News of Note
CRA rules on pipeline transaction that includes partial use of s. 164(6) and of the s. 88(1)(d) bump
Email this ContentCRA ruled on a hybrid pipeline transaction in which the two holding companies that were held by the deceased first purchase for cancellation a portion of their participating shares that are now held by the estate in order to generate a deemed dividend to clear out their RDTOH and CDA accounts - with the estate electing under s. 164(6) to treat the resulting capital loss as a capital loss of the deceased. The estate then proceeds with a conventional pipeline transaction in which it transfers its remaining shares of the holding companies to Newco and, after the requisite waiting period, the holding companies are amalgamated with Newco or are wound up into it (in either case, referred to as “Amalco”), and with the notes thereafter being gradually paid off by Amalco.
On the winding-up or amalgamation, preferred shares held by one of the holding corporations in a corporation (whose participating shares are held by a family trust) are to be bumped under s. 88(1)(d) (although there are no rulings on this aspect). The proposed transactions conclude with a s. 88(2) winding up of the Amalco.
Neal Armstrong. Summary of 2019 Ruling 2019-0793281R3 F under s. 84(2).
9 more translated CRA interpretations are available
We have published 2 translations of CRA interpretations released last week, and a further 7 translations of CRA interpretations released in November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.
These are additions to our set of 927 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.
CRA found that failure to charge for services rendered by a Canco to a NR sub of a NR trust tainted the NR trust under s. 94(2)
The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco provided services for no consideration to LLC1.
The Directorate concluded that Canco thereby was rendered a resident contributor to NRTrust (so that NRTrust was deemed to be a s. 94-resident trust) because
- s. 94(2)(f) deemed there to be a transfer of property to that trust, and
- it would be reasonable to view there as having been a resulting increase in the fair market value of the LLC1 shares.
In the Directorate’s view, this result obtained even if s. 247(2) also applied to deem Canco to have received FMV consideration for its services.
Essentially the same result obtained if Canco made an interest-free loan to LLC1 rather than providing free services. Similarly, the application of s. 17 (or s. 247(2)) to that loan would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust.
Neal Armstrong. Summaries of 28 May 2019 Internal T.I. 2018-0772971I7 under s. 94(2)(a).
CRA notes that two years were required to pass before proceeds from the sale of a related business could generate excluded share income for TOSI purposes
In Year X3, Investco sells all the shares of Opco, which was the only related business respecting the specified individual (Investco’s shareholder) and uses the proceeds in an investments business. CRA indicated that dividends paid by Investco to the individual shareholder cannot qualify for the excluded share (“tax on split income” or TOSI) exception until Year X5. For instance, in Year X4, the income of Investco was tainted because in its last taxation year (X3) it had received dividend income from Opco and, in any event, the taxable capital gain realized by it in that year was deemed by s. 120.4(1.1)(d)(i)(B) to be income derived from the Opco business.
Neal Armstrong. Summary of 12 June 2019 External T.I. 2019-0792011E5 F under s. 120.4(1) – excluded share – (c).
CRA considers that the extended reassessment period can apply to FAPI earned even before the 2018 Budget
The Canadian corporate “Taxpayer” contributed marketable securities to a wholly-owned controlled foreign affiliate ("ForeignCo") in exchange for shares. Could CRA rely on the extended reassessment period under ss. 152(4)(b)(iii) and 152(4.01)(b)(iii) to reassess the Taxpayer respecting the foreign accrual property income (FAPI) earned by ForeignCo from the marketable securities (for a taxation year before the 2018 Budget reversal of Ho)? In responding “yes”, CRA stated:
[W]here there is a causal link between the FAPI earned by an FA and the taxpayer's investment in the capital stock of that FA, and where the shares have been acquired by the taxpayer directly from the FA, the adjustment attributable to FAPI arising from the assessment or reassessment can reasonably be considered to have been made as a result of a transaction (the investment in the FA) between the taxpayer and a related non-resident corporation (the FA). …
[T]he reassessments would be attributable to FAPI arising directly from the contribution by the Taxpayer of the Marketable Securities to ForeignCo which … would be a "transaction" between Holdco and ForeignCo referred to in subparagraph 152(4)(b)(iii) that it would be reasonable to consider as relating to the reassessments for purposes of subparagraph 152(4.01)(b)(iii).
