News of Note
CRA confirms that the amended TFSA “advantage” definition still does not accommodate estate-freeze style transactions
Email this ContentIn 2009-0320311I7 and ITTN, No. 44, CRA concluded that where common shares of a company are issued to a TFSA of a key employee as part of a freeze, it will consider subsequent increases in those shares’ fair market value to be an "advantage" as defined in s. 207.01(1), so that there will be taxable benefits to the employee. CRA has now confirmed that an amendment effective March 23, 2011, which narrowed this definition somewhat by replacing a reference to "open market" with "normal commercial or investment context," has not changed this position.
Neal Armstrong. Summary of 28 May 2015 T.I. 2015-0574481E5 under s. 207.01(1) – Advantage.
CRA considers that s. 7 can apply to a bona fide sale to an employee of a share investment in a subsidiary
CRA considers that where Holdco sells a portion of its investment in the shares of Opco to an Opco employee at a sale price that is intended to represent fair market value, the s. 7 rules will apply, so that if CRA treats the fair market value as being higher, it will compute a s. 7 benefit.
Neal Armstrong. Summary of 1 June 2015 T.I. 2015-0581311E5 under s. 7(1)(a).
CRA appears to imply that a “bad” (offside s. 7(1.4)) option exchange merely accelerates tax rather than resulting in double taxation [corrected]
To use illustrative numbers that were not provided in the question posed or CRA response, s. 7 stock options of an employee on Target shares with an in-the-money value of $100,000 are exchanged for options on Buyer’s shares with an in-the-money value of $101,000 (rather than $100,000) so that the continuity rule in s. 7(1.4) does not apply. If the employee subsequently surrenders her new options to Buyer for $110,000, is her s. 7(1)(b) benefit $110,000 – or is it $10,000 on the basis that the $100,000 value of the exchanged old options qualifies as "the amount…paid by the employee to acquire those [surrendered] rights"?
CRA appears not to have answered this question directly, but instead indicated that there is a s. 7(1)(b) benefit realized on the "exchange" of the old options for the new options– which is not reduced by their value at the time of the exchange. (A previous version of this post, where I thought the CRA answer was in response to the question which likely was posed, may be misleading.) However, CRA finishes with a cryptic statement that "the new options acquired as a result of the exchange will have a cost equal to the value of the exchanged options at the time of the exchange." This could be interpreted as an affirmative response to the above question.
Accordingly, to return to the illustrative numbers, the employee would realize a $101,000 s. 7(1)(b) benefit on the bad stock option exchange (even though in fact the old options likely were surrendered to Target for nil consideration), and might realize a further benefit of $10,000 rather than $110,000 on the subsequent surrender of her new options – on the basis that her "cost" of $100,000 reduces her second s. 7(1)(b) benefit, as suggested in the question posed. If there is no such reduction, there is double taxation, and the cryptic reference to cost makes no sense.
Neal Armstrong. Summary of 13 May 2015 T.I. 2015-0570801E5 under s. 7(1)(b).
CRA confirms that the shareholder of a s. 149(1)(o.2) corporation can be a trust with a single pension plan beneficiary
The permissible shareholders of a s. 149(1)(o.2) (exempt) corporation are described in s. 149(1)(o.2)(iv) and Reg. 4802. For example, s. 149(1)(o.2)(iv)(B) refers to "one or more trusts all the beneficiaries of which are registered pension plans." In light of s. 33(2) of the Interpretation Act (words in the plural include the singular), CRA considers that s. 149(1)(o.2)(iv)(B) will be satisfied where the shareholder is a trust with a single registered pension plan beneficiary. CRA also takes the same approach to other branches of the s. 149(1)(o.2)(iv) rule, where essentially the same point arises.
Neal Armstrong. Summary of 28 May 2015 T.I 2015-0582901E5 under s. 149(1)(o.2)(iv).
Income Tax Severed Letters 8 July 2015
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
New gifting rules generally deny a donation credit for testamentary private company share gifts to public foundations or charitable organizations
A gift of non-qualifying securities to an arm’s length public foundation is generally excepted by s. 118.1(19) from the gift denial rule in s. 118.1(13). However, for testamentary gifts made after 2015, s. 118.1(5)(a) provides that a gift by will is deemed to be made by the estate, and s. 251(1)(b) continues to deem a personal trust to not deal at arm’s length with a person which is beneficially interested in it – such as a public foundation that is entitled to a testamentary gift. Accordingly, a testamentary gift of shares which are non-qualifying securities to a public foundation will not be an excepted gift.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q.12 under s. 118.1(19).
