News of Note
CRA’s policy on employees’ purchases of discounted merchandise excludes condos and shareholders
Email this ContentIn Guide T4130, CRA indicates that the sale of “merchandise” by an employer will not give rise to a benefit from employment in a wide range of specified circumstances. CRA is unwilling to extend this policy to condos rented by an employer to an employee at its “costs,” nor does the T4130 policy extend to shareholders.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.8 under s. 6(1)(a) and s. 15(1).
CRA accepts that a farm house used more than 50% by farming employees is an active business asset
CRA will accept that a farm house is an active business asset for purposes of the definitions of “qualified small business corporation share,” “share of the capital stock of a family farm or fishing corporation” and "interest in a family farm or fishing partnership" if it is used more than 50% by farming employees who are providing their services in that capacity rather than as shareholder (or partner).
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.9 under s. 110.6(1) - “qualified small business corporation share.”
CRA considers an estate to own its property
One of the tests for a property to qualify as a qualified farm or fishing property of an individual is that for the previous 24 months it was owned by the individual, a personal trust from which the individual acquired the property or a parent. CRA considers that during the period that a farm is held by an executor, it is the estate (viewed as a personal trust) that owns the trust, and that the 24-month test will be satisfied where the individual acquired the farm from the estate which in turn received the farm from the individual’s parent who had owned it for the balance of the 24 months.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.10 under s. 110.6(1.3)(a)(i).
CRA considers that the stipulated rights of lessee should be valued for SBC and QSBCS purposes
Although CRA considers it to be irrelevant whether, under GAAP, a lease is capitalized by a lessee as a capital lease, it considers that the rights of a lessee specified in its lease are property whose fair market value (if any) should be taken into account in determining whether the lessee is a small business corporation or whether its shares are qualified small business corporation shares – so that if the leased property is used principally in a Canadian active business, this will help towards satisfying those definitions– and, conversely, if it is not.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.11 under s. 248(1) – small business corporation.
CRA response implies that pipeline transactions and the like should use an amalgamation rather than wind-up
A, who holds 50% of the (common) shares of Opco (having a nominal ACB and PUC), accomplishes a sale of a portion of his shares to the other 50% shareholder (B) by B rolling his shares into a wholly-owned Newco, Newco paying the cash purchase price with proceeds of a bank borrowing and then amalgamating with Opco.
CRA acknowledged that it was unlikely that s. 84(2) applied given that the amalgamation by itself would not produce a “winding-up, discontinuance or reorganization” of Opco’s business. However, it could not be clear on this point in the absence of more information, viz.:
information regarding the nature of the business carried on by Opco, the composition of the assets of Opco (for example, the level of liquidity), the magnitude of the surplus of the corporation or the time within which the loan from the financial institution and the note due to Mr. B would be repaid by Amalco.
CRA indicated, without much further comment, that whether s. 84.1 applied turned on the factual question whether there was arm’s-length dealing.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.12 under s. 84(2).
CRA contemplates that all of the business income earned by a corporation following a subscription for a separate class of discretionary dividend shares could be allocated to those shares
Opco has three holding-company shareholders, each holding a separate class of discretionary dividend common shares. Whereas the first two shareholders only invested a nominal amount for their shares on Opco’s incorporation, the third shareholder (HA) subscribed $50,000 for its shares at a time that the global safe income of Opco was $70,000. Two years later, when the global safe income had increased to $90,000, Opco paid a $35,000 dividend to HA.
CRA indicated that if the safe income generated in the two years up to the dividend was business income (rather than, for instance, being from the realization of gains that had already accrued at the time of HA’s share subscription), and making some surmises on the contribution of this safe income to the accrued capital gain on the shares of HA, “the amount of $20,000 would represent a separate taxable dividend pursuant to paragraph 55(5)(f) and would not be subject to subsection 55(2),” whereas if the purpose test in s. 55(2.1)(b) was satisfied, the balance of the dividend could be subject to s. 55(2).
Before referring to various conferral-of-benefit provisions, GAAR and the difficulties posed by discretionary dividend shares in a butterfly, CRA stated that it was “not intended to give our general approval for the use of discretionary dividend shares.”
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 13 under s. 55(2.1)(c).
CRA indicates whether dividends paid on non-participating prefs engage s. 55(2) is a question of fact
Respecting the payment of a non-participating dividend to a holding company on preferred shares whose paid-up capital and ACB equals their redemption amount, CRA indicated that “the hypothetical capital gain that would have been realized on a FMV disposition of [the] preferred shares immediately before the dividend…would be nil,” so that the dividend would not be considered to come out of safe income on hand. Since the safe income harbour was not available, whether s. 55(2.1)(b) applied was a question of fact.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 14 under s. 55(2.1)(c).
CRA is negative on using a stock dividend of nominal value discretionary shares to shift value to an affiliated company
An individual) holding Class A common shares of Opco with substantial safe income on hand (“SIOH”) and an undisclosed ACB, receives a stock dividend of Class B discretionary voting shares, which are voting, participating, bear discretionary dividends and are redeemable by Opco for $1 – and then transfers the Class B share to a new Holdco under s. 85(1). Opco then pays a $1M dividend to Holdco.
CRA noted that no safe income travelled with the Class B share’s transfer to Holdco and stated that “if all other conditions were satisfied, subsection 55(2) would apply in respect of the dividend of $1 million.”
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 15 under s. 55(2.1)(c).
CRA comments on the application of safe income on hand to dividends paid on estate freeze prefs
Opco declares and pays a dividend (at the fixed 8% rate specified in the share terms) on estate freeze preferred shares held by Holdco with a nominal ACB and which had “inherited” safe income on hand from the common shares for which they had been exchanged of $700,000. CRA noted that the SIOH that contributed to the hypothetical capital gain on these prefs could be greater or less than $700,000 due to the effect of previous dividends or post-freeze earnings and stated that the dividend would reduce any post-SIOH attributable to the prefs before it ate into whatever was the balance remaining of the $700,000 of SIOH.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 16 under s. 55(2.1)(c).
CRA indicates that FX gains or losses on pre-transition debts are not affected by an s. 111(4)(e) election made following an acquisition of control
Where a taxpayer with an elected functional currency (e.g., the USD) has an accrued FX loss on a debt obligation owing in another foreign currency (e.g., the euro), an s. 111(4)(e) election made following an acquisition of control of the taxpayer will not affect the FX gain which would be realized under s. 261(10) re a pre-transition debt, so that it is only changes in the euro/USD exchange rate occurring from the beginning of the taxpayer’s first "functional currency year" up to the acquisition of control that would be subject to ss. 111(4) and (12).
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 17 under s. 111(4)(e).