News of Note
CRA applies its view that a contribution of FA1 shares to FA2 causes the FA2 shares to be substituted property for s. 93(2.01) purposes
Email this ContentThe stop-loss rule in s. 93(2.01) applies to grind the capital loss realized on the disposition of a share of a foreign affiliate by the amount of exempt dividends previously received on that share “or on a share for which [it] was substituted.”
The 2016 IFA Roundtable dealt with a contribution Canco made to a foreign subsidiary (FA2) of its shares of a non-resident Finco subsidiary (FA1 – which previously had paid exempt dividends to Canco). CRA found that s. 93(2.01) denied a subsequent capital loss realized on an arm’s length sale of the FA2 shares to the extent of such dividends, on the grounds that the shares of FA2 were substituted shares for those of FA1. This was so even though the contribution did not entail any exchange of property and even though the FA1 shares likely would never have generated an accrued loss (given that its asset was an interaffilate loan).
This answer was a foreshadowing of an internal technical interpretation (i.e., dealing with an actual audit situation involving Luxcos) which CRA issued on June 22.
Neal Armstrong. Summary of 22 June 2016 Internal T.I. 2016-0632821I7 Tr under s. 93(2.01).
CRA finds that a “legal representative” of a taxpayer has potential personal liability for the maximum value of the property under its control from the moment that the taxpayer’s tax debt was assessed
A trust, whose sole individual beneficiary has an unpaid tax liability for 2014 of $150,000 (which was assessed on April 30, 2015), holds a portfolio with a fair market value of $125,000 on December 31, 2014 and (due solely to market declines) of $100,000 on April 30, 2015 and of $70,000 on January 1, 2016, being the date when the sole trustee (viewed for s. 159 purposes as the beneficiary’s ”legal representative”) receives a demand for payment.
CRA appears to consider that the trustee can be assessed for $30,000 under s. 159(3), being the deficiency between the $70,000 that was used (following the sale of all the trust property) to satisfy the payment demand, and the maximum value of the property under the control of the trustee after “the taxpayer’s liability arose on April 30, 2015.” This position is unfavourable in that it treats a legal representative as being personally liable for failing to immediately liquidate a portfolio (which is subject to market fluctuations) in respect of tax debts of which it may have no knowledge even though doing so may breach fiduciary or other obligations, and favourable in that it treats a tax liability as not arising for s. 159 purposes until it is assessed. If you are a legal representative, be careful about holding anything other than cash!
Neal Armstrong. Summary of 14 September 2016 External T.I. 2016-0638171E5 under s. 159(3).
CRA indicates that a general power to encroach on capital is not sufficient to make a deemed gain payable to a trust beneficiary
CRA indicated (similarly to the 2016 STEP Roundtable ) that in order for a deemed gain (e.g., under s. 48.1) to be made payable for purposes of s. 104(24):
- the terms of the trust must specifically permit an amount equivalent to the deemed capital gain to be paid or payable, or
- the trustee must have the discretionary power to pay out amounts that are defined as income under the Act.
CRA provided an expanded rationale for this position in the following terms:
Under trust law, capital gains would typically be considered to be part of the capital of a trust; however, a deemed capital gain created under a provision of the Act is a “nothing” for trust purposes. It is not possible to define a deemed capital gain to be income (or a capital gain) for trust purposes. A power to encroach on capital is not in and of itself sufficient to make a deemed capital gain payable.
Neal Armstrong. Summary of 8 June 2016 External T.I. 2015-0604971E5 under s. 104(24).
Herman Grad 2000 Family Trust – Ontario Superior Court of Justice finds that trusts, whose Alberta-lawyer trustees did not make substantial decisions, were resident in Ontario
In finding that a family trust and a spousal trust, that had two Alberta lawyers as their trustees, were resident in Ontario, Wilton-Siegel J noted that, in the context of an investment trust, “the principal decisions taken by trustees pertain to the investment of the assets of the trust and distributions to beneficiaries,” and noted the principle that “management and control of a trust may rest with a trustee who has little investment experience provided that the trustee has the power to retain others for advice and remains the ultimate decision-maker.” He found here that the ultimate decision maker instead was the family patriarch along with the CFO of the family companies, in the absence of evidence that there was any real decision-making by the trustees in relation to the core investing function or with respect to all but perhaps one of the trust distributions.