S. 84(2) generally should not apply to a hybrid sale transaction
Hybrid transactions typically are engaged in where some of the shareholders of Target (a small business corporation) wish to utilize the capital gains exemption whereas the purchaser wishes to achieve a step-up in the tax basis of Target’s assets. The transactions might entail the sale of some Target shares to the purchaser to utilize capital gains exemption, sale of Target assets (preferably mostly goodwill rather than appreciated real estate in light of Part IV tax considerations) to the purchaser and redemption of Target shares held by purchaser.
CRA seems to accept that s. 84(2) would not apply to recharacterize the proceeds as dividends from Target where the vendor shareholders and the purchaser are dealing at arm's length and, essentially, the purchaser is using its own funds to purchase Target's shares.
In a hybrid transaction in which a redemption of the shares will trigger a deemed dividend, an exemption in s. 191(4) will treat the deemed dividend as an excluded dividend, so as to exempt it from Part VI.1 tax, where the specified amount for which the shares are redeemed does not exceed the fair market value of the consideration for which they were issued. Although at the 1989 CTF Roundtable, CRA indicated that the specified amount must be a dollar amount and cannot be fixed at a later date, or be subject to a price adjustment clause or described by way of a formula, "in a private ruling, the CRA accepted a redemption amount that was subject to a price adjustment clause where a separate specified dollar amount was also provided."
Neal Armstrong. Summaries of Charles P. Marquette, "Hybrid Sale of Shares and Assets of a Business," Canadian Tax Journal, (2014) 62:3, 857 – 79 under s. 84(2) and s. 191(4).
McNally – Federal Court finds that CRA’s program, of delaying assessments of returns claiming leveraged donation credits, is illegal
CRA sent a letter to the taxpayer, along with other participants in various leveraged donation tax shelters, stating that his return would not be assessed until the tax shelter was audited - unless he withdrew his donation claim. CRA admitted that the main reason was "to discourage participation in these tax shelters."
Harrington J has ordered CRA to assess the taxpayer's return within 30 days, stating that it was "plain and obvious that Mr. McNally's rights have been trampled upon for extraneous purposes."
Neal Armstrong. Summary of McNally v. MNR, 2015 FC 767 under s. 152(1).
CRA is considering whether some types of US partnerships are corporations for Canadian tax purposes
CRA accepts that separate legal personality is not a touchstone for classification of an entity as a corporation so that, for example, the existence of separate legal personality for various types of US limited partnerships does not cause them to be corporations rather than partnerships. However, CRA is considering whether Florida limited liability limited partnerships and limited liability partnerships are corporations or partnerships. CRA appears to be tempted by the view that they are corporations given that "they seem to have both legal personality and full, or at least very extensive, limited liability for all members," i.e., liability protection which "seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces." CRA is inviting comments on this issue.
CRA also noted that it accepts that LLC are corporations. The reasoning in Anson suggesting that an LLC is transparent respecting the treatment of its income would also suggest that LLLPs and LLPs are partnerships.
Neal Armstrong. Summary of 28 May 2015 IFA Roundtable, Q. 3, 2015-0581511C6 under s. 96.
Anson - UK Supreme Court finds that an LLC member had a personal (non-proprietary) entitlement to his share of LLC profits as they arose rather than only when they were distributed to him
The First-tier Tribunal made a finding that profits of a Delaware LLC belonged to the members as they arose, so that a UK member (Mr Anson) was taxed on the same income in both countries, and was entitled to double taxation relief under the applicable provision in the US-UK Treaty.
Lord Reed, speaking for the UK Supreme Court, has confirmed this approach. However, at the same time he found that such right of the members to their share of the profits was a personal right - rather than a proprietary right (such as that of the members of an English or Scottish partnership).
It is not at all clear that this decision should be neatly summarized as finding that an LLC (or, at least, the LLC in this case) is fiscally transparent. The findings suggest a continuum, starting with an English partnership, followed by a Scottish partnership (which, like many US LPs but unlike an English (or Canadian) partnership has legal personality but whose members, like a conventional partnership have, at least collectively, a proprietary interest in the partnership assets), an LLC (with a personal but not proprietary right of the members to the profits as they arise), and a conventional corporation. The current CRA position (at least before considering this case) is that most or all LLCs are fiscally opaque (see 25 October 1994 T.I. 941750, and see also TD Securities).
The relevant Treaty provision required that the UK tax on the LLC distributions be "computed by reference to the same profits or income by reference to which the United States tax [was] computed." Lord Reed stated:
The words "the same" are ordinary English words. ...[A] degree of pragmatism in their application may be necessary...for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions.
The same pragmatic approach is appropriate in applying the exclusion from the anti-hybrid rule in Art. IV, para. 7(b) of the Canada-US Treaty that is available where income derived from a hybrid entity is treated the same as if the entity were not a hybrid.
Neal Armstrong. Summary of Anson v. HMRC, [2015] UKSC 44, under Treaties – Art. 24, Art. 3.