News of Note
Abstracting from Descarries, CRA will no longer permit an individual to effectively use the ACB of shares previously stepped-up using the capital gains deduction to create a loss to offset a gain on the sale of common shares
Email this ContentFollowing Descarries, CRA will 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 ("CGD") (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 articulates the common thread between Descarries and such a now-GAARable transaction as follows:
Such transactions effectively accomplish a distribution of surplus of a corporation in the form of a capital gain even while such capital gain is reduced by a capital loss sustained from the disposition of shares whose ACB arose from the CGD or from the FMV of such shares on V-Day.
Neal Armstrong. Q. 14 of 9 October 2015 APFF Roundtable under 2015 APFF Conference.
CRA acknowledges that no secondary adjustments are required for the operation of most income attribution provisions
Suppose that most of the income of a partnership has been allocated and distributed to a partner which is a personal trust, but that CRA reallocates most of such income under s. 103 to the other partner, which is a corporation (subject to a lower tax rate than the trust). Notwithstanding that the trust partner has enjoyed income on which it is not subject to tax, CRA acknowledges that there is no obligation for the trust to make any reimbursement payment to the other partner. More generally, CRA acknowledges that the operation of s. 15(1), 51(2), 69(1), 74.1(1) or (2), 74.4(2), 75(2), 85(1)(e.2), 86(2), or 103 to attribute income of one taxpayer to a second taxpayer does not obligate the first taxpayer to reimburse the second taxpayer therefor. This contrasts with ss. 20(1)(j), 90(14), 227(6.1) and 247(13), which provide for the tax consequences of a reimbursement.
Neal Armstrong. Q. 13 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA accepted that GAAR did not apply where a taxpayer deliberately triggered the application of s. 55(2) – but has notified Finance
Less overall tax is paid if, rather than Opco paying a taxable dividend to one of its shareholders (A, an individual), A rolls his shares into a new Holdco, Opco redeems the shares now held by Holdco (but without any s. 55(5)(f) designation being made by Holdco so that all of the redemption proceeds are subject to capital gains treatment under s. 55(2)), and then Holdco pays a capital dividend to A. CRA commented:
[T]he GAAR committee…recommended that the GAAR not be applied [in a similar file] having regard to the current state of the jurisprudence.
Nonetheless, the CRA is concerned by this type of tax planning, which in particular, is contrary to the integration principle. Accordingly, we have brought our concerns…to…Finance.
See also 16 June 2014 STEP Roundtable Q. 7, 2014-0522991C6.
Neal Armstrong. Q. 15 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA acknowledges that s. 18(3.1) does not require capitalization of repair or maintenance expenses incurred during a renovation
When asked if it agreed with Janota (a light-weight case cited for the proposition that s. 18(3.1) applies only to the capitalization of soft costs), CRA was somewhat non-commital, but acknowledged that "the general expenses of repair and maintenance which are incurred during the period of Construction [defined to include renovation or alteration] of a building but which are otherwise not related to such Construction do not come within subsection 18(3.1)."
By the way, a glitch in the translation of Q. 12 (where s. 55(2.1)(a) was rendered as s. 55(3)(a)) has been corrected.
Neal Armstrong. Q. 3 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA lets the chips fall where they may in interpreting the new s. 55(2) rules
Holdco holds shares of Opco with a nominal ACB and no safe income. In order to creditor-proof Opco, Holdco lends money to Opco equal to the accrued gain on the shares and receives that money back as an actual dividend (targeted to be tax-free). It does not matter if this transaction has no capital gains avoidance purpose. CRA accepted that since the purpose of the creditor-proofing is to reduce the fair market value of the Opco shares, the full amount of the dividend is deemed to be a capital gain.
Suppose that in the same transaction, the dividend from Opco was subject to Part IV tax, but this tax was refunded as a result of payment of an equivalent dividend to the individual shareholder of Opco. Under the new rules, it does not matter that the individual is not a corporation eligible for the s. 112(1) deduction, so that the dividend amount will still be deemed to be a capital gain.
