News of Note
CRA finds that shares distributed out of an inter vivos trust on an active individual’s death were received as a consequence of death for s. 120.4(1.1)(b)(ii) purposes
Email this ContentAn individual (Mr. X) had been actively engaged in a business of a corporation (Investco). CRA found that where a discretionary inter vivos trust provided, on his death, for the distribution of Investco common shares to Mr. X’s adult children, s. 120.4(1.1)(b)(ii) deemed a specified individual (one of such children) who received a dividend on such shares to have also been actively engaged etc. in the Investco business for the same five years, so that such dividend qualified in her hands as being from an excluded business. S. 120.4(1.1)(b)(ii) was so engaged on the basis of a CRA position that that property received from an inter vivos trust, the terms of which unconditionally require that it distribute the property to the individual on the death of another person, can be considered as property acquired by the individual as a consequence of that person’s death. (Regarding GAAR where s. 120.4(1.1)(b)(ii) has been engaged, CRA looks for a sufficient connection between the deceased person and the property that is being distributed, and the specified individual, to support the application of the s. 120.4(1.1)(b)(ii) deeming rule.)
However, if it instead was preferred shares of Investco that Mr. X bequeathed to his children, and the inter vivos trust at all relevant times held the common shares of Investco, s. 120.4(1.1)(b)(ii) would not apply to a dividend paid, following Mr. X’s death, on those common shares to the trust and distributed by it to the children.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.7 under s. 120.4(1.1)(b)(ii).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in April 2011, including 3 items from the 2010 APFF Roundtable. Their descriptors and links appear below.
These are additions to our set of 1,023 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA considers that a s. 247(12) secondary-adjustment deemed dividend paid by Canco to an LLC sister qualified under Art. IV(6) for the 5% Treaty-reduced rate on dividends to its U.S. parent
Canco, which is wholly-owned by a disregarded US LLC (Parentco LLC which, in turn is wholly-owned by a corporation residing in the US for Treaty purposes (Parentco),), will be assessed by CRA to include in its income, under s. 247(2), the difference between an arm’s length price for goods sold by Canco to a sister company (Sisterco LLC, a disregarded LLC wholly-owned by Parentco LLC) and the consideration paid, and also will be assessed for a secondary adjustment under s. 247(12) on the basis that the resulting benefit conferred on Sisterco LLC was deemed to be a dividend that was paid by Canco and that was subject to a Pt. XIII remittance obligation.
In finding that this deemed dividend would be eligible for a Treaty-reduced rate, CRA had to address Art. IV(6) of the Canada - U.S. Treaty having regard to the requirements thereunder that the deemed dividend amount be considered under U.S. tax law to have been derived by Parentco through Sisterco LLC and Parentco LLC and that by reason of those LLCs being fiscally transparent, the U.S. treatment of such amount was the same as its treatment would be had it been derived directly by Parentco.
CRA considered that even if there was no adjustment in the U.S. pursuant to competent authority proceedings, this test would be satisfied given that from a US tax perspective, Parentco would have a reduced cost of the inventory considered, from that perspective, to have been purchased by it directly from Canco, so that the s. 247(12) deemed dividend corresponded to income (i.e., inventory profit) generated by Parentco. Consequently, Art. IV(6) would result in the s. 247(12) deemed dividend being derived by Parentco for purposes of Art. X(1) and (2), and Parentco would benefit from the 5% dividend rate under Art. X(2)(a).
The requirements of Art. IV(6) would be more obviously satisfied if a corresponding adjustment were made in the U.S. to consider that Canco had paid a dividend that was derived by Parentco through Parentco LLC. Thus, either way, the s. 247(12) amount would not be disregarded for U.S. tax purposes.
Neal Armstrong. Summaries of 18 April 2019 Internal T.I. 2018-0753621I7 under Treaties – Income Tax Conventions – Art. 10, Art. 4, s. 247(12).
CRA considers that a s. 107(2) rollout of Cdn Realtyco shares (i.e., TCP) to a NR-owned corporate beneficiary is inherently abusive
CRA indicated that 2016-0669301C6 and 2017-0693321C6 dealt with an abusive circumvention of s. 104(5.8) through a s. 107(2) rollout by a Canadian-resident discretionary trust to a Canadian corporation whose shares were wholly owned by a newly established Canadian-resident discretionary trust; and 2017-0724301C6 dealt with the circumvention of ss. 107(5) and (2.1) by such a trust rolling out, under s. 107(2), property that was not taxable Canadian property to a newly-formed Canadian corporation which was a corporate beneficiary.
The GAAR Committee recently reviewed a similar distribution by a Canadian resident discretionary trust, but with the distributed property being taxable Canadian property (TCP) that did not come within the carveouts to s. 107(5) (principally, property described in ss. 128.1(4)(b)(i) to (iii).) Such distributed property was the shares of a private Canadian real estate corporation.
