News of Note
CRA considers that a s. 107(2) rollout of Cdn Realtyco shares (i.e., TCP) to a NR-owned corporate beneficiary is inherently abusive
Email this ContentCRA 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.
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.