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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.
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.
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).
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.
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:
- do a drop-down of half of his Opco shares to a wholly-owned Newco on a s. 85(1) rollover basis
- 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
- sell in two equal tranches his remaining Opco shares to Newco in consideration for two $2.5M notes, thereby generating, under s. 84.1:
- a $2.5M capital dividend; and
- 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).
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 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).