News of Note
CRA considers that a corporation can claim a s. 42(1)(b) loss after (per IT-126R2) it has been wound up
Email this ContentIn IT-126R2, CRA indicates that it will accept that a corporation "has been wound up" if it has been liquidated and the only reasons for not yet filing articles of dissolution is outstanding litigation. CRA considers that if the corporation subsequently settles the litigation by making a payment that otherwise qualifies as a deemed capital loss under s. 42(1)(b)(ii) (e.g., pursuant to a previous share sale indemnity), it can claim that capital loss in the year of payment thereof (i.e., after it is considered for s. 88 purposes to have been wound up).
Neal Armstrong. Summary of 26 November 2014 T.I. 2014-0551641E5 F under s. 88(2).
CRA rules that a negative participation make-whole is not participating debt interest
CRA has ruled that a convertible debenture on which interest was payable in shares or cash did not give rise to participating debt interest, or to interest withholding to an arm’s length holder.
On conversion, a holder was entitled to receive a make-whole (generally payable in shares) computed as the value of foregone future interest but reduced by a percentage of the gain enjoyed by the holder on conversion – so that in a sense it had a negative participation feature. CRA also effectively ruled that the make-whole was not participating interest.
Neal Armstrong. Summary of 2014 Ruling 2013-0514551R3, amended by 2014-0536001R3 under s. 212(3) - participating debt interest.
CRA treats the granting of an emphyteusis as a part disposition of property rather than as a lease
CRA now considers that the entering into of an emphyteutic lease represents a part disposition of property rather than something analogous to the entering into of a common law lease. Therefore, any "rents" receivable must be recognized as proceeds of disposition at the time of grant rather than as amounts which can be recognized over time as they become receivable (although a s. 40(1) reserve may be available). This represents a reversal of a 2012 technical interpretation.
Neal Armstrong. Summary of 23 December 2014 T.I. 2013-0487791E5 F under s. 248(1) – disposition.
CRA considers that a B.C. community contribution company cannot qualify as an exempt NPO
The B.C. Business Corporations Act now allows for a "community contribution company" to do business and generate profits in the normal course of its commercial activities, while at the same time capping the dividends that can be paid out to shareholders. CRA considers that because the C3 is organized for profit (albeit limited profit), it will not qualify as an exempt NPO under s. 149(1)(l) – even if its articles stipulate that all its profits will be contributed to a worthy charity.
Neal Armstrong. Summary of 11 September 2014 T.I. 2014-0540031E5 under s. 149(1)(l).
Income Tax Severed Letters 4 February 2015
This morning's release of 19 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
2143569 Ontario – Ontario Superior Court finds that a registered recital of the current beneficial owner does not eliminate the Ontario land transfer tax deferral on a previous inter-affiliate transfer
The land transfer tax exemption in s. 3(9) of the Ontario Land Transfer Tax Act for inter-affiliate transfers of beneficial ownership takes the form of an application for a deferral of that tax with the tax then being conditionally eliminated after three years upon the satisfaction of specified conditions including that there has been no registration of a conveyance or instrument evidencing that disposition.
The Ministry of Revenue unsuccessfully took the position that the registration on title by the local City of a development agreement, which simply recited who was the current beneficial owner of the property, evidenced the fact that there had been a previous transfer (in an inter-affiliate transaction) of the beneficial ownership to that corporation. Lofchik J stated that "evidence of ‘the’ disposition would at the very least have to identify the entity disposing of the property," so that a bare recital of the current beneficial owner was not enough to oust the exemption.
Neal Armstrong. Summary of 2143569 Ontario Inc. v. Minister of Revenue, 2014 ONSC 4628 under Land Transfer Tax Act, s. 3(11)(a).
CRA considers rentals of recreational properties and of regular rental properties to be “similar” use
CRA somewhat generously considers that where insurance proceeds from the destruction of a year-round rental property are used to acquire chalets which will be rented out, the chalets generally will satisfy the requirement in s. 44(5)(a.1) of the involuntary-disposition replacement property rollover rules that their intended use is "a use that is the same as or similar to the use to which the taxpayer … put the former property." The wording used seems to imply that the replacement of rental properties of different types (e.g., apartments, shopping centres or office buildings) could satisfy this test.
Neal Armstrong. Summary of 13 November 2014 T.I. 2014-0535041E5 F under s. 44(5).
It may be negligent to advise the payment of assessed taxes to cut off interest
A non-resident corporation, which was assessed following many years of not filing T2 returns, was advised to pay the assessments, and then "successfully" objected to the assessments by establishing that its income was Treaty-exempt.
CRA now has informed the advisers that it is precluded by s. 164(1) from refunding this overpayment of tax because the corporation did not file its T2 returns for the years in question within three years from the ends of those years, i.e., by paying taxes which were not owing as a substantive matter, the corporation supposedly has lost the ability to get that money back!
Neal Armstrong. Summary of 5 November 2014 T.I. 2014-0538901E5 under s. 164(1).
CRA suggests that s. 55(5)(f) designations are unnecessary
CRA stated that its long-standing practice "is to apply subsection 55(2) only to the excess of the taxable dividend paid on a share over the safe income on hand attributable to that share, when issuing an assessment based on subsection 55(2)." Accordingly when a corporate shareholder receives a dividend in excess of SIOH and does not make s. 55(5)(f) designations to carve the dividend up into safe income and taxable dividends, CRA will only apply s. 55(2) to the portion of the dividend in excess of SIOH - so that, by implication, the shareholder is permitted to do the same on a self-assessment basis.
Neal Armstrong. Summary of 16 June 2014 STEP Roundtable Q. 7, 2014-0522991C6 under s. 55(2).
Techtronic Industries – Quebec Superior Court finds the place of supply of goods for QST purposes was the customer destination rather than place of their legal delivery into FedEx’s hands
Although in broad brush terms, the situs of sales of goods for GST/HST purposes is governed by the place of legal delivery, this result is overridden by Sched. IX, Pt. II, s. 3 of the interprovincial place-of-supply rules, which deems the place of supply to be in the province of the customer, notwithstanding that legal delivery occurs in the province of the supplier, where the goods are shipped by a common carrier retained by the supplier. Accordingly, under the equivalent Quebec rule, a supply of goods was deemed to occur in Quebec where the goods were delivered FOB the Toronto distribution centre but with the Ontario supplier retaining the "common carrier" (FedEx) for shipment to the Quebec destination.
Neal Armstrong. Summary of Techtronic Industries Canada Inc. v. Agence du revenu du Québec, 2014 QCCQ 7394 under ETA, Sched. IX, Pt. II, s. 3.