News of Note
CRA is now willing to apply the Trans-Prairie indirect use test to the safe harbour in s. 17(8)(a)(i)(A)
Email this ContentS. 17(8)(a)(i)(A) provides an exception to the imputed interest rule under s. 17(1) for outbound low-interest loans where the loan was used by a controlled foreign affiliate for the purpose of earning income from an active business, as defined. In a change of position, CRA has now indicated that it is willing to apply the (Trans-Prairie “fill the hole”) indirect use test described in the interest-deduction Folio in this context as well, so that such a loan used to fund a return of capital or accumulated profits that had funded an active business would fit the exception.
Neal Armstrong. Summary of 15 May 2017 External T.I. 2016-0676701E5 under s. 17(8)(a)(i)(A).
Income Tax Severed Letters 31 May 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Green – Federal Court of Appeal states that an upper-tier partnership should not compute its income
CRA considered that business losses incurred by lower-tier partnerships (the PSLPs) were deemed to be limited partnership losses of an upper-tier LP (MLP) – which meant that they were effectively trapped in MLP given that s. 111 (and, thus, the ability to deduct limited partnership losses under s. 111(1)(e)) was only available to a taxpayer and not to a partnership such as MLP. Webb JA rejected this interpretation and considered that the PSLP business losses were also business losses rather than limited partnership losses in the hands of MLP, so that such losses could be allocated to the MLP partners in the same manner as if they had been generated in a single-tier LP. In the course of a detailed discussion, he stated:
Since the computation of income for a partnership that is a member of another partnership will cause problems when that top-tier partnership attempts to allocate its income on a source basis to its partners, in my view, Parliament did not intend for a partnership that is a member of another partnership to compute income. Rather, Parliament intended for the sources of income (or loss) to be kept separate and retain their identity as income (or loss) from a particular source as they are allocated from one partnership to another partnership and then to the partners of that second partnership (and so on as the case may be). [emphasis added]
Since MLP was not supposed to compute its income, does this mean that the adjusted cost base of its units do not reflect the income or loss earned by it (but still reflect the distributions made by it out of those earnings) – or in the post-Green world, is the ACB of interests in an upper-tier partnership now an irrelevancy since the partnership is transparent?
Webb JA also stated that the Crown’s concern, “that the at-risk rules could be avoided entirely if the top-tier partnership (MLP) were a general partnership,” was outweighed by other considerations.
Neal Armstrong. Summary of The Queen v. Green, 2016 FCA 107 under s. 96(2.1) and s. 102(2).
Turgeon - Federal Court of Appeal affirms that an accommodation party was not dealing at arm's length
In the Turgeon case (usually referred to by the name of the other taxpayer, Poulin), CRA successfully applied s. 84.1 to a transaction in which one of the two major shareholders of a Quebec CCPC (Mr. Turgeon) agreed to sell some preferred shares of the CCPC to a newly formed Holdco of its comptroller (“Hélie Holdco”) in consideration for a promissory note bearing interest at 4% and which was to be repaid over a number of years out of dividends or redemption proceeds received by Hélie Holdco from the CCPC. D’Auray J noted that this employee had no risk, and Hélie Holdco had no upside as its only assets and liabilities were the prefs and the note, both with frozen values – so that Hélie Holdco essentially was just an accommodation party. She stated:
Hélie Holdco served only to participate in the transaction for the benefit of Mr. Turgeon, thereby permitting him to strip the surplus of [the CCPC] free of tax by virtue of utilizing the capital gains deduction.
Mr. Turgeon appealed this decision on the sole ground that he was dealing at arm’s length with Hélie Holdco. Boivin JA dismissed his appeal, stating that D’Auray J had followed the principles stated by the Supreme Court in McLarty.
Neal Armstrong. Summary of Poulin v. The Queen, 2016 TCC 154, briefly aff’d sub nomine Turgeon v. The Queen, 2017 CAF 103 under s. 251(1)(c).
Six further full-text translations of CRA technical interpretations are available
Full-text translations of the three French technical interpretations that were released last week along with a further technical interpretation obtained directly from the correspondent, and of two technical interpretations released on February 11, 2015 and February 4, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 28 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for June.
