News of Note
Aubrey Dan Family Trust – Ontario Court of Appeal confirms that a federal form applied for Ontario purposes without any specific reference on its face to that effect
Email this ContentA purported Alberta trust, that wanted more time to make submissions to CRA that it was not resident in Ontario, provided a related waiver on the prescribed (T2029) federal form. When it was ultimately reassessed for Ontario income tax (with the previously assessed Alberta tax being reversed) it unsuccessfully argued that the waiver was invalid because the T2029 form did not refer to the fact that it was a prescribed form for provincial purposes. The Court of Appeal confirmed the finding of Lederman J below that it was sufficient, for the form to “purport” to be an authorized form for these purposes, to bear the CRA insignia without any reference being made to it being the prescribed form for Ontario purposes.
Neal Armstrong Summary of Aubrey Dan Family Trust v. Minister of Finance, 2017 ONCA 875 under Taxation Act, 2007 (Ontario), s. 158.
Five further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for five French technical interpretation released in April 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for December.
CRA may rule that an election for a listed Target to cease to be a public corporation can be made after Target’s amalgamation
A corporation cannot make an election under (c)(i) of the public corporation definition to cease to be a public corporation (based on now being closely held) while its shares are still listed. This may be problematic if the stock exchange has not confirmed the delisting of Target until following the amalgamation of Target with Buyco (given that Amalco is tainted as a public corporation if a predecessor was so tainted.)
However, CRA generally is prepared to rule that the election can be made after the amalgamation (and after the delisting has occurred) even though at the time of making the election the Target shares no longer exist.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.12 under s. 89(1) - public corporation - (c)(i).
CRA indicates that the Treaty anti-hybrid rule (Art. 7(b)) applies to dividends paid by a ULC to two LLCs held by U.S. C-Corps
A Canadian-resident unlimited liability company (ULC) pays dividends to its two (disregarded) LLC shareholders, which are each held by a U.S. C-Corp. Are the dividends eligible for Treaty benefits?
CRA indicated that because ULC is fiscally transparent, the payment from ULC of a dividend is viewed as a partnership distribution, so that the same result in the two jurisdictions is not being obtained. Accordingly, the application of the anti-hybrid rule in para. 7(b) of Article IV of the Treaty would apply, so that the LLCs (which in the absence of the 7(b) rule, would qualify under para. 6 of Art. IV for Treaty benefits) would be subject to 25% Canadian withholding tax on the dividends.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.11 under Treaties – Articles of Treaties - Art. 4.
CRA indicates that it could assess the same cross-border transaction both under GAAR and the PPT
CRA indicated that the GAAR Committee “may offer a useful model” for ensuring consistency of application of the MLI principal-purpose test (“PPT”) within the CRA when the MLI comes into effect. PPT ruling requests will be entertained when this occurs.
Although CRA continues to contemplate the application of GAAR to transactions undertaken primarily to secure a tax benefit accorded by a tax treaty (and has done so), it considers that in appropriate circumstances, the PPT and GAAR could apply as alternative assessing positions.
CRA considers it to be premature to assess how the case law on s. 245(4) will inform the PPT’s application.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.8 under Treaties - MLI - Art. 7(1).
CRA indicates that it will not extend its policy on set-off of unequal redemption notes beyond a butterfly reorg
As described in 2015-0601441R3, a partnership was wound-up under s. 98(5) by one partner (Sub2) transferring its partnership interest under s. 85(1) to the other partner (Sub2) for consideration including Sub1 Preferred Shares.
A second ruling letter deals with the elimination of this cross-shareholding in reliance on the s. 55(3)(a) rule. This is accomplished by the Parent of Sub2 exchanging its common shares of Sub2 under a s. 86 reorg for new common shares and (non-voting redeemable retractable) Sub2 Preferred Shares – and then transferring the Sub2 Preferred Shares under s. 85(1) to Sub1 under s. 85(1) in exchange for common shares of Sub1. Notes arising from the cross-redemption of the Sub1 Preferred Shares and Sub2 Preferred Shares then are set-off.
CRA ruled that the debt forgiveness rules would not apply to the note set-offs provided that the two notes were equal in amount. This is not as vacuous as it sounds. On a spin-off that complied with the butterfly rules, CRA would have ruled that s. 80 did not apply to the note set-off even though the two note amounts differed. This note difference typically arises because the value of the shares of the distributing corporation has a discount for underlying taxes, whereas the assets distributed by it to the transferee corporation do not. Here, the summary answered the question of “Whether administrative position in respect of section 80 applies” with “No,” stating: “Set-off and cancellation of debts not occurring in context of a distribution as defined in subsection 55(1).” The value of the Sub1 Preferred Shares reflected the value of a partnership interest for which there would be no discount for underlying taxes, whereas the value of the Sub2 Preferred Shares was effectively required to be based on the value of that partnership interest even though their redemption value was being carved out of a Sub2 equity value that likely reflected such a discount.
