News of Note

CRA provides examples of the application of the UHTA exemptions for seasonal, inaccessible, renovated or recently-acquired residential properties

CRA has provided some simple examples illustrating the application of the exemptions from the UHTA tax (as a substantive matter, although there still is a return-filing obligation) under ss. 6(7)(c) to (g) of the UHTA regarding the ownership by non-resident/non-citizen owners of Canadian residential properties:

  • A house lacking a central heating system, such as a furnace or boiler, or room heating sources, such as fireplaces or electric baseboard heaters is not suitable for year-round use as a place of residence (exempted under s. 6(7)(c)).
  • A property fronting on a road which is impassable throughout the winter season is considered to be seasonally inaccessible (exempted under s. 6(7)(d)).
  • Where the first unit in a duplex was renovated so that it was uninhabitable for 5 months in 2022 and there was a similar renovation of the second unit in 2023, because the (one-time) exemption under s. 6(7)(f) for a renovation had applied in 2022, it was not available in 2023.
  • Two spouses (C and D) co-owned a property on December 31, 2022, with the interest of D having been acquired in 2022 from C, who had acquired 100% of the property in 2020 (the co-ownership interest of D is exempted under the s. 6(1)(g) exemption for a property acquired in the year– but not that of C).

Neal Armstrong. Summary of Underused Housing Tax Notice UHTN8 Special Rule and Elections for Individual Owners of Multiple Residential Properties under s. 6(10), summaries of UHTN9 Exemptions for Residential Properties That Cannot be Used Year-round under s. 6(7)(c) and s. 6(7)(d), summary of UHTN10 Exemptions for Uninhabitable Residential Properties under s. 6(7)(f) and summary of UHTN11 Exemption for New Owners under s. 6(7)(g).

K & D Logging – Tax Court of Canada finds that a s. 20(21) deduction cannot offset previously-recognized s. 17 income

The taxpayer (K & D) initially recognized interest from year to year at the prescribed rate under s. 17 on a loan to a Uruguay farming corporation (Interan) of which it was a 44% shareholder. It supposedly did not confirm that the loan was non-interest-bearing until years’ later, after the loan had become, in part, a bad debt and was only partially repaid.

K & D argued that it could obtain a deduction under s. 20(21), for the amount of the interest previously recognized by it, on the loan’s disposition (its partial repayment). In rejecting this position, Russell J stated:

Subsection 20(21) cannot apply where subsection 17(1) does. Allowing a subsection 20(21) deduction for reported income on the basis of fictional receivable interest would completely nullify the intended purpose and effect of subsection 17(1). It would leave the appellant in a better place than if the true situation of the Loan being non-interest bearing had governed from the start.

Russell J found in the alternative that even if the accumulated interest could be treated as an interest receivable amount, there could still be no s. 20(21) deduction given that the terms of the loan provided that repayments were to be applied to interest before principal, i.e., all of the loss was in the collection of principal rather than interest.

Neal Armstrong. Summary of K & D Logging Ltd. v. The King, 2023 TCC 23 under s. 20(21).

We have translated 8 more CRA severed letters

We have published two CRA interpretations and a ruling which were released last week and a further 5 translations of CRA interpretations released in October of 2003. Their descriptors and links appear below.

These are additions to our set of 2,390 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 19 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2023-02-22 17 November 2022 External T.I. 2021-0919001E5 F - Eligible Dividends and Non-Capital Loss Carry-Back Income Tax Act - Section 152 - Subsection 152(6) - Paragraph 152(6)(c) s. 152(6)(c) permitted amending carryback request, if made within s. 152(6)(c) deadline and normal reassessment period, and implicitly authorized consequential Part III.1 reassessment
Income Tax Act - Section 152 - Subsection 152(3) s. 152(3) (and, consequentially, s. 185.2(2)) requires filing of amended return to reflect missing excessive dividend
Income Tax Act - Section 185.1 - Subsection 185.1(2) s. 185.1(2) election can be made before the incremental Part III.1 assessment that is being avoided
Income Tax Act - Section 89 - Subsection 89(1) - General Rate Income Pool - Element B B of formula reduces GRIP by NCLs carried back
Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(i) CRA discretion re accepting adjustment to losses carried back provided that the amendment request is made within the s. 152(4)(b)(i) period and loss year not statute-barred
22 December 2022 Internal T.I. 2020-0856411I7 F - SSUC/CEWS -– Rémunération admissible Income Tax Act - Section 125.7 - Subsection 125.7(1) - Eligible Remuneration eligible remuneration for each qualifying period for CEWS purposes includes additional payments for vacation and sick leave pay
2021 Ruling 2020-0862431R3 F - Variation of a trust deed and addition of new beneficiaries Income Tax Act - Section 248 - Subsection 248(1) - Disposition trust deed amendment by court order to permit addition of corporations that were only indirectly owned by family beneficiaries did not trigger a disposition/ such addition triggered dispostion of trust interests but without proceeds
Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) addition of corporate beneficiaries to discretionary trust resulted in a disposition by existing family beneficiaries, but not in the receipt by them of proceeds of disposition
2003-10-17 8 September 2003 External T.I. 2002-0163705 F - Choix Tardif
Also released under document number 2002-01637050.

