News of Note
6 more translated CRA interpretations are available
Email this ContentWe 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).
CRA finds that a USA stripped away voting control of a parent over its wholly-owned subs
All the shareholders of a corporation entered into a unanimous shareholders agreement (USA) that stripped away all the management powers of the board of the corporation, with all those powers instead exercised by majority vote of the shareholders. CRA accepted that included in the powers taken away from the corporation’s board under the USA was the right to exercise the voting rights attached to the shares of the wholly-owned subsidiaries of the corporation.
In CRA’s view, this then engaged ETA s. 128(4), which provides that for qualifying voting control purposes, a person is not considered to own shares if another person (other than a closely-related person) has voting rights over those shares described in similar terms to ITA s. 251(5)((b)(i), e.g., a “right under a contract … to control the voting rights attached to the share.” Since the corporation (which was not closely related to any of its shareholders) thus was deemed not to have voting control of its subsidiaries, they were not closely related to it.
Neal Armstrong. Summary of 18 March 2019 GST/HST Interpretation 186839 under ETA s. 128(4).
Finance proposes to extend the principal residence exemption to an inter vivos disability trust
Beginning after 2016, eligibility for the principal residence exemption was limited to three categories of trusts, including a qualified disability trust that was a testamentary trust - so that an inter vivos trust established for the benefit of an individual eligible for the disability tax credit (DTC) was excluded. Finance has now provided a comfort letter recommending, effective for taxation years beginning after 2016, that the principal residence exemption be amended to also accommodate an inter vivos trust for a resident child, or present or previous spouse, of the settlor, where that beneficiary is eligible for the DTC and, during his or her lifetime, no other person can obtain the use of the trust income or capital.
Neal Armstrong. Summary of 4 September 2019 Finance comfort letter under s. 54 – principal residence – (c.1)(iii.1)(B).
Finance provides comfort letter opening up statute-barred years for additional s. 20(1)(v) deductions
The Mining Association of Canada suggested that it was inappropriate for taxpayers, who had been provincially reassessed for additional mining taxes to lose the additional s. 20(1)(v) deduction because the reassessed years were now statute-barred. Finance has provided a comfort letter recommending (retroactive to taxation years that end after 2007):
that a deduction for mining taxes be allowed for the taxation year in which the mining taxes are paid if the mining taxes paid are in respect of income from mining operations that were carried on in a prior taxation year of the taxpayer that is barred from reassessment under the Act.
Neal Armstrong. Summary of 3 September 2019 Finance comfort letter under s. 20(1)(v).
CRA is refusing requests for Canadian branches of foreign FIs to register for GST/HST purposes
A Canadian branch of a foreign financial institution that has imported taxable supplies potentially may reduce its compliance burden (i.e., less frequent returns and payments – but with the potential to then be required to file an annual information return) if it voluntarily registers for GST/HST purposes.
However, the CRA is increasingly refusing such applications; its reason is that the existence of a Canadian branch does not make the financial institution a Canadian resident for GST/HST purposes. …
This is puzzling since ETA s. 132(2) provides that a non-resident person with a permanent establishment in Canada is considered to be resident in Canada in respect of the person's activities carried on through that establishment.
Neal Armstrong. Summary of Andrew Linton and Jillian Adams, “CRA Denies Voluntary GST/HST Registration for Financial Institutions,” Canadian Tax Focus, Vol. 9, No. 4, November 2019, p. 7 under ETA s. 240(3).