Under a variation of the first alternative where the shares of Opco have full ACB, the dividend amount also will be a capital gain in CRA’s view, so that the ACB can only be utilized on a future disposition of the Opco shares.
Neal Armstrong. Q. 12 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA accepts the potential relevance of IT-349R3 and IT-268R4 to the kiddie tax provisions
A relatively recent addition to the "split income" definition refers to "income derived from a business of, or the rental of property by, a particular partnership or trust, if a person who is related to the individual at any time in the year is actively engaged on a regular basis in the activities of the particular partnership or trust related to earning income from a business or the rental of property. CRA considers that it is reasonable for the meaning of the phrase "actively engaged on a regular basis" to be partly informed by judicial and CRA interpretations (e.g., in IT-349R3 and IT-268R4) accorded to the phrase "actively engaged on a regular and continuous basis" in provisions (e.g., s. 70(9)) dealing with farming or fishing businesses, as well as in the somewhat similar specified member definition.
Neal Armstrong. Q. 2 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA finds that discharge of a debt through its assumption denies a s. 20(1)(e)(v) deduction
The usual deduction by a taxpayer under s. 20(1)(v)(v) for its remaining unamortized debt issuance expenses when the debt is settled does not apply where such settlement occurs "as part of a series of borrowings or other transactions and repayments."
CRA considers that this exclusion applies where (i) the debt of the taxpayer is settled by the taxpayer transferring assets to a subsidiary in consideration inter alia for an assumption of the debt (with the taxpayer being released) – or (ii) where the debt is not assumed on the asset transfer and the taxpayer instead uses cash consideration received from the subsidiary (funded out of a borrowing by it) to discharge the debt. In the second situation, CRA considers that the subsidiary borrowing is a borrowing occurring as part of the series. It considers that in the first situation, the debt assumption is also caught, without indicating how the quoted word specifically apply.
Three summaries of questions posed at the October 2015 APFF Roundtable, including this one, along with translations of the full text of the preliminary CRA responses, have been uploaded. The other 21 responses will be translated and uploaded piecemeal over the next week or so.
Neal Armstrong. Q. 1 of 9 October APFF Roundtable under 2015 APFF Conference.
CRA confirms that the same date must be picked by it in totalling the maximum cost of foreign property on which the T1135 s. 162(10.1)(e) penalty is calculated
CRA considers that the additional penalty under s.162(10.1)(e) for failure to file a T1135 is determined based on the total costs of all specified foreign property on the day in the year where that total is the highest, rather than by determining the highest cost that each specified foreign property had in the year, and totalling all those highest costs.
Neal Armstrong. Summary of 16 July 2015 Memo 2015-0590681I7 under s. 162(10.1).
CRA provides favourable interpretation on the ability of a Newco (which may take a while to get going) to make an ETA s. 156 nil consideration election
A member of a closely-related corporate group generally will be a "qualifying member," so as to be able to make a nil consideration election with other qualifying group members under ETA s. 156 if (under (c)(i) if the "qualifying member" definition") substantially all of its property, other than financial instruments or property with only a nominal value ("disregarded property"), has been acquired for consumption, use or supply exclusively in the course of its activities ("commercial acquisitions"). However, if it has no property other than disregarded property, it nonetheless may qualify under (c)(iii) of the "qualifying member" definition if "it is reasonable to expect" that it will be making taxable supplies "throughout" the following 12 months, substantially all of which will be taxable supplies, and that substantially all of its property acquisitions (other than of disregarded property) within those 12 months will be commercial acquisitions.
CRA has issued an interpretation which, reading between the lines, seems to reflect a relaxed interpretation of "throughout" – and notes that if, in fact, the mooted qualifying member has any commercial acquisitions during the 12-month period, it generally will thereupon qualify under the regular test in (c)(i).
Neal Armstrong. Summary of 14 January 2015 Interpretation 165076 under ETA s. 156(1) – qualifying member.
Income Tax Severed Letters 21 October 2015
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.