News of Note
Québecor – Tax Court of Canada finds that a yo-yo transaction to utilize the accrued capital loss of an indirect subsidiary to step-up nil-basis shares to FMV was not a GAAR abuse
Email this ContentQuébecor held 54.72% of the shares of another holding company (Québecor Media) which, in turn, held all the common shares of a third holding company (“366”) directly, and preferred shares of 366 through a fourth holding company (“9101”). In order to utilize an accrued loss of 366 on its shares of an operating company, Québecor transferred its shares of Abitibi, having an FMV of $191.8 million and a nominal ACB, to 366 on a s. 85(1) rollover basis in exchange for preferred shares of 366, then immediately redeemed those preferred shares for a note, which was repaid through the transfer back to Québecor of the Abitibi shares. 366 realized a capital loss to offset its capital gain on the Abitibi shares by being wound up into its two shareholders (Québecor Media and 9101) pursuant to s. 69(5). (The common shares of 366 held by Québecor Media were treated as having no value, so that Québecor Media received no winding-up distribution and realized a large capital loss on the wind-up; all the property of 366 instead was distributed as a s. 84(2) dividend to 9101.)
In finding that it was no abuse of ss. 88 and 69(5) for 366 to have been wound-up on a non-rollover basis so as to realize a capital loss, Ouimet J noted that the scheme of s. 88 was to provide for both wind-ups on a rollover basis under s. 88(1) and for wind-ups on a taxable basis under ss. 88(2) and 69(5), with the application of stop-loss rules being expressly excluded in ss. 69(5)(c) and (d).
In finding that the transfer of the Abitibi shares on a rollover basis to 366 did not constitute an abuse of s. 85(1), Ouimet J stated that “this provision allows two related corporations ... to transfer a capital gain to be realized on a property from one corporation that does not have a capital loss to another that does have a capital loss, so that the latter can deduct it from the capital gain to be realized on the transferred property.” Although he accepted that the object of s. 85(1) was to provide for the deferral rather than the elimination of tax, here the step-up of the ACB of the Abitibi shares in the hands of Québecor entailed the receipt by it of a deemed dividend that was included in its income (albeit, eligible for the s. 112(1) deduction), and the capital gain realized by 366 on disposing of the Abitibi shares was included in computing its income.
Québecor’s GAAR appeal was allowed.
Neal Armstrong. Summary of Québecor Inc. v. The King, 2023 CCI 142 under s. 245(4).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released during November of 2002. Their descriptors and links appear below.
These are additions to our set of 2,603 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 20 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-11-08 | 15 November 2002 Internal T.I. 2002-0162427 F - Price Adjustment Clause & 85(7.1) | General Concepts - Effective Date | large FMV discrepancy suggested lack of bona fide valuation so that price adjustment clause need not be applied/ if applied, s. 85(1) election must be amended |
| Income Tax Act - Section 85 - Subsection 85(7) | amended s. 85(1) election must be filed if price-adjustment clause applied | ||
| Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e.2) | significant FMV shortfall suggested that a benefit was desired to be conferred | ||
| 14 November 2002 Internal T.I. 2002-0169957 F - "Exercice" - Effet de 134.2 | Income Tax Act - Section 134.2 - Subsection 134.2(2) | s. 134.2 election has no effect on corporation’s fiscal period | |
| Income Tax Act - Section 249.1 - Subsection 249.1(1) | s. 134.2 election affects only the corporation's current taxation year and not its fiscal period | ||
| 6 November 2002 External T.I. 2002-0170545 F - Section 55(3)(a) - Exception55(3)(a) | Income Tax Act - Section 55 - Subsection 55(4) | s. 55(4) inapplicable where parent retained de jure control primarily for protection of their economic interest | |
| 6 November 2002 External T.I. 2002-0132395 F - Robot Class 10 Catégorie 10 | Income Tax Regulations - Schedules - Schedule II - Class 10 - Paragraph 10(a) | cost of remote-controlled duct-inspecting robot to be allocated between Class 10(a) (“automotive equipment” – which is broadly construed) and Class 8(j) (“radiocommunication equipment”) | |
| Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(j) | cost of remote-controlled duct-inspecting robot to be allocated between Class 10(a) (“automotive equipment”) and Class 8(j) (“radiocommunication equipment” – informed by IA meaning of “radiocommunication”) | ||
| 27 November 2002 Internal T.I. 2002-0149207 F - INTERETS ET FRAIS LEGAUX | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) | prejudgment interest included in damages received for defective work on the recipients’ personal homes was taxable | |
| 5 December 2002 Internal T.I. 2002-0155187 F - DEPENSES PERSONNELLES | Income Tax Act - Section 248 - Subsection 248(16) | ITRs, like ITCs, treated as government assistance, so that included under s. 12(1)(x) unless s. 12(2.2) election made | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(hh) | repayment of ITRs would result in deduction under s. 20(1)(hh)(i) or (ii) depending on whether or not an s. 12(2.2) election had been made |
The domestic exception for an EIFEL excluded entity contains potential traps
The third condition in the “domestic exception” in para. (c) of the definition of “excluded entity” regarding the EIFEL rules is essentially that (i) no non-resident “specified shareholder” or “specified beneficiary” of the taxpayer or any eligible group entity, and (ii) no partnership, the majority of the FMV of the interests in which are owned by non-residents, may own more than 25% of the equity in the taxpayer or any eligible group entity.
This condition would apply, for instance, if:
- a non-resident person is the beneficiary of a discretionary family trust that is an eligible group entity, given that the “specified beneficiary” definition in s. 18(5) generally deems a beneficiary of a discretionary trust to own a 100% interest in the trust.
- a non-resident family member owns one share of an eligible group entity and, together with other family members, has 25% of the votes or value in respect of the eligible group entity (by virtue of being a non-resident “specified shareholder” of the eligible group entity).
- a large, wholly domestic CCPC with a relatively small subsidiary (but whose shares have an FMV exceeding $5 million) sells a 25% interest in the subsidiary to a non-resident investor (but this result would be avoided if the non-resident were to invest through a Canadian acquisition company).
Neal Armstrong. Summary of Kyle A. Ross and Trent J. Blanchette, “Issues with the ‘Excluded Entity’ Exception to the EIFEL Rules,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 4 under s. 18.2(1) – excluded entity – (c).
The proposed AMT rules undercut the revised s. 84.1 rules
The revised alternative minimum tax (AMT) rules, including the increasing the percentage of capital gains included in adjusted taxable income (ATI) from 80% to 100% and the AMT rate from 15% to 20.5%, may work at cross purposes with the proposed regime for intergenerational business transfers (IBTs) that are excluded from the application of s. 84.1.
Because of the IBT requirement that the parent transfer management of each relevant business to a child within either 36 or 60 months of the disposition time, or within such greater period of time as is reasonable in the circumstances, there may be reduced scope for the payment of increased salaries or bonuses during the AMT carryforward to recover AMT generated on the disposition.
If the IBT sale occurs for deferred purchase price (debt), the 10-year reserve proposed by s. 40(1.2) may allow the parent to avoid AMT entirely if the gain is small enough – but for larger sales, utilizing the 10-year reserve may trigger AMT in multiple years, reducing the parent’s ability to recover AMT.
If the parent makes charitable donations out of the sales process, the halving of the charitable credit under the revised AMT rules may very well compound the AMT difficulties both immediately and as a result of the competition between the need in the AMT carryforward period to recover the AMT from the sale and from the donation, particularly if the IBT planning relies on the 10-year reserve.
Neal Armstrong. Summary of Balaji (Bal) Katlai, Hugh Neilson and H. Michael Dolson, “AMT and Intergenerational Business Transfers: Planning Challenges,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 3 under s. 127.52(1).
