News of Note
A pipeline where there are non-resident beneficiaries might use high-PUC shares, not a note
Email this ContentA post-mortem pipeline is normally effected by the estate transferring its shares of Opco (whose adjusted cost base, but not their paid-up capital, was stepped-up on death) to a new a Holdco in consideration for a Holdco note (which then is gradually paid off following a subsequent amalgamation of Opco and Holdco). Under the expanded look-through rule in s. 212.1(6), this transaction would be quite problematic if, for example, a non-resident beneficiary was one of two equal heirs. Ss. 212.1(6)(b) and 212.1(1.1)(a) would deem Holdco to pay a pro rata (1/2) dividend to X, i.e., ½ of the excess of the note consideration over the Opco PUC. This dividend would not reduce the estate’s proceeds of disposition.
There is a generally better result if Holdco issues high-PUC shares to the estate rather than a note. S. 212.1(1.1)(b) grinds the PUC of the Holdco shares by ½ of of the increase in their PUC over that of the Opco shares. Significantly, the resulting deemed dividend when the Holdco shares are repurchased will be excluded from the estate’s “proceeds of disposition” (under para. (j) of the definition), thereby producing a capital loss to the estate that it could potentially carry back under s. 164(6). There also may be a CDA or RDTOH balance.
Neal Armstrong. Summary of Alexander Demner and Kyle B. Lamothe, "Section 212.1 Lookthrough Rules Create Issues for Trusts with Non-Resident Beneficiaries", Tax for the Owner-Manager, Vol. 19, No. 2, April 2019, p. 2 under s. 212.1(6).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in March 2012. Their descriptors and links appear below.
These are additions to our set of 843 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for April.
Des Groseillers – Court of Quebec decision indicates no s. 7(1)(b) application to option cash-out amount assignments, and no s. 69(1)(b) application to s. 7(1)(b) dispositions
An individual (Des Groseillers) who donated some of his employee stock options on the shares of his public-company employer (“BMTC”) to arm's length registered charities was assessed by the ARQ on the basis that the Quebec equivalent of s. 69(1)(b) deemed the “value of the consideration for the disposition” received by him to be equal to the options’ fair market value of $3M, thereby resulting in the receipt of deemed employment income in that amount by him pursuant to the Quebec equivalent of s. 7(1)(b). (S. 69(1)(b)(ii) is not limited to non-arm's length gifts.)
Bourgeois, JCQ reversed the assessment. To him, a crucial factor was that the stock option plan specified that a permitted donee of the options was not entitled to physically exercise the options, and instead was only permitted to realize on them pursuant to a clause in the plan permitting the option holder to require the corporation to pay the in-the-money value of the options to their holder. Accordingly, Des Groseillers had effectively only donated a right to receive cash, rather than an agreement to issue shares as contemplated by the s. 7(1)(b) equivalent, so that s. 7(1)(b) equivalent did not apply. In other words, “the intention of the parties was never to assign the options on shares … but rather to transfer the sums to the foundations.”
He further found, in the alternative, that even if the s. 7(1)(b) equivalent applied, it only applied on the basis of the nil consideration actually received by Des Groseillers rather than being expanded by the s. 69(1)(b) equivalent to deem the consideration to be $3M. In this regard, he agreed with Des Groseillers’ submission that the stock option rules constituted “a complete code which by itself contains an exhaustive treatment of the rules for computing income on the issuance of securities of an employer.” After quoting the equivalent of ITA s. 7(3)(a), he stated:
Thus … [the s. 69(1)(b) equivalent] cannot be engaged in order to fill in the rules for computing income provided in [the stock option rules].
Since the ARQ assessments and pleadings had not relied, in the alternative, on the equivalents of ITA ss. 6(1)(a) and 15(1)), and the ARQ’s assessments based on a mooted expansive effect of the s. 69(1)(b) equivalent had been demolished, Des Groseillers’ appeal was allowed.