CRA applies the “predecessor employer” concept on a business segment basis
Reg. 8504(2.1) provides that employment with a “predecessor employer” is included in the computation of the maximum pension benefit. This term references inter alia a sale of all or a part of a business “if all or a significant number of employees of the vendor have, in conjunction with the sale…become employees of the employer acquiring the business.”
If a distinct segment of a particular company were sold off, CRA would consider it appropriate to look only at that particular segment, rather than the company as a whole, in determining whether or not a significant number of employees had become employees of the acquiring employer.
Neal Armstrong. Summary of 5 May 2017 OBA Seminar, Q.7 under Reg. 8500(1) – predecessor employer.
CRA is willing to accept target benefit plans that breach the equal periodic benefit rule
In October 2016 the federal government announced changes to the federal PBSA to permit federally-regulated employers to offer target benefit plans (i.e., plans somewhat like defined benefit plans, but with benefits based on affordability), and various provinces are moving in this direction as well.
CRA indicated that it currently will accept target benefit plans as long as the only rule that is violated is the equal periodic benefit rule (i.e., the benefits would be permitted to fluctuate up and down.) The Department of Finance is working on what changes to the Regulations should be made to accommodate target benefit plans, but has not landed on what these should be.
Neal Armstrong. Summary of 5 May 2017 OBA Seminar, Q.2 under Reg. 8503(2)(a).
Lumenpulse privatization contemplates cash consideration for its majority public shareholders and a share-for-share exchange for 38% of its shareholders
Under the proposed privatization of TSX-listed Lumenpulse pursuant to a CBCA Plan of Arrangement, the public shareholders would receive cash for their common shares, and the specifically-listed “Rollover Shareholders” (holding 38% of the common shares) would receive common shares of the newly-incorporated purchaser, which is an indirect subsidiary of Power Corporation of Canada. The Circular does not mention whether the “Rollover” contemplated is under s. 85 or 85.1
Neal Armstrong. Summary of Lumenpulse Circular under Mergers & Acquisitions - Mergers - Privatizations.
CRA states that using the s. 55(3)(a) redemption exception to circumvent the safe income limitation could be GAARable
The CRA position on creditor-proofing suggested that if Opco, which has no safe income and whose common shares have a nominal adjusted cost base and paid-up capital, uses cash (or other assets) to pay a dividend to its shareholder (Holdco) to fund Holdco’s purchase of real property to be rented to it, that cash dividend likely would be considered to have a tainting purpose described in s. 55(2.1)(b)(ii). Accordingly, Opco avoids s. 55(2.1)(b) by using the cash to purchase most of its common shares for cancellation. CRA was unenthusiastic, stating:
[S.] 55(3)(a) is intended to facilitate corporate reorganizations made in good faith by related persons but is not intended to accommodate the payment or receipt of dividends or transactions or events which seek to increase, manipulate or manufacture tax basis.
Thus, the application of the general anti-avoidance rule in subsection 245(2) should be queried, considering that the money given to Holdco would not come from the income that had already been taxed in Opco and that the adjusted cost base of participating shares in the capital stock of Opco would be nominal.
Neal Armstrong. Summary of 2017-0683511E5 Tr under s. 55(2.1)(b)(ii).
CRA indicates that s. 118.1(5.1) does not apply where a GRE donates a capital interest in a charitable residual trust created by will
In order for a charitable gift by a graduated rate estate gift to be included in the total charitable donations of the estate (or the deceased) under (c)(ii)(B) of the definition in s. 118.1(1) of "total charitable gifts," there is a requirement inter alia that s. 118.1(5.1) deems the gift to have been made by the estate. S. 118.1(5.1) references “property that was acquired by the estate on and as a consequence of the death.”
CRA considers that s. 118.1(5.1) does not apply where a GRE donates a capital interest, in a charitable residual trust created by will, to a qualified donee. However, this does not have much significance as:
under (c)(ii)(A) of the [same] Definition, the eligible amount of a gift of an interest in a trust could be included in the computation of the total charitable gifts of the GRE in the taxation year in which the gift is made or in any of the five subsequent taxation years [until claimed].
Neal Armstrong. Summary of 19 April 2017 External T.I. 2016-0625841E5 Tr under s. 118.1(5.1).