News of Note
CRA is willing to take a policy-based approach to issues re the effect of s. 55(2) on ACB
Email this ContentWhat did CRA conclude in its review of questions regarding the impact of s. 55(2) on the computation of cost and CDA and the application of s. 112(3)? CRA indicated:
- Where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value.
- Since Finance’s intent is to give cost to the portion of the stock dividend that is supported by safe income, and also to a portion of the stock dividend that is technically subject to the application of s. 55(2), cost will be recognized under s. 52(3) for the amount of a stock dividend to which s. 55(2) has applied. (This and the above position reverse 9830665.)
- A dividend arising on a paid-up capital increase to which s. 55(2) applied remains a dividend for s. 53(1)(b)(i) purposes but such dividend was not permitted a deduction under s. 112(1), for purposes of the application of the basis reduction under s. 53(1)(b)(ii). Conversely, there is a reduction of cost under s. 53(1)(b)(ii) to deny cost on the amount of the dividend that exceeds safe income, and on which a deduction under s. 112(1) was obtained. Thus, cost will not be denied when a dividend on a paid up capital increase has been subject to s. 55(2).
- CRA will ensure that the taxpayer will not be penalized in the capital dividend account calculation where a stock dividend or paid-up capital increase was previously subject to s. 55(2). Thus, CRA will restrict the exclusion of 53(1)(b)(ii), and the similar provision found in s. 52(3)(a), in the CDA calculation, to situations where s. 55(2) did not apply to the stock dividend or the PUC increase.
Neal Armstrong. Summaries of 27 November 2018 CTF Roundtable, Q.2 under s. 52(2), s. 52(3), s. 53(1)(b)(ii) and s. 89(1) – capital dividend account - (a)(i)(A).
CRA will now only provide guidance on safe income allocation to discretionary dividend shares in ruling letters
We have now published the questions posed at the CRA Roundtable at the annual 2018 CTF Conference and our summaries of the oral responses of the Income Tax Rulings Directorate.
In response to Q.1 as to the allocation of safe income where a corporation has discretionary dividend shares, CRA indicated that:
- It stands by all positions on this matter that it has expressed since the 2015 CTF Annual Conference.
- On a going-forward basis the CRA is willing to provide assurance on the tax treatment of the discretionary dividend shares, but only in the context of a ruling request – and thus will no longer express its views on this matter in Technical Interpretations or Roundtable responses.
Neal Armstrong. Summary of 27 November 2018 CTF Roundtable, Q.1 under s. 55(2.1)(c).
CRA finds that a lower tier internal spin-off transaction accompanied by an upper-tier sale by a minority shareholder was subject to s. 55(2)
Holdco A has wholly-owned Opco spin off Opco’s real estate to a newly-formed subsidiary of Holdco A (and sister of Opco), namely, to Realco. The spin-off entails a cross-redemption of shares and resulting s. 84(3) dividends. In the course of the spin-off transactions, an unrelated shareholder of Holdco A (Holdco C) with a direct and indirect equity interest in Holdco A of around 16% sells its interest at fair market value (giving rise to gain) to arm’s length purchasers. Does s. 55(2) apply to the s. 84(3) dividends?
CRA indicated that assuming (as appeared to be the case) that the sale by Holdco C was part of the same series as the spin-off, and that the shares of Opco and Realco represented more than 10% of the value of what Holdco C was selling, then ss. 55(3)(a)(iii)(B) and 55(3)(a)(iv)(B) would “technically apply” to oust the s. 55(3)(a) exemption. Was CRA troubled that the deemed dividends at the Opco and Realco level did not affect the capital gains arising on the share sales by Holdco C? It stated:
[P]aragraph 55(3)(a) is intended to provide an exemption from the application of subsection 55(2) for certain dividends received in the course of related-party transactions. … [S]ince the other direct or indirect shareholders of Holdco A are not related persons, and the transactions … include a sale of Holdco A shares as part of the same series as the deemed dividends … the application of subsection 55(2) is operating as intended.
This approach illuminates why advisors sometimes seek s. 55(3)(a) rulings on internal spin-off transactions beneath a public company.
Neal Armstrong. Summary of 10 September 2018 External T.I. 2018-0772501E5 under s. 55(3)(a)(iii)(B).