Neal Armstrong. Summary of Herman Grad 2000 Family Trust v. Minister of Revenue, 2016 ONSC 2402 under s. 2(1).
Income Tax Severed Letters 19 October 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Further translations of French severed letters are available
The table below links to full-text translations of French technical interpretation that were released last Wednesday and in the week of February 10 and January 27, 2016. They are paywalled in the usual (4-days per week) manner.
Proposed s. 152(9) might not alter the outcome in Last
Finance responded to the finding in Last, that the prohibition of an increased assessment on appeal is to be applied on a source-by-source basis, by proposing to amend s. 152(9) to provide that additional arguments can be advanced to support "all or any portion of the total amount determined on assessment." “However, it is worth considering whether [this] selected method to address Last would alter the outcome of the decision,” given that this language does not engage with the source-by-source finding in Last.
Neal Armstrong. Summary of Derrick Hosanna, "Alternative Arguments on Appeal: Does Finance Get the Last Word?", Tax For The Owner Manager, Vol. 16, No. 4, October 2016, p. 3 under s. 152(9).
Proposed s. 212.1(4) discriminates against foreign buyers
The proposed version of the s. 212.1(4) safe harbour from the application of s. 212.1(1) “discriminates against foreign buyers” – notwithstanding that “there is no difference to the Canadian tax base whether purchasers are Canadian or foreign or whether they deal at arm's length or not (as shareholders) with the Canadian corporation that acquires the non-resident corporation.”
Neal Armstrong. Summary of Nathan Boidman, "Judicial and Legislative Developments Threaten Indirect Canadian Acquisitions", Tax Notes International, Vol. 84, No. 2, 10 October 2016, p. 163 under s. 212.1(4).
CRA indicates that qualifying non-resident employers can file T4s for their affected employees without obtaining individual tax numbers
Effective January 1, 2016, Treaty-exempt non-resident employers have been able to apply under s. 153(7) for certification as "qualifying non-resident employers" (QNERs) so as to be exempt from source deduction requirements on remuneration paid to "qualifying non-resident employees" (broadly, Treaty-exempt non-resident employees who work in Canada for less than 45 days in the calendar year of payment or are present in Canada less than 90 days in any 12-month period that includes the payment time).
In early September 2016, CRA started issuing review letters to QNERs, requesting the following particulars:
- the number of employees who have come to Canada during a certain period
- an explanation of what documentation the employer has obtained to support each employee's country of residence
- an explanation on how the employees are expected to be exempt from tax in Canada under a tax treaty
- the number of days each qualifying non-resident employee was either working in Canada, or present in Canada, including arrival and departure dates, and
- the employment income attributable to each employee's workdays in Canada
Although the QNERs must issue T4 slips to qualifying non-resident employees earning more than C$10,000 of remuneration attributable to Canadian workdays during the year, CRA has indicated that a QNER's certification status will not be rescinded if T4 slips for the employees QNEEs are received without individual tax numbers.
Since the QNERs are required to obtain business numbers, their BN applications have been triggering GST/HST reviews to determine whether they are carrying on business in Canada.
Neal Armstrong. Summary of PWC, "Non-Resident Employer Certification Program: Compliance Reviews and other Updates", PWC Tax Insights – Global Mobility Services, Issue 2016-47, 12 October 2016 under s. 153(7).
CRA might not be authorized to carryforward an unreported SDA benefit to the first non-statute-barred year
S. 6(11) effectively provides that a deemed benefit “shall be included” in an individual’s employment income in the year in which a right under a salary deferral arrangement arises. CRA considers where there was a failure to report such an inclusion, the amount can be included in income by reassessment of the individual's first year that is not statute-barred.
“The Act provides no such statutory election to the minister” to change the year of required inclusion of the benefit.
Neal Armstrong. Summary of David Nathanson, "Included Versus Reported," Canadian Tax Highlights, Vol. 24, No. 9, September 2016, p. 5 under s. 6(11).