News of Note

CRA asserts that accrued recapture of depreciation is irrelevant to share valuation

Father transfers his shares of a real estate corporation with substantial accrued recapture of depreciation to his son.

After repeating (albeit, with confused terminology) its uncontroversial position that the assets of a corporation or other taxpayer are to be valued without taking into account deferred tax credits or debits, CRA then made the extraordinary statement:

In the situation provided, the CRA would not accept the latent taxes respecting the assets held by the corporation being considered in the determination of the FMV of the shares of the corporation.

Earlier in the interpretation, CRA referred to "deferred taxes" ("impôts différés"), so that the above statement referring to "latent taxes" ("impôts latents") apparently cannot be rationalized as merely indicating that you ignore the bogus deferred tax (or FITL) balances generated under GAAP.

Neal Armstrong.  Summary of 10 October 2014 APFF Roundtable, Q. 12, 2014-0538121C6 F under General Concepts – FMV – Shares.

Income Tax Severed Letters 14 January 2015

This morning's release of 20 severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA requires reporting of corporate websites only when they directly generate revenue

Sched. 88 to the T2 corporate return requires the reporting of websites from which the corporation earns income. CRA interprets this as referring only to sites which "directly generate income," so that sites which only provide information would not be reportable – whereas, for example, bank sites which generate banking charges to the bank would be reportable.

Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 27, 2014-0538211C6 F under s. 150(1)(a).

Gaumond – Tax Court of Canada finds that a settled debt is not disposed of to the debtor

The taxpayer renounced debt owing to him by his small business corporation pursuant to a bankruptcy proposal.  Lamarre J found that, in the absence of a provision similar to s. 84(9) deeming the debt to have been disposed of to someone, all the taxpayer had was a disposition of the debt rather than a disposition to another person, so for that reason alone he did not have a business investment loss.  Furthermore, the French version of the BIL definition requires that such disposition be to a person with whom he did not have a non-arm’s length relationship, and this also could not be demonstrated.  (The English version, which she did not refer to, states a positive requirement that the disposition be to an arm’s length person, which more clearly was not satisfied.)

Notwithstanding its protestation to the contrary, s. 84(9) was not enacted "for greater certainty."  This indicates that the CRA position (e.g., in 2012-0448681E5 and 2010-0385771E5), that a non-resident capital beneficiary whose interest is satisfied is thereby disposing of property to the resident trust, is wrong.

Neal Armstrong.  Summary of Gaumond v. The Queen, 2014 TCC 339, under s. 39(1)(c).

Brown – Federal Court of Appeal recognizes, but finds inapplicable, a doctrine of statutory voidness for uncertainty

In rejecting a submission of a self-represented taxpayer (er, rather, natural person) that definitions in the Act, such as of "taxpayer" and "business," are so vague as to render the Act null and void, Webb JA quoted with approval a statement in the Supreme Court that "a law will [only] be found unconstitutionally vague if it so lacks in precision as not to give sufficient guidance for legal debate."

Neal Armstrong. Summary of Brown v. The Queen, 2014 FCA 301 under Statutory Interpretation – Resolution of Ambiguity.

New FAPI pick-up rule (similar to Code s. 951(a) rule) is on hold for reworking

Proposed ss. 91(1.1) and (1.2) would now potentially require a FAPI pick-up where a CFA interest has been disposed of before year end, so that the FAPI pick-up generally will not now be avoided through not holding the CFA at that year end. The comparable U.S. rule is that pro rata portions of Subpart F income must be recognized unless the disposition occurs in the first 30 days of the CFC's taxable year and the sale is to a non-U.S. person.

This proposed rule was not included in the recently enacted Bill C-43 because it is being reworked by Finance.

Neal Armstrong. Summary of Nathan Boidman, "Canada Augments International Tax Rules", Tax Management International Journal, Vo. 43, No. 12, December 12, 2014, p. 759 under s. 91(1.1).

QROC elections (where available) should be considered for pre-acq dividends received by a partnership

Pre-acquisition surplus dividends received on foreign affiliate shares held by a partnership with Canadian corporate partners do not reduce the adjusted cost base to it of those shares.  Instead, the consequences of the dividend are deferred until either those shares or the partnership interest are disposed of, with the result that the Canadian corporate partners realize a corresponding gain or increased proceeds of disposition at that time – even where such disposition otherwise would occur on a rollover basis.

