News of Note
Pomerleau – Tax Court of Canada finds that GAAR applied to converting soft ACB (generated from crystallizing the capital gains deduction) into pseudo-hard ACB under s. 53(1)(f.2) for use in extracting surplus
Email this ContentAn individual taxpayer engaged in a surplus-stripping transaction similar to transactions in a ruling which CRA had resiled from following Descarries. He held shares of a holding company whose adjusted cost base reflected the step-up of predecessor shares’ ACB in capital gains crystallization transactions by him and other family members. Such additional “soft” ACB would have been ignored under s. 84.1 if those shares had been transferred to a personal holding company in exchange for the issuance of shares with a purported paid-up capital equal to the transferred shares’ soft ACB.
Instead, he retracted his own soft ACB shares (as well as soft ACB shares that had been gifted to him by family members), which resulted in a capital loss under s. 40(3.6) that was added to the ACB of his common shares of the corporation under s. 53(1)(f.2). This s. 53(1)(f.2) bump was not caught by s. 84.1(2), so that he could transfer the bumped common shares to a personal holding company, taking back high PUC shares which he promptly redeemed.
Favreau J agreed with CRA that this conversion of soft ACB into hard ACB, in order to receive a tax-free return of capital, contravened GAAR, stating:
This series of transactions permitted the appellant, on the redemption of the Class G shares of [his new holding company], to extract as a tax-free return of capital, $994,628 derived from the surplus of his corporation by virtue of utilizing his capital gains deduction and that of his mother and sister. …
Neal Armstrong. Summary of Pomerlau v. The Queen, 2016 CCI 228 under s. 84.1(2)(a.1).
Francoeur – Cour du Québec finds that a somewhat quick flip by a builder was eligible for the principal residence exemption
Aubé, JCQ found that an entrepreneur who had followed a pattern of building and selling residences, realized a capital gain eligible for the principal residence exemption where he built a home to the exacting requirements of his spouse, and then sold it at a gain somewhat over three years after having purchased the vacant lot. She stated:
The financial situation motivated the sale of the property. Mr. R. F. stated that… his lines of credit had reached their limit. …
Although Mr. RF works in the construction industry, this does not deprive him of the right to acquire and sell his principal residence if circumstances make it unavoidable or desirable, even if the transactions occur over a relatively short period of time.
Neal Armstrong. Summary of Francoeur v. Agence du revenu du Québec, 2016 QCCQ 11906 under s. 9 – capital gain v. profit – real estate.
The replacement property rollover for voluntary dispositions of ECP has not been replaced
The rollover in s. 14(6) for the acquisition of replacement eligible capital property following a voluntary disposition of ECP (e.g., of farm quota) is not being replaced. The somewhat equivalent provisions of ss. 13(4) and 44(1) only apply to former business properties, i.e., real property.
The ITA historically has accommodated farmers, so that this may not be a targeted result.
Neal Armstrong. Summary of 4 November 2016 External T.I. 2016-0666901E5 - New Class 14.1 and replacement property rules under s. 13(4).
On December 6, the Supreme Court of Canada will review whether Google is carrying on business in Canada
In Equustec v. Google, the B.C. Court of Appeal found that Google was carrying on business in B.C. even though it did not have servers, offices, or resident employees there. Although this finding related to whether the B.C. courts had the jurisdiction to entertain a suit against Google rather than to a taxation issue, the decision of the Supreme Court of Canada in this case (which will be heard by it on December 6) will interest Canadian tax advisors and CRA.
Neal Armstrong. Summary of Susan McKilligan, "Carrying Business in Canada," International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 13 under s. 2(3)(b).
Evoy Estate – Tax Court of Canada finds that a s. 104(2) trust-consolidation designation requires that the respective trusts’ future income cannot accrue to different beneficiaries
S. 104(2) provides that CRA may designate that multiple trusts be treated as one trust where inter alia they each are “conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary or group or class of beneficiaries.” Paris J found that this condition was not satisfied where three testamentary trusts had the same income beneficiary (the surviving wife) during her lifetime, but thereafter the income of each trust was to go to one of the three children of the testator (or their respective children).
