News of Note
CRA considers that a deceased contributor to a trust can be affiliated with the contributor to another trust
Email this ContentFollowing 2014-0534851C6 F, CRA considers that a deceased contributor is affiliated with a contributor (such as her brother) with whom she was connected by blood relationship during her lifetime. This means, for example, that if her will funded Trust B of which her brother is a discretionary beneficiary, and her brother is the settlor and sole beneficiary of Trust A, then the two trusts are affiliated.
Neal Armstrong. Summary of 25 August 2015 T.I. 2015-0571271E5 F under s. 251.1(3) – contributor.
CRA confirms that a testamentary trust cannot be a graduated rate estate
CRA considers that "only an estate can be a graduated rate estate," so that a spousal testamentary trust formed out of the deceased’s property pursuant to his will cannot qualify even if it receives all of his property.
Neal Armstrong. Summary of 25 June 2015 T.I. 2014-0553181E5 F under s. 248(1) – graduated rate estate.
CRA appears to apply an indirect use test to the s. 17(8.1)(b) safe harbour
S. 17(8.1)(b) provides a safe harbor from interest imputation on a non-interest bearing loan made by a Canco to a CFA ("CFA 3") if (among other requirements) the loan proceeds were used by CFA 3 to repay an amount owing by it for previously acquired property used principally for earning active business income. CRA has found that this requirement was satisfied where this refinanced loan originally was made by another CFA of Canco (CFA 1) to CFA 2, with CFA 2 using the loan proceeds to purchase the shares of CFA 3 (so that the interest on the loan was deemed to be active business income under s. 95(2)(a)(ii)(D)), and with CFA 2 then being merged into CFA 3 with CFA 3 as the survivor - so that the loan was assumed by CFA 3.
CRA stated that "because the assets of CFA 3 were used principally for the earning of income from an active business," the loan assumed by CFA 3 on the merger "was in respect of assets previously acquired by CFA 3 in the course of carrying on an active business." Although cryptic, CRA seems to consider that because the CFA 3 shares previously acquired by CFA 2 with the loan proceeds were "in respect of" the active business assets of CFA 3, the loan after its assumption by CFA 3 qualified as an amount owing in respect of the (indirect) acquisition of those active business assets.
Neal Armstrong. Summary of 5 June 2015 Memo 2015-0569061I7 F under s. 17(8.1)(b).
Income Tax Severed Letters 16 September 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Zhang – B.C. Supreme Court refuses rectification on the basis that the true agreement of parties to a share transfer agreement was accessing the s. 113(1)(a) deduction rather than avoiding capital gains tax
The taxpayer (Mr. Zhang) briefly got advice from his tax accountant (Bob) that he could access the earnings of his Chinese operating company using the exempt surplus system by transferring his shares to a BC holding company. Without getting further advice from Bob (who would have charged $2,000), he effected the transfer for a cash payment of U.S.$150,000. When CRA assessed on the basis that the fair market value of the transferred shares was much higher than this, he filed a late s. 85 election with the holding company and sought a rectification order backdating an issuance of common shares as additional consideration.
In dismissing the petition, Butler J found that "the true agreement between the parties" was the acquisition of Mr. Zhang’s shares by the holding company so as to permit tax-free dividends to be paid – rather than to minimize capital gains tax, which "was a secondary concern and one which Mr. Zhang asked Bob not to investigate."
Neal Armstrong. Summary of Zhang v. The Queen, 2015 BCSC 1256, under General Concepts – Rectification.
CRA rules that lump sum settlement payments made under a CCAA plan to private health services plans claimants were non-taxable to them.
CRA has ruled that lump sum payments, made under a CCAA plan to former employees in settlement of their claims respecting private health services plans of which they had been beneficiaries, were non-taxable to them – although they would not be able to claim medical credits until their cumulative expenses exceed the payment received.
Neal Armstrong. Summary of 2014 Ruling 2013-0514561R3 under s. 6(1)(a).
CRA rules on a double pipeline with flexible note repayments between the two pipelines
The death of the survivor of mother and father holding Class C common shares of a Canadian-controlled private corporation ("Investmentco") holding marketable securities triggered the disposition by her of those shares at their fair market value under s. 70(5) and a disposition at FMV under s. 104(4)(a) of preferred shares of Investmentco held by an inter vivos trust that had been settled for the benefit of her and her husband during their lifetimes, with their children as the residuary beneficiaries.
