News of Note
Six further full-text translations of CRA technical interpretations are available
Email this ContentThe table below provides descriptors and links for six French technical interpretations released in March of 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ¾ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Finance is not contemplating any amendments to fix the problems with the Pt IV tax refund exception to s. 55(2)
Comments on the s. 55(2) rules include:
- Given that CPL Holdings found that a creditor-proofing transaction, which had the effect of significantly reducing the capital gain that would have been realized on the disposition of shares, did not have that purpose, the position of CRA in 2015-0623551C6, that creditor-proofing transactions offend the new purpose tests, is questionable.
- The mechanics of the amendment to the Part IV tax exception (so that it is not available even if the Part IV tax is refunded as a consequence of the payment of a dividend to an individual) create a host of issues that may not have been anticipated by the Department of Finance (including over-integration or under-integration). “However, the department is now fully aware of these issues and has indicated that it currently has no intention of making any further amendments to the provision, as suggested in the submissions by the joint committee.”
- In 2015-0610681C6, CRA indicated that it would challenge a preliminary transaction segregating pre-existing ACB from shares to be subsequently redeemed (i.e., shunting ACB away from shares that are being redeemed in reliance on the s. 55(3)(a) exception). However, what if a dirty s. 85 reorg had resulted in common shares of Opco, with an FMV of $1,000,000 and an ACB of $100,000, being converted into preferred shares with an ACB and FMV of $100,000 and new common shares with a nil ACB and an FMV of $900,000? Quaere whether it would be acceptable to engage in a preliminary cost base consolidation transaction to ensure that a redemption of the preferred shares would result in the disappearance of only $90,000 of ACB.
- CRA has not made any specific comments regarding the potential application of the new s. 55 to PUC-streaming transactions. In its simplest form, PUC of the class of shares to be redeemed, in reliance on the s. 55(3)(a) exception, can be reduced with a corresponding increase in the PUC of another class.
Neal Armstrong. Summaries of Doron Barkai and Alexander Demner, "Dealing with New Subsection 55(2): Issues and Strategies", 2016 Conference Report (Canadian Tax Foundation), 6:1–56 under s. 55(2.1)(b), s. 55(2.1)(c), s. 55(2.3), s. 55(2), s. 55(3)(a), s. 248(10) and s. 55(1) – safe income determination time.
Savage – Tax Court of Canada finds that a “dog kennel” operation was a source of revenue, but not of income
A couple had two dogs, which supposedly were part of an objective of developing a show dog business, but were not registered. The couple had about $2,000 a year in revenues from dog sitting and training. C. Miller J found that they were not able to deduct their claimed losses of $15,000 to $22,000 per year, as there could be no “objective finding of commerciality” for their “dog kennel” operation, and the evidence “smack[ed] more of a hobby than a business,” so that the operation did not represent a source of income. Accordingly, it was unnecessary to resume the hearing to review evidence as to the expenses incurred by them.
The effect of the CRA assessments, which thus were confirmed, was that they received their revenues on a tax-free basis, irrespective of the reasonableness of their claimed expenses.
Neal Armstrong. Summary of Savage v. The Queen, 2017 TCC 247 under s. 3(a) – business source.
Notwithstanding the very different Cdn and U.S. rules, a Canadian resident can establish a U.S. dynasty trust
“Dynasty trusts” are commonly used in the U.S. as a way to shelter transfers from U.S. generation-skipping transfer tax.
A Canadian resident on death can establish a U.S.-resident dynasty trust with exclusively U.S. residents and holding property that is not taxable Canadian property or that is exempted under Art. XIII of the Treaty. The property transferred to the trust generally has been stepped up under s. 70(5) and the trust is not deemed to be resident under the s. 94 rules once the settlor is deceased. This means that the trust will not be subject to Canadian income taxation or the 21-year deemed realization rule.
Neal Armstrong. Summary of Robert E. Ward, "Twenty-One Years Is Not Enough: Avoiding Canada's 21-Year Rule with Trusts for U.S. Beneficiaries," Tax Management International Journal, 2017, p. 710 under s. 94(5).
CRA extends its policy on the executor’s year to a stub executor’s year
IT-286R2, para. 6 states that the income of the trust for that year is considered to be payable to the beneficiaries where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the taxation year of a testamentary trust coincides with the executor’s year, and all of the beneficiaries agree to this treatment. CRA confirmed that where the initial taxation year of the estate is less than one year, the above comments apply to the “stub” portion of the executor’s year that is within the first estate year. In this regard, CRA indicated that the mere fact that the beneficiaries each had a fixed percentage entitlement to the net estate would not by itself result in the trust income being considered to be payable to them during the stub executor’s year.
