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We have uploaded all CRA severed letters going back to April 1993

We have uploaded all of the CRA severed letters (e.g., Technical Interpretations, Rulings and Roundtable items) released by the Income Tax Rulings Directorate under its severed letter program, which commenced in April 1993.

These will continue to be open access. However, our translations of the French-language interpretations and Roundtable items, and our summaries of severed letters, will continue to be subject to the standard paywall (currently, 3 working weeks per month).

It is part of our process to format severed letters which we upload, e.g., indenting quoted passages, highlighting and linking titles, indenting subparagraphs, italicizing case citations and correcting the occasional situation where the text runs off the side of the page. Due to the volume of the recently-uploaded letters, this editing process will take a number of months.

Income Tax Severed Letters 19 December 2018

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA finds that a departing U.S. resident who has a deemed inclusion for his IRA cannot then obtain a s. 60(j) deduction for contributing actual IRA withdrawals to his RRSP

A Canadian citizen who was a U.S. long term resident under the U.S. expatriation rules was deemed for Code purposes to receive a taxable distribution of his entire interest in his IRA (the “Deemed Distribution”) immediately before his relinquishing of his green card and returning to Canada. When he then made an actual withdrawal of those amounts (the “Withdrawal”) in order to contribute them to his RRSP, they were not subject to further U.S. income tax.

In policy terms, the RRSP contribution should have generated a s. 60(j) deduction – but did not. The Withdrawal did not qualify as an “eligible amount” for s. 60.01 purposes because it was the amount of the Deemed Distribution (not the Withdrawal) that was included in the indiviual's income under s. 56(12) and s. 56(1)(a)(i)(C.1). Conversely, the amount of the Deemed Distribution also was not an “eligible amount” as it was not a “payment received” for the purpose of s. 60.01.

This anomaly has been pointed out to Finance.

Neal Armstrong. Summary of 29 October 2018 External T.I. 2018-0750411E5 under s. 60.01.

CRA provides a s. 84(2) ruling for a resource property spin-off by a public resource company

A public resource company effected a spin-off of one its properties by transferring it on a taxable basis to a wholly-owned Newco in consideration for Newco shares, and then distributing its Newco shares to its shareholders as a stated capital distribution.

CRA ruled that the distribution did not give rise to a s. 84(4.1) deemed dividend on the basis of the s. 84(2) exception rather than on the basis that it came within the s. 84(4.1)(a) and (b) exclusion for the distribution of sales proceeds (i.e., of the common shares of Newco). Consistently with all the other s. 84(2) spin-off ruling letters, CRA ruled that the shareholders had a cost for the Newco shares equal to their FMV even though there is no specific provision to this effect.

Neal Armstrong. Summary of 2018 Ruling 2017-0731971R3 under s. 84(2).

McEachern – Tax Court of Canada finds that the first leg of travel to a remote work location did not qualify for exclusion under s. 6(6)(b)(ii)

An employee, who worked two weeks out of every four at a norther diamond mine, received an allowance of 4.5% of his salary to help him to pay the costs of transportation between his New Brunswick residence and the Edmonton site for boarding or deboarding his flights to and from the mine. Masse DJ found that the allowance was includible in the employee's income under s. 6(1)(b), because it was not excluded under s. 6(6) for three alternative reasons:

  • The s. 6(6)(b) exclusions were not available on substantive grounds because he regarded the travel between home and Edmonton as something separate from travel to and from the special work site (s. 6(6)(b)(i)) or remote location (s. 6(6)(b)(ii)). [This seems odd as presumably there could have been an exempt allowance if the employee instead had received a larger allowance to make it on his own steam all the way to and from the remote work site.]
  • The employer had not provided a TD4 certifying that the s. 6(6)(b)(i) exclusion was available. After referencing the jurisprudence on s. 8(10), Masse DJ found that it was necessary for the taxpayer to demonstrate that the employer had been acting unreasonably in not providing the certification - and in fact its refusal was reasonable, as the “Allowance of 4.5% of salary was arbitrary and bore no resemblance at all to the actual costs involved in travelling between the Appellant’s principal residence and Edmonton.” [He earlier noted that the employee’s actual travel costs were approximately double the allowance amount. The fact that there was no provision like s. 8(10) requiring an employer certification seemed to help the taxpayer’s rather than the Crown’s position.]
  • “The travel between New Brunswick and Edmonton, AB were essentially personal in nature since he chose to maintain his principal place of residence in another province. It has long been established that expenses related to travel from one’s residence to one’s work site are personal expenses.” [S. 6(6) states that it applies notwithstanding s. 6(1) and, therefore, overrides this jurisprudence.]

