News of Note
CRA rules that lump sum settlement payments made under a CCAA plan to private health services plans claimants were non-taxable to them.
Email this ContentCRA 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).
CRA generally will not consider a due diligence defence in initially assessing a s. 163(1) penalty
CRA does not "routinely afford taxpayers the opportunity to make submissions on due diligence" before assessing a s. 163(1) (at least one repetition) penalty, so that such submissions are deferred until the Appeals officer review. At that stage, CRA will not waive part of the penalty: if due diligence is not established and the other conditions are satisfied, the penalty is assessed in full.
Neal Armstrong. Summary of May 2013 ICAA Roundtable, Q. 4 (reported in April 2014 Member Advisory) under s. 163(1).
Kokai-Kuun Estate – Tax Court of Canada finds that interest carrying charges were not a cost of land
Following Stirling, Lyons J found that interest carrying charges on vacant land could not be added to its ACB.
Neal Armstrong. Summaries of Kokai-Kuun Estate v. The Queen, 2015 TCC 217 under s. 54 - adjusted cost base and s. 50(1).
The carve-out rule potentially can apply in the year of acquiring a foreign subsidiary without contradicting the calendar application of the fresh start rule
If on, say October 1, Canco acquires a non-resident corporation ("FA"), which carries on a passive business, s. 95(2)(k.1)(i) generally will apply to deem FA to have been carrying on its investment business in Canada from January 1 onwards of that year for purpose of computing its income from that business. Russell and Montillaud suggest that "this is not the same as deeming [FA] to have been an affiliate from the beginning of the year," so that the carve-out rule in "paragraph 95(2)(f.l) can apply to exclude from income, gains or losses that arose prior to [FA] becoming an affiliate without contradicting the rule in subparagraph 95(2)(k.1)(i)."
Neal Armstrong. Summary of Grant Russell and Philippe Montillaud, "’Fresh Start’ Rules – on Becoming an Affiliate", International Tax Planning (Federated Press), Vol. XX, No.2, 2015, p. 1392 under s. 95(2)(k).
Open market repurchases by the issuer of US dollar notes may produce a better tax result than a tender offer
Where a Canadian issuer makes a tender offer for its notes, which have an accrued foreign exchange gain but which also trade at a substantial discount to their US dollar principal, the issuer will realize a capital loss under s. 39(2), and a forgiven amount which generally will offset other more valuable tax attributes rather than such loss. Contrast this with open market purchases of the same notes which might result in only a smaller capital gain under s. 39(3). This result depends in part on 2008-0302511I7, where CRA considered that s. 80 should not apply to an open-market purchase to which s. 39(3) applies
Neal Armstrong. Summary of Carrie Smit, "Repurchasing Underwater US Dollar Notes", International Tax (Wolters Kluwer), August 2015, No. 83 under s. 39(3).
CRA may permit non-pro-rata sharing by partners of withholding taxes borne at partnership level
Although unclear, it appears that taxes imposed by a foreign jurisdiction under a domestic override of an existing treaty (or perhaps under a domestic anti-treaty shopping rule) qualify as "taxes" under general principles, so that the usual Canadian domestic foreign tax credit or deduction provisions apply.
In Folio S5-F2-C1, CRA indicates that the Canadian partner of a partnership which has paid foreign income tax generally is treated as paying its proportionate share of such partnership tax. However, this statement is not intended to require a pro rata sharing of foreign withholding taxes borne on payments made to the partnership where the amount withheld is based on the withholding rate that would have applied to each partner.
Where a Canadian individual member of an LLC (which carries on an active business) receives distributions from the LLC which are sufficient only to fund his US tax liability on the LLC’s income, most of those US taxes will not be eligible for a foreign tax credit (but with eligibility for the s. 20(11) deduction).
Neal Armstrong. Summaries of Manjit Singh and Andrew Spiro, "The Canadian Treatment of Foreign Taxes," draft version of paper for CTF 2014 Conference Report under Treaties – Art. 24, s. 126(7) – non-business income, s. 20(11), 126(2), s. 104(22) and s. 113(1)(c).