News of Note
CRA indicates that a licence has an indefinite life if “in the circumstances” it is “reasonably” certain it can be renewed
Email this ContentClass 14 properties can include a “concession or licence for a limited period.” In IT-477 (Archived), CRA stated:
Where… renewals or extensions are automatic or within the control of the taxpayer, that is they do not require any further negotiation with or the concurrence or consent of the grantor, the life of the property includes such additional periods. … Where the taxpayer has an option to renew or extend the term only if certain conditions are met, for instance meeting certain performance or sales criteria, the circumstances of the particular case must be examined to determine whether or not, when he acquired the property, it was reasonably certain that these conditions would be met. If so, the additional periods are included in the life of the property.
Post-Shell, the last sentence is dubious and, as discussed below, even the first sentence could be questioned.
In a recent technical, CRA referred to the above passage before finding that a government licence which could be renewed each year on the payment of a fee was an eligible capital property rather than a Class 14 property, i.e., the taxpayer had the right to renew on tendering the fee, so that presumably the first sentence in the above passage applied. Is this consistent with the proposition that a lessee with a bargain purchase option is not the property owner (see 2008-0303651E5)?
Neal Armstrong. Summary of 30 July 2015 T.I. 2014-0552041E5 F under Sched. II – Class 14.
CRA is proposing to assess taxpayers who have overcontributed to TFSAs after only one warning letter
CRA is proposing to streamline its procedures so that any taxpayer who, having failed to remove an excess contribution from his or her TFSA following a warning letter from CRA, will be subject to an automatic assessment of tax on the excess contribution without further warning. CRA considers that “subsection 152(7) permits the Minister to make an assessment of tax under Part XI.01 without first contacting the taxpayer,” so that such assessments are authorized.
Neal Armstrong. Summary of 11 September 2015 Memorandum 2015-0599851I7 under s. 152(7).
CRA finds that a payment to a lender based on equity value of the borrower was not eligible for the s. 20(1)(e) deduction
No s. 20(1)(e) deductions are available for amounts “computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion.” An amount payable to a lender on specified events such as an IPO and computed as X% of a modified computation of NAV was found by CRA (after referring to its positions on the predecessor of the similarly worded participating interest definition) to be caught as being computed by reference to a similar criterion, i.e., the equity value of the enterprise was a function of profitability and cash flow. A factual finding of Audit that this amount “was used as a substitute for a direct equity investment that the Lender originally wanted but could not acquire” was also germane. Finally, it did not make any difference that the borrower resisted paying the amount, so that what it ended up paying was pursuant to a negotiated settlement of what it owed under the formula.
Neal Armstrong. Summary of 2014-0547431I7 under s. 20(1)(e).
CRA affirms that the thin cap rules have always applied to the computation of income in s. 216 returns
Following 2013 amendments, the thin cap rules have made specific mention of their application to non-resident corporations which file returns under s. 216 as if they were Canadian residents. CRA has rejected the suggestion that this implies that such corporations were not caught by the thin cap rules before the 2013 amendments.
Neal Armstrong. Summary of 2015-0599161I7 under s. 18(4).
University of Calgary – Tax Court of Canada finds that indirect costs which could not be traced to revenues from taxable supplies were eligible for pro rata ITCs
Before finding that it was fair and reasonable for the University of Calgary to allocate (for input tax credit purposes) its GST costs for its grounds using the same split between taxable and exempt use as was applicable to the floor space of its buildings which was directly used for one (third-party rentals) or the other (e.g., classroom) use, D’Arcy J stated:
The purpose of [a registrant’s] business is to earn revenue, i.e., to make supplies. Therefore, the result of subsection 141.01 (2) is that all costs incurred by a person in the course of the person’s business must be traced to a specific supply or multiple supplies in respect of which the costs were incurred. [emphasis added]
This confirms that, notwithstanding the enactment of s. 141.01(2), the GST costs for property or services whose acquisition cannot be traced to the making of taxable supplies nonetheless may qualify for ITCs (see also BJ Services).
Neal Armstrong. Summaries of University of Calgary v. The Queen, 2015 TCC 321 under ETA s. 141.01(2) and s. 141.01(5).
CRA will accommodate brief screw-ups resulting in a technical breach of the prohibition against TFSA or RRSP borrowings
Various types of glitches can cause a TFSA, RRSP etc. to go into overdraft (so that technically the brokerage is lending money to the plan in breach of the prohibition against borrowing) until the problem is remedied a day or so later. CRA states that it will not act on “an overdraft in a TFSA [etc.] if it:
- is temporary in nature and covered without undue delay;
- arises as a result of (i) a mismatch of cash flow due to differences in standard settlement cycles for securities, (ii) a reasonable error, or (iii) an unintended infrequent event; and
- does not have the character of leveraged investing.”
However, CRA will not accommodate a breach which results from a cashless exercise procedure in which the broker advances funds to the plan to exercise warrants and repays itself out of the sale proceeds of the acquired shares.
De-registration of an individual’s TFSA for breach of the borrowing requirement would cause a permanent loss of TFSA savings room for the individual.
Neal Armstrong. Summaries of 22 October 2015 Memo 2013-0486491I7 under s. 146.2(2)(f) and s. 207.10(1) – unused TFSA contribution room.
Income Tax Severed Letters 23 December 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA will not accommodate a trust which merely distributes all it can
Where a trust distributes all of its share of the accounting profits of a partnership but its share of the taxable income of the partnership is higher, it will be subject to trust-level taxation on the excess.
Neal Armstrong. Summary and translation of 2015-0595851C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable, Q. 6.
CRA generally accepts that loss of a s. 107(2) rollover can be avoided, where a trust owes debt to a capital beneficiary, by refinancing the debt with a bank
CRA considers (e.g., 2013-0488061E5) that the s. 107(2) rollover does not apply to the property of a personal trust which is distributed to a capital beneficiary to pay a debt owing to the beneficiary. In order to avoid this result in the case of a real property subject to a mortgage owing to the capital beneficiary, the trust can pay off the mortgage with a fresh mortgage financing from a bank, and then distribute the encumbered property to the beneficiary.
Neal Armstrong. Summary and translation of 2015-0593091C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable Q. 8.
The surplus recasting rule in Reg. 5907(2.02) can extend to non-rollover reorganizations
Reg. 5907(2.02) recasts exempt earnings a taxable earnings if they were generated in an avoidance transaction disposition to a non-arm’s length person or partnership. although the main target may have been be intercompany excluded-property transfers, the rule might also encompass a dividend in kind paid by an FA, a non-QLAD (qualifying liquidation and dissolution) liquidation; an FA-to-FA liquidation or merger that is not structured as a rollover - and it also might apply to an asset-packaging rule described in Reg. 5907(2.01) in circumstances where surplus maximization was a strong motivator. Moreover, Finance's technical notes suggest the dubious proposition that it could apply to exempt earnings generated from a deemed disposition of active business assets under the fresh start rules.
Neal Armstrong. Summary of Paul Barnicke, Melanie Huynh, "Exempt Earnings Anti-Avoidance," Canadian Tax Highlights, (Canadian Tax Foundation), Vol. 23, No. 12, December 2015, p. 5 under Reg. 5907(2.02).