News of Note
CRA considers that employee-shareholders presumptively receive benefits under s. 15(1) rather than 6(1)(a) where they can significantly influence business policy
Email this ContentHealth and welfare trusts are attractive to an employer as CRA permits an employer to deduct the contributions when they are made to the trust rather than when benefits are provided to the employee. (This contrasts with employee benefit plans which only provide for a deduction when the amount is paid to the employee.) The employee is taxed on the benefit provided through the trust in the same manner as if the amount had been paid directly by the employer on behalf of the employee.
CRA has rewritten its Bulletin on such trusts (IT-85R2) in a way that further obscures the statutory logic for various positions that are taken. Various unhelpful comments have been added, including that:
- Such a trust cannot provide benefit coverage to the partners of a partnership (whereas previously, CRA stated that a partnership needs two distinct trusts for its partners and employees).
- Contributions made after a trust loses its status as a health and welfare trust "will" be treated as capital contributions which are non-deductible under s. 18(1)(b) [i.e., they will be treated as capital even if they do not create "an advantage for the enduring benefit of a trade" - see British Insulated and Halsby Cables].
- "There is a general presumption that an employee-shareholder receives a benefit in the capacity of a shareholder [so that s. 15(1) applies] when the individual can significantly influence business policy."
CRA has dropped a statement that benefits that would not otherwise be taxable under s. 6(1)(a) may be treated at the trustee’s discretion as having been paid out of prior year’s funds or current year’s employer contributions to avoid the application of s. 104(13), and has maintained a statement that employer contributions which are voluntary or gratuitous are non-deductible (cf. Aluminum Co., see also Ken and Ray’s).
Neal Armstrong. Summaries of Folio S2-F1-C1: "Health and Welfare Trusts" under s. 248(1) – employee benefit plan, s. 18(1)(a) – income producing purpose, s. 6(1)(a), s. 15(1), s. 9 – nature of income.
Gleig – Tax Court of Canada finds that promissory notes were a prescribed benefit for tax shelter purposes where the holder had no intention of demanding their payment
Although the language of the definition of a prescribed benefit in Reg. 231(6) (now Reg. 3100(1)) is aimed at more sophisticated arrangements that this, Lyons J found that promissory notes issued by investors to a promoter in consideration for the promoter incurring resource expenditures on their behalf were a prescribed benefit on the basis of the promoter’s testimony that it never intended to demand payment of the notes. Accordingly, the arrangement was a tax shelter as the resource deductions promised to them were mostly funded by the notes rather than cash. This is similar in the result to finding that the notes were shams.
Neal Armstrong. Summary of Gleig v. The Queen, 2015 TCC 191, under s. 237.1(1) – tax shelter.
CRA applies ss. 69(1)(b)(ii) and s. 69(1)(c) to the gross rather than net FMV of gifted property subject to an encumbrance
If an individual donates an immovable worth $200,000 that is subject to a $100,000 charge and it qualifies as a gift under the relevant provincial law (here, of Quebec), CRA will consider the proceeds to the donor under s. 69(1)(b)(ii) and the cost to the done under s. 69(1)(c) to be $200,000, notwithstanding that presumably the amount of the gift is only $100,000. In this regard, CRA stated that a real estate property is only one property, so that it apparently was resisting the temptation to think of this transaction as a sale of $100,000 of the property in consideration for the assumption of the $100,000 hypothec, and a gift of the balance of the property for $100,000.
Neal Armstrong. See summary of 9 June 2015 T.I. 2014-0519981E5 F under s. 69(1)(b)(ii).
CRA rules on cash circling to effect intercompany payments and that s. 80 does not apply to a loan extinguishment without an explicit set-off
A ruled-upon loss shifting transaction between Lossco and its indirect Parent avoids a daylight loan through Lossco making a series of loans to Parent and Parent making a series of subscriptions for Lossco pref shares (so that presumably the same sum of money is continually circled, although the ruling letter is too bashful to say this).
The transaction will be unwound by Lossco delivering the loans (owing to it by parent) to Parent as the redemption proceeds for the prefs in its capital. CRA ruled that this would not give rise to a forgiven amount (see also 2013-0498551R3).
Neal Armstrong. Summary of 2014 Ruling 2014-0543911R3 under s. 111(1)(a).
S. 22 election is not restricted to Canadian businesses
IT-188R states that "section 22 is applicable upon election by a vendor and a purchaser, where the vendor…sells all or substantially all of the assets of a business that was carried on in Canada to the purchaser who proposes to continue the business." CRA has confirmed that no particular significance should be attached to the "in Canada" reference, so that the election is available for the sale by a Canadian taxpayer of a branch business carried on abroad.
Neal Armstrong. Summary of 12 February 2015 T.I. 2014-0560491E5 F under s. 22(1).
