News of Note
New gifting rules generally deny a donation credit for testamentary private company share gifts to public foundations or charitable organizations
Email this ContentA gift of non-qualifying securities to an arm’s length public foundation is generally excepted by s. 118.1(19) from the gift denial rule in s. 118.1(13). However, for testamentary gifts made after 2015, s. 118.1(5)(a) provides that a gift by will is deemed to be made by the estate, and s. 251(1)(b) continues to deem a personal trust to not deal at arm’s length with a person which is beneficially interested in it – such as a public foundation that is entitled to a testamentary gift. Accordingly, a testamentary gift of shares which are non-qualifying securities to a public foundation will not be an excepted gift.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q.12 under s. 118.1(19).
S. 84(2) generally should not apply to a hybrid sale transaction
Hybrid transactions typically are engaged in where some of the shareholders of Target (a small business corporation) wish to utilize the capital gains exemption whereas the purchaser wishes to achieve a step-up in the tax basis of Target’s assets. The transactions might entail the sale of some Target shares to the purchaser to utilize capital gains exemption, sale of Target assets (preferably mostly goodwill rather than appreciated real estate in light of Part IV tax considerations) to the purchaser and redemption of Target shares held by purchaser.
CRA seems to accept that s. 84(2) would not apply to recharacterize the proceeds as dividends from Target where the vendor shareholders and the purchaser are dealing at arm's length and, essentially, the purchaser is using its own funds to purchase Target's shares.
In a hybrid transaction in which a redemption of the shares will trigger a deemed dividend, an exemption in s. 191(4) will treat the deemed dividend as an excluded dividend, so as to exempt it from Part VI.1 tax, where the specified amount for which the shares are redeemed does not exceed the fair market value of the consideration for which they were issued. Although at the 1989 CTF Roundtable, CRA indicated that the specified amount must be a dollar amount and cannot be fixed at a later date, or be subject to a price adjustment clause or described by way of a formula, "in a private ruling, the CRA accepted a redemption amount that was subject to a price adjustment clause where a separate specified dollar amount was also provided."
Neal Armstrong. Summaries of Charles P. Marquette, "Hybrid Sale of Shares and Assets of a Business," Canadian Tax Journal, (2014) 62:3, 857 – 79 under s. 84(2) and s. 191(4).
McNally – Federal Court finds that CRA’s program, of delaying assessments of returns claiming leveraged donation credits, is illegal
CRA sent a letter to the taxpayer, along with other participants in various leveraged donation tax shelters, stating that his return would not be assessed until the tax shelter was audited - unless he withdrew his donation claim. CRA admitted that the main reason was "to discourage participation in these tax shelters."
Harrington J has ordered CRA to assess the taxpayer's return within 30 days, stating that it was "plain and obvious that Mr. McNally's rights have been trampled upon for extraneous purposes."
Neal Armstrong. Summary of McNally v. MNR, 2015 FC 767 under s. 152(1).
CRA is considering whether some types of US partnerships are corporations for Canadian tax purposes
CRA accepts that separate legal personality is not a touchstone for classification of an entity as a corporation so that, for example, the existence of separate legal personality for various types of US limited partnerships does not cause them to be corporations rather than partnerships. However, CRA is considering whether Florida limited liability limited partnerships and limited liability partnerships are corporations or partnerships. CRA appears to be tempted by the view that they are corporations given that "they seem to have both legal personality and full, or at least very extensive, limited liability for all members," i.e., liability protection which "seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces." CRA is inviting comments on this issue.
CRA also noted that it accepts that LLC are corporations. The reasoning in Anson suggesting that an LLC is transparent respecting the treatment of its income would also suggest that LLLPs and LLPs are partnerships.
Neal Armstrong. Summary of 28 May 2015 IFA Roundtable, Q. 3, 2015-0581511C6 under s. 96.
Anson - UK Supreme Court finds that an LLC member had a personal (non-proprietary) entitlement to his share of LLC profits as they arose rather than only when they were distributed to him
The First-tier Tribunal made a finding that profits of a Delaware LLC belonged to the members as they arose, so that a UK member (Mr Anson) was taxed on the same income in both countries, and was entitled to double taxation relief under the applicable provision in the US-UK Treaty.
Lord Reed, speaking for the UK Supreme Court, has confirmed this approach. However, at the same time he found that such right of the members to their share of the profits was a personal right - rather than a proprietary right (such as that of the members of an English or Scottish partnership).
It is not at all clear that this decision should be neatly summarized as finding that an LLC (or, at least, the LLC in this case) is fiscally transparent. The findings suggest a continuum, starting with an English partnership, followed by a Scottish partnership (which, like many US LPs but unlike an English (or Canadian) partnership has legal personality but whose members, like a conventional partnership have, at least collectively, a proprietary interest in the partnership assets), an LLC (with a personal but not proprietary right of the members to the profits as they arise), and a conventional corporation. The current CRA position (at least before considering this case) is that most or all LLCs are fiscally opaque (see 25 October 1994 T.I. 941750, and see also TD Securities).