This result can be avoided if any such distributions are made by the foreign affiliate as capital distributions to the partnership and are electively treated as qualifying returns of capital. However, this solution will not be available if capital distributions are not permitted or practicable in the particular foreign jurisdiction.

Neal Armstrong.  Summary of Geoffrey S. Turner, "ACB Adjustments for Foreign Affiliate Shares Held Through Partnerships", International Tax (Wolters Kluwer CCH), No. 79, December 2014, p. 1 under s. 92(5).

Al-Hossain – Tax Court of Canada states that a declaration of trust cannot have a backdated effective date

Where two unrelated individuals purchase a new home jointly, each is required to satisfy the requirements for the new housing GST/HST rebate including that they each must occupy the home. Although Davidson adopted the dubious proposition that a non-occupying co-purchaser will scupper the rebate even if she is only a registered co-owner and is acquiring no beneficial interest, but this seems to have been implicitly rejected in Goyer.

Although her reasons are quite unclear on this point, Lyons J in Al-Hossain may have followed the Davidson rather than the Goyer approach. However, in any event, she went on to reject a submission that the non-occupying co-purchaser (who had signed the ownership and mortgage documents only to facilitate mortgage financing for his friend and appears to have been only an accommodation party) held his co-ownership interest only as bare trustee, as evidenced in a statutory declaration made less than three weeks after closing, stating:

The creation of a trust must be properly documented containing the requisite elements of a trust, dated, signed and in existence prior to or contemporaneous with the matter that is the subject of the trust arrangement.

She did not cite authority for this statement, which is inconsistent with judicial findings that property has been held on and after a date on trust or a resulting trust notwithstanding the lack of a contemporaneous trust deed or other document (Nelson, Bouchard).

Continued judicial statements like this might embolden CRA to resuscitate the position in the defunct IT-216 that it will not accept that a corporation holds real estate for its shareholder unless the declaration of trust was signed at the time of the property’s acquisition.

Neal Armstrong. Summaries of Al-Hossain v The Queen, 2014 TCC 379 under ETA s. 254(2) and General Concepts – Effective Date.

MBI Properties – High Court of Australia notes that, on general principles, an executory contract entails two supplies for GST purposes

The High Court of Australia observed that (under general principles):

[The] entering into and performing [of] an executory contract will in general involve the supplier making at least two supplies: a supply which occurs at the time of entering into the contract, in the form of both the creation of a contractual right to performance and the corresponding entering into of a contractual obligation to perform; and a supply which occurs at the time of contractual performance, even if contractual performance involves nothing more than the supplier observing a contractual obligation to refrain from taking some action….

This is a helpful backdrop for the rule in ETA s. 133, which assimilates all subsequently provided property or services under an agreement to the supply which occurs when the agreement is entered into (subject to exceptions, e.g., for leases under s. 136.1).

Neal Armstrong. Summaries of Commissioner of Taxation v MBI Properties Pty Ltd, [2014] HCA 49 under ETA s. 133 and s. 123(1) – supply.

CRA considers that an ITC generated to the transferor in a s. 85(1) drop-down of a building does not reduce the building UCC for s. 85 elected amount purposes

A registrant, such as a bank, acquires a building for $100, but for exempt use, so that its capital cost is $113 including non-creditable HST.

After the building has appreciated and CCA claims have reduced the undepreciated capital cost to $90, the building is transferred under s. 85(1) to a subsidiary.  Because this is a taxable sale for HST purposes, the bank now is entitled to a $13 input tax credit.  ITA s. 248(16) deems this ITC to be government assistance, so that for s. 85(1) purposes the building UCC is reduced from $90 to $77.  Right?

CRA considers that because s. 85(1)(e) refers to the UCC of the building "immediately before" its disposition, whereas no entitlement to claim the ITC arises until the consideration for the drop-down becomes payable, the UCC for purposes of determining a permissible elected amount is $90, not $77.  CRA appears to be effectively ignoring s. 248(16)(a)(i), which deems the ITC to have been received as government assistance when the $13 of HST originally was payable, because that does not make any sense under facts such as these.

Neal Armstrong.  Summary of 27 November 2014 T.I. 2013-0503861E5 F  under s. 85(1)(e).

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