Income Tax Severed Letters 5 August 2015
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The foreign-affiliate dumping rules could apply currently, or year-by-year, to earnout clauses, and commercial conflicts can arise re whose PUC (the non-resident parent’s or an arm’s length 3rd-party shareholder’s) is reduced under those rules
There are two interpretations of how to apply an earnout clause in an agreement for the acquisition of a subject corporation by the CRIC: there are successive transfers of property by the CRIC each time a payment obligation is crystallized under the earnout (so that there are successive deemed dividends subject to the PUC offset rules); or the deemed dividend (or PUC offset) is determined only once at the investment time.
The first interpretation produces the peculiar result that the value of the subsequent deemed dividends are measured based on the fair market value of the transferred property at the investment time rather than at the times of their actual subsequent transfers (which might, for example, entail valuing shares at a time that the issuer had not yet been incorporated.) However, this approach nonetheless may be preferable to the second approach, which "would require the contingent obligation to be valued at the investment time and necessitate an analysis of the likelihood of the CRIC being required to make future earnout payments as well as the quantum of such payments."
Potential conflicts can arise between a non-resident parent of the CRIC and an arm’s length 3rd party who holds all of the shares of one class of shares of the CRIC. Where the CRIC "can demonstrate" that all of the PUC of that class arose as a result of property transferred to the CRIC which was all used to make the investment in the subject corp, the PUC of that class will be automatically reduced under the offset rule in s. 212.3(7)(a). Thus, from the perspective of the non-resident parent, it could reduce the reduction to the PUC of its share investment by causing the CRIC to demonstrate that none of the transaction costs reduced the amount of the investment traceable to the share subscription proceeds of the 3rd party. Should the 3rd party get the CRIC to agree that it will not demonstrate that the s. 212.3(7)(a) requirements are satisfied?
S. 227(6.2) generally requires the CRA to accept late-filed forms under s. 212.3(7)(d) for the offset of a deemed dividend otherwise arising under the foreign affiliate dumping rules and refund the Part XIII tax paid on the deemed dividend. However, s. 227(6.2) does not retroactively rescind the deemed dividend so that, even after the s. 212.3(7)(d) form is late-filed, the CRIC is still deemed to have paid a dividend to the non-resident parent for purposes of other provisions, e.g., ss. 129(1), 112(3) and Part IV.
Neal Armstrong. Summaries of Brett Anderson and Daryl Maduke, "Practical Implementation Issues Arising from the Foreign Affiliate Dumping Rules," draft version of paper for CTF 2014 Conference Report under s. 212.3(2), s. 212.3(7)(a), s. 227(6.2), s. 212.3(14)(a), s. 212.3(19) and s. 212.3(1.1).
Turcotte – Quebec Court of Appeal finds that an estate could not “double dip” for a testamentary gift
An estate which, under the Quebec equivalent of s. 118.1(5), had claimed a charitable credit in the terminal return of the deceased for a gift directed to be made in the will, also claimed a deduction under the equivalent of s. 104(6)(b) in the estate return on the basis that paying the gift to the charity in question was a distribution of estate income. Vézina JCA found that this deduction represented impermissible "double dipping," and that it made no difference that the gift was clearly funded out of proceeds of an RRSP, which had been included in the estate’s income.
Neal Armstrong. Summary of Turcotte v. ARQ, 2015 QCCA 396 under s. 104(6).
Guindon – Supreme Court of Canada finds that “culpable conduct” under s. 163.2 must be at least as bad as gross negligence under s. 163(2)
Before finding the preparer’s penalty under s. 163.3(4) is not a criminal penalty so that the preparer does not benefit from procedural protections under s. 11 of the Charter, Rothstein J quoted the definition of "culpable conduct" and stated:
"[W]ilful, reckless or wanton disregard of the law" refers to concepts well-known to the law, commonly encountered as degrees of mens rea in criminal law… . [T]he standard must be at least as high as gross negligence under s. 163(2)… .
A family lawyer and president of a charity was liable for penalties (of $547,000, before add-ons) for issuing charitable receipts to 134 different investors in a charitable donation scheme after falsely representing in a tax opinion that that she had looked at the implementing documents (which did not exist).
Neal Armstrong. Summaries of Guindon v. The Queen, 2015 SCC 41 under s. 163.2(4) and s. 163.2(1) – culpable conduct.
Public Television Association of Quebec – Federal Court of Appeal finds that PTAQ was a conduit for a U.S. public TV station
In order for a Quebec-based corporation with educational TV objects (PTAQ) to qualify as a "charitable organization" under s. 149.1(1), it was required to itself carry on charitable activities rather than merely disbursing funds to a non-qualified done, in this case, a Vermont public TV station (VPT). Accordingly, agreements were carefully crafted to require VPT to produce non-commercial television as agent for and at the direction of PTAQ and engage in fund-raising for PTAQ.
This structure was ignored by them. PTAQ merely purchased programming from VPT that had been assembled without input or control by it. Indeed, PTAQ was merely a "conduit" for VPT, i.e., VPT allocated its Canadian donors to PTAQ, PTAQ issued receipts to them, and paid the proceeds over to VPT in amounts that always matched VPT’s programming charges.
Neal Armstrong. Summary of Public Television Association of Quebec v. M.N.R., 2015 FCA 170 under s. 149.1(1) - charitable organization.