News of Note
CRA reviews the effect of receiving a BC forgivable loan to construct and rent out a secondary suite
Email this ContentThe BC Secondary Suite Incentive Program assists qualifying homeowners to create a new secondary suite or accessory dwelling unit (a “Secondary Suite”) on the property of their principal residence, by providing a forgivable loan in the amount of 50% of the Secondary Suite’s construction costs, subject to a maximum loan amount. It must be rented at no more than a rent affordability limit for at least five years to a tenant who is not an immediate family member, and the loan amount will be forgiven over five years if all of the program requirements are satisfied.
The findings of CRA included:
- The Stewart test likely suggests that (even with the below-market rents), the Secondary Suites constitute a source of income, being property income, notwithstanding any generation of a loss.
- The forgivable loan when received would reduce the cost of the property pursuant to s. 13(7.1) or 53(2)(k), so that s. 12(1)(x) would not apply by virtue of the exclusion in s. 12(1)(x)(vi).
- The creation of a Secondary Suite, either within or detached from the homeowner’s home, generally would trigger a deemed disposition pertaining to the converted portion, pursuant to s. 45(1)(c)(ii).
- However, the homeowner could make an election pursuant to s. 45(2) to defer the recognition of any resulting gain to a later taxation year.
- For principal residence exemption purposes, the Secondary Suite, and the balance, would be treated as two distinct housing units (essentially because each could be ordinarily inhabited separate from the other) so that the principal residence exemption for any particular year could only be claimed for one of the two units, as also discussed below.
- Although the ordinarily-inhabited condition under the principal residence definition would not generally be met for the Secondary Suite while being rented to third parties, where it was subject to the s. 45(2) election it could nonetheless qualify as the taxpayer’s principal residence for up to four taxation years during which the election remained in effect – so that the homeowner would be able to choose for such a year to designate the Secondary Suite rather than the balance of the property as that taxpayer’s principal residence.
Neal Armstrong. Summaries of 27 June 2024 External T.I. 2023-1000391E5 under s. 3(a), s. 54 – ACB, s. 13(7.1), s. 45(1)(c)(ii), s. 45(2) and s. 54 – principal residence.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in August and July of 2001. Their descriptors and links appear below.
These are additions to our set of 2,946 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 23 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Alcoa – Court of Quebec finds that an unrecoverable receivable was not a bad debt to the extent compensated under a standby letter of credit
The supply agreement between Alcoa and a purchaser (Sural) provided that Sural would maintain a standby letter of credit of US$16 million to ensure payment by Sural of the amounts invoiced by Alcoa. After Sural entered into CCAA proceedings, and was in default as to the payment of US$52.7 million (including GST and QST) in invoices, Alcoa made a demand for, and was paid, US$16 million by the Bank under the L.C. However, Alcoa treated the full invoice amounts as bad debts for QSTA and ETA purposes. The ARQ denied the portion of Alcoa’s bad debt deduction that corresponded to the QST (and GST) components of US$16 million.
After referring to the presumption in Re Rizzo, [1998] 1 SCR 27 that “the legislature does not intend to produce absurd consequences,” Bourgeois JCQ indicated that the position of Alcoa entailed it both claiming a bad debt deduction for the QST and GST included in the US$16 million and also receiving compensation for those amounts under the L.C.
After also noting that the L.C. was issued pursuant to the agreement for the supply of aluminum to Sural and for invoicing Sural therefor, he concluded that the US$16 million should be considered as a partial payment of the unpaid Sural invoices, so that the ARQ position was confirmed.
He attempted to distinguish Policy Statement P-058R (now obsolete), in which CRA concluded that a credit insurance claim payment that related to the indemnification of an account receivable that became a bad debt did not constitute the recovery of the bad debt for the purposes of ETA s. 231(3).
Neal Armstrong. Summaries of Alcoa Canada Cie v. ARQ, 500-80-042769-225 (6 September 2024, Court of Quebec) under ETA s. 231(1) and s. 123(1) - money.
CRA rules on a non-resident parent issuing flow-through shares to renounce its CEE, and renounced CEE of its Canadian sub, re a mine restart project
A Canadian exploration company (the Company) wholly-owned by a non-resident company (Company B) whose shares are listed, determined that its mine that had produced, but never successfully, could be restarted if it were able to significantly expand the resource so as to potentially support a much higher throughput. It proposed to engage in scout and expansion drilling at surface, and in expansion and infill drilling underground, including related work such as the construction of underground infrastructure, in order to expand the resource. CRA ruled that the property was not a mine that had come into production in reasonable commercial quantities for the purposes of s. (f)(vi) of the definition of CEE in s. 66.1(6), and also gave a ruling regarding the qualification of the expenditures as CEE.
It was proposed that Company B would acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value. The proceeds of disposition would be included by the Company in element “F” of the definition of cumulative CDE, and Company B would include its expenditure as a CDE pursuant to para. (e) of that definition – with the Company distributing its sales proceeds as a PUC distribution to Company B.