As to the portion of the executor’s year falling in the second estate year, although CRA did not state it this baldly, effectively the executor’s year concept was irrelevant given that the income for the second estate year could be paid or payable to the beneficiaries under the general s. 104(24) rules by the end of that year.
Neal Armstrong. Summary of 14 September 2017 CPA Alberta Roundtable, Q.25, 2017-0703921C6 under s. 104(24).
CRA indicates that waivers generally cannot be used to extend the 6-year period for claiming a FTC under s. 126(2.21)
Where an individual, who had been resident in Canada for over five years, realized a capital gain from the deemed disposition of non-Canadian real property under s. 128.1(4)(b) on emigrating from Canada, he would be potentially eligible under s. 126(2.21) to claim a Canadian foreign tax credit for foreign taxes that become payable on the gain that accrued in Canada, provided that this credit is assessed within the extended reassessment period of six years following the emigration year. Can this period be extended by filing a waiver with CRA? CRA stated:
[I]f any of the circumstances to support the deduction under subsection 126(2.21) … (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) … it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.
This seems to be saying that a waiver can be useful in giving CRA the time to process the FTC, but is not a mechanism for getting the FTC for foreign tax that is not triggered until, say, 20 years after the emigration year.
Neal Armstrong. Summary of 11 October 2017 External T.I. 2016-0660421E5 under s. 152(4)(b)(i).
CRA provides comfort on when provision of corporate security for a shareholder loan will not trigger the B2B loan rules
When will the back-to-back loan rules in s. 15(2.17) apply where a corporation provides security to a lender to its shareholder? CRA noted that “where a security interest in the assets of the company is tantamount to putting assets in the hands of the intermediary for its general use, the shareholder loan rules will ordinarily apply.” On the other hand:
[W]here a financial institution lends money on commercial terms to an individual that is a shareholder of a corporation, the corporation provides a security interest in its property to the lender, and such property can only be used in the event of default on the loan as a means of repaying amounts owing by the debtor under the lending agreement, then the security interest would not ordinarily be considered a “specified right”.
CRA also noted that this quoted safe harbour is not affected if the security interest is granted by the corporation to secure more than one shareholder debt.
Neal Armstrong. Summary of 14 September 2017 CPA Alberta Roundtable, Q.11, 2017-0703901C6 under s. 15(2.16)(c)(ii).
Income Tax Severed Letters 20 December 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Groscki – Tax Court of Canada finds that a director was not liable for failure to obtain a s. 159(2) certificate before his corporation disposed of most of its assets
Bocock J appears to have found that a director was not a “legal representative” of a Macao-incorporated corporation that disposed of all of its inventory (being substantially all of its assets) without obtaining a s. 159(2) clearance certificate given inter alia that the director did not do a lot more than directors normally do and, in particular did not act as a liquidator given that there was no liquidation process authorized by the corporation nor any formal authority granted to him to act as a liquidator, de facto or otherwise.
Neal Armstrong. Summary of Groscki v. The Queen, 2017 TCC 249 under s. 159(3).
Farm Credit Canada – Federal Court of Appeal finds that “loan corporation” for GST/HST purposes has a broader meaning than its provincial regulatory meaning
Different types of selected listed financial institutions (SLFIs) are subject to different attribution rules for determining the blended HST rate of tax to which they are ultimately subject. One of these SLFI categories is for “a trust and loan corporation, a trust corporation or a loan corporation.” “Loan corporation” is undefined.
Farm Credit Canada (a federal Crown corporation providing financing assistance to farmers) argued that it was not a “loan corporation” because the quoted phrase above had a well understood meaning given that the provincial legislation regulating trust and loan corporations defined a “loan corporation” as a corporation that was incorporated for the purpose of borrowing money from the public (which Farm Credit Canada did not do) and then lending or investing such money. It preferred another rule for general non-loan corporations that would have given weight to much of its payroll being in low-rate provinces.
Near JA, in rejecting this submission, found that the words “loan corporation” simply mean “a corporation that makes loans.” He also found that this accorded with the rule’s likely policy, which would have contemplated a level playing field between privately-funded loan corporations and those funded with deposits from the public.
Neal Armstrong. Summary of Farm Credit Canada v. The Queen, 2017 TCC 29 under Selected Listed Financial Institution Attribution Method (GST/HST) Regulations, s. 26(1).