News of Note
Planning for potential estates with FAs and NR beneficiaries should consider the FAD rules
Email this ContentSuppose that the deceased wholly owned a Canadian corporation (Opco), with nominal capitalization, which has more recently capitalized a US subsidiary (US FA) with debt and equity totalling $100,000. The deceased’s will provided discretion to the executor as to the distribution of the estate property in something other than equal shares to his four children, one of whom is a non-resident (NR son).
Leaving aside potential outs, the normal tax arising from the deemed disposition on death is supplemented by a deemed dividend from Opco to NR son of $100,000 (the FMV of property transferred by Opco to US FA). This occurs at the dividend time (per s. 212.3(4)), which is one year after Opco capitalized US FA.
Potential “outs” include:
- The purpose test in s. 212.3(26)(c)(iii) may not be satisfied if the discretionary power was not granted to the executor to avoid the s. 212.3 rules, so that NR son may not, in fact, be deemed to own 100% of the voting shares of Opco and, thus, may not be deemed to control Opco on the death of the deceased.
- The three events (the capitalization of US FA, the inclusion of a non-resident in the will, and the death) could be separated by a long period of time and not linked by any grand strategy and, therefore, might not form a series.
- Opco’s investment (if a loan) in US FA might be elected to be a pertinent loan or indebtedness.
- The “more closely connected business activity” exception in s. 212.3(16) is another possibility.
Neal Armstrong. Summary of Henry Shew, “Foreign Affiliate Dumping and Estates with Non-Resident Beneficiaries,” Canadian Tax Focus, Vol. 10, No. 1, February 2020, p.9 under s. 212.3(26).
Income Tax Severed Letters 12 February 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA provides loss-shifting rulings involving limited recourse loans
CRA provided standard loss-shifting rulings on transactions in which three losscos in the group annually shift losses to a single newly-incorporated Lossco, which is then sold at FMV to a Profitco in the group whose ownership is redacted, with such Lossco immediately wound-up into the Profitco under s. 88(1.1). The annual un-winding of the loss shifting structures used daylight loans rather than being done on a cashless basis. The interest-bearing loans, whose proceeds were used by the new Lossco to subscribe for preferred shares of Newcos, were made to Lossco on a limited recourse basis, i.e., recourse was limited to such preferred shares.
Creditworthy reps were made on a consolidated basis, i.e., there is a rep that “The borrowing capacity of Parentco and its subsidiaries significantly exceeds the maximum amount … required to complete the Proposed Transactions … .”
Neal Armstrong. Summary of 2017 Ruling 2017-0706211R3 under s. 111(1)(a).
Patel – Federal Court of Appeal confirms that an appeal can be bifurcated under s. 171(2)
Nadon JA confirmed that s. 171(2) gave the Tax Court the discretion to bifurcate the issues in an appeal and deal with one of those issues as requested by the parties in a letter to the Tax Court.
Neal Armstrong. Summary of Patel v. Canada, 2020 FCA 27 under s. 171(2).
Productions GFP – Federal Court declines request for judicial review of a CAVCO reversal of a preliminary ruling
The appellant (“GFP”) requested a preliminary opinion from the Canadian Audio-Visual Certification Office (CAVCO) as to the eligibility for the Canadian film or video production tax credit of a proposed production that would be in the form of a quiz contest but where the points would not matter and the focus would be on the participants being funny. CAVCO responded quickly that the synopsis provided to it indicated that the production did not seem to be ineligible, but reserved a final decision based on its review of an episode when produced. Two years later, after GFP had produced quite a number of episodes and CAVCO had reviewed some of them, it communicated its preliminary determination (later confirmed) that the Production had the features of a “game, questionnaire or contest” and was, therefore, excluded under Reg. 1106(1)(b)(iii).
In dismissing GFP’s application for judicial review, Pentney J stated:
… [I]t is clear that the opinion provides only a preliminary indication, based solely on the information provided by the producer, and that the final decision is based on an assessment of the actual production itself. …
There is nothing in the evidence to suggest that the decision was not made in good faith, that it constituted an abuse of power or that it otherwise violates the objectives of the legislation. …
… I accept that in view of the architecture of the system … those who want a certificate must spend money to embark on a production, with no guarantee that they will receive the benefit of a tax credit.
Neal Armstrong. Summary of Productions GFP (III) Inc. v. Canada (Attorney General), 2019 FC 1613 under Reg. 1106(1) – excluded production - (b)(iii).
