News of Note
CRA rules on butterfly split-up of rental property into co-ownership arrangement
Email this ContentCRA provided the usual butterfly and other rulings on a butterfly split-up of a DC holding rental property between two transferee corporations (the TCs) for two unrelated families, with undivided interests in the real estate being transferred to each TC in consideration for the assumption of liabilities (in such proportions as to ensure satisfaction of the pro rata distribution requirement) and for voting preferred shares, which were promptly redeemed for notes. There was no business property, and the cash or near-cash assets (including a demand non-interest-bearing loan receivable from a corporation jointly controlled by the two families) was expected to be exceeded by the current liabilities, so that effectively there was to be just one type of property to distribute.
DC was then to be wound-up into its two shareholders (the TCs) and its sole assets at that time – the two redemption notes owing by the two TCs – distributed to that TC so that the note was extinguished. Apparently, in order to avoid circularity issues, the winding-up dividend (effected through such note distribution) was to occur in a subsequent calendar year (i.e., at the beginning of 2020?). When DC receives a dividend refund for this winding-up dividend, there will be a further dividend “under the terms of the agreement governing the winding-up of DC” declared and paid by it to the two TCs.
By the way, a new term to roll off the tongue: NERDTOH (“non-eligible refundable dividend tax on hand”).
Neal Armstrong. Summary of 2019 Ruling 2018-0758411R3 under s. 55(1) – distribution.
CRA states that the passing of legal title directly from the developer to the builder’s individual purchaser does not oust the Ontario new housing rebate
ETA s. 254(4)(a) and the Ontario equivalent require that in order for a taxable supply by a builder of a new house or condo unit to generate the new housing rebate, there must inter alia be a “sale” of the home to the purchaser. “Sale” is defined in ETA s. 123(1) as “any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer the ownership of the property.”
CRA considers that in this context, “the word ‘ownership’ generally refers to the legal ownership (that is, ‘titled’ ownership in the case of the underlying real property), rather than equitable ownership of the property.” That’s the bad news.
However, CRA commented favourably on a situation where legal title bypassed the builder. A developer, which was the full legal owner of land, agreed with a builder that the builder would both build new homes and condo units on the land and agree to sell those houses or units to the individual purchasers. At closing (and registration of the condo units), beneficial ownership of the built lots or units would be transferred from the developer to the builder and, moments later (on the “Subsequent Closing”), from the builder to the individual purchaser. However, at the direction of the builder, registered title was transferred directly from the developer to the individual purchaser.
After indicating that “one could argue that the Developer holds legal ownership for the benefit of the Builder and is required to transfer legal ownership … to any third party at the Builder’s request (for example, to the Home Buyer …)” CRA stated:
[P]rovided that legal ownership is transferred from the Developer, at the Builder’s direction at Subsequent Closing, to the Home Buyer who is the particular individual with whom the Builder has entered into the Home Buyer Agreement, the CRA will … regard the Builder as having transferred ownership of the House or Unit … to the Home Buyer … .
Therefore … provided that all of the other conditions … are met, the Builder may pay or credit the Rebate to the Home Buyer.
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.27 under ETA s. 254(4)(a).
CRA, changing course, states that recognition by statute can include recognition by regulation
ETA Sched V, Pt. VI, s. 18, generally provides a GST/HST exemption for “a supply of a membership made by an organization membership in which is required to maintain a professional status recognized by statute.” This is similar to ITA s. 8(1)(i)(i), which provides for the deductibility of “annual professional membership dues the payment of which was necessary to maintain a professional status recognized by statute.”
After the Excise and GST/HST Rulings Directorate queried the view in 2014-0530691E5 that:
a professional status would generally have to be acknowledged in the statute itself to satisfy the “recognized by statute” condition in subparagraph 8(1)(i)(i) … .
the Income Tax Rulings Directorate changed course and concluded:
[F]or purposes of the meaning of the phrase “professional status recognized by statute” … applying a textual, contextual and purposive analysis, a “professional status” can be “recognized by a statute” for purposes of subparagraph 8(1)(i)(i) … even if it is only recognized in the supporting regulations of an act.
Neal Armstrong. Summary of 8 August 2019 Internal T.I. 2019-0804641I7 under s. 8(1)(i)(i).
Ontario and B.C. do not provide explicit credits for US estate tax
Since US federal and state estate taxes are inheritance rather than income taxes, they are eligible for a foreign tax credit only because of Art. XXIX B(6) of the Canada-US Treaty. Although, the majority of provinces have enacted legislation that aligns the federal and provincial foreign tax credits for US estate taxes, Ontario and B.C. have not done this - see 2010-0379381E5.
Another gap in the provincial tax credit system can arise in calculating the non-business-income tax credits where a Canadian tax treaty provides for tax sparing with a foreign country (such as Bangladesh, India. Brazil, Jamaica, Pakistan, and Nigeria). For example, 2016-0632711I7 indicates that Ontario taxpayers are not entitled to a provincial foreign tax credit on amounts spared under the Canada-Brazil tax treaty. This issue is more likely to arise with respect to non-business-income tax since the provinces do not have business-income tax credits for corporations.
Neal Armstrong. Summary of Kailey McLeod and Nadia Pulla, “Misalignment of Federal and Provincial Tax Credits,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p.8 under s. 126(7) – non-business-income tax.
