News of Note
CRA indicates that the two components received under a “face amount plus fund value” universal life policy are included in computing the corporate policy owner’s CDA
Email this ContentCRA indicated that where an exempt universal life held by Opco on the life of its shareholder paid two amounts to Opco on the death of the individual - the fund value of the policy (being the accumulated balance of the investment accounts within the policy at the time of the death of the life insured); and the face amount – the total of those two amounts would be “proceeds of a life insurance policy” for purposes of computing the increase to the capital dividend account of Opco.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 3, 2020-0842151C6 under s. 89(1) – capital dividend account – (d)(ii).
CRA comments on the use of notes in hybrid pipelines to fund estate taxes or other liabilities
In 2018-0767431R3, the amount of the pipeline note paid in any single quarter in the first post-amalgamation year was not to exceed 15%, and in 2018-0780201R3, this percentage was 10%. CRA effectively intimated that these specific percentages and other “gradual repayment” particulars were offered up by the pipeline ruling applicant and were not imposed by it.
When asked if it is permissible for the estate to borrow funds from the pipeline corporation in order to pay its liabilities (e.g., for taxes) during the period in which the note is being repaid following the amalgamation of the pipeline corporation, CRA noted that as “an example,” this can occur in a hybrid pipeline transaction in which there is a preliminary redemption of shares of the estate for a note (subject s. 84(3)) with a resulting carryback of a loss under s. 164(6).
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 6, 2020-0842241C6 under s. 84(2).
CRA confirms that a refund of premiums on death under a life insurance policy does not entail its disposition but can increase the CDA of the corporate owner
A private corporation is the owner and beneficiary of an exempt life insurance policy (with an adjusted cost basis of $90,000) on the life of a shareholder, who dies from, say, suicide or skydiving, which does not void the policy, but instead results in the insurer repaying all premiums ($100,000).
CRA confirmed that there is a CDA addition of $10,000 under para. (d) of the CDA definition respecting the receipt of “proceeds of a life insurance policy... of which the corporation was... a beneficiary" received as a “consequence of the death of any person;" while at the same time, pursuant to para. (j) of s. 148(9) - “disposition,” there is no disposition in relation to an interest in a life insurance policy.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 2, 2020-0842141C6 under s. 89(1) – capital dividend account – (d).
Income Tax Severed Letters 19 August 2020
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Gestions Cholette – Tax Court of Canada finds that failure to review a return containing an error that should have been detected was carelessness under s. 152(4)(a)(i)
Due to what Favreau J found to be carelessness of its external accountant, the taxpayer failed to include, in its income, taxable dividends totalling $920,700 received in 2010 from subsidiaries while, at the same time, claiming a s. 112(1) deduction of $920,700 in computing its taxable income, thereby understating its taxable income by that amount.
In finding that CRA had established carelessness or neglect in reassessing beyond the normal reassessment period to add back the dividend amounts, Favreau J stated:
[T]he failure to review the appellant's income tax return and the failure to question the accountant to ensure the accuracy of the information contained in the return demonstrate a lack of due diligence on the part of the appellant's officers. Considering the skills, experience and knowledge of the appellant's officers, I believe that they would have been able to discover the error had they taken the trouble to check the return as would a prudent and conscientious person.
Neal Armstrong. Summary of Gestions Cholette Inc. v. The Queen, 2020 CCI 75 under s. 152(4)(a)(i).
CRA finds that an Australian “Self-managed Super Fund” was a pension plan for Canadian purposes
CRA found that an Australian “Self-managed Super Fund” to which the taxpayer, her husband and her husband’s employer had made contributions before their divorce and her coming to Canada was a pension plan (so that payments under the “SMSF” were required to be included in her income after becoming a Canadian resident) given such employer contributions and that the sole purpose of the SMSF was to provide retirement benefits to its members. The fact that the Australian tax treatment was quite different (i.e., income accumulating in the fund had been subject to flat tax of 15%, or 10% in the case of long-term capital gains, and pension payments after retirement were free of Australian tax) was irrelevant.
