News of Note
Income Tax Severed Letters 18 Octoboer 2023
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The basic policy of the drop-shipment rules is explained
The drop-shipment rule in ETA s. 179 addresses inter alia the situation where an unregistered non-resident vendor who does not carry on business in Canada (A) sources goods in Canada at a cost of, say, $80, from a registered Canadian supplier (C), and directs C to “drop-ship” the goods directly to the registered Canadian purchaser (B), who has purchased from A for $100.
In the absence of s. 179, CRA would collect tax only on C’s $80 selling price and the sale for $100 by A would escape tax under s. 143.
S. 179 addresses this leakage by deeming the supply made by C to A to be made for the FMV of the good (presumably, $100) and by allowing for a certificate mechanism (e.g., permitting B, if it is acquiring the goods for use as a registrant in commercial activities, to issue a “drop-shipment” certificate) permitting the parties to deal with A’s purchases and sales on a tax-free basis, with the liability for the tax being passed along the chain to the first purchaser who uses the goods otherwise than in the course of its commercial activities.
It is suggested that “the presence of an unregistered non-resident in a transactional scheme involving property moving within Canada should be an immediate red flag” that engages a detailed review of these complex rules.
Neal Armstrong. Summary of Robert G. Kreklewetz and Stuart Clark, “Drop Shipments: Tips, Traps, and Terrors,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 10 under ETA s. 179(2).
Joint Committee suggests a list of examples of transactions which should not be considered to be a GAAR abuse
The Joint Committee notes that the Explanatory Notes examples regarding the proposed GAAR amendments do not reflect that many tax planning strategies utilize a series of transactions which navigates around inappropriate tax consequences in ways that likely were not specifically contemplated by Parliament.
The Committee suggests that the Explanatory Notes provide more examples of acceptable transactions, for instance:
- Those identified in IC88-2 and the IC88-2 Supplement.
- Post-mortem pipeline transactions.
- PUC distributions to non-resident shareholders of Canadian-resident private corporations.
- The use of a Bidco to step-up PUC to fair market value on the purchase of a Canadian corporation.
- Acquiring 10.1% of the relevant shares of a corporation so that Part IV tax is inapplicable.
- The use of cash damming and other tracing techniques where funds-tracing is relevant.
- Debt-slide (a.k.a., ATR-66) transactions.
Neal Armstrong. Summary of Joint Committee, “GAAR Proposals and Self-Help Transactions,” 13 October 2023 Joint Committee Submission under s. 245(4.1).
We have translated 8 more CRA interpretations
We have translated 2 CRA interpretations released last week and a further 6 CRA interpretations released during October of 2002. Their descriptors and links appear below.
These are additions to our set of 2,611 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
It is unclear what could be meant by “demolishing” a CRA assumption of FMV, which is a matter of opinion
Preston stated: “A statement that an identified property has a particular fair market value at a particular point in time is an assumption (or finding) of fact, notwithstanding that fair market value has a legal definition. Fair market value is predominantly factual … .”
It is suggested that fair market value (FMV) is not a “fact” in the sense provided by Phipson on Evidence, namely, “a statement that can be verified”, i.e., “can be proven to be true or false through objective evidence”, whereas evidence as to FMV is essentially opinion evidence. In other words, “fair market value is not a fact that can be rebutted by proving it to be false.”
This last proposition generates difficulties in applying the dictum of L’Heureux-Dubé J in Hickman Motors that if the taxpayer meets its initial onus of “demolishing” the Minister’s assumptions through making out a prima facie case, the onus shifts to the Minister. Thus:
If a fair value is neither true nor false, nor more likely than not to be true or false, it cannot be proven. The initial onus on the taxpayer to “demolish” the Minister’s assumption by presenting enough evidence to create a rebuttable presumption that the matter assumed is false cannot be met, nor can the subsequent onus on the Minister “to prove” that the assumption is true.
(Note that although this shifting-onus doctrine is well entrenched in the Quebec Court of Appeal, it was suggested to be incorrect by Webb JA in Sarmadi and Eisbrenner, whose comments were endorsed by Monaghan JA in Kufsky.)
Neal Armstrong. Summary of David H. Sohmer, “Is Fair Market Value a Fact?,” Tax Topics (Wolters Kluwer), 10 October 2023, No. 2689, p.1 under General Concepts - Onus.
CRA concludes that adjusted income for RMES purposes does not include income of spouse who died in the year
“Adjusted income” as defined in s. 122.6 is relevant to an individual’s entitlement to the refundable medical expense supplement ("RMES") under s. 122.51 and to the Canada child benefit under s. 122.61. Given that the “adjusted income" is the total of the income for the year of the individual or of the individual's "cohabiting spouse or common-law partner" at the end of the year, CRA unsurprisingly concluded (in the context of the RMES entitlement) that the adjusted income of a surviving spouse for a year does not include the income of a spouse who died during the year.
