News of Note
CRA indicates that the purchase price of a subsurface mineral exploration right was CDE
Email this ContentThe definition of “Canadian oil and gas property expense” includes the cost of a right to explore for Canadian hydrocarbons, but the definition of “Canadian development expense” does not explicitly include the cost of a right to explore for Canadian mineral resources. CRA indicated (in the case of a taxpayer who was not in the exploration/mining business and who acquired subsurface mineral exploration rights) that the cost of purchasing those rights would qualify as CDE.
CRA also appeared to indicate that on the s. 85(1) transfer of a Canadian resource property with a nil balance in the relevant resource pool, a “nil” elected amount can be designated.
Neal Armstrong. Summaries of 7 February 2018 External T.I. 2016-0637221E5 under s. 66.2(5) – Canadian development expense and s. 85(1)(a).
CRA finds that a partnership is not fiscally transparent for patronage dividend purposes
Can a cooperative corporation, that is a member of a limited partnership, deduct patronage dividends computed on the basis of sales made by the partnership to its customers who are members of the cooperative corporation? In responding negatively, CRA indicated that this approach would be contrary to “customer” being defined in s. 135(4) as a customer of the “taxpayer,” which under the s. 96(1) assumptions was to be treated as the partnership rather than its member.
Neal Armstrong. Summary of 29 January 2018 External T.I. 2017-0702731E5 under s. 135(4) - customer.
Cheema – Federal Court of Appeal indicates that a reference to a purchaser included a bare trustee
In order to satisfy lender requirements, the individual taxpayer persuaded a friend (Dr. Akbari) to jointly sign an agreement for the purchase of a new home. The Ontario new housing rebate rules required that each individual who becomes liable under the purchase agreement is acquiring the new house as the primary place of residence of that individual or a relation. “From the beginning it was understood that Dr. Akbari would not have any real interest in the property” and, indeed, at the closing of the purchase Dr. Akbari executed a declaration of trust in favour of the taxpayer.
Stratas JA (speaking for the majority, with Webb JA dissenting) nonetheless found that Dr. Akbari’s co-signing of the purchase agreement scuppered the rebate. The fact that Dr. Akbari “had no beneficial interest in the property” was “irrelevant,” as what mattered was that Dr. Akbari became liable to the builder under the purchase agreement when he signed it. Thus, the proposition that the ETA (and ITA) focus on the beneficial owner rather than any bare trustee, should now be applied with caution. His interpretation accorded with the principle that “an interpretation that favours administrative efficiency is more likely to have been intended by Parliament over one that does not” (i.e., CRA only need look at the purchase agreement to see who is the “legal acquirer,” rather than sorting out beneficial interests.)
Part of the debate between Stratas and Webb JJA. was as to the scope of ETA s. 133, which provides that a supply of property is deemed to be made at the time the agreement for its supply is entered into. Stratas JA was not bothered that the new home did not yet exist at the time of signing the purchase agreement, stating that “Deeming provisions create legal fictions … for example, the supply of a home that is not yet constructed.” Furthermore, “As Mr. Cheema and Dr. Akbari both signed the agreement of purchase and sale, they are deemed to receive a supply of the property at the time they entered into the agreement.” This is a further indication that, notwithstanding its wording, s. 133 is to be interpreted as deeming there to be a deemed acquisition at the time of execution of the related agreement for the property’s (or service’s) supply.
Neal Armstrong. Summaries of Canada v. Cheema, 2018 FCA 45 under ETA s. 254(2)(b), s. 133 and Statutory Interpretation – Ordinary Meaning, Ease of Administration.
CRA treats the members of a partnership as the payers of RCA withdrawals made to the partnership employees for source deduction purposes
A partnership that was the employer respecting a supplementary retirement plan that was a retirement compensation arrangement (RCA) submitted that no withholding should apply to its withdrawal of plan surplus on the basis that, as a partnership, it not taxable under Part I and on the basis that the applicable source deduction Regulation (Reg. 106(1)) indicated that withholding was to be made based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient with respect to the payment.
In rejecting the employer’s position, the Directorate stated that “subsection 96(1) … ensures that the members of the partnership are taxable on their respective share of the partnership’s income” and that in applying Reg. 106(1), “the amount to be withheld from the [withdrawal] Payment should be equal to the total amount of tax that may reasonably be expected to be payable under the Act by the members of the employer partnership with respect to the Payment.”
Neal Armstrong. Summary of 7 February 2018 Internal T.I. 2017-0711961I7 under s. 153(1)(q) and Reg. 103(6).
CRA applies its guidelines on cash as an active business asset to the “specified small business corporation” test
CRA set out general guidelines on when cash held by a corporation would be considered to be used in an active business carried on by it for purposes of the “specified small business corporation” definition in Reg. 4901(2) (respecting qualification of its shares for RRSPs). The listed factors (which are similar to those applied by CRA in other contexts) included:
- Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
- Cash which is only temporarily surplus to the business needs may qualify.
- Cash balances which accumulate only to be depleted in accordance with the annual seasonal fluctuations of the business will generally qualify – but a permanent balance in excess of the company's reasonable working capital needs will generally not qualify.