The Committee recommended that GAAR be applied to that distribution on the basis that, even though the distributed property was TCP, it was not the type of property that was specifically carved out in s. 107(5). Such transfer was considered as an abuse of ss. 107(2), (2.1) and (5). CRA noted that it would be appropriate to apply the same conclusion whether or not the transactions are undertaken to avoid the 21-year disposition rule under s. 104(4) (which seems to ignore that you don’t get to the abuse test under s. 245(4) if there is no avoidance transaction.)
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.6 under s. 107(2).
CRA effectively confirms that a pipeline transaction where there are non-resident beneficiaries currently generates Pt XIII tax
In a post-mortem pipeline transaction, the estate typically sells its shares of a Canadian private corporation (Canco) having full ACB but a lower paid-up capital to a non-arm’s length newco (Holdco) for a note of Holdco, which on its subsequent repayment effectively extracts the corporate surplus of Canco. CRA indicated that under the new look-through rule in s. 212.1(6)(b), the non-resident beneficiaries of the estate generally will be subject to a deemed dividend based on their proportionate share of the excess of the note over the paid-up capital of the transferred Canco shares.
CRA adverted to the recent Finance comfort letter, but noted that it did not extend to non-GRE trusts (which would include life interest trusts, such as alter ego or spousal trusts).
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.5 under s. 212.1(6)(b).
CRA confirms its recent volte-face that s. 84.1(1)(b) dividends can generate dividend refunds
In 2002-0128955, CRA indicated that a deemed dividend under s. 84.1(1)(b) would not generate a dividend refund (DR). In Q.1 of the 2019 APFF Roundtable, CRA stated:
[W]e have come to the conclusion that the position described in the Interpretation no longer represents the position of the CRA. In particular, according a DR to a corporation deemed to have paid a dividend by virtue of paragraph 84.1(1)(b) provides in our view a result that is more compatible with the integration principle enshrined in the Income Tax Act.
CRA essentially repeated this position at the 2019 CTF Roundtable, but expanded somewhat on its “integration” comment. It noted that the deemed dividend treatment under s. 84.1 allows the individual taxpayer on the receipt side to benefit from the integration mechanisms that are provided in the Act such as the gross-up and the dividend tax credit.
CRA also takes the position that, if the individual taxpayer is already a shareholder of the corporation, the individual can also benefit from another integration mechanism: the CDA account with respect to deemed dividend under s. 84.1. Accordingly, it is hard to justify why an individual taxpayer could benefit from the various integration mechanisms while the purchaser corporation could not.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.4 under s. 129(1).
CRA states that the TFSB of FA should be translated into Canadian dollars under s. 55(5)(d) at the safe income determination time
S. 55(5)(d) deems the safe income of an FA wholly-owned by Canco to be its tax free surplus balance (or its shares’ fair market value, if lower). Where Canco pays a dividend to its shareholder (Can Holdco) at a time subsequent to the safe income determination time (SIDT), CRA considers that the TFSB of FA should be translated into Canadian dollars at the SIDT rather than on the dividend payment date.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.3 under s. 55(5)(d)(i).
CRA indicates that taxpayers can translate under s. 126 foreign taxes at the exchange rate applied to the related income
CRA indicated that for purposes of claiming the foreign tax credit under s. 126 in situations where the foreign tax is paid at a different time than the income arose, the foreign tax can be translated into Canadian dollars on the date of payment of the foreign tax or, alternatively, through use of the same relevant spot rate as was used for the conversion of the foreign income itself: either method is acceptable as long as it is used consistently from one year to another.
CRA also indicated that the Canada-U.S. or Canada-U.K. Treaty does not eliminate the requirement that the amount of the foreign tax needs to be paid in order to be eligible for the foreign tax credit.
Neal Armstrong. Summaries of 3 December 2019 CTF Roundtable, Q.2 under s. 126(1) and Treaties – Income Tax Conventions – Art. 24.
CRA is establishing a “TAP” Committee, similar to the GAAR Committee, to address PPT issues
CRA is establishing a new “Treaty Abuse Prevention Committee” (the “TAP Committee”), which will be in charge of making recommendations on the application or non-application of the principal purpose test in the MLI. It will be staffed in a similar manner to the GAAR Committee (i.e., also including Finance and Justice representatives) and run in a similar manner. Where a s. 245(1) “tax benefit” emanates from a bilateral treaty, the TAP Committee is charged with considering both the PPT and GAAR, thereby taking over GAAR responsibility from the GAAR Committee in this Treaty context.
Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.1 under Treaties – MLI – Art. 7(1).
Income Tax Severed Letters 4 December 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.