Neal Armstrong. Summaries of Des Groseillers v. Agence du revenu du Québec, 2019 QCCQ 1430 under s. 7(1)(b), s. 7(3)(a) and Reg. 100(1) – employer.
Rochefort – Court of Quebec finds that a quick flip of a development property occurred on capital account
The taxpayer entered into an agreement to purchase a restaurant building and related land in Montreal with a view to tearing down the building and erecting a mixed-use rental project (comprising 44 residential and 6 retail units) – and then, three months later, accepted an offer from the construction company “Groupe Legacé”) which she had asked to bid on doing the construction work, to purchase the property for approximately twice her purchase price. On closing, about five months later, title went directly from the original owner to Groupe Legacé.
In finding that the disposition to Groupe Legacé occurred on capital account, Dortélus JCQ stated:
The Court concludes from the evidence that she did not envisage, at the time of investing in the project, the resale of the St-Laurent Property in its entirety. It was not until she had received a completely unexpected and unsolicited offer from Groupe Legacé, whom she had approach to make a bid as construction contractor on the project, and by reason of the amount that was offered by Groupe Legacé, that she changed her view and decided to sell the St-Laurent Property.
Neal Armstrong. Summaries of Rochefort v. Agence du revenu du Québec, 500-80-031868-152, 18 April 2019 (Court of Quebec) under s. 9 – capital gain v. profit – real estate.
Green – Tax Court of Canada finds that a severe anxiety disorder qualified the taxpayer for the disability tax credit
Whether the taxpayer was entitled to the disability tax credit turned on whether her anxiety disorder represented a mental impairment that markedly restricted her ability to perform one or more basic activities of daily living substantially all the time. The particular focus was on whether she satisfied this test re mental functioning as defined in s. 118.4(1)(c.1)(iii) (“adaptive functioning”) OR s. 118.4(1)(c.1)(ii) (“problem-solving, goal-setting and judgment (taken together)”). Monaghan J found that the taxpayer satisfied both tests, respecting her 2015 and subsequent taxation years (but not the prior 5 years, where the effects were less severe).
Respecting the satisfaction of the s. 118.4(1)(c.1)(iii), she stated that the taxpayer’s disorder impaired her abilities respecting “self-care, health, safety, social skills, and common simple transactions in life (i.e., the mental function necessary for daily living) and her independence to do so.”
Respecting the s. 118.4(1)(c.1)(iii) test, Monaghan J stated:
Ms. Green’s behaviour is not illogical, but her choices are affected by her anxiety. … Her anxiety causes a lot of avoidance, procrastination and withdrawal, which assists Ms. Green in coping with her anxieties, but has led to other problems, such as failing school, loss of employment, self-harm activities, reluctance to pursue therapy, and taking on too many projects.
Neal Armstrong. Summary of Green v. The Queen, 2019 TCC 74 under s. 118.4(1)(c.1).
CRA analyses the consequences of the recipient of trust distributions not in fact qualifying as a beneficiary
As a discretionary irrevocable personal family trust, which had non-resident beneficiaries (Y and Y’s spouse (Z)), was approaching the 21-year deemed realization date, its trustees resolved to distribute an equal share of the Trust’s assets to each of Y and Z to the complete exclusion of any other beneficiary (the “vesting”). After the vesting, Y and Z assigned their respective capital interests in the Trust under s. 85(1) to an unlimited liability company (“ULC”).
CRA found that ULC did not become a beneficiary under the Trust (notwithstanding that it was the valid assignee of a beneficiary) as the Trust indenture defined “Beneficiary” to mean Y, Y’s spouse (Z) and Y’s issue, and the trustees were not empowered to vary the Trust or to add new beneficiaries. This meant:
- Taxable dividends paid by the Trust to ULC were includible in the income of Y and Z under s. 104(13), i.e., were subject to Part XIII tax under s. 212(1)(c).
- Similarly, the subsequent transfer of the Trust’s assets to ULC was for the benefit of Y and Z, so that s. 107(2.1) applied to generate fair market value proceeds to the Trust.
- The trustees could not recharacterize, as capital, the taxable dividend income received by the Trust.