This reversed 2014-0536771E5 F, which appeared to consider that where the deceased spouse was not living separate and apart from the survivor at the time of death, the deceased spouse was deemed to be a "cohabiting spouse or common-law partner" of the survivor.
Neal Armstrong. Summary of 24 January 2023 External T.I. 2018-0753471E5 F under s. 122.6 – adjusted income.
CRA confirms no withholding where an RCA pays a retiring allowance to the beneficiary’s RRSP that is an s. 60(j.1) eligible amount or within the RRSP deduction limit
The beneficiary of a retirement compensation arrangement (RCA) set up by his employer was entitled on his retirement in 2017 to receive a $50,000 retiring allowance, which was transferred directly to his RRSP. CRA confirmed that, by virtue of Reg. 100(3)(c), no withholding by the RCA custodian was required given that his RRSP deduction limit for his 2017 taxation year, as confirmed by his notice of assessment for his 2016 taxation year, was $30,000, and the eligible portion of the retiring allowance qualifying for the s. 60(j.1) deduction was $20,000.
Neal Armstrong. Summary of 9 June 2017 External T.I. 2017-0700961E5 F under Reg. 100(3)(c).
CRA takes an accommodating approach to determining what is a prescribed amount under Reg. 5907(1.3)
Two LLCs in a US consolidated group beneath Canco made tax compensation payments indirectly to the top CFA in that group in respect of the share of the U.S. taxable income of the US consolidated group earned through those LLCs during their 2011 and 2012 taxation years.
In finding that those payments by the LLCs (which were disregarded for US tax purposes) qualified under Reg. 5907(1.3)(a) as amounts that could reasonably be regarded as being in respect of income tax that would otherwise have been payable by the CFA single members of those LLCs in respect of the FAPI earned by those CFAs had their US tax liabilities been determined for US purposes on an unconsolidated basis, CRA indicated that:
- although it was only the regarded CFAs and not LLC1 and LLC2, as disregarded entities, who severally bore the liability to pay the US consolidated group’s tax liability, the payments made by the LLCs were made on behalf of their respective sole members
- although the payments for the 2011 taxation years were not made pursuant to a written agreement, there was no requirement that tax sharing payments be made pursuant to a written agreement
- the fact that the tax sharing payments were paid in June 2014, i.e., well past the end of the 2011 and 2012 taxation years, did not prevent Reg. 5907(1.3)(a) from applying to these amounts for the purposes of Canco’s 2011 and 2012 taxation years
- in particular, the amounts constructively paid by the single-member CFAs (through their LLCs) were determined in a manner that supported that they could reasonably be regarded as being in respect of the income tax that these foreign affiliates would have paid in respect of FAPI earned by their disregarded (LLC) subsidiaries if those tax liabilities of had not been determined as members of the US consolidated group, but rather had been determined separately
However, given that the income from LLC1 and LLC2 was offset for US purposes by reported operating losses from the active businesses of other members of the US consolidated group, Reg. 5907(1.4) reduced the prescribed amounts recognized for Canco’s 2011 and 2012 taxation years to nil, resulting in no FAT being recognized regarding the above tax sharing payments until (and to the extent that) Regs. 5907(1.5) and (1.6) applied in respect of one or more of Canco’s five subsequent taxation years.
Neal Armstrong. Summaries of 3 March 2023 Internal T.I. 2016-0662221I7 under Reg. 5907(1.3)(a) and Reg. 5907(1.091).
Income Tax Severed Letters 11 October 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
There is a concern that redeeming the preferred shares of a related individual at the commencement of a butterfly reorganization would oust the butterfly exception
Suppose that the distributing company (“DC”) has three shareholders: Dad owning frozen preferred shares; and his two sons, each owning 50% of the common shares. Dad’s shares are redeemed and the sons then butterfly the DC assets to their respective transferee companies (“TCs”).
There is a concern that the test in s. 55(3.1)(b)(i)(C) would not be met, so that s. 55(3.1)(b)(i) will applies to deny butterfly treatment. S. 55(3.1)(b)(i)(C) might apply on the basis that the redemption of Dad’s preferred shares constitutes an acquisition of property by a person (DC) who ceased to be related to the vendor (Dad) as part of the series (DC will be wound-up as part of the series and, therefore, will cease to be related to Dad). The particular issue is that it might be considered that this redemption entailed the acquisition of property by DC.
There is greater certainty if Dad instead transfers his DC preferred shares to each of the TCs in consideration for voting shares of the TCs, with the TCs then redeeming those preferred shares. In particular, this would appear to satisfy the technical requirements of ss. 55(3.1)(b)(i)(C), 55(3.1)(b)(iii)(A) and 55(3.2)(c).
Neal Armstrong. Summary of David Carolin, Manu Kakkar and Paola D’Agostino, “To Redeem or Not To Redeem a Specified Shareholder: That Is the 55(3)(b) Question,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 6 under s. 55(3.1)(b)(i)(C).