News of Note
CRA considers that rodents are best eaten
Email this ContentCRA now construes "livestock" more narrowly than as stated in IT-427R, so that it considers that raising rodents qualifies as farming only if they are sold as food rather than as pets.
Neal Armstrong. Summary of 13 March 2015 T.I. 2015-0564611E5 under s. 248(1) – farming.
CRA rules on CCPC split-up which was structured to avoid Part IV tax circularity
Where the distributing corporation (DC) in a butterfly is a Canadian-controlled private corporation with refundable dividend tax on hand, a circular computation of Part IV tax under s. 186(1)(b) arises if the butterfly mechanics entail it both paying and receiving a deemed dividend from the transferee corporation (TC), as the resulting generation of a dividend refund to it will trigger Part IV tax and an RDTOH addition to TC which, in turn, will trigger Part IV tax and a dividend refund on the deemed dividend going the other way, and so on.
In a butterfly reorganization for the split-up of DC into three TCs, this circularity problem was solved by having DC transfer its properties to respective new Subcos of each TC, so that no s. 186(1)(b) Part IV tax was generated on the redemption of the prefs received by DC as consideration on this transfer. The Subcos then were wound-up into the respective TCs, and DC was wound-up under s. 88(2) into the TCs, with s. 186(1)(b) applying non-circularly to the resulting s. 88(2)(b)(iii) deemed dividends.
Neal Armstrong. Summary of 2014 Ruling 2013-0513211R3 under s. 55(1) – distribution.
FirstService is proposing a butterfly spin-off of over half its assets
FirstService is proposing its separation into two public corporations (FirstService and Colliers) pursuant to a butterfly spin-off. The residential real estate and property services business of FirstService will be spun-off as New FSV (to be renamed FirstService), and (old) FirstService following its amalgamation with a subsidiary (FCRESI) will carry on the (retained) commercial real estate services division as Colliers. Completion of the arrangement is conditional inter alia on a Canadian tax ruling and a U.S. tax opinion of PWC respecting treatment as a Code s. 355 spin-off.
The spun-off company (FirstService) apparently will have greater value than the distributing corporation (Colliers). A complication relates to there being minority shareholders of FCRESI. Arrangements for a purchase of their holdings in exchange for Colliers shares will be entered into before the Arrangement, but will be timed to occur immediately after the butterfly distribution so as not to run afoul of s. 55(3.1)(a). There is no intended compliance with the types-of-property rules in reliance on s. 55(3.02).
Neal Armstrong. Summary of FirstService Circular under Spin-Offs & Distributions – Butterfly spin-offs.
CRA rules on the s. 85(1) transfer as capital property of farm land potentially held for subdivision and sale
"Eligible property" for s. 85 purposes does not include real estate inventory. Property transferred on a single-wing split up butterfly of a distributing corporation, whose farm land was being used on a share-crop basis to a neighbouring farmer, included a property which had been rezoned to permit the severance and sale of separate lots – which had already occurred and might continue to occur subsequently. The wording of the ruling letter suggests that CRA was not especially troubled by the proposition that it was capital property.
CRA did not comment on whether the property being used on a share-crop basis was a business or investment-type property for butterfly purposes, although in other contexts (e.g., 2015-0567231E5) it has indicated that it regards share-cropping as rental rather than business use.
Neal Armstrong. Summary of 2014 Ruling 2013-0498651R3 under s. 55(1) – Distribution.
Leasing agent commissions are currently deductible
CRA treated commissions paid by an owner of rental buildings to leasing agents as currently deductible, stating that they "gave rise only to short term advantages – immediate or at most limited to the term of the lease" and they "must be renewed each year."
Neal Armstrong. Summary of 23 December 2014 Memo 2014-0535921I7 F under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs or running expense.
CRA will not accept an eligible dividend election conditional on an unsuccessful appeal generating a GRIP balance
If a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), CRA is willing to hold the processing of a s. 184(3) election (to convert the dividend into a taxable dividend so as to eliminate the Part III tax) in abeyance, so that the election will be treated as void if the taxpayer’s objection is successful, and treated as timely filed if the objection (or subsequent appeal) is dismissed.
CRA is unwilling to extend this policy to the payment of a dividend thought to be made out of earnings eligible for the small business deduction (i.e., earnings thought not to generate a GRIP balance), so that no eligible dividend designation was made, where the corporation then is assessed to deny the deduction – so that CRA will not accept and hold in abeyance an eligible dividend designation made shortly after the assessment which is conditional on the corporation being unsuccessful in establishing that the earnings were eligible for the deduction.
Neal Armstrong. Summary of 12 March 2015 T.I. 2014-0541991E5 under s. 89(14.1).
CRA indicates that a trust declaration of an amount not yet received by it might be eligible for a separate “right or thing” return of a deceased beneficiary stating
A corporation held by a discretionary trust declares a dividend, with the trustees then resolving that the trust will pay the dividend, on receipt, to an individual beneficiary – who dies before the dividend is received by the trust. CRA indicated that it was possible that on death the trust declaration amount would be considered to be a "right or thing" of the individual for s. 70(2) purposes, stating, "an amount which a taxpayer has the right to receive at the moment of his or her death and whose value is determinable can constitute a right or thing…even if it is not payable at the moment of death because it is subject to a condition."
Neal Armstrong. Summary of 9 March 2015 T.I. 2012-0469761E5 F under s. 70(2).
CRA finds that a forfeited land-sale deposit was proceeds of a security interest rather than of taxable Canadian property
CRA considers that a sales deposit forfeited to a vendor represents proceeds of a contractual right. If the sale which did not close was of land in a common law province, doesn’t this mean that the forfeited deposit was proceeds of taxable Canadian property to a non-resident vendor given that the sales contract represented an equitable interest in land?
Not so. CRA considers that the disposition is of "a security interest derived by virtue of an agreement for sale," so that the disposed-of interest is deemed by s. 248(4) not to be an interest in real property, i.e., s. 116 (and presumably s. 115(1)(b)) would not apply.
Neal Armstrong. Summary of 16 March 2015 Memo 2013-0479861I7 under s. 248(4).
Cloud computing may facilitate MNE tax avoidance
Use of cloud computing makes it easier for a multi-national enterprise to avoid having a server (viewed as a potential permanent establishment) in a source jurisdiction and also may facilitate disguised transfers of intangibles under cover of the Cloud.
Neal Armstrong. Summaries of Mateusz M. Krauze, "Impact of Cloud Computing on Permanent Establishments Under the OECD Model Tax Convention," Tax Management International Journal, Vol. 44, No. 3, March 13, 2015, p. 131 under Treaties – Art. 5, Art. 9.
Presidential MSH Corp. – Tax Court of Canada finds that a definition of a noun referenced a remotely-placed verb
In the face of some submissions not made in Tawa, Graham J. revisited the question as to whether the refundable dividend tax account of a taxpayer is reduced by amounts which the taxpayer could have claimed, but failed to timely claim, as dividend refunds. S. 129(1) provides that the Minister "may...refund...an amount (...[the] "dividend refund"...) equal to [a formula amount]." Notwithstanding that "refund" is first used here as a verb (see also IA, s. 33(3)), Graham J found that the defined term refers to a refund of the formula amount, rather than to the formula amount whether or not refunded, so that the taxpayer’s RDTOH was not reduced by unclaimed dividend refunds. Although "dividend refund" was used inconsistently in the Act, he agreed with the purposive analysis in Tawa.
Neal Armstrong. Summaries of Presidential MSH Corporation v. The Queen, 2015 DTC 1101, 2015 TCC 61 under s. 129(1) and Statutory Interpretation - Interpretation Provisions.