News of Note

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Comments made by the Joint Committee to CRA (the ILBD) primarily on EIFEL interpretive or administrative matters included the following:

• Although there are many instances in which a family trust could be treated as the ultimate parent of a private Canadian group, a consolidated audit is rarely done at the family trust level – and preparing financial statements would entail significant complications, e.g., accounting for direct ownership by family members in the parent company as minority interests; CRA should consider relief through permitting the uppermost corporation in the group to be treated as the ultimate parent.
• Given that the group ratio is calculated for a consolidated group for a “relevant period”, where a corporation was incorporated or acquired, or disposed of, during a year, will it be eligible for the group ratio where its financial results are included in the consolidated financial statements for the portion of the year that it is an eligible group entity?
• Schedule 130 should accommodate taxpayers that become subject to the EIFEL rules being able to recognize a balance of cumulative unused excess capacity (CUEC) without the need for amending the three preceding tax returns.
• The calculation and application of non-capital losses where the EIFEL limitations are engaged (including a potential iterative computation under para. (h) or (i) of element B of the “adjusted taxable income” (ATI) definition) was summarized as follows (with these points being illustrated in numerical examples), with requested confirmation of CRA’s agreement:

i. A non-capital loss from another taxation year that was not used to reduce taxable income to zero when determining ATI and the IFE [interest and financing expense] denial ratio for the year, may be used to further reduce taxable income for a denial for IFE under subsection 18.2(2), a partnership IFE add-back under paragraph 12(1)(l.2) or an adjustment for relevant affiliate IFE under subclause 95(2)(f.11)(ii)(D)(I), or subclause 95(2)(f.11)(ii)(D)(II) that created additional taxable income following the EIFEL computations;

ii. Where the amount of the loss claimed in the circumstances described in (i) above results in an iterative adjustment to ATI under either of paragraphs (h) or (i) of ATI; to the extent of embedded EIFEL attributes as described in variable J of paragraph (h) or to the extent of the 25% of the additional non-capital loss claimed against the IFE denial in the case of a specified pre-regime loss under paragraph (i) of ATI; the ATI will be increased and the IFE denial reduced. This will occur on an iterative basis until the amount of the IFE denial equals the amount of the loss from the other year that is needed to bring taxable income to zero.

iii. Despite the fact that no tax (or a lower amount of tax) is payable in the circumstances described in (i) above, the arising RIFE [restricted IFE] may be carried forward and recovered as a deduction in computing taxable income in a future year, where there is either excess capacity in the year or a transfer of CUEC received from an eligible group entity; and

iv. In the circumstances described in (iii) above, any RIFE recoverable in a future year in excess of the taxable income, will result in a non-capital loss for the year in which the RIFE is recovered.

Neal Armstrong. Summaries of Joint Committee, “Summaries of Feedback on the EIFEL Administration”, 2 November 2024 Joint Committee Submission to the International and Large Business Directorate, under s. 18.21(1) – ultimate parent, relevant period, s. 18.2(1) – CUEC, ATI - B - (h).

In 2015, the taxpayer Bank requested to carry back $54 million of non-capital loss from its 2008 taxation year to its 2006 taxation year to offset the increase to its income for the 2006 year that would occur when the Minister implemented a concurrent settlement agreement regarding a transfer-pricing audit. The Minister did so, but calculated interest on the increased balance of tax owing for the Bank’s 2006 year (before application of the loss carryback) for the period of approximately eight years ending, pursuant to s. 161(7)(b)(iv), with the date of the Bank’s carryback request, rather than (pursuant to s. 161(7)(b)(ii)) with the return filing date for the loss year. The Bank submitted that s. 161(7)(b)(iv) was inapplicable because the reassessment of its 2006 year did not occur “as a consequence of [its carryback] request” as required by s. 161(7)(b)(iv) but “[r]ather, the reassessment was made in order to process the audit adjustment”.

The various reasons of Woods JA for rejecting the Bank’s position included:

• Given that “Parliament seeks certainty, predictability and fairness in tax legislation … [i]f Parliament did not intend to impose interest when a loss carryback is claimed as a result of an audit adjustment, it is likely that Parliament would have provided for this with explicit language”.
• The Bank’s position could produce anomalous results, e.g., if the Minister implemented the audit adjustment and the loss carryback in two separate reassessments rather than one, the “interest clock” would continue until the loss carryback was requested, whereas with a single reassessment, the “interest clock” would stop when the return for the loss year was filed: “There is no principled reason why the issuance of one or two reassessments should lead to diverse outcomes …”.
• It was “likely that Parliament knew that subparagraph (b)(iv) could function in a manner similar to a penalty … [and] that substantial interest could accrue under subparagraph (b)(iv) if the carryback request resulted from an audit”.

It also may be of interest that, in the course of dismissing a Bank argument not summarized above, Woods JA indicated that the “Minister has the right to reject a taxpayer’s request for a loss carryback” to offset an audit adjustment.

Neal Armstrong. Summaries of Bank of Nova Scotia v. Canada, 2024 FCA 192 under s. 161(7)(b)(iv), s. 111(1)(a), and Statutory Interpretation – French and English Version.

At the beginning of 2016, Killam Properties Inc. (KPI) effectively converted to a REIT under a Plan of Arrangement pursuant to which most of its shareholders exchanged their KPI shares for units of the REIT on a taxable basis, but with some electing to receive rollover treatment by transferring their shares on a s. 97(2) rollover basis for exchangeable units of a subsidiary LP (Killam MLP) - into which the REIT then also contributed the KPI shares acquired by it on a taxable basis.

Starting with 2003-0053981R3, CRA issued various rulings permitting an income fund or REIT to eliminate a corporate subsidiary by creating a mutual fund corporation (MFC) through a distribution of shares of the MFC, having a nominal value, to its unitholders, then amalgamating the corporate subsidiary with the MFC to form Amalgamated MFC, and then effecting a s. 132.2 merger of Amalgamated MFC into the income fund or REIT.

On October 11, 2024, CRA issued a ruling letter confirming the tax consequences of transactions of this general character for the elimination of KPI, including the application of the s. 132.2 rules, and the REIT is now proposing to implement. A complicating factor is that KPI is held by the REIT through Killam MLP rather than directly. Accordingly, the proposed transactions include a renunciation by Killam MLP of the receipt of redemption proceeds for its 99.999%+ shareholding in Amalco MFC, somewhat similar to that ruled on in 2016-0660321R3.

Neal Armstrong. Summary of Circular of Killam Apartment Real Estate Investment Trust dated October 18, 2024 under Public Transactions - Other - Internal S. 132.2/107.4 Mergers - Corporate Sub s. 132.2 Merger.