Income Tax Severed Letters 28 November 2018
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Ntakos Estate – Tax Court of Canada finds that reassessments at the request of a taxpayer lacking mental capacity were void
An accountant got the taxpayer (Anna – who at that point was mentally failing), months before her death, to file T1 adjustment requests in 2003 for her 1998, 2001 and 2002 taxation years to allocate increased management fees and employment income to her by the family companies. This apparently had the effect of improving the tax position of one of Anna’s brothers, for whom the accountant was also acting. Over 10 years after the resulting reassessments of Anna (i.e., well beyond the s. 166.1(7)(a) deadline), her estate filed notices of objections or applications for an extension of time to file a notice of objection. Bocock J found:
Non est factum is available where a person is not capable of both reading and sufficiently understanding a document. …
… Anna from and after her diagnosis date, lacked mental capacity to execute or did not execute and file the 2003 filings… . Therefore, the notices of reassessments responsive to the 2003 filings … were void. … [T]he reassessments were consequential to invalid or unlawful filings and issued by the Minister under innocent mistake of fact. Accordingly, no objection was required to the void reassessments. …
Bocock J went on to vacate those reassessments.
He was striving for an equitable result. He did not explain how lack of mental capacity to make or adjust a return for a taxation year invalidates an assessment of that year.
Neal Armstrong. Summary of Ntakos Estate v. The Queen, 2018 TCC 224 under s. 166.
6 further translations of CRA French-language interpretations are available
The table below provides descriptors and links for six Interpretations released in January 2013 (from the 2012 APFF Roundtables), all as fully translated by us.
These are additions to our set of 696 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 5 3/4 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 December.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-01-16 | 5 October 2012 Roundtable, 2012-0454021C6 F - Expiration d'un arrangement | Income Tax Regulations - Regulation 6205 - Subsection 6205(2) | purpose of Reg. 6205(2) re estate freezes and employees |
| 5 October 2012 Roundtable, 2012-0451241C6 F - Benefit conferred on a NR shareholder by a NR corp | Income Tax Act - Section 15 - Subsection 15(7) | s. 15(7) assists in determining that s. 15 can apply to the NR shareholder of a NR corporation gratuitously using the corporation’s Canadian property | |
| Income Tax Act - Section 247 - New - Subsection 247(2) | s. 247(2) could apply to produce s. 212(1)(d) withholding where the NR shareholder of a NR corporation gratuitously uses Canadian corporate property | ||
| Income Tax Act - Section 214 - Subsection 214(3) - Paragraph 214(3)(a) | gratuitous use by NR shareholder of Canadian property of the NR corporation produces a s. 214(3)(a) deemed dividend | ||
| 5 October 2012 Roundtable, 2012-0453171C6 F - TFSA - Survivor payments to more than one survivor | Income Tax Act - Section 207.01 - Subsection 207.01(1) - Exempt Contribution - Paragraph (d) - Subparagraph (d)(iii) | CRA allows contributions by two survivors totaling what would have qualified with only one survivor | |
| 5 October 2012 Roundtable, 2012-0451231C6 F - Gifts to American charities | Treaties - Income Tax Conventions - Article 21 | U.S. charities are not qualified donees under Art XXI(7) of U.S. Convention | |
| 5 October 2012 Roundtable, 2012-0454131C6 F - Caractère raisonnable d'une allocation automobile | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | reasonable car allowance potentially can exceed Reg. 7306 levels/Treasury Board rates will be accepted | |
| 5 October 2012 Roundtable, 2012-0453201C6 F - Règles d'attribution- séparation & décès | Income Tax Act - Section 74.5 - Subsection 74.5(3) | s. 74.5(3) busting of attribution occurs even if they were living separate and apart for under 90 days before the death to the transferee common-law spouse | |
| Income Tax Act - Section 13 - Subsection 13(1) | recapture from rental property is property income from that property |
Louie – Tax Court of Canada places a temporal limitation on the advantages considered to arise from TFSA swap transactions
From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed TFSA and her taxable trading account at a discount brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The transfers were made near the close of trading for the day, and at the high price if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that those FMV increases were “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
Lamarre ACJ found that the swaps were a series of transactions described in s. (b)(i), i.e., they were transactions that “would not have occurred if the parties had been dealing at arm’s length and were acting prudently, knowledgeably and willingly” and she inferred that one of the main purposes of the series was to benefit from the ability to ultimately withdraw amounts from the TFSA tax-free.
She concluded that although it was reasonable to regard the 2009 increase in the FMV of the TFSA as being directly or indirectly attributable to the series of swaps, she did not consider that it was reasonable to so regard the 2010 and 2012 increases. She was troubled that the attributable test had “no easily defined or delineated end point … regarding the length of time during which an increase may still be attributed to an impugned transaction” and noted that “A more restrictive interpretation of paragraph (b) … avoids these difficulties.” Accordingly, she concluded that the 2010 and 2012 FMV increases should be attributed to the stock market appreciation in those years rather than to the 2009 swaps.