Neal Armstrong. Summary of McEachern v. The Queen, 2018 TCC 232 under s. 6(6)(b).

Our translations of CRA French-language interpretations now go back 6 years

The table below provides descriptors and links for 3 Interpretations released in January 2013 and December 2012 (including one 2012 APFF Roundtable item), as well as for 10 of the 2018 APFF Roundtable items released by CRA last week - all as fully translated by us. In October, we provided full-text translations of the CRA written answers and summaries of the questions posed at the two 2018 APFF Roundtables, so that what we are now providing is complete in that there also are full-text translations of the questions posed.

The above items are additions to our set of 721 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2018-12-12 5 October 2018 APFF Roundtable Q. 1, 2018-0768721C6 F - Procedure re: refund of excess w/h under Part XIII Income Tax Act - Section 227 - Subsection 227(5) withholding on interest that does not reflect the benefit of a subsequent s. 214(16)(b) designation can be recovered only on a s. 227(5) annual basis
Income Tax Act - Section 214 - Subsection 214(16) - Paragraph 214(16)(b) whether withholding on interest subject to the thin cap rules can take into account a subsequent s. 214(16)(b) designation
5 October 2018 APFF Roundtable Q. 2, 2018-0768901C6 F - Deemed dividend payable to trust beneficiary Income Tax Act - 101-110 - Section 104 - Subsection 104(24) deemed dividend realized by trust is deductible only if made irrevocably payable by the trustees in the year pursuant to trust deed terms
5 October 2018 APFF Roundtable Q. 3, 2018-0768841C6 F - Rollover under 73(1) and gifts to charities Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) the terms of an alter ego trust cannot permit charitable gifts before death
5 October 2018 APFF Roundtable Q. 4, 2018-0768891C6 F - Stock Dividend and Safe Income Income Tax Act - Section 55 - Subsection 55(2.3) different effect of stock dividend of high-low preferred shares paid to Holdco and trust shareholders
Income Tax Act - Section 52 - Subsection 52(3) - Paragraph 52(3)(a) different effect of stock dividend of high-low preferred shares paid to trust and corporate shareholders
Income Tax Act - Section 55 - Subsection 55(2.3) shift in safe income to high-low prefs paid as stock dividend
5 October 2018 APFF Roundtable Q. 5, 2018-0768761C6 F - Partage de la déduction accordée aux petites entreprises Income Tax Act - Section 125 - Subsection 125(8) use of personal holding companies precluded assignment
Income Tax Act - Section 125 - Subsection 125(7) - Designated Member - Paragraph (b) - Subparagraph (b)(i) Serviceco met the 3 conditions for being a designated member
5 October 2018 APFF Roundtable Q. 6, 2018-0768771C6 F - Determination for a foreign partnership Income Tax Act - Section 152 - Subsection 152(1.4) CRA cannot make a partnership income or loss determination where the partnership has no T5013 filing obligation
Income Tax Regulations - Regulation 229 - Subsection 229(5) where no T5013 obligation, CRA will assess the partners directly within the s. 152(4) limitations
5 October 2018 APFF Roundtable Q. 7, 2018-0768781C6 F - Avantage en vertu d’un emploi Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) specificity needed re travel amounts paid re sabbatical stint
5 October 2018 APFF Roundtable Q. 8, 2018-0768791C6 F - Frais de repas Income Tax Act - Section 67.1 - Subsection 67.1(1) s. 67.1(1) applies to client portion of restaurant tab even where s. 8(4) applies to employee
Income Tax Act - Section 8 - Subsection 8(4) commissioned employees can deduct only 25% of the restaurant tab when they take out a client in the city
5 October 2018 APFF Roundtable Q. 9, 2018-0768801C6 F - Tax on Split Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Shares - Paragraph (a) - Subparagraph (a)(i) portfolio investment company might qualify as having a business
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (g) - Subparagraph (g)(i) inactive spouse could receive excluded amount dividends from Holdco if its income was from an active business of reinvesting Opco dividends
5 October 2018 APFF Roundtable Q. 10, 2018-0768811C6 F - Related business and subsection 120.4(1) Income Tax Act - Section 120.4 - Subsection 120.4(1) - Related Business - Paragraph (c) - Subparagraph (c)(i) - Clause (c)(i)(B) beneficial interests in discretionary trusts holding shares of a corporation with a mooted related business must be valued
2013-01-09 30 October 2012 Internal T.I. 2012-0457941I7 F - Indemnité de départ Income Tax Act - 101-110 - Section 110.2 - Subsection 110.2(1) - Specified Portion an award in settlement of severance pay did not relate back to the years in which it accrued
13 June 2012 Internal T.I. 2012-0448961I7 F - Paiements en trop faits par un employeur Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n) salary mistakenly paid after expiry of sick leave period and then repaid, treated as clerical error rather than s. 8(1)(n) adjustment
Income Tax Act - Section 80.4 - Subsection 80.4(1) grant of extended period for employee to repay overpayment was not a s. 80.4 loan
2012-12-24 5 October 2012 Roundtable, 2012-0454191C6 F - Policy on Facts in a Ruling Request Income Tax Act - Section 152 - Subsection 152(1) CRA is not confined by requested rulings and submitted facts, where it has concerns

