News of Note
CRA confirms that a surviving spouse who has been predesignated can qualify as a RRIF annuitant even if he or she does not receive any annuity payments
Email this ContentWhere the death of an annuitant under a RRIF is followed very shortly by the death of the surviving spouse, CRA accepts that the (briefly) surviving spouse will qualify as an annuitant under the RRIF provided that the predeceased spouse had so designated the survivor by will or in the RRIF contract – even if the surviving spouse did not receive any annuity payments before his or her death. This means that the deemed inclusion of the fair market value of the fund property will be in the hands of the second-to-die of the two spouses – except to the extent that there then is a transfer out of the fund to a financially dependent child or other eligible beneficiary (in which case, the eligible amount of the transfer is included in the transferee’s income under s. 146.3(5)(a).)
Neal Armstrong. Summaries of 2015-0592681E5 Tr under s. 146.3(1) – annuitant and s. 146.3(6.2).
Rojas – Tax Court of Canada finds that the (r.4) (preparatory/in conjunction) exclusion from GST/HST-exempt financial services does not apply where there is a single supply of a financial service
An individual worked as an agent (rather than employee) for a mortgage brokerage firm, so that she determined whether the customer qualified for a mortgage, identified potential lenders and processed the application - and then received 75% of the resulting client commission as her compensation. Although under the older aspects of the financial services definition, her activities would have qualified as arranging for the lending of money, CRA argued that para. (r.4) of the financial service definition now rendered her commissions subject to HST. This exclusion is stated to apply inter alia where the service in question (such as "customer assistance") is preparatory to the provision of an “arranging for” financial service or is provided “in conjunction” with that service.
In finding that (r.4) did not apply (so that her commissions were HST-exempt), D’Arcy J stated:
[P]aragraph (r.4) will only apply if the service in question is supplied separately from the [arranging] supply… .
[T]he Appellant only made one supply, the supply of arranging for the lending of money. She did not make a second separate supply that could be found to have been preparatory to or provided in conjunction with the supply of the service of arranging for the lending of money.
As most financial service supplies are single supplies, this approach (and the similar approach in Global Cash Access – see also Great-West) does not give (r.4) much scope to operate.
Neal Armstrong. Summary of Rojas v. The Queen, 2016 TCC 177 under ETA s. 123(1) – financial service – para. (r.4).
CRA states that it will not apply a penalty for reasonably estimating an unknown amount, e.g., the “cost amount” of a pension interest
An Australian Superannuation Fund (or “Super Fund”) is a government-regulated trust that has been registered and approved by the Australian Government and is funded by contributions from employers and individuals over their working lives in order to provide retirement incomes. As the investment earnings within the Super Fund are subject to Australian tax (albeit, at a favourable rate), it does not qualify as an “exempt trust,” so that a Canadian beneficiary’s interest is considered to be specified foreign property, and the individual is required to file T1135s reporting inter alia the “cost amount” of the individual’s interest in the fund.
“Cost amount” in the case of a right (other than capital property) to receive an amount is defined as such amount. CRA stated that such amounts “include all amounts… which the individual has a legal right to receive, even if the amounts are to be received in the future,” and then stated:
[W]here it is not possible to determine the cost amount of a specified foreign property, taxpayers should use their best efforts to reasonably estimate the cost amount of the property. [CRA] will not penalize taxpayers who have made reasonable estimates based on the best available information. The onus is on the taxpayer to demonstrate the reasonableness of any such estimates, if requested.
It is unclear how closely this concept of “reasonable estimates based on the best available information” aligns with the jurisprudential concept of a due diligence defence to penalties, such as the penalty under s. 162(7) which (as interpreted in 2012-0458401I7) normally applies to materially incomplete T1135s (see Kokanee).
Neal Armstrong. Summaries of 2015-0595461E5 under s. 233.3(1) – specified foreign property - (n), s. 248(1) – cost amount – (e), s. 162(7).