CRA has ruled that s. 84(2) will not apply to "pipeline" transactions in which the stepped up shares are sold by the estate and the trust to a Newco for promissory notes of Newco ("PN" and "PN1") (as well as debt already owing by Investmentco to the trust being sold by the trust to Newco for a third promissory note), Newco and Investmentco amalgamate a year later, and PN and PN1 are paid off out of the proceeds of the marketable securities at a maximum rate of xx% (likely 25% - see 2014-0559481R3) per quarter thereafter.
CRA did not care how the repayment proceeds are allocated between PN and PN1. The ruling letter specifies that up to XX% of the third promissory note can be repaid before the amalgamation out of corresponding repayment proceeds of the debt owing by the trust to Newco.
Neal Armstrong. Summary of 2015 Ruling 2014-0548621R3 under s. 84(2).
Ruling for spin-off butterfly by CCPC contemplated that leased land was business property – and accepted that a stated capital distribution can be paid by set-off
A Canadian corporation ("DC") which was a Canadian-controlled private corporation but which nonetheless appeared to have a wide shareholder base effected a spin-off butterfly under a Plan of Arrangement of two of its smaller businesses (carried on in its subsidiary "Subco 1") so that Subco 1 ended up being held by DC’s shareholders in a separate CCPC (Spinco). Compliance with the requirement for a pro rata distribution under the spin-off of each of the three types of property was eased by a finding that some land close to the business premises of Subco 1, which was leased to third parties, nonetheless was business property – on the basis of some sort of symbiotic redacted relationship between the third party’s and Subco 1’s business.
The reorganization started off in the usual manner with a s. 86 reorg under which the DC shareholders exchanged their old common and preferred shares for special "butterfly" shares and new common shares. The new common shares’ attributes were accepted as being different from those of the old shares on the basis of a more restricted right to receive stock dividends and on the basis of a right of the holders to receive quarterly financial statements. (This may have resulted from CRA prodding, as there is an inserted paragraph number for this.)
The stated capital of the special butterfly shares subsequently was reduced to an amount corresponding to that of the preferred shares issued by Spinco to DC in consideration for acquiring Subco 1. The stated purpose for this was to ensure that on the subsequent cross-redemption of the two shareholdings, the two deemed dividends would be equal to each other, so that the s. 186(1)(b) Part IV tax liability owing each way would be matched by an equal dividend refund "such that each of DC and Spinco will not have any net tax liabilities (i.e., as a result of each corporation's Part IV tax liabilities exceeding such corporation's dividend refund)."
A preliminary step for distributing a small portion of DC’s retained business from Subco 1 to DC involved Subco 1 selling that business on a taxable basis for a note (as it was not worth the bother to do this step as a preliminary butterfly), and then setting that note off against amounts that became owing by Subco 1 to DC as a result of a stated capital and dividend distribution.
Neal Armstrong. Summaries of 2014 Ruling 2014-0533601R3 under s. 55(1) – distribution, s. 86(1), s. 186(1) and s. 84(1).
CRA confirms that the payment by an LLC of the U.S. tax liability of its indirect Canadian member will give rise to a taxable s. 246(1) benefit
In the face of a spirited submission to the contrary, CRA confirmed its position that the payment by a U.S. limited liability company or its immediate unlimited liability company parent of the US taxes payable by the indirect Canadian member on the LLC income would give rise to a taxable s. 246(1) benefit (if paid by the LLC) or taxable s. 15(1) benefit (if paid by the ULC).
Neal Armstrong. Summary of May 2013 ICAA Roundtable, Q. 22 (reported in April 2014 Member Advisory) under s. 246(1).
CRA states that it will not accept a medical expense that has not been rejected by the insurance company
S. 118.2(3)(b) indicates that a medical expense cannot be claimed if it is reimbursable under an insurance plan, even if in fact no reimbursement was claimed. CRA considers that "one is to assume that the expenses would need to be submitted to the insurance company before the amount can be considered by the [CRA]."
This accords with the principle that statutory provisions should be applied to maximize CRA’s convenience: this way, CRA does not need to review the insurance plan to see what is covered! (Another example of this principle in operation was pointed out to me by David Sherman (as also reflected in his notes on s. 127.531 in the PITA): CRA did not want to change their computer system to accommodate different charitable/medical claims for AMT and regular tax purposes, so they forced him to win on this point in the Tax Court - and then asked Finance for an amendment.)
Neal Armstrong. Summary of May 2013 ICAA Roundtable, Q. 18 (reported in April 2014 Member Advisory) under s. 118.2(3)(b).