The relevant Treaty provision required that the UK tax on the LLC distributions be "computed by reference to the same profits or income by reference to which the United States tax [was] computed." Lord Reed stated:
The words "the same" are ordinary English words. ...[A] degree of pragmatism in their application may be necessary...for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions.
The same pragmatic approach is appropriate in applying the exclusion from the anti-hybrid rule in Art. IV, para. 7(b) of the Canada-US Treaty that is available where income derived from a hybrid entity is treated the same as if the entity were not a hybrid.
Neal Armstrong. Summary of Anson v. HMRC, [2015] UKSC 44, under Treaties – Art. 24, Art. 3.
CRA treats a distribution by a non-resident trust to a Canadian beneficiary, of IRA proceeds previously received by it, as income under s. 104(13)
CRA considers that proceeds from an IRA of a deceased U.S. resident which were distributed by her estate to a U.S.-resident trust, and by it to Canadian-resident beneficiaries, were income to them under s. 104(13)(a). The brief reasons cite s. 56(1)(a)(i)(C.1) (which requires the recognition by Canadian residents of IRA distributions as income). Although CRA did not cite s. 250.1(b) (stating that "a person for whom income for a taxation year is determined in accordance with this Act includes a non-resident person"), the logic may be that if the IRA proceeds instead are received by a non-resident trust, their distribution by that trust is income to the Canadian resident under s. 104(13)(a) – notwithstanding that the operation of the Canadian rules for trust taxation have no relevance to that trust (see also 2012-0448021E5).
As the distribution to the Canadian beneficiary is income to it, the U.S. withholding tax thereon of 15% (which CRA indicated would qualify as a non-business income tax) presumably would qualify for a foreign tax credit.
Summary of 2015 Ruling 2015-0570291R3 under s. 104(13).
Berger – Tax Court of Canada finds that an unsuccessful-to-date blog following the Maple Leafs was a business
A laid-off sports announcer who started a sports blog following the Maple Leafs was able to deduct his losses for the first 18 months (the period under review) notwithstanding his modest revenues and the personal element (qua sports fan and blogger). C. Miller J stated that the taxpayer’s course of conduct was "not so devoid of commercial reasoning to conclude the venture was personal and nothing more."
Neal Armstrong. Summary of Berger v. The Queen, 2015 TCC 153 under s. 3(a) – business source/reasonable expectation of profit.
CRA comments on the application of s. 74.4(2) to a freeze transaction effected by a family trust in favour of a new family trust
S. 74.4(2) imputes interest income where a resident individual transfers property to a non-SBC corporation (which is deemed under s. 84(9) or 51(1)(e) to occur on a s. 86 or 51 reorganization) if one of the main purposes of the transfer was to reduce the individual’s income and benefit designated persons respecting the individual (e.g., non-arm’s length minors) who also will be specified shareholders (under a modified definition).
CRA found that where a family trust which held common shares of the corporation and with minor (grandchildren) beneficiaries (Trust A) did a s. 51 exchange of its common shares for preferred shares, and a new family trust with a similar but expanded list of beneficiaries (Trust B) subscribed for new common shares, the grandchildren would be considered to be designated persons in respect of the old trust, viewed as the "individual" for s. 74.4(2) purposes. In particular, CRA stated "that a designated person in respect of Trust A would include…a person under 18 years who would be beneficially interested in Trust A if subsection 248(25) applied without taking into account clauses (b)(iii)(A)(II) to (IV), or a person under 18 years who did not deal at arm’s length with a [beneficially interested] person… ."
CRA was not asked the further question how the purpose test in s. 74.4(2) could or should apply where the designated persons in question (the grandchildren) are already beneficiaries of the old trust (Trust A).
Neal Armstrong. Summary of 2 June 2015 T.I. 2015-0570071E5 F under s. 74.4(2).
CRA rules that s. 261(21) does not apply to FX hedging with NR affiliates who are not subject to Canadian tax
On its face, s. 261(21) denies losses incurred, by a taxpayer who has made a functional currency election, in transactions (in this case, FX hedging contracts) with related persons who do not have the same tax-reporting currency at any time while those losses accrued. However, CRA has ruled that it will not apply s. 261(21) where the related (non-resident) affiliates in question "are not subject to tax under the Act on any amount included in their respective Canadian tax results."
Neal Armstrong. Summary of 2015 Ruling 2014-0561001R3 under s. 261(21).
Income Tax Severed Letters 30 June 2015
This morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.