News of Note
CRA confirms that an alter ego trust is entitled to a deduction for ordinary income distributions in the year of death
Email this ContentS. (i)(B)(I) of Element B in the formula in s. 104(6) ensures that no deduction is available to the an alter ego for any amount included in the trust’s income in the trust year ending with the death of the lifetime beneficiary because of the application of the deemed disposition rules in ss. 104(4) to (5.2). CRA agreed that, however, the alter ego trust is entitled to a deduction under s. 104(6)(b) for the amount of dividend income received by it that was made payable to that beneficiary prior to the death.
Neal Armstrong. Summary of 2 May 2018 External T.I. 2017-0717831E5 under s. 104(6)(b) – B – s. (i).
Iberville Developments – Tax Court of Canada finds that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)
All you gotta do to offset the capital gain from a property sale is run the sale through a new partnership. For example, a taxpayer with a property with an adjusted cost base and fair market value of $20 and $120, respectively, contributes the property under s. 97(2) to a newly-formed LP in consideration for units with a FMV of $120. This is a barter exchange so that on general principles, the cost of the units is $120. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $20 “shall be added” to the ACB of the partnership interest, so that its ACB is now increased to $140. The property is sold by the LP at a gain of $100, which is largely allocated to the taxpayer, and the ACB of its interest thus is increased to $240. The taxpayer can then realize a capital loss on winding-up LP that more than offsets the capital gain that was realized on the sale.
In dealing with transactions that were only modestly more complex than these, Boyle J first found that the Quebec LP had been formed several hours before the time of the drop-down transaction, at the time that the limited partnership agreement was entered into. It was at that time that the taxpayer acquired its interest in the LP, so that its cost was nil. Partnership units are an irrelevancy under the scheme of the Act. Thus, it did not matter whether the taxpayer was issued additional units on the drop down – all it continued to have was a partnership interest with a nil cost, and with an ACB as increased only as contemplated under s. 97(2)(b) (i.e., to $20 in the above example).
Even if the taxpayer had managed to have the LP formed simultaneously with the drop-down transaction, Boyle J still would not have been persuaded. It was not at all clear to him that under the scheme of the Act, the cost of the taxpayer’s interest was to be determined at the very instant of the drop-down conveyance - rather than immediately after, when s. 97(2)(b) would govern.
It is unclear whether the reasoning in this case will give rise to interpretive difficulties where there are various contributing partners and the s. 97(2) rollover is not utilized. S. 97(1) does not explicitly deal with adjustments to the cost or ACB of a partnership interest – but Boyle J nonetheless helpfully stated that “subsection 97(1) … would be the specific rule which would provide that a transferor partner’s cost of their partnership interest is fair market value.”
Neal Armstrong. Summaries of Iberville Developments Limited v. The Queen, 2018 TCC 102 under s. 97(2)(b) and s. 97(1).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Technical Interpretation released in August and September 2013, as fully translated by us.
These (and the other full-text translations covering all “French” Interpretations released in the last 4 3/4 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall. You are currently in the open week for June.
CRA’s pipeline policy has not changed
In the course of confirming that its position on pipeline transactions has not changed as a result of s. 246.1 being proposed, and then being dropped, CRA referenced with approval the positions taken at STEP 2011 (2011-0401861C6), and indicated that it will continue to issue favourable rulings where the facts do not involve a cash corporation, there is a continuation of the business for at least one year, and this is followed by a progressive distribution of the corporate assets.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.10 under s. 84(2).
CRA references a checklist for determining indefeasible vesting
For purposes of the 21-year deemed disposition rule, a trust does not include a trust "all interests in which … have vested indefeasibly". In commenting on the “vested indefeasibly” concept, CRA indicated:
- although IT-449R dealt with this concept in the s. 70(9) rollover context, its comments were equally applicable to the trust definition
- the Boger Estate definition was accepted as authoritative
- the 2006 article of Catherine Brown lays out a good checklist of the questions to ask in making the determination
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.9 under s. 108(1) – trust – (g).
CRA dismisses a judicial comment that s. 70(5) is inapplicable to non-residents
In the course of dealing with a secondary issue, McKenzie stated that s. 70(5) does not apply to a non-resident person. This statement was per incuriam.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.8 under s. 70(5).
CRA indicates that a corporation with only property income does not accord excluded share status
CRA confirmed that where a corporation has no business income because it derives income from property (e.g., rental income that is property income), its shares cannot qualify as excluded shares. In particular, where both the business and service income are nil, it will not be considered to satisfy the requirement that less than 90% of its business income is from the provision of services.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.7 under s. 120.4(1) – excluded shares.
CRA indicates that holding company shares do not qualify as excluded shares for TOSI purposes
CRA indicated that the definition of excluded shares should generally not include the shares of a Holdco, because all or substantially all of its income would be derived from a related business with respect to the individual. Thus, any income or taxable capital gains from the disposition of such shares will not be an excluded amount and will be split income of the individual subject to the tax on split income unless another exclusion applies, for example, if the related business is itself an excluded business.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.6 under s. 120.4(1) – excluded shares.
In TOSI context, CRA considers that “income” means “revenue” and applies a single supply doctrine to incidental provisions of property
Under the split income proposals, dividends or gains from “excluded shares” are excluded from the tax on split income. Subpara. (a)(i) of the excluded share definition requires that at least 90% of the corporation’s "business income" be from the provision of services, and para. (c) requires that "all or substantially all of the income" of the corporation be not derived directly or indirectly from related businesses.
CRA indicated that these references to “business income” and “income” are to gross income rather than net income.
Where the corporation has income from the provision of services and from income from non-services, the two should generally be computed separately. However, CRA apparently considered that where the non-service income was necessary for or incidental to the provision of the services themselves, all of the income would be considered to be services income. This is reminiscent of the single supply doctrine applied on the GST side (see, e.g., OA Brown and, most recently, Intrawest).
It remains to be seen whether CRA ports over the expansive interpretation it has given in the GST context to the concept of a supply of property. For example, it considers (e.g., in 2014 CBAO Roundtable, Q.35) that a fee for a training session or seminar is for the supply of intangible personal property rather than of a service. Or maybe CRA will look more to the M&P and Class 29 cases (see, e.g., Reg Rad, Crown Tire, Canadian Wirevision and Will-Kare).
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.5 under s. 120.4(1) – excluded shares.
626468 New Brunswick – Tax Court of Canada finds that safe income was reduced by corporate income taxes that would be computed on that income
An individual rolled his apartment building into a Newco in consideration for a mortgage assumption and shares with nominal paid-up capital, and then rolled those shares into a new Holdco. Following the realization shortly thereafter by Newco of a taxable capital gain and recapture of depreciation on a sale of the building, Newco increased the adjusted cost base to Holdco of its shares by effecting a series of s. 84(1) dividends (including a capital dividend) – following which the individual sold his shares of Holdco to a third party for a sale price based on the amount of cash sitting in Newco.
D’Auray J followed Deuce Holdings and a statement in Kruco in finding that the safe income of Newco was reduced by the amount of corporate income tax ultimately payable by it on its gain on the building sale. She also rejected the argument of Holdco that at the time of sale, no income taxes had yet become payable (because the income for the year had not yet been determined) so that there were not yet any corporate income taxes to deduct from safe income.
Neal Armstrong. Summary of 626468 New Brunswick Inc. v. The Queen, 2018 TCC 100 under s. 55(2.1)(c).