Income Tax Act - Section 132.11 - Subsection 132.11(6) late designation can be requested pursuant to s. 220(3.2) in light of s. 220(3.21)(b)
Income Tax Act - Section 220 - Subsection 220(3.21) - Paragraph 220(3.21)(b) s. 220(3.21)(b) brings s. 132.11(6) within the s. 220(3.2) regime
23 September 2003 External T.I. 2002-0172175 F - Arrangements Funérailles - Provision 20(1)m)
Also released under document number 2002-01721750.

Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) portion of prepaid funeral amount which the funeral home can use in its operations is income under s. 9, not s. 12(1)(a), for which no s. 20(1)(m) reserve can be claimed
Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(a) prepaid funeral amounts which a funeral home was not required to hold in trust were s. 9, not s. 12(1)(a), income
12 September 2003 External T.I. 2003-0001335 F - Gain en Capital par une fiducie
Also released under document number 2003-00013350.

Income Tax Act - 101-110 - Section 104 - Subsection 104(21) s. 104(21) designation can be made even if non-taxable half of capital gain is retained by trust
17 September 2003 External T.I. 2003-0027555 F - REER JUGES
Also released under document number 2003-00275550.

Income Tax Act - Section 146 - Subsection 146(1) - RRSP Deduction Limit computation of RRSP deduction limit for federal judges
2 October 2003 Internal T.I. 2003-0031747 F - paiement pour service de volontaire
Also released under document number 2003-00317470.

Income Tax Act - Section 81 - Subsection 81(4) $1,000 cap is multiplied by the number of payers

CRA indicates it may accept adjusting losses carried back provided that the amendment request is made within the s. 152(4)(b)(i) period and the loss year is not statute-barred

Opco carried back non-capital losses from its 2019 and 2020 taxation years to its 2016 to 2018 taxation years. This had the effect of reducing its GRIP under “B” of the GRIP formula, so that dividends paid by it in its 2020 year, which it had designated as eligible dividends, were excessive and subject to Part III.1 tax.

CRA indicated that it had the discretion to grant a request to reduce the carrybacks so as to eliminate the GRIP reduction and associated Part III.1 tax (so that it might grant such request if it was satisfied that this was “a situation involving a bona fide error and not amounting to retroactive tax planning) provided that the loss years (2019 or 2020) were not statute-barred and that the request to reduce the carryback satisfied “the conditions … in subparagraphs 152(4)(b)(i) and 152(4.01)(b)(i) in respect of the [prior] Years.” The quoted requirement seems to indicate that CRA would consider itself precluded from accepting a carryback reduction request except in the highly unusual circumstance where the request was made before the s. 150 filing deadline (made applicable by s. 152(6)(c)) for the 2019 or 2020 year, as applicable (which did not appear to be the case here, as enough time had passed in order for the Part III.1 tax to have been already assessed).

In the (unlikely) event that such carryback reduction occurred, CRA considered that it would be authorized to make a consequential reassessment to reduce the Part III.1 tax that had been initially assessed “since the reassessment could be considered to be required to be made pursuant to subsection 152(6)” (which explicitly required the acceptance of the initial timely carryback requests).