Paris J stated that the quoted test “contemplate[s] a consideration of the right to receive the income of the trust over the entire lifetime of the trust rather than for each taxation year,” whereas here, after the death of the wife, the income of each trust went to a separate family rather than “ultimately accruing to the same group or class of beneficiaries.”
Neal Armstrong. Summary of Evoy Estate v. The Queen, 2016 TCC 263 under s. 104(2).
CRA indicates that it generally is looking only to the investment dealer or mutual fund manager to report mutual fund unit redemptions on T5008s
CRA has announced that where mutual fund units (or shares) are held in nominee for with an IIROC dealer or through a mutual fund dealer, after redemption of the units (or shares) only the dealer or fund manager, as the case may be, and not the mutual fund, is expected to issue T5008 slips to the redeemed investor. As worded, this policy also appears to apply to other “investment funds,” e.g., mortgage investment corps.
Neal Armstrong. Summary of 8 November 2016 External T.I. 2016-0673361E5 under Reg. 230(3).
Shreedhar – Tax Court of Canada finds that a taxpayer can appeal a nil assessment of tax if it includes some interest
Boyle J found that the doctrine that a taxpayer cannot appeal a nil assessment does not apply to a notice of assessment which assesses nil tax but also includes interest (in this case, $2.10).
Neal Armstrong. Summary of Shreedhar v. The Queen, 2016 TCC 254 under s. 169(1).
Income Tax Severed Letters 23 November 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA publishes an official translation of a previous interpretation on the expansion of directed benefits under s. 15(1.4)(c)
S. 15(1.4)(c) assimilates a benefit conferred on an individual related to a shareholder to s. 15 benefits conferred on that shareholder. In a situation where there was personal use of a corporate aircraft by the individual shareholder (Mr. A) of the "grandfather" (indirect parent) of the corporate owner of the aircraft and by Mr. A’s father (Mr. B), CRA (surprisingly) indicated that there would be no taxable benefit from such use by the father for the years under review before the effective date of s. 15(1.4)(c) – but thereafter, the value of the benefits enjoyed by the father were taxable to his son (Mr. A). CRA’s analysis was that, under Massicotte (a.k.a. Pub Création), the conferral of a benefit by a corporation on the shareholder of its parent (or, in this case, of the grandparent) constitutes an indirect benefit to the shareholder of the grandparent which is a taxable benefit to him (Mr. A) under s. 246(1), given that a benefit conferred on him directly by the grandparent corporation would have been taxable to him under s. 15(1). S. 15(1.4)(c) would then apply to add the benefit conferred on Mr. A’s father to the benefits which were taxable to Mr. A under s. 246(1).
As for the valuation of those benefits, CRA concluded after reviewing four Court of Appeal decisions (Youngman, Fingold, Schroter and Anthony) that the valuation of the benefits should be based on their fair market value (corresponding "to the price the user would have paid an independent corporation for a similar benefit") rather than their cost – although, here, the denied operating expenses and CCA of the corporate owner "can be used to establish the value of the benefit conferred on Mr. A and Mr. B., to the extent that it can be demonstrated that this value approximates the FMV of the benefit received."
CRA has now taken the trouble to provide an official translation of this interpretation, thereby signifying that it considers it to be important. This is indicated by the “2” before the I7 in the assigned number.
Neal Armstrong. Summary of 2014-0527842I7 under s. 246(1)(c), s. 13(7)(c) and s. 15(1.4)(c).
Alexander College – Federal Court of Appeal finds that a private college qualified as a “university” for GST purposes
The ETA states that a "’university’ means a recognized degree-granting institution or an organization that operates a college affiliated with, or a research body of, such an institution."
A private for-profit B.C. college with a two-year arts program provided "associate degrees," which were recognized as degrees under the Degree Authorization Act (B.C.). Gleason JA found that the college unambiguously qualified as a university under the definition, so that its fees were GST-exempt, and so that there was no further requirement (as found by Lyons J below) that it also be recognized as a university under provincial law (which was not the case.)
Neal Armstrong. Summary of Alexander College Corp. v. The Queen, 2016 FCA 269 under ETA s. 123(1) – university, Sched. V, Part III, s. 7 and Statutory Interpretation – Interpretation Provisions.