- Funds will not qualify by virtue only of being accumulated to purchase capital assets or repay long-term debt.
Neal Armstrong. Summary of 25 January 2018 External T.I. 2017-0717561E5 under Reg. 4901(2) - “specified small business corporation”.
Income Tax Severed Letters 28 February 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that a set-off right of an issuer of a TFSA put the TFSA offside
S. 146.2 (2)(a) requires that a TFSA generally “be maintained for the exclusive benefit of the holder,” and s. 146.2 (2)(b) prohibits “anyone that is neither the holder nor the issuer of the arrangement from having rights under the arrangement relating to … distributions.” Ss. 146.2(3) and (4) provide that these conditions do not apply to prevent the holder of a TFSA from using his or her interest in the TFSA as security for a loan or other indebtedness.
CRA concluded that a TFSA specimen plan (respecting a deposit with a bank) that gave the issuer the right to apply a positive balance from the account to satisfy any debts owing by the holder to the issuer or any of its affiliates was offside. Respecting s. 146.2 (2)(a), CRA noted that the “arrangement benefits the issuer and its affiliates,” so that it was not for the exclusive benefit of the TFSA holder. S. 146.2 (2)(b) was not complied with because the issuer’s affiliate had set-off rights.
The terms are not saved from offending the conditions in paragraphs 146.2(2)(a) and (b) by subsections 146.2(3) and (4) because the right of setoff does not confer a property interest on the issuer or its affiliates and so does not rise to the level of security.
Although the quoted passage is opaque at best, CRA’s analysis seems to suggest that the TFSA would have been offside even if the set-off rights had only been accorded to the issuer – which may be at odds with the most likely interpretation of ss. 146.2(2)(b) and 146.2(4) as setting out a safe harbour for lender security.
Neal Armstrong. Summaries of 22 January 2018 Internal T.I. 2017-0727421I7 under s. 146.2(2)(a) and s. 146.2(4).
Two further translated Technical Interpretations are available
The table below provides descriptors and links for two technical interpretations released in December 2013 as fully translated by us.
These (and the other full-text translations covering the last 50 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for March.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-12-18 | 26 November 2013 External T.I. 2012-0449631E5 F - Amount deductible under paragraph 20(1)(e.2) | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) | reduction of deductible premium amount re pledged policy where net cost of pure insurance (“NCPI”) is lower than premiums |
| 15 November 2013 Internal T.I. 2013-0478621I7 F - Transfer of intangibles - TP adjustments | Income Tax Act - Section 247 - New - Subsection 247(2) | group sale with Canco not charging for intangibles should engage s. 247(2) | |
| Income Tax Act - Section 56 - Subsection 56(2) | secondary adjustment re group sale with Canco not charging for intangibles | ||
| Income Tax Act - Section 69 - Subsection 69(4) | s. 69(4) inapplicable where grandchild Canco undercharges for asset sale, enhancing sales proceeds received by ultimate U.S. parent |
CRA indicates that the deemed U.S. income inclusion from an IRA on renouncing U.S. citizenship or relinquishing a green card also is recognized for ITA purposes
Where a U.S. long-term resident relinquishes her green card (or a U.S. citizen renounced citizenship) after having become a Canadian resident, there would be a deemed taxable distribution to her of the amount in her IRA for Code purposes – which by virtue of ss. 56(1)(a)(i)(C.1) and 56(12) would be deemed to be included in her income at that time for ITA purposes as well. This generally would accommodate a s. 126(1) foreign tax credit.
Subsequent (actual) withdrawals of the IRA funds generally would not be subject to further Canadian taxability.
Neal Armstrong. Summary of 29 January 2018 External T.I. 2017-0682301E5 under s. 56(1)(a)(i)(C.1) and s. 126(1).
CRA restrictively interprets “series of loans or other transactions and repayments” in the upstream loan rules
An LLC subsidiary of a Canadian subsidiary (Canco3 - that was lower down in a corporate group controlled by a U.S. Pubco) received the repayment of a loan that it had made to a non-resident affiliated corporation (Forco2, which was not a foreign affiliate of Canco3), and used the repayment proceeds to purchase note receivables from group companies within the Forco2 silo and also to pay a dividend to Canco3 – which then lent some of this money “back” to Forco2 and also repaid loans owing to Canadian affiliates held in a separate silo from the Canco3 or Forco 2 silos.
CRA ruled that the repayment by Forco2 of its loan from the LLC would not be considered to be made “as part of a series of loans or other transactions and repayments” for the purpose of s. 90(8)(a) or 90(14). This is consistent with the favourably narrow interpretation that CRA has accorded to the quoted phrase in a s. 15(2) context.
The loan owing by the LLC had had a maturity date that was automatically extended for consecutive one-year terms unless terminated by either party. The “Additional Information section of this ruling letter stated that these automatic extensions did not result in a new loan being made for the purposes of s. 90(6).
Neal Armstrong. Summary of 2017 Ruling 2016-0670971R3 under s. 90(8)(a).