News of Note
CRA thinks using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary/Holdco shareholder, is surplus stripping
Email this ContentA discretionary trust of which X and his holding company (Holdco) are the beneficiaries receives a s. 84(1) deemed dividend of $100K from Opco (not in excess of applicable safe income) resulting from a PUC increase, and issues a $100K note to Holdco as the distribution of this deemed dividend. Opco uses its newly-created PUC to make a capital distribution to the trust, which makes a $100K capital distribution to X. These transactions are similar in economic effect to the trust using the $100K capital distribution that was made to it, to pay off its note to Holdco, with Holdco paying a corresponding dividend to X, but that of course would not be as “tax efficient.”
CRA stated that the transactions appeared “to strip Opco's surplus by converting a taxable dividend to a payment of a capital nature that is not taxable to Mr. X,” and that were such transactions submitted in a ruling request, the Directorate “would recommend to the General Anti-Avoidance Committee to confirm the application of subsection 245(2).”
Neal Armstrong. Summaries of 27 April 2016 External T.I. 2016-0625001E5 Tr under s. 84(2) and s. 104(24).
CRA rejects a submission to construe Descarries narrowly
In 2015-0610711C6, CRA indicated that as a result of Descarries, it would no longer issue rulings in which an individual can in effect use shares (e.g., preferred shares) whose ACB was stepped up using the capital gains deduction (by redeeming those shares to create a deemed dividend and a capital loss) to offset or reduce a capital gain on a disposition of his or her common shares. CRA has now rejected a submission that 2015-0610711C6 read the purpose of s. 84.1 too broadly and that its purpose is only “to prevent persons from monetizing their lifetime CGD outside the context of an actual sales transaction occurring on a market basis” - so that s. 84.1 was not abused if, as in the reversed ruling, all that was going on was that “a taxpayer who, with a view to retiring, embarked on a process of business succession with a family member similar to one that could be undertaken with an arm's length third party.”
CRA added that “we understand your concerns about the application of section 84.1 in the context of an intergenerational transfer of a family business between a parent and children,” but that was a policy question for Finance.
Neal Armstrong. Summary of 2 May 2016 External T.I. 2016-0633351E5 Tr under s. 84.1(1).
CRA confirms that it makes no difference if safe income is too low because of incentive tax deductions
In the course of a discussion of s. 55(2.1)(b) that is largely repetitive of previous published positions, CRA reduced to writing a comment it made orally at the June 2016 National Technical Seminar that even “if corporate income has not previously been taxed…because the corporation was entitled to certain [incentive] tax benefits under the Act…then a dividend paid by the corporation from such income should be subject to subsection 55(2) unless none of the purposes of the dividend is described in proposed paragraph 55(2.1)(b)” – and added (implying that someone had argued the contrary) that this is also the case even where the funds received by the shareholder instead are in the form of redemption proceeds funded with borrowed money.
Neal Armstrong. Summary of June 2016 External T.I. 2016-0627571E5 under s. 55(2.1)(b).
Income Tax Severed Letters 21 September 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that employee meal reimbursements other than in connection with travel are not taxable benefits if made principally to enhance employee efficiency
In response to an inquiry on the taxability of the reimbursement of meal expenses to employees, CRA indicated that although normally it only accepts that meal reimbursements are not taxable benefits where made in connection with travel outside the metropolitan area of the employer’s establishment, “where the principal objective of the reimbursement of meal expenses is to ensure that the employee's duties are undertaken in a more efficient manner during the course of a work shift, then the employer could be the one who principally benefits,” in which case there is no taxable benefit.
Neal Armstrong. Summary of 10 June 2016 External T.I. 2015-0587131E5 Tr under s. 6(1)(a).
Oxford Properties – Tax Court of Canada finds no abuse in bumping LPs to which the target transferred buildings pre-closing and then selling the bumped LP interests to tax exempts after 3 years
When Oxford Properties was sold to an OMERS subsidiary, the purchaser first negotiated that Oxford would drop various properties down into LPs on a s. 97(2) rollover basis, with those partnership interests subsequently being bumped under s. 88(1)(d). After the acquisition, those bumped costs were then pushed down onto the cost of interests in property-specific LPs (which had been formed following the acquisition), by winding-up the upper-tier LPs under s. 98(3) and using the s. 98(3)(c) bump. After the three-year s. 69(11) period, some of the property-specific LPs were then sold to tax exempts.
In rejecting CRA’s application of GAAR, D’Arcy J stated inter alia:
Parliament…made the positive decision to limit the application of subsection 69(11) to transfers to tax-exempt entities that occur within the three-year period. In my view, it is reasonable to conclude that Parliament was of the view that transfers after this three year-year period did not abuse subsection 97(2).