After the ruling application went in, a paragraph was added stipulating that, on the s. 86 reorg of Sub2, the paid-up common shares of the old common shares of Sub2 would be divided between the Sub2 Preferred Shares and the new common shares based on their relative fair market value.
Neal Armstrong. Summary of 2016 Ruling 2015-0623731R3 under s. 55(3)(a), s. 80(1) – forgiven amount and s. 86(1).
9141-5315 Québec - Court of Quebec finds that a restaurant established due diligence respecting a cashier’s failure to provide a receipt
A Revenue Quebec employee made a purchase at a Tim Hortons restaurant in Montreal and was not provided by the cashier with a receipt. The restaurant was charged for this failure under a more rigorous Quebec version of ETA s. 223(2) that was applicable to Quebec restaurants.
In finding that the restaurant had made out a due diligence defence, Costom JCQ noted that it had a detailed system in place to remind employees of the obligation to provide a receipt (including a pop-up reminder on the cash register on each sale, required written acknowledgements of this obligation by the employees and potential disciplinary consequences) and stated:
All these measures have satisfied the Court that the accused was not simply content to inform its employees of the obligation to provide customers with their invoice, but that it had put into effect a system of control and supervision of the application of this directive.
Neal Armstrong. Summary of Agence du revenu du Québec v. 9141-5315 Québec Inc., 2017 QCCQ 12233 under ETA s. 223(2).
CRA indicates that where Holdco receives a dividend subject to refundable Pt. IV tax and to s. 55(2), two different dividends should be reported for Pt. IV and s. 55(2) purposes
Holdco receives a dividend of $400,000 that is subject to Part IV tax of $153,333 (38.33% of $400,000) equalling the connected payer’s dividend refund and, in turn, pays a dividend to its shareholders resulting in a refund of the Part IV tax – so that the dividend received by Holdco is subject to s. 55(2). However, such application of s. 55(2) converts the dividend into a capital gain, thereby (it was suggested) reducing the Part IV tax under a circular calculation.
CRA considered such a circular calculation to be contrary to the scheme of s. 55(2), that for a dividend to be subject to s. 55(2), based on a Part IV tax refund, such refund must be a real refund of real tax (as per Ottawa Air Cargo) and that the right approach is for Holdco to declare $153,333 of Part IV tax in its initial return and, in a second return, show the Part IV tax paid for the taxation year as unchanged, even though the amount of the dividend received has been reduced by the application of s. 55(2).
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.6 under s. 55(2).
CRA indicates that, notwithstanding dividend bifurcation under s. 55(5)(f) (or 55(2.3), the s. 55(2.1)(b) purpose test is to be applied to the whole dividend
CRA did not like the suggestion that safe income of Opco effectively can be duplicated on the basis that where a dividend in excess of safe income is paid by Opco to Holdco, the bifurcation by s. 55(5)(f) of the dividend into two parts means that the first component is protected as coming out of safe income, and the second component also is not subject to s. 55(2) if, as per s. 55(2.1)(b), its purpose is not to significantly reduce the gain on or the value of the shares.
However, to get to the “right” result, CRA applied a gymnastic interpretation of ss. 55(2.1) and (2) under which in four places “dividend” refers to the whole dividend, and in two places refers only to the portion thereof in excess of safe income. For some reason, this brings to mind the statement in Gulf Canada that: "There is a strong, indeed overwhelming, presumption that Parliament, having used the same word three times in the same subsection, intended it to bear the same meaning each time."
Hopefully Finance will accept the CRA interpretation as being judicially persuasive, so that these rules do not suffer further encrustation.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.5 under s. 55(2.1)(b) and s. 55(2.3).
CRA indicates that there is an immediate CDA addition for a non-redemption dividend subject to s. 55(2)
S. 55(2)(c) deems most dividends that did not arise on a share redemption and to which s. 55(2) applies to be gains “for the year,” without specifying when in the year the deemed gains occurred. In a reversal of the result in 2011-0412131C6 (which dealt with somewhat different statutory wording), CRA has now indicated that a gain under s. 55(2)(c) is deemed to be realized at the time of the payment of the dividend, with the result that there is an addition to the capital dividend account at that time rather than only on completion of the year.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.4 under s. 55(2)(c).