CRA finds that the s. 95(2)(c) rollover is available on the drop-down of shares into a Dutch cooperative in consideration for a credit to the membership account
In 2016 IFA Roundtable Q. 10, CRA indicated that s. 95(2)(c) could apply to the drop-down of shares by a foreign affiliate to a another foreign affiliate (FA3) which was a non-share corporation even though no membership interests were issued by FA3, provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares. CRA has now published a somewhat similar ruling, respecting the contribution of shares of a Netherlands private limited liability company to a newly-formed Dutch cooperative (DC) in consideration for a credit to the membership accounts of the contributing foreign affiliates equal to the FMV of the contribution, in which it ruled that the s. 95(2)(c) rollover was available. (The wording of this ruling seems to imply that any increase in the FMV of the membership interest as a result of the drop-down would have been sufficient.)
CRA also explicitly ruled that DC was a corporation, on the basis of a much more detailed description than in 2015-0581151I7. The description notes that DC had separate legal personality, that under the Dutch Civil Code, “a Dutch cooperative may, by its articles of association, exclude or limit to a maximum, any liability of its members or former members to contribute to a deficit,” and that such a limitation was contained in DC’s articles. This flexibility under the Dutch Civil Code may suggest that it might be possible for some Dutch cooperatives to be considered to be partnerships.
Neal Armstrong. Summaries of 2015-0571441R3 under s. 95(2)(c) and s. 248(1) – corporation.
Income Tax Severed Letters 10 August 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that the s. 104(4)(a) deemed disposition rule for a spousal trust is engaged based on the trust terms at the time of its creation
IT-305R4, para. 8 states:
Once a trust qualifies as a spouse trust under the terms of subsection 70(6), it remains a spouse trust and is subject to the provisions affecting such trusts (for example, paragraph 104(4)(a)) even if its terms are varied by agreement, legal action or breach of trust.
CRA stated that the purpose of this wording was merely “to clarify that in applying paragraph 104(4)(a), one must look to the terms of the trust at the time of creation, such that any subsequent change in the terms of the trust would not invalidate the application of paragraph 104(4)(a).”
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.11, 2016-0645821C6 under s. 104(4)(a).
CRA generally expects Canadian taxpayers to obtain U.S. transcripts to back up U.S. FTC claims
At the June 2016 STEP Roundtable, CRA noted that, starting in 2015, it began to no longer exempt Canadian taxpayers' claims for U.S. foreign tax credits from the approach, which it already had been applying to FTC claims for other jurisdictions, of requiring a copy of the foreign tax return as well as proof of payment of the foreign tax. In its official response published last week, CRA suggested that taxpayers get U.S. transcripts (evidencing payment) even before any CRA review and stated:
According to the IRS website “Most [transcript] requests will be processed within 10 business days”. ...
[T]he IRS has a very structured process for requesting tax account transcripts online or through the mail using Form 4506-T. … In addition, the majority of the U.S. states have an online system which allows the taxpayer to print his/her “account statement” which would confirm the taxpayer’s final tax liability.
Neal Armstrong. Summary of 10 June 2016 STEP Roundtable, Q.9, 2016-0634941C6 under s. 126(7) – non-business income tax.
Sirius XM exchangeable share structure uses a Canadian-controlled Canadian purchaser
A Delaware subsidiary (the “Guarantor”) of a Delaware public corporation (Sirius XM Holdings Inc., or “SIRI”) holds approximately a 37% equity interest in TSX-listed Sirius XM Canada Holdings Inc. (the “Company”) (some of it in the form of non-voting shares to address CRTC non-resident control issues) and two Canadian corporations (Slaight and Obelysk), together have approximately a 22.4% equity interest in the Company. It is proposed that the Company shareholders (who also include the CBC, with a 10% equity interest, and the public) will transfer their shares under an OBCA Plan of Arrangement to a new Canadian company (the “Purchaser”). Slaight and Obelysk will together hold 67% of the voting interests and 30% of the equity of the Purchaser at the time of implementing the Plan, with the Guarantor holding the balance of the voting interests and equity. Public shareholders will be offered cash or shares of SIRI for their Company shares, subject to proration based on a maximum share consideration. Shareholders who wish rollover treatment are being offered exchangeable shares of the Purchaser, subject again to potential proration. The Purchaser’s obligations are guaranteed by the Guarantor. Slaight, Oblelysk and the Guarantor will receive only shares of the Purchaser as their sale consideration (much of it in the form of non-voting prefs in the case of the Guarantor.)
