News of Note
CRA declines to give comfort that a U.S. style merger qualifies as an ETA s. 271 merger
Email this ContentAs a result of the merger of USCo1 into USCo2 with USCo2 as the survivor (“MergeCo”), all of the assets of the Canadian branch business of USCo1 are transferred to USCo2. Would ETA s. 271 (which applies where “two or more corporations are merged or amalgamated to form one corporation”) deem such transfer not to be a supply? CRA responded:
Where pursuant to the state, provincial or federal laws under which the entities are incorporated, the predecessors are continued as one corporation with the new successor being a continuation of the predecessors (otherwise than as a result of a purchase or distribution of property ...), it appears that section 271 would apply.
This, of course, was ducking the question. Everyone would accept that a conventional Canadian continuation-style amalgamation would be a qualifying amalgamation (or merger). The question is whether a conventional U.S.-style absorptive merger with only one survivor would qualify as a merger (or amalgamation) to “form” one corporation. This answer suggests that CRA is either unsure or negative on the issue. Since the questioner did not provide anything other than the bare bones of the U.S. corporate law, diffidence is unsurprising.
Neal Armstrong. Summary of 23 March 2017 CBA Commodity Taxes Roundtable, Q. 5 under ETA s. 271.
CRA indicates that the s. 110(1.1) election is available even if, absent the election, no employer deduction would be claimable
A stock option plan also includes a cashless exercise provision that permits an employee to elect, in lieu of paying the exercise price and acquiring the optioned shares, to receive the in-the-money value of the options in the form of treasury shares. CRA confirmed that, absent a s. 110(1.1) election, the employee would not be eligible for the s. 110(1)(d) deduction, and that a s. 110(1.1) election could be made in order for that deduction to be accessed. CRA stated:
[T]he mechanism in subsection 110(1.1) is available to an employer regardless of whether the employer is already denied a deduction for the stock option expense because of another provision of the Act (such as paragraph 7(3)(b) or 18(1)(b)).
Neal Armstrong. Summary of 18 August 2017 External T.I. 2016-0672931E5 under s. 110(1.1).
Income Tax Severed Letters 1 November 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Cook – Tax Court of Canada gives tax effect to a retroactive court order
Whether the taxpayer was able to take a deduction for a dependent child depended on whether in the year in question she was considered to have a support obligation to her ex-spouse. They had agreed that she no longer was obligated to pay support, but this was not reflected in a court order until a subsequent year, although the court order was stated to have effect to the date of their support-cessation agreement. After noting conflicting authority on the point, Russell J stated that he preferred the authority that the retroactive nature of the subsequent court order should be respected.
However, the taxpayer’ claim still failed on the ground that “no statutory language used in or in connection with subsection 118(1) indicates that the deductions may be prorated for a taxation year” – and here, the support obligation had been agreed to be terminated only partway through the year.
Neal Armstrong. Summary of Cook v. The Queen, 2017 TCC 188 under s. 118(5).
Whittall - Tax Court of Canada finds that gutting only half the rooms in a house did not qualify as “substantial renovation” for GST/HST purposes
An individual gutted and renovated approximately half of the floor space in his bungalow, and did less substantial renovations to the other half (e.g., merely replacing windows, fixtures and doors, and repairing and painting, but not replacing, the drywall). After reviewing the mildly inconsistent jurisprudence, Bocock J concluded that this did not meet the statutory test of “substantial renovation,” so that the individual was not eligible for the GST/HST new housing rebate.
Neal Armstrong. Summary of Whittall v. The Queen, 2017 TCC 212 under ETA s. 123(1) – substantial renovation.
The revised stub-period FAPI rules raised a double-taxation issue
The focus of both the currently-proposed stub-period foreign accrual property income rules and those proposed over a year ago was on the situation where the percentage interest (now referenced by the concept of participating percentage rather than surplus entitlement percentage) of a taxpayer in a foreign affiliate with FAPI decreases in a year, so that there is a deemed year end and recognition by it of its share of the FAPI that accrued up to that point. In the 2016 draft rule, draft s. 91(5) also provided elective relief in some situations where there was an increase in the percentage interest of another taxpayer in the foreign affiliate with FAPI, so that there could be an exclusion from its income for the portion of the FAPI of that FA that accrued in the stub period while it had a lower percentage interest. Subject to transitioning, draft s. 91(1.5) rule has been removed from the revised draft s. 91(1.1) et seq. rules. This was potentially problematic:
The technical notes say that the concept of connected corporation now includes non-arm's-length corporations as described above, which makes unnecessary subsection 91(1.5) in the 2016 draft. However, subsection 91(1.5) in that draft applied to all taxpayers, not just corporations. Hence, under the 2017 draft, the same stub-period FAPI is now taxed twice—in a taxpayer that has a PP decrease, and in another arm's-length non-corporate taxpayer (such as an individual or a trust) that has a PP increase.