Fink – Federal Court of Appeal considers it reasonable for CRA to not recommend FAA relief for s. 7 stock option benefits, as contrasted to s. 7 stock purchase plan benefits
The taxpayer realized s. 7 stock option benefits, and requested relief under the Financial Administration Act after having disposed of the shares in a subsequent year at a capital loss, with no ability to carry back that loss to offset any s. 7 benefit. On his appeal to the Federal Court of CRA’s refusal to recommend remission, he argued that he should be treated the same as employees of SDL Optics, who had been granted remission orders respecting their inability to offset capital losses against s. 7 income realized under a stock purchase plan.
Dawson JA agreed with the view of Roussel J below that it was reasonable for CRA to consider that the taxpayer’s stock option benefits were categorically different from the s. 7 benefits at issue in the SDL case, stating:
In the case of SDL Optics, employees who purchased shares through a stock option plan, as opposed to a stock payment plan, were not entitled to remission. This reflects the fact that a stock option plan provides greater flexibility to employees. The appellant had the option to purchase, or not purchase, shares at a designated price for a specified period of time regardless of shifts in market value during that period.
Incidentally, the Federal Court reasons (2018 FC 936) reveal that the taxpayer had got CRA to agree to a reduction pursuant to a Tax Court consent judgment to the quantum of his stock option benefits based on discounting the shares' value from their TSX trading price by 30%. Thus he had been largely successful in his argument that: "since the shares acquired were subject to numerous blackout periods and he was considered an insider of [the employer] for the purposes of the TSX and relevant shares legislation and regulations, the assessed value of the shares should not be more than 60% of the trading price on the date of purchase."
Neal Armstrong. Summaries of Fink v. Canada (Attorney General), 2019 FCA 276 under Financial Administration Act, s. 23(2) and ITA s. 7(1)(a).
CRA indicates that s. 104(13.4)(b) cannot be used to redirect only a targeted portion of a trust’s income
Any income arising from the application of the deemed disposition rules in s. 104(4) on the death of the relevant beneficiary, is subject to taxation in the trust unless a valid joint election is made under s. 104(13.4)(b.1) for that income to fall into the terminal return of the deceased. CRA is of the view that this election operates on all of the trust’s income.
Therefore, in the situation where the surviving spouse beneficiary of a spousal trust died in 2017 and all the s. 104(13.4)(b.1) conditions for making the joint s. 104(13.4)(b) were met, it nonetheless would not be possible to elect on only a portion of the capital gains deemed to be realized on the death of the surviving spouse respecting the trust’s portfolio of marketable securities. Thus, it would not be possible for only this amount to be included in the terminal return (where it would be subject to graduated rates), with the remaining portion of the deemed capital gains being retained at the trust level in order to use up trust capital loss carryforwards.
However, CRA noted that s. 104(13.1) or (13.2) designations generally are available to soak up trust losses.
Neal Armstrong. Summary of 16 August 2019 External T.I. 2018-0742431E5 under s. 104(13.4)(b).
CRA indicates that it has no specific policy for providing interest relief where its Registry falsely indicates that a registration number is valid
CRA indicated, respecting the GST/HST Registry for confirming GST/HST registration numbers, that “they have resolved the issue of false positives that occurred in some instances.” CRA went on to indicate that the “CRA does not currently have a specific policy to waive penalty and interest in cases where a supplier of real property relied on the GST/HST registry to verify a recipient’s GST/HST registration status and the GST/HST registry gave a false positive.”
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.26 under ETA s. 221(2).
CRA confirms that the GST/HST test of an investment limited partnership is not a day-by-day numerical test
The ETA definition of an “investment limited partnership” (ILP) includes a test as to whether the “primary purpose” of the limited partnership was to “invest funds in property consisting primarily of financial instruments.” CRA confirmed its position in Notice 308 that this encompassed situations where the purpose of the LP was to invest in real estate through subsidiary LPs. CRA indicated that this was a primary purpose test which “would generally reflect its main or fundamental purpose at the time it was established – and may be reassessed later on.” Thus, the application of this test would not be affected solely by short-term changes in the value of investments due to market shifts.
Respecting this scenario:
On day one, LP uses 40% of the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property; and on day two, it uses the remaining 60% to invest directly in real property. On day 180, due to market shifts, the interests LP owns in the limited partnerships are now worth $1,200,000, while the direct investments in real property (acquired with 60% of the original capital) are now worth $800,000.
CRA stated that “we would likely conclude that the LP is not an ILP and further information would be required to determine if the LP … is considered an ILP at a later time."
Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.25 under ETA s. 123(1) - investment limited partnership.
Diamond Stacking – B.C. Supreme Court finds that a purchaser could not rely on a vendor’s GST exemption certificate where he knew of the property’s commercial use
ETA s. 194 provides that where a supplier has incorrectly certified that a sale of real estate was of exempt residential real estate, then the sale price is deemed to have been inclusive of the applicable GST/HST (so that it is that supplier rather than the purchaser who bears that GST/HST) – except where the purchaser “knows or ought to know that the supply is not an exempt supply.”
A vendor certified that an 18-acre property was an exempt residential property and, when it was assessed by CRA for failure to charge GST on the 16-acre portion of the property that was used as a blueberry farm, sued the purchaser for the GST thereon, plus interest. Saunders J found that the purchaser knew of the property’s use as a blueberry farm, and stated that the purchaser thus “possessed knowledge of fact which, through taking the appropriate advice a reasonable person would seek on those facts, would have indicated that GST would apply to the sale.” Accordingly, since the contract was silent on GST, the vendor was entitled under ETA s. 224 to recover its GST assessment from the purchaser – but had no entitlement to recover interest that CRA has assessed against it.
Neal Armstrong. Summaries of Diamond Stacking Co. Ltd. v Zuo, 2019 BCSC 1849 under ETA s. 194 and s. 224.
Income Tax Severed Letters 13 November 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.