News of Note
S. 69(11) can apply to non-rollover transactions
Email this ContentThe shareholders of X Co, which is engaged in an equipment leasing business, would like to sell their shares for $4 million, but potential purchasers are only interested in an asset purchase. The X Co shareholders instead sell their shares for $4.5 million to an arm’s length Lossco, which winds up X Co and sells the equipment to an arm’s length purchaser (Buyco) for $5 million.
Since the sale of the X Co shares is likely for an amount in excess of their fair market value, s. 69(11) should not apply to that sale. However:
If Buyco was a real estate developer and the property owned by X Co was real estate that was capital property to it but inventory to Buyco, subsection 69(11) could be an issue. The shares of X Co would be worth the full $5 million to Buyco, because Buyco could step up the cost of X Co's underlying land to the $5 million purchase price of the shares of X Co….This being the case, the shareholders of X Co, in order to effect the share sale to Lossco, will have accepted less from Lossco ($4.5 million) than they could expect Buyco to pay ($5 million).
Neal Armstrong. Summary of Perry Truster, "Loss Trading and Subsection 69(11)," Tax for the Owner-Manager, Vol. 17, No. 2, April 2017, p.4 under s. 69(11).
A year-end income allocation by a non-resident partnership to an immigrant included offshore capital gains realized pre-immigration
Where a member of a non-resident partnership becomes a Canadian resident in a year, s. 96(8) prevents the recognition for ITA purposes of losses realized by the partnership from dispositions occurring in that year but prior to the immigration. There is no symmetrical application for capital gains realized from a disposition in the year of a property (e.g., U.S. real estate) occurring prior to the immigration, so that the new resident must include his or her share of that gain in computing income for that year.
Neal Armstrong. Summary of 17 January 2017 Internal T.I. 2016-0647161I7 under s. 114.
CRA treats amounts paid by a Canadian sub, to reimburse its U.S. parent for dilution under SARs that could be settled in cash at the issuer’s option, as deductible
A Canadian subsidiary (Canco) of a U.S. parent (USco) was charged by USco for the “costs” to it in issuing stock to Canco employees under various incentive plans at a discount, and Canco took the position that s. 7(3)(b) did not prohibit the deduction by it of those “reimbursement” payments. The Directorate accepted this position respecting Stock Appreciation Rights (SARs) provided to the Canco employees given that the choice to satisfy them in cash or shares was in the discretion of the USco compensation committee. However, it considered that s. 7(3)(b) applied to a performance share plan (where the number of shares to be received by the employee was contingent on assessed performance over a three year period), as well as to a number of other plans where the USco obligation to issue shares was less contingent.
Neal Armstrong. Summary of 29 July 2016 Internal T.I. 2015-0600941I7 under s. 7(3)(b).
CRA indicates that a non-resident director who attends all Canadian board meetings by phone or internet is not subject to source withholding
CRA considers that attendance of a non-resident individual outside Canada at Canadian board meetings through the internet or telephone does not constitute the performance of services in Canada, so that under Reg. 104(2), no withholding would be required. However, Reg. 200(1) nonetheless would require reporting of the remuneration on T4 slips (unless, per RC4120, the remuneration paid in the year was under $500.)
Neal Armstrong. Summary of 9 March 2017 External T.I. 2016-0677351E5 under Reg. 104(2) and Reg. 200(1).
Income Tax Severed Letters 12 April 2017
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Lauber v. Reid – Quebec Court of Appeal finds that unless otherwise stipulated, a contract price is exclusive of GST even if the supplier was not registered until invoicing
A Quebec real estate agent unsuccessfully took the position that a contract specifying a dollar amount for house renovation work to be done for the agent by a contractor (who did not register until the date she invoiced) was inclusive of GST and QST. In addition to finding that “the law [ETA s. 223, and QSTA equivalent] provides that unless specifically stipulated, GST and PST are not included in the gross price for the taxable goods or service,” Dutil JA also confirmed a finding below that “the right to bring an action to recover the sales taxes is not subject to the collector having been registered with the tax authorities when the services were provided.”