Deliberately generating a s. 84.1 dividend on a sale of a CCPC can produce lower tax if this planning works

An individual shareholder holding shares of a Canadian controlled private corporation (Opco) with a nominal adjusted cost base and a fair market value of say $10M potentially could use s. 84.1 on a sale of his shares to a third-party for cash in order to generate and receive a capital dividend as well as generating a dividend refund. For example, he could:

  1. do a drop-down of half of his Opco shares to a wholly-owned Newco on a s. 85(1) rollover basis
  2. have Newco do a dirty s. 85(1) exchange of its Opco shares with Opco for new Opco shares, thereby realizing a $5M capital gain and additions to its capital dividend account and refundable dividend tax on hand account
  3. sell in two equal tranches his remaining Opco shares to Newco in consideration for two $2.5M notes, thereby generating, under s. 84.1:
    1. a $2.5M capital dividend; and
    2. a $2.5M taxable dividend (generating a dividend refund)

Since he and Newco have high basis in the Opco shares, the sale to the purchaser can now close without further gain being realized.

Issues to be addressed in this planning include:

  • It would appear that CRA now accepts that a s. 83(2) election can be made on a s. 84.1 dividend.
  • However, CRA might challenge the proposition that a s. 84.1 dividend can generate a dividend refund.
  • S. 129(1.2) could apply to deny the dividend refund if one of the main reasons for step 3(b) was to obtain a dividend refund
  • Re GAAR, what arguably is the Lipson doctrine, that a specific anti-avoidance provision should not be used to generate a tax benefit, is bothersome (see also Satoma)

Speaking of GAAR, it would appear that continuing a CCPC under foreign corporate law in order to avoid the high corporate rate on investment income is not abusive given inter alia that the scheme of the Act is to make it hard to be a CCPC rather than going in the opposite direction – and furthermore, the Department of Finance turned its mind to extending the refundable tax regime to non-CCPC private corporations in July 2017, but so far has not moved on this.

Neal Armstrong. Summaries of Anthony Strawson and Timothy P. Kirby, “Vendor Planning for Private Corporations: Select Issues,” 2017 Conference Report, (Canadian Tax Foundation), 11:1-28 under s. 110.6(2.1), s. 123.3, s. 84.1(1), s. 83(2), s. 129(1) and s. 129(1.2).