Patterson Dental – Federal Court of Appeal finds that the single supply doctrine did not deem an anesthetic containing a drug substance to be that drug
Sales by the taxpayer of anesthetic solutions containing epinephrine (which reduced bleeding) to dentists were not zero-rated under Sched. VI, Pt. I, s. 2(e), which referenced any of the “drugs” listed therein including “epinephrine and its salts.”
The taxpayer submitted that the single-supply doctrine deemed its sales to be that of the main element, so that they were zero-rated. Gleason JA did not consider that doctrine to be applicable (although she didn’t really get into it, there is circularity in bifurcating a supply into two supplies, so that you can argue that they are deemed by the single supply doctrine to be one supply), but found that even if the doctrine did apply, it did not work in the taxpayer’s favour, stating:
[B]oth common sense and the expert evidence establish that the reason for administration of dental anesthetics - including those containing epinephrine - is pain control … . Thus, the predominant element in the appellant’s epinephrine-containing anesthetic solutions is not epinephrine but rather the local anesthetic.
Neal Armstrong. Summary of Patterson Dental Canada Inc. v. Canada, 2020 FCA 40 under ETA Sched. VI, Pt. I, s. 2(e).
6 more translated CRA interpretations are available
We have published a translation of an interpretation that was released last week and a further 5 translations of CRA interpretations released in March, 2011. Their descriptors and links appear below.
These are additions to our set of 1,084 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ 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 February.
Béton Mobile – Tax Court of Canada includes managerial payroll in what qualified for purposes of the proxy method election
A taxpayer who has made a valid proxy election under s. 37(8)(a)(ii)(B) can calculate its SR&ED expense by totaling up a restricted base of direct qualifying expenses, and then grossing up that total by a percentage amount (the prescribed proxy amount).
Such a taxpayer (BMQ) was successful in including some of the payroll costs of supervisory and managerial personnel in the base payroll expenditures referenced in s. 37(8)(a)(ii)(B)(IV). Lafleur J stated:
[T]he manager or supervisor who manages the conduct of the SR&ED and the employee who analyzes the results will be considered to be directly engaged in SR&ED. The same will be true for such a manager or supervisor with respect to the time he or she devotes to various tasks that have a direct impact on the SR&ED activities, such as planning the experiment, as well as researching the information required for the proper conduct of the SR&ED project. However, more general supervisory or management activities, as well as second or third level management or supervision, will generally not be considered in this regard.
She also went through the numerous projects identified by BMQ (who used mobile concrete mixers to provide concrete at the site of construction or major repair projects) as representing SR&ED, and agreed for some but not others. For example, she found that a successful project arising from a customer request for a rapidly-setting cement-based mortar mix to be used to seal underwater rock used in a bridge pier so qualified, stating that “although BMQ used current technological knowledge or current practices in this project to create the new product, BMQ could not predict whether the objectives could be achieved, or at least, BMQ could be fairly confident that they could be achieved, but without knowing with certainty which solution would be applicable.”
Neal Armstrong. Summaries of Béton Mobile du Québec Inc. v. The Queen, 2019 CCI 278 under s. 37(8)(a)(ii)(B)(IV) and s. 248(1) - SR&ED.
Xia – Federal Court of Appeal confirms a gross negligence penalty for failure to report a share of tips paid by patrons of a casino
In confirming that a slot attendant at a casino, who doubled his income through the receipt of his share of tips received from winning patrons from their non-taxable winnings, was subject to a gross negligence penalty for failure to report the tip income, de Montigny JA stated:
Mr. Xia is an intelligent and well-educated individual, has provided tax and financial advice, has knowledge of the tax benefits and consequences of security funds and life insurance, and yet made no effort to ascertain whether the tip amounts he received from casino patrons had to be reported.
Neal Armstrong. Summaries of Xia v. Canada, 2020 FCA 35 under s. 6(1)(a) and s. 163(2).
White – Tax Court of Canada indicates that you receive nothing when your spouse deposits to your joint account
The taxpayer’s husband transferred $90K in pay cheques to the joint bank account between him and the taxpayer while he had tax debts, as a director for a defunct company, for unremitted GST and source deductions of that company. In finding that these deposits did not constitute a transfer to the taxpayer for purposes of ITA s. 160 (and ETA s. 325), D’Arcy J stated:
[T]he mere placing of funds in a joint bank account does not constitute a transfer. Mr. White … continued to have full access to the funds in the account.
Accordingly, he vacated the s. 160 assessment, and found that the s. 325 assessment could only be made in the smaller amount ($34K) of the transfers that had, in turn, been made from their joint account to the taxpayer’s own bank account.
Neal Armstrong. Summary of White v. The Queen, 2020 TCC 22 under ETA s. 325(1).