Neal Armstrong. Summary of Lauber v. Reid, 2016 QCCA 1587 under ETA s. 223(1).
Nine further full-text translations of severed letters are available
Full-text translations of the remaining nine French severed letters released on April 29, 2015 are now available, and are listed and briefly described in the table below.
These (and the other translations covering the last 23 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.
1245989 Alberta – Tax Court of Canada finds that the use of class PUC-averaging to bump the PUC of personally-held shares was abusive under s. 245(4)
An individual (Mr. Wild) stepped up the adjusted cost base of his investment in a small business corporation (PWR) by transferring his PWR common shares to two new Holdcos for him and his wife in exchange for preferred shares of the Holdcos, and electing under s. 85 at the right deemed proceeds amount to use up his capital gains exemption. However, the paid-up capital of those preferred shares was ground down to essentially nil under s. 84.1.
The solution was for PWR to then transfer high basis assets to the Holdcos in consideration for preferred shares of the same class, so that the PUC of the preferred shares held by Mr. Wild personally could be bumped due to the class-averaging rule in s. 89(1). It didn’t matter that there was a corresponding shifting of PUC away from the prefs taken back by PWR, because those prefs were then redeemed for a note in reliance on the s. 55(3)(a) exception (and their relatively high basis anyway).
Lyons J, in finding that there was an abuse under s. 245(4), so that CRA’s assessment taking away the stepped-up PUC in the personally held prefs was confirmed, stated:
[T]he…transactions…achieved a result (extraction of corporate surplus indirectly and use of his [capital gains] exemption) that section 84.1 was intended to prevent and defeats its underlying rationale and did so by misusing the PUC computation in subsection 89(1) to trigger the share averaging thus artificially inflated the PUC in The Shares held by Mr. Wild without any new capital contribution made by him.
Neal Armstrong. Summaries of 1245989 Alberta Ltd. v. The Queen, 2017 TCC 51 under s. 84.1(1) and s. 245(4).
CRA rules on transactions to rectify for an overlooked life insurance policy of an amalgamated target
An estate sold a private company (Canco 1) to a third party purchaser, which promptly amalgamated with Canco 1. To the surprise of the estate, the widow beneficiary then received a cheque under a policy under which Canco 1 had been the beneficiary, which she deposited in an account in Canco 1's name.
Since additions to the capital dividend account for life insurance proceeds occur on a received rather than receivable basis, the cheque was an addition to the CDA of Amalco rather than of Canco 1. The Amalco shareholders were willing to have Amalco pay a capital dividend to them equal to the insurance proceeds and to pay those proceeds over to the widow net of Amalco’s transaction costs, provided that CRA first ruled that this worked, which it did. CRA did not comment on whether there was any tax benefit generated from the transaction costs.
Neal Armstrong. Summary of 2015-0624611R3 under s. 89(1) – capital dividend account - (d) ande s. 83(2.1).
bcIMC – B.C. Supreme Court held that bcIMC was immune from HST payable on its investment fund but for an intergovernmental agreement
bcIMC is a BC Crown agent which was formed to manage and hold, under a provincial statutory trust, investments for the provincial pension plans. Weatherill J rejected a federal Crown argument that bcIMC was not immune under s. 125 of the Constitution Act from HST otherwise payable on the fees taken out of the funds under its management - on the grounds inter alia that ETA s. 267.1(5) deemed the statutory trust impressed on bcIMC’s investments to be a separate (non-Crown) person who thus was not exempt from federal tax on such fees - stating that “Canada cannot, under the guise of the deemed trust provisions of the ETA or otherwise, defeat the Province’s immunity from taxation.” However, he found that such immunity was taken away by agreements between B.C. and Canada in which the Province committed itself and its agents to pay any tax imposed under the ETA. He stated:
Section 16 of [bcIMC’s incorporating legislation] states that bcIMC “…is not liable for taxation except as the government is liable for taxation”. That language, in my view, is the specific legislative authority required to bind bcIMC to the Agreements and should be interpreted accordingly.
Neal Armstrong. Summary of British Columbia Investment Management Corp. v. Canada (A. G.), 2016 BCSC 1803 under Constitution Act, 1867, s. 125.