CRA also noted that is some circumstances, “paragraph 60(j) allows for a tax-deferred transfer of a pension benefit (that is not part of a series of periodic payments) from an unregistered pension plan to an RRSP.”
Neal Armstrong. Summaries of 24 June 2020 External T.I. 2018-0747781E5 under s. 248(1) – superannuation or pension benefit and s. 60(j).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in April and March, 2010. Their descriptors and links appear below.
These are additions to our set of 1,246 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
MMV Capital – Tax Court of Canada finds no GAAR abuse in acquiring an approximate 100% interest in a Lossco but with no change of de jure control
A venture capital corporation (MMV Finance) acquired 49% of the voting common shares of a corporation (MMV) in interim bankruptcy proceedings and subscribed $1,000 for a large number of non-voting common shares giving it over 99.9% of all the common share equity. It then financed taking MMV out of bankruptcy proceedings at a modest cost, and transferred a loan portfolio of U.S.$86 million to MMV, effectively in consideration for debt and preferred shares, thereby reducing the equity interest of the arm’s length holders of 51% of the MMV common shares to less than 0.00001%.
Bocock J did not consider it to be a GAAR abuse for MMV to deduct its ample losses from the income generated by the loan portfolio, stating:
Parliament … deliberately kept the reference to de jure control in 111(5) instead of adopting a de facto standard. …
Evidence was not presented to show that the board did not have the actual authority to make material decisions on behalf of MMV. …
The presence of the longstanding, bright-line test of de jure control bears … witness to the rejection of applying the GAAR in the circumstances of this appeal as regards subsection 111(5).
Neal Armstrong. Summary of MMV Capital Partners Inc. v. The Queen, 2020 TCC 82 under s. 245(4).
Brown – Tax Court of Canada appears to find that wholly-owned corporations that currently could not legally pay dividends were a source of income for s. 20(1)(c) purposes
Wong J accepted that interest was deducible by an individual on personal lines of credit (mostly secured on one of his two homes) drawn down by him in order to fund construction, and substantial unexpected renovation work, on two prospective rental properties, or to repay loans from family and friends which initially had funded some of this work.
Although the decision describes the properties as if they were held by the taxpayer, it seems likely that they instead were held through two wholly owned corporations, with the taxpayer being treated in the books of account as having advanced the borrowed funds to the two corporations, presumably on a non-interest-bearing basis. Wong J stated that she did “not believe that either corporation would have met the statutory solvency test for payment of dividends.”
Thus, this case may support the proposition that money borrowed to make interest-free advances, to a wholly-owned corporation that has no current legal ability to pay dividends, can be deductible.
Neal Armstrong. Summaries of Brown v. The Queen, 2020 TCC 84 under s. 20(1)(c)(i) and s. 20(3).
CRA rules on pipeline implemented by the beneficiaries, not the estate
CRA has ruled on pipeline transactions that were to be implemented by the beneficiaries of the deceased rather than his estate. The shares of an investment portfolio company (Holdco) were held by the deceased and his two resident brothers, who were the legatees of his shares. The estate distributed the shares of the deceased to his two brothers shortly after his death.
The two brothers then formed a Newco, whose common shares were held equally by them, and transferred all their shares of Holdco to Newco on a s. 85(1) rollover basis in consideration for notes equal to their shares’ ACB and for preferred shares of Newco. Following a specified period of time (presumably a year), Holdco and Newco were to amalgamate, with the notes then being paid off by Amalco on a specified schedule.
The effect of these transactions is that the two brothers can extract all the ACB of their shares of Holdco (including for the shares previously held by them), not just the stepped up ACB that occurred on the death of their deceased brother. This is unstartling if their historical shares had the same ACB as their paid-up capital.
Neal Armstrong. Summary of 2020 Ruling 2020-0838951R3 F under s. 84(2).