News of Note
CRA references shareholder’s benefit on gratuitous transfer of critical illness policy by corporation to its shareholder
Email this ContentCRA noted that the transfer of a critical illness insurance policy by a corporation to its shareholder would not give rise to a capital gain to the corporation, but appeared to consider that if the transfer was made for no consideration, there would be a taxable shareholder benefit conferred on the shareholder equal to the policy’s fair market value.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q. 1 under s. 15(1).
Jacques – Tax Court treats a 401(k) plan as a savings plan rather than as a superannuation or pension plan
Graham J found that a 401(k) plan before him was a savings plan rather than a superannuation or pension fund or plan, so that a payment of the balance in the fund to the Canadian beneficiary was not income in her hands. Although he also was influenced by the right of an employee under the plan to significantly vary the amount contributed (from nil to 50% of his or her compensation), and to make early withdrawals, what influenced him the most was that generally distributions out of the Plan were to be made in a single lump sum payment. This did not satisfy the test in Woods that:
A superannuation or pension fund or plan is an arrangement which provides for payment of regular post-retirement income to employees… .
Neal Armstrong. Summary of Jacques v. The Queen, 2016 TCC 245 under s. 248(1) - superannuation or pension benefit.
CRA indicates that no loss can be recognized for damages paid by a purchaser for failure to close a purchase
Where a purchaser defaults on its purchase of a rental property, CRA considers that the damages paid by the purchaser to the vendor cannot be recognized as a capital loss “since the purchaser had not disposed of property as defined in subsection 248(1).” This reasoning would seem to apply to deny any recognition for damages paid for any failure of a purchaser to close any agreement of purchase and sale.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.3 under s. 39(1)(b).
Tusk Exploration – Tax Court of Canada finds that Part XII.6 tax applies to CEE which is invalidly (as well as validly) renounced on a look-back basis
A Canadian exploration company argued that it was not subject to Part XII.6 tax on Canadian exploration expenses that it had purported to renounce under the look-back rule - but which were now admittedly not eligible for look back because the flow-through share investors were non-arm’s length – because the reference in Part XII.6 to CEE that it “purported” to renounce under the rule referred only to expenses which had been validly rather than invalidly renounced under the look-back rule.
This argument was doomed notwithstanding one non-tax English decision stating that “’purports’… means ‘has the effect of’.”
Neal Armstrong Summary of Tusk Exploration Ltd. v The Queen, 2016 TCC 238 under s. 211.91(1).
CRA will not accommodate backdating as of the year end re the 3-year SDA bonus exception
A right which otherwise might be taxable under the salary deferral arrangement rules is excluded from the SDA definition if it is a right to a bonus for services rendered in Year 1 which is paid within three years following the end of Year 1 (i.e., by the end of Year 4). CRA will not extend this deadline by a few months to permit performance-based criteria for Year 4 (which affect the amount of the ultimate payout) to be measured based on year-end results for Year 4. CRA noted that the calculation of the three-year deadline was less ambiguous in the English than in the French version.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.4 under s. 248(1) – salary deferral arrangement – para. (k).
CRA accommodates using manufacturer’s per-kilometre electricity use standard in meauring the operating cost of an electric car
Where an electric vehicle used for business purposes or in the course of employment is charged at home and there is no electricity meter specific to the vehicle, CRA is amenable to using the per-kilometre electricity standard provided by the manufacturer in determining the annual electricity cost of the vehicle.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.5A under s. 6(1)(e) and s. 13(21) – undepreciated capital cost – A.
Income Tax Severed Letters 2 November 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA affirms Penn Ventilator doctrine
In S3-F6-C1, para. 1.65, CRA accepts that, in accordance with Penn Ventilator, interest on a note issued in order to repurchase common shares may be deductible. When asked whether A.P. Toldo has changed this view, CRA stated:
The Court in A.P. Toldo suggested that the decision in Penn Ventilator should be applied narrowly. However, it is our view that those comments were obiter and somewhat ambiguous. Accordingly, A.P. Toldo has not caused us to change our position.
Neal Armstrong. Summary of 31 May 2016 Internal T.I. 2016-0638241I7 under s. 20(1)(c)(ii).
CRA confirms right of GREs to carry forward donations for five years
CRA confirmed that a charitable gift can be included in the calculation of total charitable gifts of a graduated rate estate or a former GRE for the taxation year in which the donation was made or in the five taxation years following that of the donation.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.6 under s. 118.1(1) – total charitable gift – s. (c)(ii).
CRA indicates that a right to find a 3rd party purchaser for another’s shares is not a s. 251(5)(b)-style right
Ss. 256(1.4) and 251(5)(b) reference a right (including a contingent right) to, or to acquire, shares and a right to cause a corporation to redeem shares. There is not considered to be such a right where the shareholders’ agreement for a corporation carrying on a franchised operation (“Franchisee”) specifies that in the event that the individual manager of Franchisee (who holds 50% of Franchisee’s commons shares) departs, the other 50% common shareholder (the Franchisor) has the mandate to find an third party to purchase the manager’s shares.
The question also asked (somewhat innocently of corporate law) about the treatment of a clause in the shareholders’ agreement providing that the Franchisee would automatically repurchase the manager’s shares in the event of his departure. CRA referenced a previous ruling “that a person does not generally control the triggering of an event where a corporation is obliged to redeem or purchase shares of its capital stock held by a shareholder convicted of defrauding the corporation,” but was reluctant to answer this question without more facts and analysis, and also appeared to indicate that s. 251(5)(b)(ii) could be engaged by a right to cause shares to be redeemed that did not arise until the occurrence of a triggering event that was beyond the person’s control.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.7 under s. 256(1.4)(a) and s. 251(5)(b)(ii).