The Company would then conduct exploration for its own account and as agent for Company B. The Company’s portion of the exploration expenditures would be financed by its issuing flow-through (common) shares (FTS) to Company B. To fund its exploration work, Company B would issue FTS to Canadian investors, and renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company. The reason for Company B issuing FTS is that its listed shares may be more attractive to the Canadian investors.
CRA ruled that:
- Provided that Company B is carrying on a business in Canada, s. 66(12.71) will not apply to prevent Company B from renouncing CEE as per the above.
- Provided Company B and the Company continue to be related at all relevant times, s. 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B.
Neal Armstrong. Summaries of 2023 Ruling 2023-0961681R3 under s. 66.1(6) – CEE – (f) and s. 66(12.71).
CRA now treats a payment of withholding tax by a partnership “on behalf of” its partners as an ACB-reducing distribution to them
Would the allocation of foreign tax by a partnership to a partner be regarded as a withdrawal by the particular partner that reduced the ACB of its partnership interest? CRA stated:
If the partnership pays the foreign tax on behalf of the partner or the foreign tax is withheld on behalf of the partner in accordance with foreign law from the foreign income paid to the partnership, such amount would be considered [for purposes of s. 53(2)(c)(v)] to be received by the partner on account or in lieu of payment of, or in satisfaction of, a distribution of the partner’s share of the partnership profits or partnership capital. Consequently, subparagraph 53(2)(c)(v) of the Act would reduce the ACB of the partner’s interest in the partnership for the amount of any non-business income tax paid by the partnership on behalf of the partner. …
CRA went on to note that such ACB reductions could trigger negative ACB gains under s. 40(3.1).
This position on s. 53(2)(c) overruled 2004-0075931E5, which stated that “paragraph 53(2)(c) does not provide for a deduction in computing the adjusted cost base of a taxpayer's interest in a partnership for the amount of any non-business income tax paid to a foreign country through the accounts of the partnership that was allocated to the particular partner… .”
CRA is effectively treating such an imposition of withholding tax on the income of a partnership the same as if the partnership had distributed those amounts to its partners in order for them to satisfy their personal liability. It is unclear which foreign jurisdictions treat such taxes as pro rata liabilities of the partners rather than of the recipient of the income (the partnership). On the other hand, if the foreign taxes are income taxes imposed on the income of the partnership (e.g., for a US partnership that has checked the box), then presumably it would be clear that those taxes were not partner liabilities.
Neal Armstrong. Summaries of 10 April 2024 External T.I. 2021-0919231E5 under s. 53(2)(c)(v) and s. 40(3.1).
Milgram – Federal Court finds that it has the jurisdiction to quash an abusive decision of CRA to assess, even though the resulting assessment was objected to
Milgram, a Liechtenstein-resident trust that had determined that it might be a deemed resident under s. 94, made a 2015 filing under the CRA voluntary disclosure program for its 2003 to 2014 taxation years (for which the financial information was still available), and in December 2015, the VDP officer accepted the disclosure. However, in a September 5, 2018 proposal letter, the Minister proposed to assess Milgram for its 1998 to 2002 taxation years (the “earlier years”) based on an estimate of Milgram’s investment income for those years, stating that this assessment came about due to “misrepresentation” attributable to “neglect, carelessness or wilful default.” After Milgram applied for judicial review of the proposal letter, the Minister in February 2021 assessed the earlier years, to which Milgram objected.
Go J declared that the Minister’s decision to assess Milgram for the earlier years after her acceptance of Milgram’s voluntary disclosure constituted an abuse of process, quashed that decision and directed the Minister “to consider the Court’s declaration and to take such actions as are necessary to give effect to the reconsidered decision.” In reaching this result, Go J:
- Found (citing Dow Chemical) that because Milgram was challenging the Minister’s conduct or process that led to the proposed assessment, and not the proposed assessment itself, it was raising a “matter” that fell within the Federal Court’s jurisdiction under s. 18.1(1) of the Federal Courts Act.
- Noted that, indeed, Dow Chemical had approved the statement in JP Morgan that the “‘[t]he Tax Court does not have jurisdiction on an appeal to set aside an assessment on the basis of reprehensible conduct by the Minister leading up to the assessment, such as abuse of power or unfairness’, therefore in such a circumstance, ‘the bar in section 18.5 of the Federal Courts Act against judicial review in the Federal Court does not apply’…”
- Found that the Minister had the discretion to waive tax, not just interest and penalties (and the Crown’s argument to the contrary did not comport with the Minister’s decision to assess back only to 1998 even though Milgard had disclosed at the outset that it had been formed in 1964);
- Stated, before noting that the voluntary disclosure by Milgard was complete and accurate rather than containing a misrepresentation, that “in reneging on her own prior decision by impugning, without any justifications, misrepresentation on the Applicant, the Minister’s conduct violates a sense of fair play and the Decision amounts to an abuse of process.”