As to the alleged abuse of the s. 88(1)(d) bump, its design insofar as a partnership interest bump was concerned did not, at the time, reflect an ability to look through to the underlying (depreciable) nature of the assets of the partnership.
Neal Armstrong. Summary of Oxford Properties Group Inc. v. The Queen, 2016 TCC 204 under s. 245(4).
Proposed Vail Resorts acquisition of Whistler includes exchangeable share consideration (likely bearing dividends) and an exchange-rate adjusted cash component
Vail Resorts is proposing to acquire Whistler Blackcomb under a BC Plan of Arrangement for a combination of shares and cash, paid by a B.C. subsidiary of Vail Resorts (Exchangeco). Resident Whistler shareholders who so elect will receive the share consideration in the form of exchangeable shares of Exchangeco under a largely conventional exchangeable share structure, with those shares being listed on the TSX and having a sunset date seven years out. The cash component of the consideration is nominally in Canadian dollars, except that it is based on an exchange rate of 0.7765 so that, for example, if the exchange rate is less than this six days before the Arrangement implementation date, the Whistler shareholders will receive a correspondingly lower amount.
The Vail shares currently have a dividend yield of around 2%. The U.S. tax disclosure points out that if (contrary to expectation) the exchangeable shares were issued after 2016, any dividends paid on them would be subject to U.S. withholding tax under Code s. 871(m).
Neal Armstrong. Summary of Whistler Blackcomb Circular under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Exchangeable Share Acquisitions.
CRA indicates that the status of Delaware, NY and Florida LLCs as corporations is not affected by the Quebec residence of a member
A taxpayer’s representative submitted that Delaware, New York and Florida LLCs of which the taxpayer was a member should be treated as partnerships because the taxpayer was a Quebec resident and the attributes of an LLC were similar to those of a partnership under the Civil Code. CRA indicated that it was not convinced that an analysis of the Civil Code provisions pointed to this conclusion, but went on to state:
[I]f it were determined that such a comparative analysis supported the conclusion that a US LLC must be considered as a partnership for the purpose of application of the Act, we suggest that it would not be appropriate to adopt a classification approach to entities and foreign arrangements which could result in a different classification according to the province or territory of the residence (or permanent establishment) of the taxpayer holding an interest in the entity or the arrangement. …
[I]t appears to us, based in particular on the conflict of law rules, that the provincial and territorial laws of property and civil rights in Canada provide for mutual recognition of different types of entities or arrangements established under the respective jurisdictions of the various provinces and territories, thus providing an expanded base for analysis that is uniform across Canada for the purposes of applying the two-step approach.
Although the second sentence may be deliberately woolly so as to avoid outraging the Quebecer fans of bijuralism, it may be effectively saying that, just as Quebec recognizes, as a partnership, an entity of another province (say, Ontario) that satisfies the common law tests for partnerships, it should also recognize, as a corporation, a foreign entity which, in applying the two-step approach to entity classification, would be recognized as a corporation in Ontario.
Neal Armstrong. Summaries of 1 December 2015 Internal T.I. 2015-0588381I7Tr under s. 248(1) - corporation and Interpretation Act, s. 8.1.
CRA considers that a parking space can form part of a condo unit for principal residence exemption purposes
CRA accepts that when a parking space was acquired as part of the purchase of a residential condo unit, the parking space can thereafter form part of the condo unit (viewed as a “housing unit” for principal residence exemption purposes) provided that the parking space facilitates the use of the housing unit (which presumably would always be the case if it is actually used by the condo owner) and it is part of the common or private area for the same building – and this is so even if the parking space as a matter of real property law is separate from the condo unit.
Since the parking space is viewed as part of the single principal residence, CRA apparently considers that using the principal residence designation for the disposition of the parking space does not preclude the use of the principal residence exemption for the same years in question where there has been a subsequent sale of the condo unit.
Neal Armstrong. Summary of 10 June 2016 External T.I. 2015-0590371E5 Tr under s. 54 – principal residence – s. (e).
CRA considers a Quebec regional county municipality to be a municipality
S. 149(1)(d.5) exempts a corporation, commission or association, not less than 90% of the capital of which was held by one or more entities each of which is a municipality in Canada, or a municipal or public body performing a function of government in Canada. The Quebec system of regional county municipalities was introduced beginning in 1979 to replace the historic counties of Quebec.
CRA considers that an RCM is a “municipality” for purposes of s. 149(1)(d.5).
Neal Armstrong. Summaries of 5 January 2016 External T.I. 2015-0568911E5 Tr under s. 149(1)(d.5) and s. 256(5.1).