Income Tax Severed Letters 4 October 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Adlexco – Court of Quebec finds that the presence of any large business in a JV taints all inputs acquired by the operator for ITR recapture purposes
When Ontario (and other provinces) agreed to join the HST system, one of the added features of the provincial component of the HST system was that input tax credits (ITCs) to which "large businesses" otherwise would be entitled for various categories of purchases (such as fuel, electricity, telecommunications services, food and entertainment) were "recaptured" (i.e., effectively denied), subject to a phase-out of this rule. In 28 March 2013 Interpretation 141341, CRA indicated that one of the effects of s. 27(6) of the New Harmonized Value-added Tax System Regulations, No. 2 was that, in the situation where the operator under a joint venture was not a large business and one of the three joint venture participants was a large business, the purchase of electricity by the operator would result in the recapture of the provincial component of HST based on the proportionate (33 1/3%) interest of the large business participant.
Lachapelle JCQ confirmed that the somewhat similar Quebec rule for the recapture of input tax refunds (ITRs) worked in a more draconian manner regarding such a joint venture: if any of the joint venturers on behalf of whom the operator of the JV acquired subject inputs was a large business, this had a “tainting” effect, i.e., 100% of such inputs were subject to the recapture rule.
Neal Armstrong. Summary of Gestions Adlexco Ltée v. Agence du revenu du Québec, 2023 QCCQ 5625 under s. 27(6) of the New Harmonized Value-added Tax System Regulations, No. 2.
Adboss – Federal Court of Appeal confirms, based on abuse of process, the striking of the Minister’s assumption that a company’s “controlling mind and management” was in Canada
The Minister’s reply, to the taxpayers’ appeals of assessments denying zero-rating of taxable supplies made by them to a Cyprus company (“Lowfroc”) on the basis that Lowfroc was a resident of Canada, pleaded an “assumption” that “at all material times, the controlling mind and management of Lowfroc was in Canada.”
After confirming that the quoted assumption was one of mixed fact and law, Goyette JA further confirmed the finding below that there had been prejudice to the taxpayers and an abuse of process (justifying the striking of this assumption pursuant to Rule 53(1)(c)) given inter alia that this pleading “went to the heart of the appeal” and that the Crown had refused the taxpayers’ request for particulars in this regard, so that the taxpayers accordingly “had few options if they wanted to know what factual assumptions they must demolish in order to succeed in their appeal.”
Neal Armstrong. Summary of The King v. Adboss, Inc., 2023 FCA 201 under Rule 53(1)(c).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released during November of 2002. Their descriptors and links appear below.
These are additions to our set of 2,597 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 20 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-11-22 | 28 November 2002 Internal T.I. 2002-0153837 F - SOMMES IMPAYEES | Income Tax Act - Section 78 - Subsection 78(1) - Paragraph 78(1)(a) | IT-109R, para. 12(a) not applied where there was an asymmetry between the deduction/ net inclusion amounts reported by the debtor and creditor |
| 5 December 2002 Internal T.I. 2002-0155667 F - DEDUCTIBILITE DES INTERETS CAPITALISEES | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | capitalized simple interest on loan to acquire common shares was deductible if reasonable expectation of dividends | |
| Income Tax Act - Section 80 - Subsection 80(2) - Paragraph 80(2)(b) | debt forgiveness rules do not apply to forgiveness of compound interest | ||
| Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount | debt forgiveness rules do not apply to forgiveness of compound interest | ||
| 5 December 2002 External T.I. 2002-0163135 F - Source Deductions - Nominal Partnership | Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) | an individual could cover the payroll of the employees of him and another in agreed proportions as agent and principal, and handle all the source deductions, and prepare one information return | |
| General Concepts - Agency | paymaster under payroll agency arrangements could fulfill the source deduction and T4 reporting requirements of the principal | ||
| 5 December 2002 Internal T.I. 2002-0171847 F - RESIDENCE D'UNE FIDUCIE | Income Tax Act - Section 15 - Subsection 15(2.1) | s. 15(2) applies to loan made by a corporation to a personal trust of which its shareholder is a beneficiary | |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) - Subparagraph (c.1)(ii) | principal residence designation is available in respect of a specified beneficiary even though the residence is rented by the trust to that beneficiary | ||
