News of Note
Joint Committee makes submissions on the draft small business deduction rules
Email this ContentThe Joint Committee has made various submissions to Finance respecting the proposed small business deduction rules including respecting potential pitfalls and deficiencies regarding the assignment of the business limit among associated corporations, the CRA discretion to add an amount to specified corporate income, the absence of a de minimis safe harbour in the designated member definition and the zeroing (rather than limiting) of specified partnership income where a partnership earns some non-arm’s length income. and inappropriate inflexibility in the specified partnership business limit definition.
The Joint Committee also submitted that proposed life insurance policy amendments should not have retroactive effect to transfers of policies that were undertaken on a non-arm’s length basis prior to March 22, 2016.
CRA rules that where CFAs hold commercial properties needed for their regulated active businesses through individual property subsidiaries of a Holdco proportionately owned by them, the property rents are s. 95(2)(a)(i) income
A group of regulated non-resident subsidiaries (the “Regional FAs”) of Canco have held commercial estate as part of and in support of their regulated active businesses. In order to diversify risk, it is proposed that: the existing real estate as well as further real estate acquisitions will be held in individual “Property Cos;” the holdings in all the Property Cos will (subject to exceptions) be held in a single holding company (“FA Holdco”); and the Regional FAs will (where permitted) hold pro rata portions of the shares of FA Holdco rather than direct interests in the Property Cos or in the underlying commercial real estate.
CRA ruled that the income of the Property Cos (to the extent of the percentage interest therein of the Regional FAs held directly or “via” FA Holdco) will be deemed active business income under s. 95(2)(a)(i). Although the ruling letter is laconic, this presumably is based on the proposition that the properties held through the Property Cos are directly related to the active business activities of the Regional FAs because they support the regulatory requirements for those businesses in some manner, and would have given rise to active business income in the hands of the Regional FAs if they instead had continued to be held directly.
Neal Armstrong. Summary of 2016 Ruling 2015-0604451R3 under s. 95(2)(a)(i).
Granofsky – Tax Court of Canada finds that a taxpayer’s counsel can consent in writing to reassessment of the taxpayer
S. 169(3) provides that Minister may at any time reassess, with the consent in writing of “the taxpayer.” D’Auray J found that this requirement can be satisfied through a signature of the taxpayer’s counsel acting within the scope of her mandate (and went on to find that, in the case before her, counsel had the mandate).
Neal Armstrong. Summary of Granofsky v. The Queen, 2016 TCC 181 under s. 169(3).
Income Tax Severed Letters 24 August 2016
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The narrowing of “taxable Canadian property” also has narrowed s. 119 relief
S. 119 provides relief from double taxation where an individual paid income taxes under s. 128.1(4), on emigrating from Canada, on accrued gains on shares and subsequently received dividends on those shares that were subject to Part XIII tax. However, such relief is only available where the shares were taxable Canadian property.
Neal Armstrong. Summary of Henry Shew, "Section 119: Flawed Relief from Departure Tax," Canadian Tax Focus, Vol. 6, No. 2, May 2016, p.9 under s. 119.
Foreign income taxes imposed on business income which is allocated to a provincial PE generally is non-creditable
The provinces do not accord a foreign tax credit for foreign taxes imposed on business income because, from their perspective, they only impose tax on income which is allocated to provincial permanent establishments under the Reg. 400 rules. There thus is an obvious problem if in fact foreign income tax is imposed on such business income. This happens where the foreign rules for allocating business income are different from the Canadian and provincial rules.
Neal Armstrong. Summary of Kyle B. Lamothe, "The Missing Provincial Tax Credit for Foreign Business-Income Tax," Canadian Tax Focus, Vol. 6, Number 2, May 2016, p. 10 under s. 126(2).