However, as subsequently noted by the authors, the October 25, 2017 Notice of Ways and Means Motion likely addresses this issue by replacing the definition of "connected corporation" by "connected person" (defined in draft s. 91(1.3).)
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "Revised Stub-Period FAPI", Canadian Tax Highlights, Vol. 25, No. 10, October 2017, p. 3 under s. 91(1.2).
Scotia Mortgage Corp. v. Gladu – B.C. Supreme Court finds that it lacks jurisdiction to declare that a vendor was a Canadian resident for s. 116 purposes
Two banks which had foreclosed on properties of non-resident debtors, petitioned the B.C. Supreme Court for a declaration that a purchaser of the foreclosed properties would be considered to be acquiring them from the (resident) banks rather than from the non-residents (so that s. 116(5) would not apply.) Macintosh J found that he lacked the jurisdiction to make the requested declaration given that, as a practical matter, it related solely to a federal income tax issue.
Neal Armstrong. Summary of Scotia Mortgage Corporation v Gladu, 2017 BCSC 1182 under s. 220(1).
BT Céramiques – Quebec Superior Court finds that the mere suspicion of tax evasion and corrupting CRA officials is insufficient to invalidate audit information
Jarvis found that where the predominant purpose of a particular inquiry is the determination of a penal liability (e.g., under s. 239 of the ITA), CRA officials may not have recourse to the inspection and requirement tools in the ITA. In reversing the decision of the Court of Quebec to invalidate evidence obtained in a search and seizure of a Quebec registrant (BT Céramiques), which was believed to have fraudulently claimed input tax credits and corrupted CRA officials, Payette JCS stated:
When it commenced the audit, the CRA only had suspicions that BT Céramiques was engaged in tax evasion and that a “grand patron” in the CRA was assisting it. …
[T]he judge contrasted “auditing” and “investigation” … without noting that the audit powers themselves constitute powers of investigation, and without pausing to determine if the objective of the steps she described was to establish penal liability of the respondents.
Neal Armstrong. Summary of R. v. BT Céramiques Inc., 2017 QCCS 4262 under Charter s. 8.
Finance recognizes, as anomalous, the double deduction of the ACB of a corporate held life insurance policy in computing the CDA addition to two corporate beneficiaries of the proceeds
In 2017-0690311C6, Corporation A was the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C were each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A died after March 21, 2016 at a time that the adjusted cost basis of the policy to Corporation A was $200,000. CRA considered that the addition to the capital dividend account (CDA) of each of Corporation B and Corporation C was $300,000 (=$500,000-$200,000), not $400,000, i.e., the full ACB reduces the CDA addition for each rather than being prorated. Finance recognized that this result is anomalous, stating that:
The Department of Finance is prepared to address this issue as part of its ongoing review of the rules of the Income Tax Act.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 89(1) – capital dividend account – s. (d)(iii).
Finance indicates that extending s. 110.6(15)(a) to address disability coverage would raise potential policy issues
The two individual shareholders of a small business corporation agree that on the disability of either of them, his shares will be purchased out of the proceeds of a policy purchased by the corporation. What is the policy reason for not applying the s. 110.6(15)(a) cash-surrender-value rule so as to exclude the death benefit in determining whether the corporation qualifies as an SBC? Finance responded:
[T]he examination of such an issue could only be made in the context of a comprehensive review of the taxation of disability and critical illness insurance policies - unlike life insurance policies, the Act does not provide a comprehensive set of tax rules for disability and critical illness insurance policies. In addition, there may be significant differences between life insurance and disability or critical illness insurance, including the fact that an insured event under disability or critical illness insurance does not necessarily imply that the insured person ceases to participate in the corporation's business on a permanent basis.
Neal Armstrong. Summary of 6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.3 under s. 110.6(15)(a).