P3 projects raise a range of income tax and GST/HST issues

Observations on P3 projects (e.g., for the construction and operation of hospitals or infrastructure projects) include:

  • Interim payments received (before the operational phase commences) from the public sector proponent are typically treated as reducing construction costs under s. 13(7.1) rather than as income receipts.
  • However, if the progress payments are treated as capital cost deductions, the potential Reg. 3100(1)(b) benefit can cause Projectco partners to be deemed to be limited partners under s. 96(2.4)(b).
  • CRA appears to be willing to apply the two-year rolling-start rule in s. 13(27)(b) on an as-expended basis so that, for example, expenses incurred in Year 1 would satisfy the available-for-use test in Year 3, even if the entire contract is not complete in Year 3; however, the more conservative approach may be to treat the assety as not being available for use until the construction phase is complete - which could give a more favourable result under the tax-shelter analysis.
  • A P3 project likely will flunk the mathematical test in the s. 237.1 “tax shelter" definition at financial close given that costs not yet incurred (albeit committed to be incurred) are not taken into account.
  • GlaxoSmithKline emphasized the difference between the reasonableness standard in s. 20(l)(c) and the arm’s-length standard in the predecessor of s. 247(2). “These two standards are different, which means that potentially different allowable interest expenses might be permitted as deductions under paragraph 20(1 )(c) or section 67, as compared with transfer pricing.”

Neal Armstrong. Summaries of John Tobin, “Infrastructure and P3 Projects,” 2017 Conference Report (Canadian Tax Foundation), 10:1-31 under ETA, s. 168(3)(c), ITA s. 9 – nature of income, s. 13(27)(b), Reg. 3100(1)(b), s. 96(2.2)(d), s. 237.1(1) – tax shelter – para. (b), s. 248(1) – taxable Canadian property - para. (d). s. 18(7) and s. 20(1)(c).

CRA rules on a butterfly on a gross FMV basis and finishing with an estate freeze

CRA ruled on a butterfly split-up of DC (a Canadian-controlled private corporation holding marketable securities and cash, and also with related-person liabilities) among new holding companies (ACo1, BCo1 and CCo1) for A and her two adult children, B and C. The steps entailed initially packaging DC’s assets into two new subs (BSub and CSub) pursuant to a s. 85(1) drop-down, so that after effecting the butterfly split-up, BCo1 held shares of BSub, CCo1 held shares of CSub and ACo1 held shares both of BSub and CSub.

This was the set-up for ACo to then transfer its shares of BSub and CSub to BCo1 and CCo1, respectively, under s. 85(1) in consideration for preferred shares of the transferees, thereby permitting A’s interest in the DC assets to be frozen for the future benefit of her children.

The spin–off of the DC assets was to be accomplished on a gross FMV basis rather than net FMV basis, i.e., liabilities of DC were not taken into account in determining whether there was a pro rata distribution of each type of property of DC. The butterfly mechanics avoided any Pt IV tax circularity issues.

Neal Armstrong, Summary of 2018 Ruling 2017-0733011R3 under s. 55(1) – distribution.

Jayco – Tax Court of Canada finds that the taxpayer has no remedy in a costs award for LC fees paid to secure its GST/HST obligation until reversed

After its successful appeal of a GST/HST assessment, Jayco sought to include, in the costs recoverable from the Crown, the $1.4 million paid by it to JP Morgan in order to obtain a letter of credit to secure the GST/HST it owed until the assessment was reversed. In rejecting this claim, D’Auray J stated:

In essence, Jayco is submitting that the Minister ought to have exercised her discretion differently and not taken any collection action on the GST/HST assessed. …

This Court does not have jurisdiction to review the Minister’s exercise of that power—that jurisdiction rests with the Federal Court. …

The Rules are clear that disbursements will only be awarded if they are essential to the conduct of the proceedings. … The interest was not paid by Jayco to establish that the Minister’s assessment was incorrect … .

Neal Armstrong. Summary of Jayco, Inc. v. The Queen, 2018 TCC 239 under Tax Court Rules, Rule 147(3)(j).