Neal Armstrong. Summaries of 17 November 2022 External T.I. 2021-0919001E5 F under s. 89 – GRIP – B, s. 152(4)(b)(i), s. 152(6)(c), s. 152(3) and s. 185.1(2),

CRA rules that a trust deed amendment by court order to permit the addition of corporations that were only indirectly owned by family beneficiaries did not trigger proceeds of disposition

A trust deed for a family trust (whose current named beneficiaries were family individuals) was to be amended by court order to expand the range of beneficiaries who could be added in the discretion of the trustees to include inter alia corporations which were wholly-owned indirectly by the family beneficiaries (previously, corporate beneficiaries could only be added if they were directly owned by family individuals). Following such amendment, the trustees would then exercise their discretion to add four corporations as beneficiaries, one of which was directly owned by two of the other corporate beneficiaries.

CRA ruled that (1) these transactions did not trigger a disposition of the trust property, (2) the obtaining of the amending court judgment would not result in a disposition of the interests in the trust of the existing beneficiaries and (3) that the addition of the corporate beneficiaries would not result in their receipt of proceeds of disposition including pursuant to s. 69(1)(b). It did not rule that such addition would not result in a disposition by the existing beneficiaries. The CRA summary states:

The addition of a new beneficiary to a discretionary trust by the exercise of a power to add such beneficiary in the trust deed results in a disposition, by the existing beneficiaries, of a portion of their interest in the trust. However, provided the existing beneficiaries do not direct to whom the interest is transferred, they would not be deemed to have received proceeds of disposition under paragraph 69(1)(b). This is also true for the trustee/beneficiary who, in this particular situation, is not considered to have control over the decision to add a new beneficiary.

Neal Armstrong. Summary of 2021 Ruling 2020-0862431R3 F under s. 248(1) – disposition.

CRA confirms that eligible remuneration for each qualifying period for CEWS purposes includes additional payments for vacation and sick leave pay

CRA confirmed that where mandatory vacation, statutory holiday and sick leave pay provided for in the various collective agreements in the Quebec construction industry is added by the employer (an eligible entity) to the basic salary or wages included in each pay cheque of an eligible employee, it will consider that the eligible entity has paid that additional amount to the eligible employee in respect of the same week as the related salary or wages are paid, so as to be included in determining the CEWS entitlement of that employer for that week.

Neal Armstrong. Summary of 22 December 2022 Internal T.I. 2020-0856411I7 F under s. 125.7(1) – eligible remuneration.

Supreme Court grants leave in Dow ULC

The Supreme Court of Canada has granted leave to appeal in Dow ULC. The Federal Court of Appeal had found that the denial by CRA of a requested “downward” adjustment under s. 247(10) (to increase the interest expense on a loan from a Swiss affiliate) was a matter that could only be reviewed in the Federal Court, so that the Tax Court lacked jurisdiction regarding the taxpayer’s challenge of this denial.

Neal Armstrong. Summaries of Canada v. Dow Chemical Canada ULC, 2022 FCA 70, leave granted 23 February 2023 under s. 247(10), s. 247(11), s. 169(1) and Federal Courts Act, s. 18.5.

Boliden v. FQM – Ontario Court of Appeal finds that the denial of loss carryforwards of the target was covered by an indemnity clause for reasonably foreseeable loss

Under the share purchase agreement (“SPA”) for the purchase of a Finnish mining company (Kevitsa) by Boliden from FQM, FQM represented inter alia that “[t]here are no grounds for the reassessment of the Taxes of [Kevitsa and its subsidiary].” Pursuant to the SPA’s “general indemnification obligation”, FQM was required to indemnify Boliden for any “Losses” arising from any breach or inaccuracy in its representations. The SPA definition of “Losses” specified that consequential or indirect loss was an indemnifiable loss to “the extent it is a reasonably foreseeable consequence of the event or circumstance constituting the ground for the applicable indemnification obligation”.

Following the acquisition in 2016, the Finnish Tax Administration (alleging lack of economic substance) assessed to deny the interest and other deductions arising out of a 2010 reorganization, so that inter alia accumulated tax losses at the time of the acquisition were denied. It assessed €14.4 million of taxes on post-acquisition income of Kevitsa, which was no longer sheltered by such losses.

