News of Note
Canada may announce to what extent it will adopt the MLI by the time of the next federal budget
Email this ContentBrian 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).
CRA considers that making a s. 107(2) distribution to a corporate beneficiary held by a new trust is an abusive circumvention of the s. 104(4) 21-year rule
A discretionary resident trust that is approaching its 21st anniversary distributes property with an unrealized gain to a corporate beneficiary that is wholly owned by a newly-established discretionary trust.
When this transaction was presented to it in a ruling request, the GAAR Committee observed that the new trust technically would start afresh under the 21-year deemed realization rule, and considered that it inappropriately circumvented this rule, which works hand in hand with the s. 70 rule for deemed realizations on death, to prevent indefinite deferrals of capital gains. CRA further indicated that a distribution to a corporate beneficiary will generally be acceptable if the individual shareholders of that corporation are resident in Canada, and that, as for non-resident individual beneficiaries, it will look to see that there will be taxation within Canada in their lifetime.
Neal Armstrong. Summary of 2016 CTF Annual Roundtable, Q.1 under s. 104(5.8).
2016 CTF Roundtable Answers
Our summaries of the questions and answers at the 2016 CTF Conference CRA Roundtable are now posted. Only the first 10 questions were answered. The official answers (including to questions 11-15) may be published in several weeks.
Over the next few days, we will be releasing a number of News of Note posts to highlight points of interest.
Barejo – Federal Court of Appeal states that determining whether the notes in Barejo were debt for purposes of the ITA rather than s. 94.1 would be “an improper use of judicial resources”
The Federal Court of Appeal has dismissed the Barejo appeal – but on the grounds that the Rule 58 question posed to the Tax Court was whether the “notes” in question were debts for purposes of the Act rather than for purposes of s. 94.1 thereof. As it did “not appear as though the answer to the question asked will resolve anything in the context of the underlying appeal which turns on the meaning of the word ‘debt’ in section 94.1,” it followed in the view of Noël C.J. “that endeavouring to dispose [of] the appeals on the merits would serve no useful purpose and give rise to an improper use of judicial resources.”
Neal Armstrong. Summary of Barejo Holdings ULC v. The Queen, 2016 FCA 304 under s. 94.1(1).
Income Tax Severed Letters 30 November 2016
This morning's release of 32 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on addition of preferred units to a listed MFT’s capital
CRA ruled that the amendment of the trust deed for a listed mutual fund trust to add preferred units (also to be listed) would not result in the application of s. 104(7.1) or any disposition of trust property or existing units.
Similarly to other published rulings along this line, the amended Declaration of Trust was to provide that ITA income of the trust would be allocated among the different classes in proportion to their respective distributions. Assuming that the yield of a preferred unit as a percentage of its liquidation (or redemption) entitlement was different than that for a common unit, it would have a different percentage entitlement to trust property than its percentage entitlement to income – so that effectively the ruling (similarly to the others) affirmed that this result was not one of the main purposes of the trust terms.
Neal Armstrong. Summary of 2015 Ruling 2015-0578051R3 under s. 104(7.1).
CRA rules that s. 75(2) does not apply to trust fund where the income therefrom but not the capital can be distributed to the settlor, and no encroachment decision occurs during his lifetime
CRA ruled that s. 75(2) did not apply to property settled on a trust where during the settlor’s lifetime, no capital distributions could be made and income could only be distributed to the settlor or the settlor’s spouse. Only following the settlor’s death could the (numerous) trustees determine to distribute income and capital to the second-generation beneficiaries.
CRA also opined that s. 104(4) would not apply to the new trust 21 years later on the basis of a trust deed provision providing for the vesting (but not necessarily pay-out) of all trust interests before then.
Neal Armstrong. Summary of 2015 Ruling 2015-0610391R3 under s. 75(2).
CRA accepts a loss shift through a lump sum irrevocable prepayment of contingent future royalties
In order that the non-capital losses of Lossco would not expire, an affiliated licensee of a licence to manufacture and sell a product made a purported prepayment of the royalties (which were calculated as a function of sales), but with the prepaid royalty being non-refundable. CRA found that this payment likely was not a royalty (given its non-contingent nature) and that the full amount was business income to Lossco either under s. 12(1)(a) (on the basis, applying Ellis Vision, that it “could be considered as an amount paid in advance for the use of chattels,” or under s. 9.
It was not necessary for CRA to “resolve the issue of which of these two provisions prevails because [Lossco] does not wish to benefit from a deduction under paragraph 20(1)(m).” If the s. 20(1)(m) reserve weres relevant, it would have been necessary for CRA to engage with the finding in Doteasy that the s. 20(1)(m) reserve is available for an amount even if it is included under s. 9 rather than s. 12(1)(a), so long as it is described in s. 12(1)(a).
Neal Armstrong. Summary of 12 December 2014 Internal T.I. 2014-0524751I7 Tr under s. 9 - timing.