News of Note
CRA has an internal list of facilities which, on previous review, have been considered to be nursing homes
Email this ContentCRA acknowledged that it has a list of facilities that have already been reviewed to determine whether they qualify as nursing homes. It will not publish this list, which is for internal use only. However, CRA auditors have been instructed not to disallow medical expense claims merely because an institution does not appear on the list.
Neal Armstrong. Summaries of May 2016 Alberta CPA Roundtable, Q.16 under s. 118.2(2)(d) and Reg. 5700(n).
It may be imprudent to distribute amounts from an FA as a single dividend
The Reg. 59071(2)(b) election to have a dividend come out of pre-acquisition surplus (i.e., as an ACB reduction), rather than out of other surplus, can only be made on a “whole” dividend. Accordingly, given uncertainties as to surplus balances, foreign affiliate distributions often prudently should be paid out as multiple dividends, so that there can be later flexibility as to which dividends, if any, will be elected upon.
Neal Armstrong. Summary of Clara Pham, “Paying FA Dividends When Surplus Balances are Unclear,” Canadian Tax Focus, Vol. 7, No. 1, February 2017, p. 2 under Reg. 5901(2)(b).
Typical commercial arrangements might trigger application of the restrictive covenant rules
Two examples of what arguably are restrictive covenants engaging the s. 56.4 rules:
- A lessor receives an upfront payment under a lease stipulating that it will not unreasonably interfere with the usage of the property (thereby perhaps requiring immediate recognition of this payment rather than permitting its amortization over the lease term).
- A shareholders’ agreement “clause requiring that the parties not carry on any other businesses…could trigger the application of the restrictive covenant regime upon a sale of shares, because any sale would be subject to the terms of the agreement.”
Neal Armstrong. Summary of Sze Yee Ling and Nathan Wright, “Restrictive Covenants: Some Reminders,” Canadian Tax Focus, Vol. 7, No. 1, February 2017, p. 7 under s. 56.4(1) – restrictive covenant.
Milestone Apartments REIT sale of its U.S. portfolio is not subject to FIRPTA withholding and achieves flow-through capital gains treatment for Canadian purposes
Milestone Apartments REIT (a TSX-listed Ontario unit trust) will sell its assets (essentially only the shares of a U.S. LLC indirectly holding its U.S. apartment portfolio) to a Starwood-affiliated purchasing LP. The sale will not be subject to FIRPTA withholding given that Milestone is a U.S. corporation (and U.S. REIT) for Code purposes. In the case of Milestone’s unitholders, their pro rata portion of the capital gain will be distributed to them and their units will be redeemed with the balance of their share of the net proceeds (i.e., US$16.15 per unit, minus the portion distributed as a capital gain).
U.S. investors hold Class B exchangeable units of a subsidiary Delaware LP (MMI LP) of the LLC being sold. MMI LP will be merged into a subsidiary LP of the purchasing LP with MMI LP as the surviving entity and with each exchangeable unit being converted into the right to receive US$16.15 in cash.
Non-U.S. holders owning less than 10% of the Milestone units (actually or constructively) will not be subject to U.S. FIRPTA withholding on the transaction.
The Circular includes interesting commentary on the low cap rates now applicable in the U.S. market (in part, due to private purchasers using 80% leverage.)
Neal Armstrong. Summary of Milestone Apartments REIT Circular under Spin-offs & Distributions – REIT sales proceeds distribution.
Life Choice – Tax Court of Canada finds that there can be no SR&ED without testing
A naturopathic products company (Life Choice) reviewed the literature and consulted other researchers in order to devise three new naturopathic formulations. In finding that this did not qualify as SR&ED, Boyle J stated that “it is the absolute absence of testing of the natural health products by Life Choice after their formulations were hypothesized by Dr. Dahl that is fatal to this appeal.”
Neal Armstrong Summary of Life Choice Ltd. v. The Queen, 2017 TCC 21 under s. 248(1) – scientific research & experimental development.