Neal Armstrong. Summary of 13 August 2018 Internal T.I. 2018-0763611I7 F under s. 152(4.01)(b)(iii).
CRA illustrates s. 249(3), and accords s. 22 elections to Amalco
CRA has augmented its Folio on amalgamations.
It indicates, in an example, that if a predecessor with a calendar taxation year amalgamated on January 2, 2019, s. 249(3) would prevent the taxation year that otherwise would have ended on December 31, 2018 from being extended to January 1, 2019.
Notwithstanding no continuity rule in s. 87(2) to this effect, CRA will permit Amalco to make a s. 22 election respecting receivables generated by sales of a predecessor, provided that there was no disruption in the operation of the business between the time of the amalgamation and the business sale (and assuming the usual s. 22 conditions were satisfied).
Neal Armstrong. Additional summaries of Folio S4-F7-C1 under s. 249(3) and s. 22(1).
Income Tax Severed Letters 31 July 2019
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that the winding-up of a labour union gives rise to capital gains to the union members
A union that was eligible for the s. 149(1)(k) exemption and that had been collecting union dues, ceased to be the accredited bargaining agent for the employer, as a result of which it is being wound-up and will be distributing its remaining assets to its members as required under its articles. CRA ruled that the amount so paid to the members will constitute proceeds of disposition of their rights as members in the union, thereby resulting in a capital gain.
Neal Armstrong. Summary of 2019 Ruling 2018-0779221R3 F under s. 149(1)(k).
CRA expands its GST/HST Memorandum on Passenger Transportation Services
CRA has more than doubled its GST/HST Memorandum on passenger transportation.
Much of the additional material relates to expanding the discussion to include the provincial place-of-supply rules, covering some new rules, e.g., the revised municipal transit rules and the ride-sharing rules, and expanding the examples provided. It has ported some of its positions on the transportation zero-rating provisions into the place-of-supply arena, e.g., its positon that a scheduled stop of less than 24 hours generally will not be a “stopover.”
Neal Armstrong. Summaries of GST/HST Memorandum 28.3 Passenger Transportation Services July 2019 under ETA Sched. V, Pt. VI, s. 24, Sched. VI, Pt. VII, s. 1 – stopover, continuous journey, s. 2, s. 3, x s. 5, Sched. IX, Pt. VI, s. 4.1, New Harmonized Value-Added Tax System Regulations, s. 21, s. 22(1), s. 23, ETA s. 123(1) – taxi business.
Kim – Federal Court of Appeal indicates that a taxpayer may not be able to avoid a s. 163(2) penalty even where the Crown does not have its own witnesses
The taxpayer, who had claimed substantial fictitious business losses based on an unintelligible theory espoused by the “Fiscal Arbitrators” tax preparers, stated at the outset of the trial that the only issue being pursued by him was the gross negligence penalties. The Tax Court Judge then incorrectly told the taxpayer that he had the burden of convincing the Court that the facts underlying the penalty assessment were incorrect. After thus being misled by the Court, the taxpayer presented oral testimony of himself and the creator of Fiscal Arbitrators, before his appeal was dismissed.
Webb JA noted that if the taxpayer had remained seated rather than proffering this testimony, there would have been no evidence for the Crown to have satisfied its s. 163(3) onus. He nonetheless did not direct a fresh trial, applying the principle in Mercure, 2013 FCA 102 that:
The mere fact that a breach of procedural fairness occurred is enough to warrant a new trial. This general rule has only one exception, which is the case in which the question before the court has an inevitable answer.
If the taxpayer had not testified on his own account, the Crown could have compelled him to stand up as a Crown witness which, given the extreme facts, would have been sufficient to sustain the penalty.
Neal Armstrong. Summaries of Kim v. Canada, 2019 FCA 210 under s. 163(3) and Rule 135(2).