News of Note
12 further full translations of CRA French-language interpretations are available
Email this ContentThe table below provides descriptors and links for another 12 of the 2018 APFF Roundtable items recently released by CRA, as fully translated by us. (In October, we provided full-text translations of the CRA written answers, but only summaries of the questions posed.) The Rulings Directorate made some minor additions to the final version of the answers. In particular, in Q.3 of the Financial Strategies Roundtable, CRA added two paragraphs at the end dealing with the point that an individual cannot be a source individual respecting himself.
The above items are additions to our set of 733 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Kinder Morgan reduces its shares’ PUC by more than the PUC distribution by it of the Trans Mountain pipeline sales proceeds
As a result of its indirect 30% interest in the Trans Mountain pipeline system, Kinder Morgan realized $1.2 billion on the sale of the system to the federal government for $4.5 billion. Kinder Morgan will distribute that sum to its shareholders as a stated capital (and paid-up capital) distribution. The exclusion from deemed dividend treatment under s. 84(4.1) for a one-off distribution of recently-received sales proceeds is being relied upon.
Quite unusually, the stated capital reduction (of $1.45 billion) exceeds the $1.2 billion stated capital distribution amount, so that the stated capital of the shares will be reduced to approximately $0.33 billion. This is being done in order to not be subject to potential solvency test restrictions under ABCA in declaring dividends. Public company PUC is useless – except when it is useful.
Neal Armstrong. Summary of Kinder Morgan Canada Circular under Spin-offs & Distributions – ss. 84(4.1)(a) and (b) distributions of proceeds.
Cameco implicitly rejected the OECD cash box notion
Cameco effectively rejected the highly questionable “cash-box” notion of the OECD, which implicitly makes an investment manager the majority partner in the property being managed and reduces the interest of the party whose capital is at risk to a “risk-free” return – and thus ignores the discipline of investment markets reflected in arrangements that see the best private equity managers earning no more than a 20% “carry”.
[T]he issue is squarely dealt with in paragraphs 455 and 456 of the judgment where taxpayer expert witnesses were quoted as saying (in paragraph 455), "Thus to argue, as [the Canada Revenue Agency] does, that the provision of administrative services to investors like CEL who supply risk capital is the equivalent of bearing the risks that capital is subject to is to denigrate the role of risk bearing while putting the engagement in routine functions on a pedestal," and (in paragraph 456), "Even if the CRA's assertion that CCO monitored and managed CEL's price risk is true, this is irrelevant to the question as to who bore the price risk. The CRA confuses risk monitoring with risk-bearing."
Neal Armstrong. Summary of Nathan Boidman, “Cameco and Cash-Boxes,” 19 December 10 2018 letter to Tax Notes International under s. 247(2).
CRA treats non-resident LPs as conduits for purposes of Treaty interest withholding relief
Four non-resident LPs with the same non-resident corporate general partner (GP Co) collectively control Canco through their majority ownership of its shares and have also made unsecured interest-bearing loans to Canco. The limited partners are unrelated investors who deal at arm’s length with each other and with GP Co as a factual matter, and include both Canadian residents and residents of the U.K. for purposes of the Canada-U.K Treaty (in each case holding a relatively small limited partnership interest).
CRA ruled that Canco was not required to withhold on the U.K. partners’ share of each interest payment since each such share was exempted under Art. 11(3)(c) of the Canada-U.K Treaty, which referenced interest arising in one contracting state and paid to a beneficial owner in the other contracting state who dealt at arm’s length with the payer.
This ruling effectively accepted that each U.K. limited partner dealt at arm’s length with Canco notwithstanding that it was part of a grouping that might be regarded as collectively dealing in concert (through a common general partner) with Canco. The domestic arm’s length exemption in s. 212(1)(b)(i) was not discussed. CRA might have considered the domestic exemption not to be available because a partnership is treated as a person for such purposes under s. 212(13.1)(c), and the four partnerships likely dealt in concert respecting their joint Canco investment.
Neal Armstrong. Summary of 2017 Ruling 2017-0712731R3 under Treaties – Income Tax Conventions – Art. 11.
CRA finds that an estate is a blocker for accessing the TOSI excluded share exemption
The definition of “excluded amount” in the s. 120.4 tax on split income (TOSI) rules excludes the income of an individual aged 24 from excluded shares of the individual. The definition of “excluded shares” of a specified individual refers to shares “owned” by the individual that satisfy the three tests in paras. (a) to (c) including the 10% of votes and value test in para. (b).
CRA found that where an estate received a deemed dividend on the redemption of preferred shares of a corporation carrying on an investment business, that dividend when distributed by it to the family beneficiaries (age 24 or older) did not qualify in their hands as excluded amounts because they were not the owners of the preferred shares. It was irrelevant that the preferred shares satisfied the 10% of votes and value test, and that each beneficiary also directly held shares of the corporation that satisfied the 10% of votes and value test.
