News of Note
CRA indicates that shares of a portfolio investment company potentially may qualify as excluded shares for TOSI purposes
Email this Content2018 STEP Roundtable Q.7 indicated that the shares of a holding company (or of a company generating no business income) cannot qualify as excluded shares for purposes of the split income rules. CRA noted that if the company instead has “a business whose principal purpose is to derive income from property, including interest, dividends, rents and royalties, such as investment management corporations” then “the condition in subparagraph (a)(i) of the definition of “excluded shares" in subsection 120.4(1) would be satisfied.”
For example, suppose that:
- Mr. and Mrs. X (both age 35) respectively hold 90% and 10% of the voting common shares of Holdco
- Holdco holds all the shares of Opco in whose business Mrs. X has no involvement
- Holdco in its preceding year did not receive any dividends from Opco and it holds passive investments (acquired some time ago out of dividends received from Opco) which, in the previous year, generated interest and dividends of $100,000,
- Holdco now pays a dividend (representing much of the previously received income) pro rata to Mr. and Mrs. X.
CRA considers that her shares are “excluded shares” if such $100,000 of income was “derived from the carrying on of a business the purpose of which is to earn interest income and dividends … notwithstanding the fact that the capital used in the acquisition by Holdco of the property used in carrying on its business was derived from dividends received from Opco.” As the dividend received by her would constitute an "excluded amount" per s. (g)(i) of the definition thereof, she would not be subject to the split income tax thereon.
Maybe it was a good idea after all for your family holding company to have accumulated a lot of portfolio investments.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.9 under s. 120.4(1) - excluded shares - (a)(i).
Commissioned employees can deduct only 25% of the restaurant tab when they take out a client in their base city
By virtue of the combined operation of s. 8(4) and s. 67.1(1), the deduction for where a commissioned employee takes a client out to a restaurant within the metropolitan area of the employer is limited to 25% of the bill, i.e., a complete denial for the employee’s portion under s. 8(4) and a 50% denial for the client’s portion under s. 67.1(1). The Quebec equivalent of s. 8(4) provides an exception from its application where the commissioned employee takes a meal with a client.
CRA effectively confirmed that this was how the federal provisions operated, and stated:
At the request of the APFF, the situation described in the statement of the question and the response of the CRA will be brought to the attention of that Department [of Finance].
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.8 under s. 8(4).
CRA acknowledges that it cannot make a partnership income or loss determination where the partnership has no T5013 filing obligation
CRA’s position is that where the partners of a partnership are not required to file a T5013 (which would generally be the case if the partnership does not carry on a business in Canada, and is not a Canadian partnership or SIFT partnership), CRA cannot make a partnership income or loss determination under s. 152(1.4). Instead, if CRA considers the partnership income or loss reported by a partner to be incorrect, it will assess the partner directly subject to the normal limitations under the general rules in s. 152(4). See also 2078970 Ontario and 2017-0734751I7.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.6 under s. 152(1.4).
CRA finds that the use of personal holding companies can jeopardize the ability to assign a portion of the specified partnership business limit under s. 125(8)
The partners of a professional partnership are Messrs. B and D, who hold their partnership interests directly, and the personal Holdcos for Messrs. A and C. The shares of Serviceco (which provides its services exclusively to the partnership and deals at arm’s length with each partner) are held directly by the three individuals and Mr. D's Holdco.
CRA found that of the four partners, only B would be able to assign to Serviceco under s. 125(8) all or any portion of the business limit that had been allocated to him by the partnership. In the case of Mr. D, the problem was that although he was a partner of the partnership, he was not a shareholder of Serviceco. The Holdcos for A and C had essentially the same problem: they were partners of the partnership but not shareholders of Serviceco.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.5 under s. 125(8).
The bcIMC case will be heard by the Supreme Court of Canada
The Supreme Court has granted leave to bcIMC (which holds and manages investments for the B.C. pension plans and was assessed by CRA for uncollected GST) to appeal the decisions of the B.C. Court of Appeal finding that its immunity as a BC Crown agent was taken away by the reciprocal taxation agreement between B.C. and Canada.
Neal Armstrong. Summary of British Columbia Investment Management Corp. v. Canada (A. G.), 2018 BCCA 47 under Constitution Act, 1867, s. 125.
CRA provides a numerical example showing the reallocation of safe income occurring on the payment of a high-low preferred stock dividend
The 100 common shares of Opco, having an aggregate FMV of $1,000,000 and an aggregate PUC and aggregate ACB to their holders, of $100, are held as to 25% and 25% by two unrelated holding companies (Holdco A and Holdco B) each wholly-owned by Mr. A and Mr. B and as to a further 25% and 25% by two discretionary family trusts for the families of A and B (Trust A and Trust B). The Opco common shares have an aggregate safe income of $400,000 ($100,000 to each shareholder).
Opco now pays a $400 stock dividend (valued at $400,000) of high-low preferred shares so that each shareholder receives 100 preferred shares with a PUC of $100 and a redemption amount of $100,000.