There is an expressed concern that standard documentation for secured guarantees provided by a CCPC for shareholder bank borrowings can trigger the B2B loan rules
It has been suggested that a secured guarantee by a private corporation of a bank loan to its individual shareholder may cause an income inclusion to the individual under the s. 15(2.17) back-to-back loan rules. In order for the bank not to have a specified right, "the key consideration is that the secured property can be used only to repay the shareholder debt." However:
[M]ost guarantees and related security agreements contain broad language that covers not just the present debt but also any future indebtedness of the individual shareholder. Because of this breadth of coverage, a specified right arises, and with it the tax problem.
In addition:
In certain circumstances, a single security document (given by the corporation to the third party [e.g., bank]) can cover both (1) the individual shareholder's loan from the third party and (2) an existing operating loan given by the third party to the corporation. Because the single security document covers more than just the individual shareholder's loan, a specified right arises.
This is a broader interpretation of "specified right" than has been suggested elsewhere (see Lorito).
Neal Armstrong. Summary of Amanda S.A. Doucette and Britney Wangler, “Normal Borrowing by CCPC Owners Can Create an Income Inclusion,” Canadian Tax Focus, Vol. 7, No. 1, February 2017, p. 1 under s. 15(2.17).
CRA comments on the deductibility of rent paid by a corporation for use of its shareholder’s home
Respecting the situation where a corporation deducts rent or reimbursement amounts paid for use of space in its shareholder’s home, CRA stated:
Generally, we would evaluate reasonableness in relation to the actual costs incurred by the shareholder. We would also expect, at a minimum, that the space is needed to file records, book appointments, take business phone calls and perform other administrative functions, as the case may be, and that there is no other space available to the corporation. …
[N]o mortgage interest or…CCA…should be claimed.
CRA also stated that the rents “would not generally be reported as rental income included on a T776.”
Neal Armstrong. Summaries of May 2016 Alberta CPA Roundtable, Q.15 under s. 15(1) and s. 67.
CRA indicates that s. 13(7)(e) applied to a s. 107(2.1) distribution but not a s. 104(5) deemed disposition
CRA agreed that the ½ step-up rule in s. 13(7)(e) does not apply to a deemed disposition under s. 104(5) given that the trust is not related to itself and does not otherwise not deal at arm’s length with itself.
The correspondent also suggested that s. 13(7)(e) does not apply on a s. 107(2.1) distribution of property: although s. 107(2.1)(a) and (b) respectively deem the trust to have disposed of the property and the beneficiary to have acquired it, s. 107(2.1) does not deem the beneficiary to have acquired the property from the trust. CRA considered this argument to be precious given that the preamble to s. 107(2.1) stipulates as a precondition to its application that there be a disposition of property by the trust to the beneficiary.
Finally, CRA indicated that the assumption by the beneficiary of debt of a personal trust owing to a bank would not preclude s. 107(2) applying to the distribution provided that such assumption did not result in the trust ceasing to be a personal trust (having regard to the question, not discussed by CRA, of whether such assumption constituted consideration for the acquisition of a beneficial interest in the trust).
Neal Armstrong. Summaries of 19 January 2017 External T.I. 2015-0576751E5 Tr under s. 13(7)(e) and s. 107(2).
CRA describes what a s. 115(5) remittance letter should disclose
There is no prescribed form for the purchaser’s making of a s. 116(5) or (5.3) remittance where the non-resident vendor has failed to file a T2062. The remittance letter should state:
- the purchaser’s full name and address
- the non-resident vendor’s name
- the non-resident vendor’s address (if available)
- a description of the property (as much detail as possible)
- the date of the acquisition
- a copy of the purchase agreement and/or other documents, such as the Statement of Adjustments, to support the purchase price.
Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Q.14 under s. 116(5).
Income Tax Severed Letters 8 February 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.