Neal Armstrong. Summaries of Louie v. The Queen, 2018 TCC 225 under s. 207.01(1) – advantage - s. (b)(i), s. 207.05(3), s. 248(10) and General Concepts – FMV - shares.
Lee – Tax Court of Canada rejects reassessments treating a Quebec discretionary trust as a sham
The taxpayer, Mr. Lee, a resident of B.C., engaged in a tax avoidance plan involving a spousal trust (intended to be resident in Quebec) which avoided provincial tax on a deemed dividend received on the redemption of shares in the trust’s hands. The Trust’s trustee (Mr. Paris) was a retired KPMG accountant. The Trust elected to be taxed federally on a deemed dividend from a share redemption it had distributed to its beneficiary (Mrs. Lee) but did not elect to be taxed on this same income in Québec. Since the beneficiary was not a resident in Québec, no provincial tax was paid on the distributed income. Nevertheless, the Trust received the federal abatement. The Province of Québec subsequently enacted retroactive tax legislation that deemed the Trust to have elected to be taxed on the distributed income in Québec. However, CRA reassessed Mr. Lee on the basis that the Trust that he purportedly settled did not exist either because the trust or the transfer of property to it was a sham.
In the course of rejecting the CRA position, Owen J stated:
Creating legal (or equitable) relationships to give effect to a tax plan is not the perpetration of a sham. In this case, there was no deceit on the part of the Appellant or Mr. Paris regarding the legal relationships created under Québec law. …
[E]ven if the Appellant’s sole reason (motive) for creating the Trust and transferring the … Shares to the Trust was to save tax, that is not in and of itself evidence of a sham.
Neal Armstrong. Summary of Lee v. The Queen, 2018 TCC 230 under General Concepts – Sham.
CRA characterizes the wind-up of a CFA into three shareholders as a transaction in which it is merged to form three corporations
Subject to exceptions, if a capital loss realized on the transfer by Canco of shares of a controlled foreign affiliate is suspended under s. 40(3.4), the loss will cease to be suspended when that CFA is wound-up. One of such exceptions is in s. 40(3.5)(c)(i), which effectively provides that there is no de-suspension if the CFA is merged such that there is a corporation formed on the merger (which then is deemed to own the CFA’s shares). In 2017-0735771I7 and 2018-0745501C6, the Directorate considered that s. 40(3.5)(c)(i) so applies if the CFA is wound-up on a rollover basis under s. 95(2)(e) or s. 88(3) into a parent.
CRA has now stretched s. 40(3.5)(c)(i) even further, and found that it applies if the CFA is wound-up into its three shareholders, having regard to ss. 33(2) and 3(1) of the Interpretation Act ("Words in the singular include the plural … unless a contrary intention appears.") This thus means that CRA regards all three former shareholders as being corporations that were formed on the “merger” and that own the CFA shares. CRA did not discuss what happens if one or two of the corporations subsequently ceases to exist.
Neal Armstrong. Summary of 25 June 2018 Internal T.I. 2017-0737151I7 under s. 40(3.5)(c)(i).
Applewood – Tax Court of Canada finds that a car dealer who promoted and processed credit insurance to its customers was supplying a GST/HST exempt “arranging for” service
A car dealer entered into a “Dealer Agreement” with a distributor of credit insurance products under which it was agreed that it would “up sell” the insurance products and assist the car customers in applying for the insurance in consideration for a commission of over 50% of the insurance premium. Pizzitelli J applied the single supply doctrine in finding that the predominant element of what was being supplied by the dealer was an exempt supply of arranging for the insurance – and that the exclusion in (r.4) of the definition of an exempt financial services for promotional and various administrative services did not apply. He stated:
…[T]he “purchaser” whose perspective one must objectively look through is the consumer of the end supply that is the subject matter of the transaction. In our case, that is the car buyer who buys the insurance product and he would clearly and objectively know he was buying insurance, not the expertise or training, or commercial efficacy or profitability of the Dealer or its staff as the predominant elements of the transaction, notwithstanding that such services … may have an ancillary role to play in his decision making process… . There is simply no merit to the Respondent’s argument that the services or duties under the Dealer Agreement that may be said to be owed to [the distributor] from the Appellant constitute the predominant element of the services to be provided under the Dealer Agreement… .
Neal Armstrong. Summary of Applewood Holdings Inc. v. The Queen, 2018 TCC 231 under ETA s. 123(1) – financial service – (r.4).