News of Note
Income Tax Severed Letters 4 December 2019
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance expects to release synthesized Treaties starting in early 2020
In addition to noting the release starting about yesterday of comfort letters (e.g., the one of December 2, 2019) on pipeline transactions of estates with non-resident beneficiaries, Ted Cook also noted that 24 of the Canada’s covered tax agreements will come into effect on January 1, 2010, including for:
- Australia;
- France;
- India;
- Japan;
- Luxembourg;
- the Netherlands; and
- the UK.
More of Canada’s tax treaties will become covered by the MLI based on their ratification (for an expected total of at least 67).
After consulting with its partner jurisdictions, Finance expects to provide its first lot of “synthesized” treaty texts (i.e., showing the effect of the MLI) in early 2020.
Ted Cook, 3 December 2019 Finance Update.
Finance proposes relief for GREs, with non-resident beneficiaries, engaging in pipelines
A pipeline typically entails the estate selling its shares of Canco (whose ACB was stepped up on death) to a newco (NewCanco) for a note of NewCanco which on its subsequent repayment effectively extracts the corporate surplus of Canco. After agreeing 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, Finance stated:
[W]e are prepared to recommend to the Minister of Finance that the Act be amended to exclude, from the application of paragraph 212.1(6)(b), dispositions of shares by a Canadian resident graduated rate estate of an individual who was resident in Canada immediately before the individual's death, provided that those shares were acquired by the estate on and as a consequence of the individual's death. We also intend to recommend that this proposed amendment apply to dispositions after February 26, 2018.
No relief for non-GRE trusts.
We will provide detailed summaries of the CRA responses at today's CTF Roundtable in the next day or so.
Neal Armstrong. Summary of Finance Comfort letter entitled “Cross-Border Surplus Stripping & Graduated Rate Estates” dated 2 December 2019 under paragraph 212.1(6)(b) .
Singh – Tax Court of Canada applies the markers of possession, use and risk in ascertaining beneficial ownership
Before finding that there had been a transfer to the taxpayer of ½ of the beneficial ownership of the family home for s. 160 purposes from her husband (rather than her having been the full beneficial owner all along), MacPhee J adopted a previous judicial formulation of the concept of beneficial ownership, viz:
The primary attributes of beneficial ownership include possession, use and risk. Therefore, in determining whether a person has beneficial ownership in a property, one should consider such factors as the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations.
Here, the husband had had a significant degree of mutual control over the home, his income had contributed significantly to servicing the mortgage, and the funding of the down payment with a gift from her parents was not dispositive.
MacPhee J also commented obiter that s. 160 can be applied in a “cascading manner” so that where A transfers to B and B transfers to C then, provided the usual conditions are satisfied, CRA can assess C for A’s tax debt without first having to assess B.
He also noted obiter that there was some authority for the value of what the husband had transferred being reduced by his continuing to live there.
Neal Armstrong. Summaries of Singh v. The Queen, 2019 TCC 265 under s. 160(1) and General Concepts – FMV - Land.
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in May and April 2011. Their descriptors and links appear below.
These are additions to our set of 1,017 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. You are currently in the “open” week for December.
CRA finds that there can be multiple counting of loans for purposes of reducing a gift amount under ss. 118.1(16) and 110.1(6)
A private foundation makes interest-bearing loans to multiple corporations not dealing at arm’s length with each other. Within 60 months thereafter, the corporations make gifts to the foundation and the loans are also repaid within 60 months. CRA found that under s. 118.1(16) (which is made applicable to gifts by corporations by virtue of s. 110.1(6)) the amount of the gift by each corporation is reduced by the aggregate amount of the loans, notwithstanding that the loans are fully repaid.
CRA also found that ss. 118.1(16) and 110.1(6) applied (apparently with the same double-counting issue) in essentially the reverse situation of a corporation making a gift to a private foundation and making loans within 60 months thereafter to both that corporation and a person with whom that corporation did not deal at arm’s length.