The Court found that the application judge - who had noted the contrast between the above representation, and other representations and warranties in the SPA which were limited to the knowledge of the sellers – had reasonably concluded that such representation could be untrue as of the time of closing even if the prospect of reassessment was not reasonably expected by FQM. The Court also indicated that there was no error in the judge’s application of the common law concept of reasonable foreseeability to the general indemnification clause, and that the post-closing use by Kevitsa of the accumulated losses (prior to their subsequent denial) was reasonably foreseeable. Accordingly, FQM’s appeal of the finding of liability of it under the SPA for any taxes payable from the denial of the carryforward losses, was dismissed.

Neal Armstrong. Summary of Boliden Mineral AB v. FQM Kevitsa Sweden Holdings AB, 2023 ONCA 105 under General Concepts – Tax Indemnity.

Foix – Federal Court of Appeal confirms that s. 84(2) extends to the indirect distribution of liquid assets of the target through its sale to an arm’s length purchaser cum “facilitator”

The shareholders of a private Canadian company (“W4N”) exploiting a valuable item of software had agreed in principle to sell W4N to a U.S. public company (“EMC”) for U.S.$50 million. However, EMC was amenable to a reorganization being implemented to permit the shareholders to extract the excess cash and investment type assets of W4N. What was implemented was a hybrid transaction in which there was both a sale of the software, goodwill and other business assets of W4N to EMC and a sale of shares of W4N (which continued to hold some Canadian business assets) by its shareholders to a Canadian subsidiary (“EMC Canada”) of EMC.

Although the steps to accomplish this and related safe-income, capital dividend and capital gains deduction planning were quite intricate, Noël C.J. focused for his purposes on the following five steps:

  1. Trusts for the families of the two principals (Souty and Foix) sold shares of W4N to EMC Canada for notes of EMC Canada, later paid in cash, with the resulting capital gains of $5 million (approximately equaling the proceeds) ultimately being distributed to various family beneficiaries.
  2. W4N sold its intellectual property, goodwill and some of its other business assets to EMC for consideration including two “capital dividend” notes totaling $22 million (which were later distributed) and a “Balance Note” for $19.75 million.
  3. Souty and the holding company for Foix (Virtuose) sold special voting shares of W4N to EMC Canada for nominal consideration so as to effect an acquisition of control of W4N.
  4. The balance of the shares of W4N now were sold directly, or through a sale of shares of Virtuose, to EMC Canada for cash consideration of around $14 million.
  5. EMC Canada, Virtuose and W4N amalgamated.

Noël C.J. essentially indicated that the final aggregate purchase price for the hybrid transaction had been increased by around the amount of the Balance Note but that the Balance Note was not repaid at any relevant time and that the payment of the cash sales proceeds in Step 4 essentially was funded by a diversion of cash resources of EMC that otherwise could have been used to repay the Balance Note.

In confirming the application of s. 84(2) to proceeds received under Step 2 that were distributed to a beneficiary of the Souty Trust and to some cash proceeds received by the two principals in Step 4, Noël C.J. first accepted the submission of the taxpayers “that the target corporation must be impoverished to the benefit of its shareholders for there to be a distribution or an appropriation,” but indicated that, here, there had been such impoverishment since the Balance Debt was not paid, and “the nonpayment of the debt in the course of the hybrid sale freed up the necessary funds to defray the cost of W4N’s and Virtuose’s shares.”

He went on to indicate that “the scope of subsection 84(2) is sufficiently broad to counter this type of distribution when the property being distributed is fungible and a third-party facilitator is involved in the extraction process” and that “it would be contrary to Parliament’s intention to turn a blind eye to the existence of a distribution or appropriation for the sole reason that, for example, the shareholder received the target corporation’s property as a creditor rather than as a shareholder … or, as in the present case, that the funds received by the shareholder originate directly from a third party but indirectly from the target corporation.” The presuppositions in McNichol and Descarries “that subsection 84(2) cannot apply to indirect distributions of property or funds because in such cases, the property distributed to the shareholders is not that of the target corporation, but property of the same quality and quantity” were incorrect. Furthermore, contrary to Robillard, the proper interpretation of s. 84(2) has not narrowed in its modern context.

He also confirmed that these indirect distributions had occurred on a “reorganization” of the business of W4N (its splitting into two pieces) and on a discontinuance of Virtuose’s business (it ceased to be a holding company).

Neal Armstrong. Summary of Foix v. Canada, 2023 FCA 38 under s. 84(2).

Income Tax Severed Letters 22 February 2023

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.