News of Note
CRA treats part of a building as a “former business property”
Email this ContentInsurance proceeds received for the destruction of part of a building qualified as "compensation for property damaged" (para. (f) of the "proceeds of disposition" definition) rather than "compensation for property destroyed" (para. (c)), so that it was necessary for the destroyed property to qualify as a "former business property" in order for the replacement property rollover to potentially apply to the reinvestment of the insurance proceeds. Although parts of the building were used as a rental property, the destroyed part had been used exclusively as a business property, so that such part qualified as a former business property. In other words, the destroyed part of the property in effect was viewed as a separate property in the context of the former business property definition but not in the context of characterizing the proceeds.
A further hurdle was that the scale of the reconstruction work had to be such as to be able to conclude "that a new property is acquired by the taxpayer."
Neal Armstrong. Summary of 4 March 2015 T.I. 2014-0550761E5 F under s. 44(1).
Jennings – Tax Court of Canada finds that rezoning expenses were fully deductible
Six years after the taxpayers acquired a triplex, they discovered that it was not zoned for that use, and applied to get it rezoned. In finding that the substantial related expenses were deductible, Woods J noted that although there was in a sense a long-term benefit from the rezoning, it did not produce any change in how the property was used.
This is a more favourable result than Shabro, where the replacement of a floor, which was damaged because it rested on a former landfill site, by a floor supported by steel piles, was a capital expenditure even though (similarly to Jennings) the taxpayer thereby only got what it thought it had in the first place (a suitable building) - although it may have helped that the expenditures did not effect any change to, or acquisition of, tangible property (see BP Australia, Strick v. Regent, Oxford).
Neal Armstrong. Summary of Jennings v. The Queen, 2015 TCC 96 under s. 18(1)(b) – capital expenditure v. expense – improvements v. running expense.
Standard Life –Tax Court of Canada restrictively interprets s. 138(11.3), thereby casting doubt on a favourable CRA interpretation of the s. 95(2)(k) fresh start rule, and applies a “window dressing” doctrine
Prior to the introduction of mark-to-market rules in 2007, Standard life Assurance Company of Canada (which to that point only carried on business in Canada) scrambled to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006. It relied on the s. 138(11.3) rule, which defined an "insurer" as a Canadian life insurer which also carried on business in another country and provided that where "designated insurance property of the insurer for a taxation year [2006], was owned by the insurer at the end of the preceding taxation year [2005] and was not designated insurance property of the insurer of the insurer for that preceding year," such property could be bumped in the 2006 return.
Pizzitelli J found that in order for s. 138(11.3) to apply, it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year (2005) rather than only in the current year, so that the bump was not available. In contrast, in 2014-0536581I7 CRA found that the requirement, in the similar fresh start rule in s. 95(2)(k), that the "affiliate" whose property is sought to be bumped have carried on the business in question in the preceding year, was satisfied notwithstanding that it was not an affiliate in the preceding year.
In any event, the intended Bermuda business did not commence until 2008. In the meantime, there were just a few isolated acts, such as hiring a bookkeeper with essentially nothing to do, entering into a reinsurance contract with an affiliate which was backdated to December 2006, and getting a Bermuda licence which prohibited any business with third parties. This all was "window dressing" - a term which Pizzitelli J defined as "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayer’s intention for entering into the transaction."
Neal Armstrong. Summary of Standard Life Assurance Company of Canada v. The Queen, 2015 TCC 97 under s. 138(11.3).
Under the new charitable credit rules, it may be desirable for executors to complete gifts within 3 years of the death
Although for deaths after 2015, s. 118.1(5) will deem gifts made by the deceased’s will to have been made instead by his estate at the time of transfer of the property by it to the donee, the executors will be able to allocate such gifts between the deceased and the deceased's estate, provided that the estate is a "graduated rate estate" at the time the gift is made. This is potentially problematic for gifts made out of the residue of a complex estate or an estate in litigation, so that by the time the transfer is made the estate may no longer qualify as a graduated rate estate.
Neal Armstrong. Summary of Jessica Fabbro, "Dying to Donate – Determining Charitable Donation Tax Credits on Death after 2015", Tax Topics, Wolters Kluwer, No. 2249, April 16, 2015 under s. 118.1(5.1).
