News of Note
CRA considers that the repeal of the s. 55(2) exemption, for dividends for which the Part IV tax is refunded on on-payment to an individual shareholder, busts integration
Email this ContentA dividend is received by Holdco from an Opco, which under the new s. 55(2) rules is no longer exempted from s. 55(2) even though the Part IV tax to which it was subjected is refunded on on-payment as a dividend to the individual shareholder.
CRA considers that the high rate of resulting combined tax cannot be alleviated by treating such s. 55(2) application as permitting an election to treat the applicable portion of the individual shareholder’s dividend as a capital dividend. Instead, such capital gain only generates capital dividend account for use for future dividends.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.4 under s. 89(1) – capital dividend account – (a).
CRA considers that the bearing of RRSP or TFSA fees by the annuitant or holder typically will be subject to the 100% advantage tax, effective 2018
CRA considers that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically will be considered to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount). However, to give the investment industry time to make the required system changes, CRA will defer applying this new position until January 1, 2018. Investment management fees that are reasonably attributable to periods ending before 2018, and are paid by the annuitant or holder will have no adverse tax consequences.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.5 under s. 207.01(1) – advantage - (b)(i).
CRA considers that Poulin is consistent with its previous statements on employee buycos
CRA largely repeated a statement made at the 2016 APFF Roundtable, Q.20 (also in response to the Poulin decision) respecting employee buyco arrangements, that the employee buyco could be established to be an accommodation party and, thus, not dealing at arm’s length with the employee-shareholder vendor, where, for example:
- the employee-buyco assumes no economic risks;
- the employee-buyco does not benefit from acquiring the Opco shares;
- the employee-buyco has no interest other than to enable the employee-shareholder to realize a capital gain and benefit from the capital gains deduction; or
- the employee-buyco has no role independent of the employee-shareholder or the operating corporation.
CRA went on to state that this position is consistent with its discussion at the 2012 Annual Conference.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.6 under s. 251(1)(c).
CRA indicates that whether a GAAR proposal letter is issued before a Headquarters/GAAR Committee referral generally turns on whether the GAAR issue is familiar
In discussing the role of the GAAR Committee, CRA indicated that where the transactions under audit by the Tax Services Office are similar to situations which already have resulted in a recommendation to apply GAAR, generally the TSO will go ahead and issue a proposal letter and obtain the taxpayer’s representations - and then subsequently refer the matter to Headquarters, with the taxpayer’s representations, to obtain the GAAR recommendation.
Where the matter instead has not been previously considered by the GAAR Committee, the TSO will refer the matter to Headquarters prior to issuing of the proposal letter – so that it would generally only issue a proposal letter if Headquarters recommends GAAR’s application. Headquarters will generally, in turn, refer the matter to the GAAR Committee for consideration.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.7 under s. 245(2).
CRA indicates that cash is property for 55(2.1)(b) purposes
S. 55(2.1)(b)(ii)(B) contemplates the application of s. 55(2) where one of the purposes of a dividend (otherwise than on a redemption) is to significantly increase the cost of the dividend recipient’s property. After noting that cash is property for s. 55 purposes and that cash received on a dividend can be used to purchase any other property or even additional shares of the dividend payor, with a resulting increase in the cost amount of the shares of the dividend payor, CRA concluded that cash thus is property for s. 55(2.1)(b)(ii)(B) purposes.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.8 under s. 55(2.1)(b).
CRA indicates that BEPS 13 has no effect on the s. 247 documentation requirements
CRA indicated that BEPS Action Item 13 had been dealt with by the introduction of proposed s. 233.8 (respecting country-by-country reporting), which does not include a requirement to produce a Local File or a Master File and has no direct relation to s. 247 (including the contemporaneous documentation requirement in s. 247(4)). CRA stated that Action 13 thus has not altered its criteria regarding whether a taxpayer has made reasonable efforts to determine and use arm’s length transfer pricing.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.9 under s. 247(4).
CRA announces that it will entertain submissions for LLPs and LLLPs to file as corps only on a going-forward basis
Where a Florida or Delaware LLP and LLLP is precluded from converting to a “true” partnership, CRA will entertain submissions to allow it to file as a corporation on a going-forward basis while leaving the previous years’ filings unchanged. CRA will review such submissions to see that there is no unwarranted benefit or undue tax advantage, including a review of the relevant tax attributes.
Neal Armstrong. Summary of 29 November 2016 CTF Annual Roundtable, Q.10 under s. 96.
Canada may announce to what extent it will adopt the MLI by the time of the next federal budget
Brian Ernewein noted that the OECD’s publication of the multilateral instrument last week is not the equivalent of an endorsement by any country to use it, absent Treaty-changes. He indicated that a decision by the Canadian government as to which items it will choose to adopt might be something that is reported on by the time of the next federal budget.
Neal Armstrong. Brian Ernewein on BEPS.
CRA rejects the analysis in Agnico-Eagle
CRA rejected the suggestion that Agnico-Eagle could support the realization of a capital loss under s. 39(2) where a U.S.-dollar denominated debenture is converted into shares, stating that a loss from appreciation in the shares of the issuer is not an FX loss described in s. 39(2) – and also indicated that if a similar case arose, it would consider that s. 143.3(3)(b) also denied a loss respecting the share appreciation.
Neal Armstrong. Summaries of 2016 CTF Annual Roundtable, Q.3 under s. 39(2) and s. 143.3(3)(b).
CRA announces a moratorium on providing interpretations on safe income allocation to discretionary dividend shares
CRA is troubled by the valuation difficulties attendant on discretionary dividend shares and their potential misuse for value shifting or income splitting, and has announced a moratorium on commenting on safe income allocation questions respecting such shares until it has studied the area further. This moratorium does not detract from the Rulings Directorate being “open for business” with respect to other s. 55 issues.
CRA was not receptive to a suggestion that safe income computations could be skipped in the simple case of a holdco/opco structure and no or limited differences in accounting versus taxable income.
Neal Armstrong. Summary of 2016 CTF Annual Roundtable, Q.2 under s. 55(2.1)(c).