after the construction … of the complex … is substantially completed, the complex is used primarily as a place of residence for the individual [or family].” He quoted the conclusions of Hogan J in Coates that:
[S]ubsection 191(5) … requires … a simple factual determination as to whether or not the property was used as a family home after it was substantially completed. …
[T[he exception cannot be interpreted as requiring that the property have been built only for purely personal reasons. This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.
Sommerfeldt J then stated:
[T]hey used the ... Property primarily as a place of residence. Thus, Mr. Swift has satisfied the test enunciated in Coates.
Unlike Coates, this was not an informal procedure case (a distinction to which CRA, if noone else, pays heed).
Neal Armstrong. Summary of Swift v. The Queen, 2020 TCC 115 under ETA s. 123(1) – builder – (f) and s. 191(5).
CRA ultimately concludes that a loss that was suspended under s. 40(3.5)(c)(i), could not be de-suspended by a DLAD winding-up of the CFA referenced under s. 40(3.5)(c)(i)
A Canadian corporation (ACo) realized a suspended loss when it contributed its shares (i.e., in a drop-down to which s. 85.1(3) did not apply) of a controlled foreign affiliate (CCo) to another CFA (BCo), and then CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters considered that such loss was suspended on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.
Headquarters was subsequently asked in 2019-0793481I7 to consider the consequences of ACo dropping its shares of Bco under s. 85.1(3) into another ACo CFA (DCo) followed by a sale by BCo of its subsidiary (Fco - whose decline in value had caused the decline in value of its own shares) to an arm’s length purchaser, and then by the wind-up of BCo into DCo and into another CFA (ECo) through which DCo had held part of its intrest in BCo. Headquarters concluded that this resulted in the loss being de-suspended, stating that “[u]pon the completion of the liquidation of BCo, it would no longer be affiliated with ACo,” so that the suspended loss was deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.
Headquarters has now realized that such winding-up of BCo likely is a “designated liquidation and dissolution” described in s. 95(2)(e) )– in which event, s. 95(2)(e)(v)(A)(III) would deem DCo to be a continuation of BCo for s. 40(3.5)(c) purposes respecting shares that were deemed under that paragraph to be owned by BCo before the DLAD (i.e., respecting its deemed continued ownership of the CCo shares) – so that the loss on the CCo shares continued to be suspended.
Neal Armstrong. Summary of 29 July 2020 Internal T.I. 2020-0852071I7 under s. 95(2)(e)(v)(A)(III).