CRA considers individuals paid on a per diem or per job basis to be deemed employees
Employment is deemed to include an "office," which is defined to include a position "entitling the individual to a fixed or ascertainable stipend or remuneration." CRA considers that this includes a position entitling the individual to a per diem amount for each day of sitting or other work or (in this case) a fixed amount per completed file – even though the number of sittings or files would not be known until towards the end of the year.
This suggests, for example, that CRA would consider a trustee of a REIT who get s paid a fixed amount per board meeting to be a deemed employee (and thus eligible for s. 7 treatment).
Neal Armstrong. Summary of 7 November 2014 Memo 2014-0549861I7 under s. 248(1) – office.
CRA finds that a discretionary trust can in effect allocate a safe income dividend received by it to a corporate beneficiary
Opco pays a dividend on shares held by a discretionary trust equal to the safe income on hand of those shares, and the trust then distributes and allocates all of the dividend to a corporate beneficiary ("Holdco"), with the amount being deemed to be a dividend in Holdco’s hands as a result of a s. 104(19) designation. CRA accepts that "it would be reasonable to consider that the amount of the dividend allocated to Holdco…would be increase its safe income by an equivalent amount."
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 7, 2014-0538061C6 F under s. 55(2).
CRA finds that no s. 39(2) gain arises on a CFA distribution of U.S.-dollar stated capital
Canco used U.S. dollars to subscribe for common shares of a non-resident sub ("Foreignco"), having a U.S.-dollar stated capital. CRA confirmed that no s. 39(2) FX gain arose when (prior to 2011 and after appreciation in the U.S. dollar), Canco received a U.S.-dollar distribution of a portion of this stated capital. It reasoned that the U.S.-dollar appreciation increased the resulting ACB grind under s. 53(2)(b)(ii), thereby also increasing the ultimate capital gain when the Foreignco shares were disposed of (or when a negative ACB gain arose under s. 40(3).) Therefore, recognizing a s. 39(2) FX gain on the distribution would result in double taxation.
A similar approach would have applied if there had been a (post-2011) qualifying return of capital.
Neal Armstrong. Summary of 22 January 2015 Memo 2014-0560571I7 under s. 39(2).
Income Tax Severed Letters 29 April 2015
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kruger Wayagamack – Tax Court of Canada finds that USA restrictions on a majority shareholder’s ability to take strategic decisions negatived de jure and de facto control
Kruger Inc. was the 51% shareholder of the taxpayer and was entitled under the unanimous shareholders agreement between it and the other shareholder (SGF) to appoint three of the five directors – so that it obviously controlled de jure the taxpayer.
Not so fast! Jorré J found that such a wide range of decisions were specified in the USA to require unanimous director (or shareholder) approval – to the point that he characterized Kruger as having control of only operating, and not strategic, decisions – that Kruger did not have de jure control.
Kruger also did not have de facto control, notwithstanding that is was appointed the manager and marketing agent for the taxpayer under long-term agreements.
However, the taxpayer was associated with Kruger under s. 256(1.2)(c) as the Kruger bloc had more that 50% of the fair market value of all the shares. The 49% bloc might have had a greater value to SGF than that of the 51% bloc to Kruger because of a contingent put right accorded to SGF under the USA. However, since this put could not be assigned to any third-party purchaser, it did not affect the shares' FMV.
Neal Armstrong. Summary of Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90 under s. 256(1)(a) and s. 256(1.2)(c).
CRA rules on the elimination of a REIT sub trust through s. 107.4 transfer to a new “in house” MFT and a s. 132.2 merger of MFT into REIT
CRA has ruled respecting the elimination of an open-end listed mutual fund trust (which likely is a REIT) of its subtrust on a rollover basis. First, the subtrust will transfer its assets (being units of subsidiary real estate partnerships and the shares of the GPs) under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of the REIT, with a small percentage of MFT's units then being distributed to the REIT unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into the REIT under s. 132.2. These same general mechanics have been ruled on previously (see s. 132.2 – qualifying exchange).
It was contemplated that the transaction would be implemented without a plan of arrangement (e.g., the second stage of the s. 132.2 merger is to be implemented through a unilateral redemption of units). The proposed transactions specify that the MFT’s Canadian-resident trustee will not be a director of any of the GPs.
Neal Armstrong. Summary of 2013 Ruling 2013-0492731R3, amended by 2014 Supplement 2014-0518511R3 under s. 107.4(1).