Neal Armstrong. Summary of 7 November 2018 External T.I. 2018-0777361E5 under s. 120.4(1) – excluded shares and s. 120.4(1.1)(b).
We have uploaded all CRA severed letters going back to April 1993
We have uploaded all of the CRA severed letters (e.g., Technical Interpretations, Rulings and Roundtable items) released by the Income Tax Rulings Directorate under its severed letter program, which commenced in April 1993.
These will continue to be open access. However, our translations of the French-language interpretations and Roundtable items, and our summaries of severed letters, will continue to be subject to the standard paywall (currently, 3 working weeks per month).
It is part of our process to format severed letters which we upload, e.g., indenting quoted passages, highlighting and linking titles, indenting subparagraphs, italicizing case citations and correcting the occasional situation where the text runs off the side of the page. Due to the volume of the recently-uploaded letters, this editing process will take a number of months.
Income Tax Severed Letters 19 December 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that a departing U.S. resident who has a deemed inclusion for his IRA cannot then obtain a s. 60(j) deduction for contributing actual IRA withdrawals to his RRSP
A Canadian citizen who was a U.S. long term resident under the U.S. expatriation rules was deemed for Code purposes to receive a taxable distribution of his entire interest in his IRA (the “Deemed Distribution”) immediately before his relinquishing of his green card and returning to Canada. When he then made an actual withdrawal of those amounts (the “Withdrawal”) in order to contribute them to his RRSP, they were not subject to further U.S. income tax.
In policy terms, the RRSP contribution should have generated a s. 60(j) deduction – but did not. The Withdrawal did not qualify as an “eligible amount” for s. 60.01 purposes because it was the amount of the Deemed Distribution (not the Withdrawal) that was included in the indiviual's income under s. 56(12) and s. 56(1)(a)(i)(C.1). Conversely, the amount of the Deemed Distribution also was not an “eligible amount” as it was not a “payment received” for the purpose of s. 60.01.
This anomaly has been pointed out to Finance.
Neal Armstrong. Summary of 29 October 2018 External T.I. 2018-0750411E5 under s. 60.01.
CRA provides a s. 84(2) ruling for a resource property spin-off by a public resource company
A public resource company effected a spin-off of one its properties by transferring it on a taxable basis to a wholly-owned Newco in consideration for Newco shares, and then distributing its Newco shares to its shareholders as a stated capital distribution.
CRA ruled that the distribution did not give rise to a s. 84(4.1) deemed dividend on the basis of the s. 84(2) exception rather than on the basis that it came within the s. 84(4.1)(a) and (b) exclusion for the distribution of sales proceeds (i.e., of the common shares of Newco). Consistently with all the other s. 84(2) spin-off ruling letters, CRA ruled that the shareholders had a cost for the Newco shares equal to their FMV even though there is no specific provision to this effect.
Neal Armstrong. Summary of 2018 Ruling 2017-0731971R3 under s. 84(2).
McEachern – Tax Court of Canada finds that the first leg of travel to a remote work location did not qualify for exclusion under s. 6(6)(b)(ii)
An employee, who worked two weeks out of every four at a norther diamond mine, received an allowance of 4.5% of his salary to help him to pay the costs of transportation between his New Brunswick residence and the Edmonton site for boarding or deboarding his flights to and from the mine. Masse DJ found that the allowance was includible in the employee's income under s. 6(1)(b), because it was not excluded under s. 6(6) for three alternative reasons:
- The s. 6(6)(b) exclusions were not available on substantive grounds because he regarded the travel between home and Edmonton as something separate from travel to and from the special work site (s. 6(6)(b)(i)) or remote location (s. 6(6)(b)(ii)). [This seems odd as presumably there could have been an exempt allowance if the employee instead had received a larger allowance to make it on his own steam all the way to and from the remote work site.]
- The employer had not provided a TD4 certifying that the s. 6(6)(b)(i) exclusion was available. After referencing the jurisprudence on s. 8(10), Masse DJ found that it was necessary for the taxpayer to demonstrate that the employer had been acting unreasonably in not providing the certification - and in fact its refusal was reasonable, as the “Allowance of 4.5% of salary was arbitrary and bore no resemblance at all to the actual costs involved in travelling between the Appellant’s principal residence and Edmonton.” [He earlier noted that the employee’s actual travel costs were approximately double the allowance amount. The fact that there was no provision like s. 8(10) requiring an employer certification seemed to help the taxpayer’s rather than the Crown’s position.]
- “The travel between New Brunswick and Edmonton, AB were essentially personal in nature since he chose to maintain his principal place of residence in another province. It has long been established that expenses related to travel from one’s residence to one’s work site are personal expenses.” [S. 6(6) states that it applies notwithstanding s. 6(1) and, therefore, overrides this jurisprudence.]
Neal Armstrong. Summary of McEachern v. The Queen, 2018 TCC 232 under s. 6(6)(b).