In connection with her final declaration above, she noted that:
- Sifto (which had been cited with approval in Dow Chemical) had indicated that a remedy for unreasonable conduct of the Minister could include issuing an order precluding the Minister from enforcing a penalty assessment or collecting a resulting tax debt; and
- In light of the circumstances, including that Milgram’s 2021 notices of objection had not yet been adjudicated, “quashing the Minister’s decision to reassess may therefore have the practical effect of ordering the Minister to reconsider her decision.”
Neal Armstrong. Summary of Milgram Foundation v. Canada (Attorney General), 2024 FC 1405 under Federal Courts Act, s. 18.5.
Income Tax Severed Letters 11 September 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in September and August of 2001. Their descriptors and links appear below.
These are additions to our set of 2,940 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 23 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
It is proposed that Filo be jointly acquired by BHP for BHP cash, and by Lundin Mining for cash and shares
It is proposed that Filo, a TSX-listed CBCA corporation indirectly holding a large deposit in Argentina and Chile, will be acquired by a Canadian joint venture company (JVCo) to be held on a 50-50 basis indirectly by (TSX-listed) Lundin Mining and by a Canadian subsidiary (BHP) in the BHP Group (the parent’s primary listing is in Australia). Lundin Mining holds an adjacent property in Argentina (held indirectly by a Canadian subsidiary termed “Josemaria”).
A Contribution Agreement between Lundin Mining and BHP contemplates that Lundin Mining will contribute Josemaria to JVCo for its 50% interest and BHP will contribute US$690 million in cash for its 50% interest. Furthermore, however, they will jointly purchase all the Filo shares for consideration consisting of BHP and Lundin Mining cash of around $1.908 billion and $0.859 billion, respectively, and the issuance by Lundin Mining of around 92.1 million shares. The Filo shareholders can elect to receive cash or Lundin Mining shares, subject to proration to maintain the agreed mix. All the Filo shares (including the 5% stake already held by BHP and the 0.5% stake of Lundin Mining) will also be contributed to JVCo.
The plumbing to accomplish the final structure of JVCo holding all of Filo and Josemaria in general involves:
- BHP lending both the Filo acquisition cash and JV cash to Lundin Mining and receiving the "BHP notes";
- Lundin Mining then acquiring all the Filo shares (not already held by BHP and it) for the agreed cash and share consideration;
- Lundin Mining then contributing Filo (through intermediate Canadian holding companies) to JVCo in consideration for shares and the assumption of the BHP notes; and
- BHP converting the BHP notes into JVCo shares (as well as transferring its existing 5% interest in Filo to JVCo for JVCo shares);
so that, after the dust settles, JVCo is held on the agreed 50-50 basis.
Those Filo shareholders who elect to receive Lundin Mining shares are also required to receive a nominal amount of cash ($0.0001 per Filo share), so that they can only potentially receive rollover treatment if they qualify as taxable investors and request, within 60 days of the effective date of the CBCA plan of arrangement, that Lundin Mining jointly elect with them under s. 85.
Neal Armstrong. Summary of Circular of Filo Corporation under Mergers & Acquisitions – Mergers – Shares for Shares and Cash.
CRA rules on successive butterflies to effect the creation of a 2nd public corporation
CRA ruled on butterfly spin-off transactions to effect the split-up of DC2, a public corporation, into two publicly listed companies: DC2 and SpinCo. There were to be two successive butterflies since the subsidiaries to be transferred to SpinCo started off as subsidiaries of a wholly-owned subsidiary of DC2, namely, DC1. Accordingly, such subsidiaries were to be first dropped under s. 85(1) into a Newco subsidiary of DC1, then Newco was to be spun-off by DC1 to a newly-formed subsidiary of DC2 (SpinCo Sub) under a butterfly, and then DC2 was in turn to effect a butterfly spin-off pursuant to a plan of arrangement of SpinCo Sub to SpinCo (now held by the DC2 shareholders).
DC1 was a “specified wholly-owned corporation” so that, pursuant to s. 55(3.02), and like DC2, it was not subject to the types-of-properties strictures on its butterfly spin-off.
The ruling letter provides that the Arrangement Agreement was to state:
DC2 and SpinCo will:
a. covenant and agree with and in favour of each other that for a period of time after the Effective Date to be agreed upon, they will not (and they will ensure that their respective subsidiaries will not) take any action or enter into any transaction that could cause the transactions contemplated in the Plan of Arrangement or by the Arrangement Agreement to be taxed in a manner that is inconsistent with the rulings provided in this letter without obtaining another tax ruling or an opinion of a nationally recognized accounting firm or law firm that such action or transaction will not have such effect; and
b. agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant described in item (a) above.
Neal Armstrong. Summary of 2024 Ruling 2023-0987001R3 under s. 55(3.02).