| 4 December 2002 Internal T.I. 2002-0138067 F - REMPLACEMENT D'UNE CREANCE PAR UNE AUTRE | Income Tax Act - Section 18 - Subsection 18(9.1) - Paragraph 18(9.1)(a) | financing the repayment of a debt obligation with the proceeds of a borrowing from a different creditor does not constitute a debt substitution | |
| 2002-11-08 | 21 November 2002 External T.I. 2002-0156565 F - INTERETS HYPOTHEQUE SUR RESIDENCE | Income Tax Act - Section 20 - Subsection 20(3) | interest on new home mortgage deductible if used to pay off mortgage on old home that had been used for income-producing purposes |
CIBC – Federal Court of Appeal confirms that the predominant element supplied by a Loblaw banking sub to CIBC was a right to access Loblaw customers, rather than a financial service
A subsidiary ("PC Bank") of Loblaw had agreed with CIBC for CIBC to provide retail banking services under Loblaw’s President's Choice trademark. Webb JA noted that Hogan J in the Tax Court had “found that the predominant element of the single compound supply [by PC Bank to CIBC] was a “Bundle of Rights” [i.e., property] that allowed CIBC to solicit Loblaw’s existing and future customers for the purchase of President’s Choice Financial products.” Hogan J had gone on to find that, given that para. (r.5) of the financial service definition provided an exclusion from financial service for “property … that is delivered or made available to” CIBC “in conjunction with” CIBC selling financial products of PC Bank, the supply made by PC Bank to CIBC was taxable.
Webb JA had earlier noted that although it might seem unnecessary for (r.5) to exclude a supply of property from the supply of a financial “service,” “Parliament must have been concerned that, without the addition of this exclusion, certain supplies of property could be considered to be a financial service.”
He then concluded:
CIBC has failed to establish that the Tax Court Judge committed any palpable and overriding error in his finding that PC Bank supplied the “Bundle of Rights” to CIBC.
He also indicated that there was nothing wrong with Hogan J having made a mixed finding of fact and law (as to the nature of the supply made by PC Bank to CIBC) that was on a basis different than that argued by either party.
Neal Armstrong. Summaries of Canadian Imperial Bank of Commerce v. Canada, 2023 FCA 195 under General Concepts – Res Judicata, ETA s. 309(1) and s. 123(1) – financial service – (r.5).
CRA clarifies that the provision of goods is not incidental to services for TOSI purposes where the customer acquires property of significant value
A CRA webpage provides examples for computing the 90% services exclusion in s. (a)(i) of the "excluded share" definition in the tax on split income (TOSI) rules. These include:
- Where a corporate cleaning business consumes cleaning supplies in performing its cleaning services, such supplies will be included in its services revenue even if charges therefor are separately identified in its invoices (Example 4);
- Or where it also “separately” sells cleaning supplies to some of its customers, such sales will be respected as not belonging to its services revenue (Example 5);
- Where a corporation, that constructs and repairs decks, charges for its materials and labour for each job, its services revenue is determined by backing out its charges for materials from its total revenues (Example 6).
In commenting further on these examples, CRA stated:
Example 4 demonstrates incidental use or consumption of goods in the provision of services. In this example, the cleaning products are incidental to the services, since they were used or consumed in providing the services. Ultimately, in this situation, the customer is seeking to have their premises cleaned.
Example 5 describes a situation where the corporation, in addition to providing cleaning services, sells cleaning supplies and equipment, perhaps to other businesses providing cleaning services, or to its own customers but separate and apart from the cleaning services. In this example, the goods are not incidental to the service as they are acquired by the customer for their own use.
In example 6, a contractor is engaged to supply the materials for and carry out the construction of a deck. In this situation, the materials are significant enough of an element in the construction of the deck that the business provides both a service and non-service component. The corporation supplied all materials and labour when constructing and repairing decks. The service component was the labour provided. Given that customer is acquiring an improvement to their property in the form of the deck which is a tangible improvement affixed to the customer’s property, to the extent that the revenues reflect the provision of the materials, they are considered a non-service component provided together with, as opposed to incidental to, the services.
Neal Armstrong. Summary of 2021 Alberta CPA Roundtable under “Tax on Split Income – Services Restriction to Excluded Shares” under s. 120.4(1) – excluded share – s. (a)(i).