News of Note
CRA considers that NYSE stock trades should be translated at the noon exchange rate on the settlement date
Email this ContentAs CRA considers that shares sold on a stock exchange are disposed of on the settlement rather than trade date, it considers that the U.S. dollar proceeds received on a sale on a U.S. exchange should be translated into Canadian dollars using the noon exchange rate for the settlement date.
Neal Armstrong. Summary and translation of 2015-0588981C6 under 9 October 2015 APFF Financial Strategies and Instruments Roundtable Q. 5.
CRA is studying whether the $2,500 penalty for late T1135 filings applies automatically
Where there has been a voluntary disclosure for failure of the taxpayer to file T1135s for the past, say, 15 years, the current practice of CRA is to assess the $2,500 per-year penalty for the first five years as being before the 10-year period for which CRA is permitted to waive penalties or interest under s. 220(3.1). However, the proposition that “the late-filing penalty of $2,500 under subsection 162(7) applies automatically… is currently under study.”
Neal Armstrong Summary and translation of 2015-0588971C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable Q. 4, 2015-0588971C6 F.
CRA confirms that the s. 70(6) rollover can apply to residuary (in addition to specific) bequests
In Bueti, the court appeared to state obiter (and without reference being made to s. 248(8)(a)) that a property in the residue of an estate is vested in the executors following death rather than in any residuary beneficiary.
In the course of responding to a ridiculous question as to whether the s. 70(6) rollover for a transfer of property to a spousal trust can apply where the estate distributes a “replacement property” to the spousal trust rather than property held by the deceased on death (no, it cannot), CRA stated that s. 70(6) (which inter alia requires that the subject property vest indefeasibly in the spousal trust) “could apply to a specific property in the residue of the estate.”
Neal Armstrong. Summary and translation of 2015-0596611C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable, Q. 9.
CRA finds that there is no source disappearance where an interest-free advance made to a wholly-owned corporation (and funded with borrowed money) is forgiven
The sole shareholder of a CCPC uses borrowed funds to make an interest-free advance to the CCPC, and the CCPC then makes a proposal under the BIA, which is accepted by the creditors and entails the shareholder advance being cancelled. CRA considered that “the actual use of borrowed money, following the debt cancellation, continues to be for the purpose of investing in the shares of the corporation,” so that if “there is a reasonable expectation of deriving dividends,” the interest payable by the shareholder would continue to be deductible under general s. 20(1)(c)(i) principles without the need to resort to the s. 20.1(1) rule for source extinctions.
Neal Armstrong. Summary and translation of 2015-0588951C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 3.
CRA considers that shares acquired on stock option exercise must be disposed of in one transaction to avoid basis averaging
The s. 7(1.31) rule is intended to avoid basis averaging under s. 47 when executives exercise stock options and then immediately sell the acquired shares – so that they will not realize a capital gain even if they also held low-basis shares of the same company. This rule does not work if the executive, immediately after exercise, disposes of the acquired shares in two tranches, e.g., she donates some of them to a charity and transfers the balance to her personal holding company. The second disposition is tainted (i.e., the safe harbour in s. 7(1.31) is not available) because there was an intervening disposition of identical shares (i.e., the first disposition) following the exercise.
It is not clear whether feeding the acquired stock into the market over the course of a trading day but with settlement occurring in three days’ time essentially independent of the precise trading times, would be problematic.
Neal Armstrong. Summary and translation of 2015-0595841C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 2.
Critical illness policies can be transferred free of capital gains tax
A corporate owner of a critical illness insurance policy can transfer it free of capital gains tax as insurance policies are excluded from capital gains treatment and there is no provision explicitly taxing such a policy’s disposition.
Neal Armstrong. Summary and translation of 2015-0588941C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 1.
CRA notes that transfer adjustments to increase to sales prices (but not reduce purchases) increase gross revenue for Reg. 402 purposes
CRA considers that an upward adjustment under s. 247(2) to a Canadian resident’s sales proceeds – but not a downward adjustment to its purchase price for goods – increases its gross revenue for provincial income allocation purposes.
Neal Armstorng. Summary of 1 September 2015 Memo 2013-0507381I7 under Reg. 402(3).
CRA addresses the status of mutual funds with limited windows for unit redemption
Since 1991, CRA has had a policy of considering units of a trust to be redeemable on demand for purposes of the unit trust test in s. 108(2)(a) where a provincial securities commission policy treats the units as redeemable on demand for securities’ laws purposes – even where the securities legislation accepts a right to redeem only twice a year as satisfying this condition. It is not clear how useful this position is given that most or all REITs and income funds do qualify as mutual funds for securities law purposes and, therefore, are not able to qualify as mutual funds whose units are redeemable on demand for such purposes.
Neal Armstrong. Summary of 16 November 2015 T.I. 2015-0595041E5 under s. 108(2)(a).
Income Tax Severed Letters 16 December 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Effective January 1, 2016, Appeals files will be sent back to Audit if information requested by Audit is now provided
Points on the Appeals process made by Anne-Marie Levesque, Assistant Commissioner, Appeals at the Annual CTF Conference include:
Q.3: CRA has changed its practice so that an appeals officer can consider a request for interest or penalty relief at the same time as considering the objection – but only a decision letter will be given at that stage so as to not invalidate the objection.
Q.4: Effective January 1, 2016, if an appeals officer is provided with information which had been requested by but not provided to the auditor, the appeals officer will be required to send the file back to the auditor for review of the additional information to determine whether it changes the initial audit determination.
Q.5: There have been quite a number of cases where the appeals officer has disagreed with a valuation report, and asked for another valuation, or overturned the reassessment. Appeals also has overturned reassessments notwithstanding a GAAR Committee recommendation to apply the GAAR (so that it is worthwhile making submissions to Appeals to overturn a GAR Committee adverse opinion) – and, conversely, Appeals can raise the GAAR even if Audit did not raise it. Appeals does not go through the GAAR Committee, and can apply the GAAR on its own.
Neal Armstrong. Answers of Anne-Marie Levesque, Assistant Commissioner on Appeals Procedures.