News of Note
CRA indicates that the s. 13(38)(d)(iii) transitional election is irrelevant to ECP dispositions by a calendar-year partnership
Email this ContentA partnership with a calendar year end, but whose corporate partners have March 31 taxation year ends, disposed of eligible capital property in November 2016. CRA indicated that because income is computed at the partnership rather than partner level, there is no need for (or ability of) the partners to make the s. 13(38)(d)(iii) transitional election, i.e., the relevant taxpayer had a calendar year.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.11 under s. 13(38)(d)(iii).
CRA indicates that a s. 184(3) excess dividend election deems the elected-upon amount to retroactively be income even if it is still unpaid
The s. 184(3)(b) excess dividend election is made respecting the amount of the original dividend that was payable. S. 184(3)(d) deems the shareholder to have received the excess dividend. CRA confirmed that the effect of this is that the excess portion of the dividend becomes taxable to the shareholder as of the time of the original dividend declaration, even if it still remains unpaid.
CRA had already notified Finance of this anomaly.
Neal Armstrong. Summaries 6 October 2017 APFF Roundtable, Q.10 under s. 184(3) and s. 185(3).
Income Tax Severed Letters 11 August 2017
This morning's release of 15 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA asserts that a second freeze transaction by a family trust could be viewed as an indirect transfer by the original freezor
As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (“Initial Trust”), with spouse and children as beneficiaries, holds the non-voting common shares. Now a further freeze is implemented under which Initial Trust exchanges its shares for preferred shares, and New Trust, with spouse children, grandchildren and family corporations as beneficiaries, subscribes for new non-voting common shares.
CRA acknowledged that only the (born) grandchildren (and not the spouse) could be designated persons in respect of Initial Trust (which was the relevant transferor to Opco on the second freeze) for s. 74.4(2) purposes, but did not give up that easily, stating:
[T]he application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property made during this estate freeze was made indirectly by Mr. A by means of Initial Trust.
Consequently, were it were possible to establish that the Purpose Test was satisfied, subsection 74.4(2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.
Neal Armstrong. Summaries 6 October 2017 APFF Roundtable, Q.9 under s. 74.4(2) and s. 74.5(5).
CRA is serious about NR4 reporting of withholding-exempt amounts
CRA, presumably at its instigation rather than at the request of the APFF organizers, repeated its statement at the 2017 IFA Roundtable (2017-0691141C6) that NR4 reporting is required for all periodic amounts (as described in Regs. 202(1)(a) to (h)) paid to a non-resident of Canada, even if the amount is exempt from Part XIII and XIII.2 tax.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.8 under Reg. 202(1).
CRA confirms that where damages relate to a particular asset of a business that was not disposed of, they will reduce the asset’s cost
In 2016-0652851C6 F, as a result of breach of a purchaser's obligation to purchase a personal residence, the individual vendor received $50,000 in damages from the defaulted purchaser, which CRA stated was proceeds of disposition of a promise giving rise to a capital gain of $50,000.
In confirming its earlier position, CRA stated that although IT 365R2 provides that "where the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer," this position only applies respecting non-performance of business contracts.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.7 under s. 54 – capital property.
CRA states that there can be a services PE in Canada during the tail end of a project which ends in the first few months of a calendar year
CRA rejected the premise of a question that referred to a situation where the conditions in Art. V, 9(b) of the Canada-U.S. Convention (respecting a services PE) are satisfied during a taxation year respecting a particular project, which continues for several months longer in the following taxation year, but with the 183-day criteria not being met in that subsequent year. CRA responded that “since paragraph 9(b) of Article V of the Convention specifies that the 183-day test applies to ‘any twelve-month period,’ that period need not correspond to the fiscal year of the taxpayer.”
CRA then provided an example where a U.S. enterprise with a calendar taxation year provides services on an ongoing basis from January 15, 20_1, to January 25 20_2, and stated that it shall be deemed to provide such services through a permanent establishment in Canada for the entire period.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.6 under Treaties – Art. 5.
CRA indicates that the “short-cut method” for short-circuiting a Pt III assessment is “generally” available
In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income.
When asked whether the short-cut method is generally available or only in exceptional circumstances, CRA indicated the former, stating that “this administrative practice is still in effect and the CRA is generally prepared to apply it to a file, both at the taxpayer's request and during an audit of an election under subsection 83(2),” but that “the use of this method, however, remains in the discretion of the CRA to determine whether the circumstances of a file are appropriate for its application.”
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.5 under s. 184(3).
CRA will accommodate a s. 88(2)(b)(i) capital dividend election based on an estimated CDA balance
We have prepared brief summaries of the questions posed at the 6 October 2017 APFF Roundtable, and are providing translations of the CRA preliminary written answers on a piecemeal basis, starting with Q.4 to Q.9, and expect to be finished translating the answers by Sunday. We will also provide complete translations of the questions posed when they are officially released by CRA, towards or about year end.
Turning to Q.4, where the assets of a corporation, that is wound-up under s. 88(2) are portfolio investments or other assets with a fluctuating value, it may not be possible to know in advance of the moment of the winding-up what will be the capital dividend account (based on the gains realized on the winding-up) at the time of the winding-up, so that it will be impossible to file a completely accurate capital dividend election in advance of the winding-up time.
In these circumstances, CRA will expect the election to be filed based on the corporation’s best estimate. If CRA then comes to a different determination of the CDA, it will without further ado adjust the amount of the dividend deemed to come out of the CDA accordingly, as well as the amount shown on the election for (T2054). CRA also stated:
While the CRA usually expects a resolution to refer to the total amount of a dividend subject to an Election, which should correspond to that indicated in the Form T2054, the CRA will accept, in these particular circumstances, such amount not being specifically stated in the resolution.
Neal Armstrong. Summary of 6 October 2017 APFF Roundtable, Q.4 under s. 88(2)(b)(i).
Insta-chèques – Quebec Court of Appeal finds that a company in a cheque-cashing business was a listed financial institution under the ETA
A Quebec company whose business was to cash cheques was found to be a financial institution under ETA s. 149(1)(a)(iii), namely, a person “whose principal business is as a … dealer in … financial instruments.” This meant that it was subject to Part IV.1 tax under the Taxation Act.
The principal issue was whether the company was a “dealer.” The Court stated:
[T]he author Simon Labrecque properly states that the term “dealer” … relates to a person “whose business consists of dealing in financial instruments for its own account…” where this is for the purpose of profit. This entails, according to him, “an elevated level of transactions, in volume and frequency.”
Neal Armstrong. Summary of 2441-0946 Québec Inc. (c.b.a., Insta-chèques) v. Agence du revenu du Québec, 2017 QCCA 1491 under ETA s. 149(1)(a)(iii) and s. 123(1) – debt security.