News of Note
CRA indicates that, notwithstanding dividend bifurcation under s. 55(5)(f) (or 55(2.3), the s. 55(2.1)(b) purpose test is to be applied to the whole dividend
Email this ContentCRA did not like the suggestion that safe income of Opco effectively can be duplicated on the basis that where a dividend in excess of safe income is paid by Opco to Holdco, the bifurcation by s. 55(5)(f) of the dividend into two parts means that the first component is protected as coming out of safe income, and the second component also is not subject to s. 55(2) if, as per s. 55(2.1)(b), its purpose is not to significantly reduce the gain on or the value of the shares.
However, to get to the “right” result, CRA applied a gymnastic interpretation of ss. 55(2.1) and (2) under which in four places “dividend” refers to the whole dividend, and in two places refers only to the portion thereof in excess of safe income. For some reason, this brings to mind the statement in Gulf Canada that: "There is a strong, indeed overwhelming, presumption that Parliament, having used the same word three times in the same subsection, intended it to bear the same meaning each time."
Hopefully Finance will accept the CRA interpretation as being judicially persuasive, so that these rules do not suffer further encrustation.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.5 under s. 55(2.1)(b) and s. 55(2.3).
CRA indicates that there is an immediate CDA addition for a non-redemption dividend subject to s. 55(2)
S. 55(2)(c) deems most dividends that did not arise on a share redemption and to which s. 55(2) applies to be gains “for the year,” without specifying when in the year the deemed gains occurred. In a reversal of the result in 2011-0412131C6 (which dealt with somewhat different statutory wording), CRA has now indicated that a gain under s. 55(2)(c) is deemed to be realized at the time of the payment of the dividend, with the result that there is an addition to the capital dividend account at that time rather than only on completion of the year.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.4 under s. 55(2)(c).
CRA appears to indicate that QSBC purification dividends may not engage s. 55(2.1)(b)
CRA confirmed its position that:
- Where dividends were paid to purify a corporation for qualified small business corporation share purposes, it would be necessary under s. 55(2.1)(b) for the taxpayer to establish as a factual matter that the dividends had no purpose of reducing the gain on the shares or increasing the cost of property to the dividend recipient. The way in which the answer was articulated seemed to imply that regular annual dividends to distribute excess cash would be OK..
- Purpose for s. 55(2.1)(b) purposes is to be determined objectively (as articulated in Ludco) - rather than on the basis primarily of the taxpayer’s testimony as to its subjective intent.
Neal Armstrong. Summary of November 2017 CTF Annual Conference Roundtable, Q.3 under s. 55(2.1)(b).
Finance is still anticipating that its pending revised income-sprinkling proposals will be effective throughout 2018
Points made by Ted Cook include:
- As previously announced, the revised income sprinkling legislative proposals will not limit access to the lifetime capital gains exemption. What this means is that where the LCGE would be available prior to July 2017, that eligibility for the exemption will be preserved under the revised proposals.
- He reiterated the proposition that the revised income splitting proposals will look at total contributions, including previous contributions of capital or labour and assumptions of risk.
- In clarifying the annnouncement that measures to limit access to the lifetime capital gains exemption would not be proceeded with, he indicated that where the LCGE would be available prior to July 2017, that eligibility will be preserved under the revised proposals.
- The intention is still to have the (pending) revised split income proposals apply to 2018 and subsequent taxation years.
- Finance intends to continue to work on accommodating intergenerational transfers.
- Although s. 246.1 and the revised s. 84.1 are dead and the current focus is on passive income and income splitting, “We will have to see where we end up with the conversion of income into capital gains.”
- Finance is still working through key design elements in the revised passive income proposals, but also still expects that there will be detailed proposals in Budget 2018.
CRA intends for taxpayer to rely on appropriate exercise of discretion by senior auditors in voluntary disclosure matters when the new VDP takes effect later in 2018
Q.1 CRA explained that a major driver in its decision to make the voluntary disclosure program more stringent (along with pressure from the Finance Committee in the House of Commons) was CRA’s increasing confidence in its ability to detect high-risk taxpayers for audit.
Q.2, Q.15 The increase in CRA discretion under the revised program should be acceptable because there will be a group of three or four senior auditors whom representatives will be able to speak to on a no-names basis and who will have the judgment to give reliable guidance.
Q.8 There likely will be a delay in the implementation date for the new program until at least the summer of 2018 or perhaps October, although this decision is up to the Minister. Further major changes (or eliminating the VDP entirely) likely will not occur, if at all, for another three years.
Q.16 The revised Circular will be generally similar to the draft Circular.
Summary of 20 November 2017 CTF Annual Conference Panel on Issues in Administration and Enforcement.