Thus, the issuer of the exchangeable shares is not a SIRI subsidiary. Another unusual feature is that the holders of the exchangeable shares will have no right to vote at SIRI (or Purchaser) meetings.
The exchangeable shares are to be redeemed (subject to the usual overriding call right of a “Callco”) on their 5th anniversary (or sooner, if most of them are exchanged before then.)
Neal Armstrong. Summary of Sirius XM Canada Holdings Inc. Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Exchangeable Share Acquisitions.
Shahbazi – Tax Court of Canada denies charitable credits for donated goods because the receipts did not describe the goods
In denying charitable credits for large donations of household goods, where the tax receipts did not contain any description of the donated property, Woods J stated (at para. 19):
Even if some flexibility in interpreting the necessary requirements is appropriate, it is not possible in my view to completely overlook the requirement that a tax receipt for a donation of non-cash property must contain a brief description of the property donated.
Neal Armstrong. Summary of Shahbazi v. The Queen, 2016 TCC 129 under s. 118.1(2).
Public spin-off butterfly rulings contemplate no substantive changes to the new common shares issued on DC’s s. 86 reorg, treat replacement stock options as boot and treat effective splitting of DC management contract as no disposition
Some features of the most recent published ruling for the butterfly spin-off by a Canadian public corporation (DC) to Spinco:
- The assets (some held directly) of the two divisions to be spun-off are to be first rolled by DC into a Newco subsidiary before the transfer by DC of the Newco shares to Spinco – with Newco then being wound-up into DC at the completion of the butterfly reorg under s. 88(1). The stated reason of “simplification” may relate to Newco closing an arm’s length borrowing immediately before the spin-off and immediately paying off a note it issued to DC on the drop-down.
- In order that a disproportionate amount of the cumulative eligible capital of DC is not transferred to Newco on the drop-down, DC and Newco are permitted to pretend, in completing the s. 85(1) election form, that the CEC is a proportionate portion of the actual CEC amount (with “proportionate” defined in a somewhat circular manner).
- DC is managed by Manageco, whose long-term management contract is first to be redrafted to handle the split-up, e.g., splitting the compensation between management of the retained division, and the divisions to be spun-off, with this split to be effected based on the relative (post-drop-down) fair market value of the Newco shares. CRA ruled that these amendments would not cause a disposition of the contract. At the same time as the drop-down of the affected divisions to Newco, Manageco will then effect a s. 85(1) dropdown of its management business to two new subsidiaries.
- In order to comply with s. 7(1.4), there will be an exchange of pro rata portions (based on the relative FMV of the Newco shares) of each DC employee stock option to Spinco and DC in consideration for the issuance of replacement options. Such issuance by Spinco will be treated as non-share consideration for the butterfly transfer of Newco shares to Spinco (otherwise occurring in consideration only, or mostly, for the issuance of Spinco special shares).
- Before the butterfly spin-off, there is a s. 86 exchange of old comon shares for new common shares and for special shares of DC, with the stated capital of each old common share to be allocated to that of the two new replacement shares based on their relative FMV. The new common shares are identical to the old ones, except for their share provisions referring to the prior rights of the special shares (mainly, to receipt of any redemption amount). Thus, in order to get the s. 86 ruling, it was unnecessary to make any substantive changes to their listed rights.
Neal Armstrong. Summaries of 2015 Ruling 2014-0558831R3 under s. 55(1) – distribution, s. 7(1.4), s. 86(1), s. 85(1)(d) and s. 248(1) - disposition.