- If Y and Z argued that s. 104(13) did not apply to them because no amount was payable to them in the year, CRA would apply s. 56(2) or (alternatively) s. 105(1) to include the dividend amounts in their income – but without any s. 104(6) deduction to the Trust.
Neal Armstrong. Summaries of 8 June 2018 Internal T.I. 2017-0683021I7 under s. 104(13), s. 107(5), s. 56(2) and s. 105(1).
CIBC – Tax Court of Canada finds that Aeroplan Miles were supplied by Aeroplan to CIBC as a GST taxable service
CIBC was charged by Aeroplan for the number of Aeroplan Miles that were credited to the cards of CIBC cardholders. CIBC argued that these fees were (1) consideration for intangible personal property (the Aeroplan Miles) that were supplied by Aeroplan, and (2) that such IPP was exempted from GST as being a supply of “gift certificates.”
CIBC perhaps should have succeeded on the first argument – but did not, because two things went against it. First, the drafting of its agreement with Aeroplan was unhelpful: it stated that the fees were paid for referral and arrangement (i.e., promotional) services of Aeroplan and that all other services of Aeroplan were “incidental.” Second, a key CIBC witness testified that the Aeroplan Program allowed CIBC “to attract more customers.”
Based on his finding that CIBC received a taxable service, it was unnecessary for Visser J to consider the second argument – but he did anyway, and found that the Aeroplan Miles did not qualify as gift certificates, stating:
Parliament intended a gift certificate to be an equivalent to money, and to have attributes similar to money. … Aeroplan Miles … fatally ... do not have a stated monetary value.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. The Queen, 2019 TCC 79 under ETA s. 123(1) – supply, s. 123(1) – service, s. 181.2.
Income Tax Severed Letters 24 April 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Trover – Tax Court of Canada finds that a dividend by a sole director could not be backdated to when there was another director
While Ms. Trover was separated from Mr. Trover, their jointly-owned company (Cove) paid amounts into their joint bank account. That same year, she ceased to be a shareholder and director of Cove, and in the subsequent year Mr. Trover, who was now Cove’s sole director and shareholder, purported to sign a resolution that retroactively treated a portion of the amounts paid into their joint bank account as having been a dividend payment by Cove to her. She had not agreed to this treatment.
In finding that Ms. Trover had not received this amount as a dividend (and in reversing the assessment including that amount in her income), Monaghan J stated:
I accept that practice in the “real world” does not always conform with best practice. … [and] that directors and/or shareholders may make a decision and act upon it, even though they may not record that decision in writing until a later date. But that cannot be said to have happened here. All of the evidence is that the only two relevant people, Mr. and Ms. Trower, never agreed that the transfers would be dividends. The decision was a unilateral one by Mr. Trower. He did not have that power before he became the sole shareholder and director.
Neal Armstrong. Summary of Trower v. The Queen, 2019 TCC 77 under s. 82(1)(a).
CRA shows some flexibility as to allocating out of Canada net premiums
Reg. 403(4), in its application to a non-life insurer whose only permanent establishments are in Canada but which earns net premiums from insuring risks outside Canada (“out of Canada net premiums,” or “OCNP”), requires the insurer to allocate the ONCP to the provinces for the Canadian permanent establishments to which they are “reasonably attributable in the circumstances.”
CRA has indicated some flexibility in applying the quoted phrase. It stated that the phrase “denotes … a direct causal connection … between the OCNP and the PE taking in account all the applicable facts of the case.” However:
[W]here a taxpayer has made an allocation under subsection 403(4) and the taxpayer’s approach is reasonable, the CRA should not require the taxpayer to use a different method of allocation. …
[T]he allocation of the OCNP based on where the policies are underwritten … appears to be a reasonable method. Similarly, allocation of the OCNP on some other basis, such as where the contracts are negotiated or serviced … may also be reasonable … .
Neal Armstrong. Summary of 24 October 2018 Internal T.I. 2018-0741041I7 under Reg. 403(4).