Neal Armstrong. Summary of 7 October 2019 Internal T.I. 2019-0801871I7 under s. 118.1(16).
Zong – Tax Court of Canada finds that mandatory contributions by a dual resident to the UK’s national insurance scheme did not qualify for FTC purposes
A resident of both Canada and the UK who was employed full-time in the UK for several years was not entitled to claim a foreign tax credit under s. 126(1) for mandatory contributions that he made in 2016 to the UK’s national insurance scheme, on the basis that such contributions were not foreign income “taxes”. Bocock J found that such contributions did not in this regard satisfy the test of being “made for a public purpose,” stating:
Because the payor receives a direct personal and financial benefit from his or her contributions in the future, the Minister and this Court [citing Yates] have held that such contributions are not a tax for public purposes.
Bocock J also found that there also was nothing providing a deduction under the wording of the Canada-UK Income Tax Convention.
Neal Armstrong. Summaries of Zong v. The Queen, 2019 TCC 270 under s. 126(7) – non-business-income tax and Treaties – Income Tax Conventions – Art. 24.
It may be advantageous for a US purchaser to acquire IP in a hybrid transaction
Where the principal asset of a Canadian start-up company is its intellectual property, it may be possible to use a hybrid transaction to reconcile a US acquiror’s desire to acquire such IP in an asset acquisition with the Canadian individual owners’ desire to sell shares.
- The Canadian target’s shareholders and the US acquiror enter into a share purchase agreement, resulting in the target losing its CCPC status and having a deemed year-end.
- The target transfers all its business to a wholly-owned Newco on a s. 85(1) rollover basis, except that the elected amount for the IP is its fair market value, thereby resulting in a capital gain that bears an effective tax rate of around 13.5% - and in an addition to the target’s capital dividend account (“CDA”), given inter alia that s. 251(5)(b) does not apply for the purposes of determining whether a corporation is a “private corporation.”
- The target increases the stated capital of its shares which, with the use of its CDA, permits the shares to be sold for their stepped-up adjusted cost base.
Where there is no significant recapture respecting the IP, the shareholders’ after-tax proceeds will approximate (and may exceed, where the target had non-capital losses) the after-tax proceeds that would have been realized on a plain vanilla share sale.
Neal Armstrong Summary of Kenneth Saddington and Jennifer Hanna, “Mergers and Acquisitions in the Light of the US Tax Changes,” 2018 Conference Report (Canadian Tax Foundation), 19:1-36 under s. 249(3.1).
Wiegers – Tax Court finds that it has no jurisdiction to order the renewal of a settlement offer
In rejecting the taxpayers’ request for an order requiring the Minister to make a settlement offer to the taxpayers consistent with that previously made (supposedly unbeknownst to the taxpayers) to other participants in the same gifting tax shelter, MacPhee J stated:
[I]t remains clear and obvious, upon a review of the jurisdiction of the Tax Court as listed at section 171 of ITA, I cannot force either the Minister nor the Respondent to remake an expired settlement offer to an appellant.
Neal Armstrong Summary of Wiegers v. The Queen, 2019 TCC 260 under s. 171(1).
CRA indicates that post-death appreciation in an RRSP could qualify for a s. 146(8.1) rollover
The deceased died with an RRSP valued at $250,000. Later in the year, when the RRSP had appreciated to $255,000, the property in the RRSP was transferred to an estate account. The executor paid $205,000 (including $5,000 respecting the appreciation in the RRSP) to the surviving spouse (Ms. Y), who contributed that amount to her RRSP. That amount was designated by the executor and Ms. Y on Form T2019 as a refund of premiums, so that the deceased Mr. X had a $50,000 inclusion in his terminal return.
CRA essentially accepted this treatment of the $5,000 of income, so that it could be eligible for treatment under the refund of premiums and s. 146(8.1) designation rules, and be rolled over into Ms. Y’s return. Similar rules applied to RRIFs.
Neal Armstrong. Summaries of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.12 under s. 146(8.1) and s. 146.3(6.1).