News of Note
CRA notes that no valuation is required where drilling rights are granted in consideration for a royalty
Email this ContentIf the holder of a patent licenses it for a royalty, the royalty is only recognized as it is earned. Contrast this with an individual who grants drilling rights over his freehold property in consideration for annual royalties payable out of any oil and gas production. He will be considered to have acquired a Canadian resource property (i.e., the royalty) giving rise to an immediate addition to his "CCOGPE" account equal to the fair market value of that royalty right; and to have also disposed of a Canadian resource property (i.e., by granting of the drilling rights) so that their fair market value is subtracted from his CCOGPE account. However, CRA recognizes that the drilling rights would be considered to have the same value as what was paid for them (the royalty). Thus the two items would offset so that "a formal valuation of the right is not required."
In the case of a non-resident individual receiving the royalties, CRA was completely non-committal as to whether they were taxable to him under s. 115(1)(a)(ii) or (iii.3) rather than s. 212(1)(d)(v).
Neal Armstrong. Summaries of 23 January 2015 T.I. 2013-0509771E5 under s. 66.4(5) – CCOGPE, s. 115(1)(a)(iii.1), Treaties – Art. 6, Art. 12 and Reg. 805.
An estate cannot claim a s. 42(1)(b) capital loss for settling an indemnity claim against the deceased
Death also results in the loss of the ability to claim a s. 42(1)(b)(ii) capital loss respecting an indemnity payment which becomes payable after death (i.e., neither the deceased nor the estate can claim it).
Neal Armstrong. Summary of 19 January 2015 T.I. 2013-0511381E5 F under s. 42(1).
Repsol Canada – Tax Court of Canada finds that an LNG conversion terminal and jetty were one asset for the processing of goods and not for natural gas distribution
C.Miller J found that the LNG terminal and jetty in St. John were one asset for CCA purposes because the jetty contributed to the process at the terminal of converting the LNG into gas form. Before a change in the rules, that asset qualified as a Class 43 property because it was engaged in "processing" (as conversion from LNG to gas form represented a change in the goods, and rendered those goods more valuable) and it was not a "distribution" asset: distribution did not commence until at least the delivery of the (converted) gas to the transmission pipeline.
Neal Armstrong. Summary of Repsol Canada v. The Queen, 2015 TCC 21 under Sched. II, Class 1.
CRA finds that there is implied receipt of deemed proceeds
S. 69(11) can apply to deem a taxpayer which thought it disposed of property on a rollover basis to have instead received higher proceeds of disposition (without explicitly deeming the taxpayer to have received those additional deemed proceeds) whereas the replacement property rollover in s. 44 potentially applies to "an amount that has become receivable by a taxpayer." CRA has now stated that "while subsection 69(11) does not specifically deem the taxpayer to have an amount receivable as proceeds of disposition… CRA will generally accept that this will not, in and by itself, prevent a taxpayer from making [the replacement property] election."
Essentially the same point arises elsewhere, e.g., presumably deemed proceeds of a REIT should also be considered to be "gross REIT revenue," i.e., amounts which are "received or receivable" by it.
Neal Armstrong. Summary of 23 December 2014 T.I. 2014-0551841E5 under s. 44(1).
CRA considers that a corporation can claim a s. 42(1)(b) loss after (per IT-126R2) it has been wound up
In 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).