Consequences included the following:
- By virtue of s. 55(2.3)(b), Opco's safe income that contributed to the capital gain on the 25 common shares of the capital stock of Opco held respectively by Holdco A and Holdco B would be reduced by $100,000.
- By virtue of s. 52(3)(a)(ii), the 100 high-low preferred shares of each of Holdco A and B (with a FMV of $100,000) will have an ACB of $100,000.
- Each of Holdco’s 25 common shares (with an FMV of $150,000) will have an ACB of $25 and those 25 shares no longer have any safe income.
- By virtue of s. 52(3), the safe income of $100,000 contributing to the capital gain on the 25 common shares of the capital stock of Opco held respectively by Holdco A and Holdco B before the payment of the stock dividend is now reflected in the ACB of the 100 high-low preferred shares received as a stock dividend by Holdco A and Holdco B.
- As for Trust A and Trust B, immediately after the stock dividend, each of them will hold 100 high-low preferred shares having a redemption amount of $100,000 and, by virtue of s. 52(3)(a)(i) and para. (c) of s. 248(1) –amount, an ACB of $100.
- Opco’s safe income contributing to the capital gain on the 25 common shares held by Trust A and Trust B, respectively, will be reduced by only $100, being the stock dividend received by Trust A and Trust B. However, that safe income amount will be split between the two classes of shares held by Trust A and Trust B based on the unrealized gain on each class – and, as noted, there now is significant unrealized gain on the preferred shares.
Neal Armstrong. Summary of 5 October 2018 APFF Roundtable, Q.4 under s. 55(2.3).
Income Tax Severed Letters 10 October 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that the terms of an alter ego trust cannot permit charitable gifts before death
CRA indicated that if the terms of the deed of trust for one of the (alter ego etc.) trusts intended to qualify under ss. 73(1.01) and (1.02) provide for the possibility of making gifts to a registered charity before the death of the individual (and/or spouse or common-law partner), this would disqualify the trust for the purposes of the s. 73 rollover, even where no such gift in fact was made. Thus, a minor drafting bêtise could have major adverse consequences.
Neal Armstrong. Summary of 5 October APFF Roundtable, Q.3 under s. 73(1.01)(c).
CRA indicates that a deemed dividend realized by trust is deductible only if made irrevocably payable by the trustees in the year pursuant to trust deed terms
Following the death of the spouse respecting a spousal trust, the trust’s sole asset (a private company) is wound-up, thereby giving rise to a deemed dividend under s. 84(2). Can this dividend be made payable to the residuary beneficiaries of the trust (the surviving children) given that the trust deed does not contain an extended definition of income, but also given that the children’s interests in the trust at that point are vested indefeasibly? CRA stated:
[I]f the terms of the trust indenture are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend for the purposes of subsection 84(2), we will generally allow a deduction by virtue of paragraph 104(6)(b) in respect of that deemed income. However, this deduction will be permitted to the extent that the trustee exercises this power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in satisfaction of the beneficiary’s interest in the capital of the trust.
One of the debatable points in the above is that if all the property has vested indefeasibly equally in the two beneficiaries, then presumably the trustees on that basis (and irrespective of the trust indenture definition of income) could pay the deemed dividend to the beneficiaries.
Neal Armstrong. Summary of 5 October APFF Roundtable, Q.2 under s. 104(24).
CRA appears to address whether withholding on interest subject to the thin cap rules can take into account a subsequent s. 214(16)(b) designation
We will be publishing the October 5, 2018 APFF Roundtable on a piecemeal basis over the next week or so as we summarize the questions posed and prepare full-text translations of the CRA preliminary written answers.
A corporation with a June 30 taxation year end makes monthly payments of interest on a loan from its non-resident parent that it treats as being subject to Part XIII withholding of 15% - but when it files its annual return, it recognizes that some of such interest was deemed under s. 18(4) and s. 214(16)(a) to be dividends subject to a 5% withholding tax rate. CRA effectively indicated that once the excess withholding was made, the only way to get it back was to file an NR-7, which is only filed on an annual basis. However, CRA also noted that in its annual return the corporation could make s. 214(16)(b) designations as to which of the interest payments were deemed to be dividends, and stated that s. 214(16)(b) thus allows:
for flexibility and certainty with respect to the corporation’s withholding and payment obligations in respect of the amounts of such deemed dividends during a taxation year.
The implication may be that the corporation can guess during the year as to which interest payments it will subsequently designate to have been dividends and withhold at the lower rate accordingly. This is analogous to the modus operandi of some income funds and REITs, whose income distributions are subject to Part XIII tax and whose capital distributions are not subject to Part XIII.2 tax, and who must estimate what portion of their monthly distributions will turn out to have been income that was subject to withholding based on their annual results.
Neal Armstrong. Summary of 5 October APFF Roundtable, Q.1 under s. 227(5).