CRA applies a pro-rating approach to money borrowed from an affiliate to return capital used to fund both exempt and non-exempt activities
Where FA1 borrows from a sister (FA3) to make a capital distribution on its Class A common shares, which had previously been issued solely to finance FA1’s active business, CRA would accept that the interest on this loan would be received as deemed active business income by FA3 under s. 95(2)(a)(ii)(B), on the basis that it was deductible in computing FA1’s earnings from an active business under Reg. 5907. This would be so even if FA1 had issued shares of another class (its Class B common shares), to finance the acquisition of shares which were not excluded property, at the same time as it issued the Class A common shares – so that even though CRA did not articulate it this way, a tracing approach evidently is accepted.
In the situation where FA1 was required to compute its income (pursuant to Reg. 5907(1) – earnings – (a)(iii)) under Part I of the Act, CRA indicated that the interest was deductible under s. 20(1)(c) “because the borrowed funds replaced capital that…had been used by FA1 for the purpose of earning income from an active business,” whereas in the situation where the earnings were computed pursuant to (a)(i) or (iii) of the earnings definition under local tax law and the interest was non-deductible under such law, CRA laconically stated that the interest would be deductible under Reg. 5907(2)(j) without explicitly indicating that it was applying the fill-the-hole approach here as well.
If instead, shares of only one class had been issued to fund the two (good and bad) uses of funds, as to 80% and 20%, respectively, CRA would consider that “the portion to which clause 95(2)(a)(ii)(B) applies should be determined on a pro-rata basis based on the current use of the capital (i.e., prior to its replacement with the borrowed funds)…[so that] 20% of the interest income of FA3 would not be recharacterize.” as active business income.
Neal Armstrong. Summary of 26 May 2016 IFA Roundtable Q. 8, 2016-0642041C6 under s. 95(2)(a)(ii)(B).
CRA has expressed concerns to Finance about products which technically skirt the LIA policy rules
CRA has identified leveraged insurance arrangements (which “technically escaping the LIA policy definition”) where products that form part of the arrangements are interdependent and would not have been otherwise issued without the others. These arrangements:
involve manipulating the terms of the products (including pricing) that form part of the arrangements and the issuance of products that would not have been otherwise issued on a stand-alone basis (including life insurance policies insuring non-insurable lives) to obtain unintended tax benefits.
In addition to potentially attacking these arrangements on the basis that interdependent products are one contract or under GAAR, CRA has brought its concerns to Finance.
Neal Armstrong. Summary of 3 May 2016 CALU Roundtable, Q. 1, 2016-0632601C6 under s. 248(1) – LIA policy.
CRA will issue a clearance certificate for a partial estate distribution
CRA will issue clearance certificates to an executor of an estate for partial distribution of the estate assets. This may be useful or necessary where a graduated rate estate wishes to make a gift to a qualified donee within what may be a 36-month deadline following the death of the testator.
Neal Armstrong. Summary of 3 May 2016 CALU Roundtable, Q. 5, 2016-0632641C6 under s. 159(2).
Element Financial butterfly spin-off of ECN Capital will be followed by a merger of ECN Capital with a 3rd (cash-rich) public company
Element Financial will be spinning off its commercial finance business as ECN Capital pursuant to a butterfly for which it did not apply for a ruling. It is contemplated that following the butterfly, ECN Capital will then acquire all the shares of a cash-rich recent IPO (IAC) in exchange for about 13% of its shares.
Holders of the Element stock options will exchange a portion of their options on the shares of the “Subco,” into which the to-be-distributed business has been dropped and then, immediately following the butterfly, exchange their Subco options for options on ECN Capital shares. The old exercise price will be prorated between the options on the post-spin-off Element (“Element Fleet”) and ECN Capital based on the relative 5-day VWAP for their share prices after giving effect to the butterfly.
Holders of about $534M of Element preferred shares will not participate in the butterfly exchange. Unlike the difficulties this would create on a cross-border butterfly (see Desjardins and Diksic), this is possible in a Canadian public-company butterfly spin-off.
Neal Armstrong. Summary of Element Circular under Spin-Offs & Distributions – Butterfly spin-offs.