CRA indicates that GAAR very well may apply to s. 107(2) distribution to a Canco owned by a non-resident beneficiary
In 2016-0669301C6 and 2017-0693321C6, CRA indicated that the distribution of property by a Canadian-resident discretionary family trust to a Canadian corporation whose shares were wholly owned by a newly established Canadian-resident discretionary trust circumvented the scheme of the 21-year rule in s. 104(4) as buttressed by s. 104(5.8), and would consider applying the GAAR.
CRA has now commented on the situation where property would be deemed by s. 107(5) to be disposed of at fair market value if distributed by such a trust to an individual beneficiary who had emigrated from Canada, but the property is instead distributed to a beneficiary that is a Canadian corporation owned by the non-resident beneficiary. CRA stated that it will consider that this transaction did not achieve the intention of s. 107(5) of ensuring that Canada maintains its ability to tax the gain that accrued while the property was held by the Canadian trust, and would consider applying GAAR, unless there was substantial evidence supporting its non-application.
Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference Roundtable, Q.1 under s. 107(5).
Income Tax Severed Letters 22 November 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Justice Canada comments on rectification, and Q.1 to Q.11 of the CTF Roundtable, are available
We have published summaries of the CRA responses to the first 11 questions posed at this afternoon’s CTF Roundtable. We will post summaries of Q.12 to Q.14 tomorrow.
We have also published a summary of comments made by Diana Aird of the Department of Justice on what they are looking for in submissions on receiving Justice acquiescence to a rectification application.
We will provide summaries and posts on these and other items in due course.
CRA rules on the continuity of reserves on a s. 98(5) wind-up
The s. 98(5) wind-up rules are largely missing the detailed continuity rules contained in the s. 87 amalgamation rules. CRA has ruled that on such a winding-up, there is a flow-through of the s. 20(1)(m) and (n) reserves to the successor former partner (termed, the “proprietor”), and a continued ability of the proprietor to deduct unamortized prepaid expenses under s. 18(9), as well as there being an ability to make a s. 20(24) election between the partnership and the proprietor. Interest on debt assumed by the proprietor was ruled to be deductible to the same extent as before the wind-up. No employee income will be triggered by the assumption by the proprietor of DSUs and RSUs.
Neal Armstrong. Summaries of 2015 Ruling 2015-0601441R3 under s. 20(1)(m), s. 20(1)(n), s. 20(24), s. 18(9), s. 20(1)(c)(ii), s. 6(1)(i), s. 34.2(11) and s. 98(5).
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for six French technical interpretation released in April-May 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ½ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2014-05-07 | 2 April 2014 External T.I. 2014-0521041E5 F - Application de 13(7.1) | Income Tax Act - Section 13 - Subsection 13(7.4) | general requirements for s. 13(7.4) to apply |
| Income Tax Act - Section 13 - Subsection 13(7.1) | no s. 13(7.4) election required where s. 13(7.1) applies | ||
| 2 April 2014 External T.I. 2012-0473151E5 F - Limitation du coût de location d'un véhicule | Income Tax Act - Section 67.3 | GST ITCs included under element E of formula | |
| Income Tax Act - Section 248 - Subsection 248(16) | GST ITCs constitute a “reimbursement” for car lease expense limitation purposes | ||
| 11 March 2014 Internal T.I. 2013-0513221I7 F - Stock options | General Concepts - Fair Market Value - Options | stock options with no in-the-money value could have nil FMV | |
| Income Tax Act - Section 52 - Subsection 52(1) | s. 15 benefit due to shareholder receipt of stock options earned by corporation added to the ACB of the exercised shares | ||
| Income Tax Act - Section 15 - Subsection 15(1) | double income inclusion under s. 56(2) or (4) to consulting corporation, and under s. 15(1) to its shareholder, where consultant's options issued directly by client to shareholder | ||
| Income Tax Act - Section 56 - Subsection 56(2) | s. 56(2) benefit where corporation implicitly consented to consultant's options being issued by client directly to its shareholder | ||
| Income Tax Act - Section 56 - Subsection 56(4) | implicit transfer by corporation when stock options earned by it were issued directly by its client to its shareholder | ||
| Income Tax Act - Section 248 - Subsection 248(28) | s. 248(28) does not prevent a double income inclusion to corporation under s. 56 and shareholder under s. 15 | ||
| Income Tax Act - Section 9 - Timing | no s. 9(1) income inclusion from consultant being granted stock options until exercise | ||
| 3 April 2014 External T.I. 2013-0512371E5 F - Qualification des montants gagnés au jeu de poker | Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit | on-line poker winnings were from more than a pastime | |
| 25 April 2014 External T.I. 2013-0515621E5 F - Frais de voyage / Travelling expenses | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | benefit where employer pays costs of friend to accompany employee on training trip | |
| 2014-04-30 | 27 March 2014 External T.I. 2014-0524851E5 F - Deemed year-end and CPCC status | Income Tax Act - Section 249 - Subsection 249(3.1) | Ekamant: s. 251(5)(b) does not vitiate actual control by share owner |
| Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) | sub of public corporation does not become CCPC until time of its actual acquisition of control |