News of Note
Standard Life –Tax Court of Canada restrictively interprets s. 138(11.3), thereby casting doubt on a favourable CRA interpretation of the s. 95(2)(k) fresh start rule, and applies a “window dressing” doctrine
Email this ContentPrior to the introduction of mark-to-market rules in 2007, Standard life Assurance Company of Canada (which to that point only carried on business in Canada) scrambled to achieve a step-up to fair market value in the cost amount of its assets by purporting to commence carrying on business in Bermuda in December 2006. It relied on the s. 138(11.3) rule, which defined an "insurer" as a Canadian life insurer which also carried on business in another country and provided that where "designated insurance property of the insurer for a taxation year [2006], was owned by the insurer at the end of the preceding taxation year [2005] and was not designated insurance property of the insurer of the insurer for that preceding year," such property could be bumped in the 2006 return.
Pizzitelli J found that in order for s. 138(11.3) to apply, it was necessary for the taxpayer to qualify as an "insurer" in the preceding taxation year (2005) rather than only in the current year, so that the bump was not available. In contrast, in 2014-0536581I7 CRA found that the requirement, in the similar fresh start rule in s. 95(2)(k), that the "affiliate" whose property is sought to be bumped have carried on the business in question in the preceding year, was satisfied notwithstanding that it was not an affiliate in the preceding year.
In any event, the intended Bermuda business did not commence until 2008. In the meantime, there were just a few isolated acts, such as hiring a bookkeeper with essentially nothing to do, entering into a reinsurance contract with an affiliate which was backdated to December 2006, and getting a Bermuda licence which prohibited any business with third parties. This all was "window dressing" - a term which Pizzitelli J defined as "a deception that is not about the legal validity of a transaction, as in sham, but about the taxpayer’s intention for entering into the transaction."
Neal Armstrong. Summary of Standard Life Assurance Company of Canada v. The Queen, 2015 TCC 97 under s. 138(11.3).
Under the new charitable credit rules, it may be desirable for executors to complete gifts within 3 years of the death
Although for deaths after 2015, s. 118.1(5) will deem gifts made by the deceased’s will to have been made instead by his estate at the time of transfer of the property by it to the donee, the executors will be able to allocate such gifts between the deceased and the deceased's estate, provided that the estate is a "graduated rate estate" at the time the gift is made. This is potentially problematic for gifts made out of the residue of a complex estate or an estate in litigation, so that by the time the transfer is made the estate may no longer qualify as a graduated rate estate.
Neal Armstrong. Summary of Jessica Fabbro, "Dying to Donate – Determining Charitable Donation Tax Credits on Death after 2015", Tax Topics, Wolters Kluwer, No. 2249, April 16, 2015 under s. 118.1(5.1).
CRA considers individuals paid on a per diem or per job basis to be deemed employees
Employment is deemed to include an "office," which is defined to include a position "entitling the individual to a fixed or ascertainable stipend or remuneration." CRA considers that this includes a position entitling the individual to a per diem amount for each day of sitting or other work or (in this case) a fixed amount per completed file – even though the number of sittings or files would not be known until towards the end of the year.
This suggests, for example, that CRA would consider a trustee of a REIT who get s paid a fixed amount per board meeting to be a deemed employee (and thus eligible for s. 7 treatment).
Neal Armstrong. Summary of 7 November 2014 Memo 2014-0549861I7 under s. 248(1) – office.
CRA finds that a discretionary trust can in effect allocate a safe income dividend received by it to a corporate beneficiary
Opco pays a dividend on shares held by a discretionary trust equal to the safe income on hand of those shares, and the trust then distributes and allocates all of the dividend to a corporate beneficiary ("Holdco"), with the amount being deemed to be a dividend in Holdco’s hands as a result of a s. 104(19) designation. CRA accepts that "it would be reasonable to consider that the amount of the dividend allocated to Holdco…would be increase its safe income by an equivalent amount."
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 7, 2014-0538061C6 F under s. 55(2).
CRA finds that no s. 39(2) gain arises on a CFA distribution of U.S.-dollar stated capital
Canco used U.S. dollars to subscribe for common shares of a non-resident sub ("Foreignco"), having a U.S.-dollar stated capital. CRA confirmed that no s. 39(2) FX gain arose when (prior to 2011 and after appreciation in the U.S. dollar), Canco received a U.S.-dollar distribution of a portion of this stated capital. It reasoned that the U.S.-dollar appreciation increased the resulting ACB grind under s. 53(2)(b)(ii), thereby also increasing the ultimate capital gain when the Foreignco shares were disposed of (or when a negative ACB gain arose under s. 40(3).) Therefore, recognizing a s. 39(2) FX gain on the distribution would result in double taxation.
A similar approach would have applied if there had been a (post-2011) qualifying return of capital.
Neal Armstrong. Summary of 22 January 2015 Memo 2014-0560571I7 under s. 39(2).
Income Tax Severed Letters 29 April 2015
This morning's release of 18 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Kruger Wayagamack – Tax Court of Canada finds that USA restrictions on a majority shareholder’s ability to take strategic decisions negatived de jure and de facto control
Kruger Inc. was the 51% shareholder of the taxpayer and was entitled under the unanimous shareholders agreement between it and the other shareholder (SGF) to appoint three of the five directors – so that it obviously controlled de jure the taxpayer.
Not so fast! Jorré J found that such a wide range of decisions were specified in the USA to require unanimous director (or shareholder) approval – to the point that he characterized Kruger as having control of only operating, and not strategic, decisions – that Kruger did not have de jure control.
Kruger also did not have de facto control, notwithstanding that is was appointed the manager and marketing agent for the taxpayer under long-term agreements.
However, the taxpayer was associated with Kruger under s. 256(1.2)(c) as the Kruger bloc had more that 50% of the fair market value of all the shares. The 49% bloc might have had a greater value to SGF than that of the 51% bloc to Kruger because of a contingent put right accorded to SGF under the USA. However, since this put could not be assigned to any third-party purchaser, it did not affect the shares' FMV.
Neal Armstrong. Summary of Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90 under s. 256(1)(a) and s. 256(1.2)(c).
CRA rules on the elimination of a REIT sub trust through s. 107.4 transfer to a new “in house” MFT and a s. 132.2 merger of MFT into REIT
CRA has ruled respecting the elimination of an open-end listed mutual fund trust (which likely is a REIT) of its subtrust on a rollover basis. First, the subtrust will transfer its assets (being units of subsidiary real estate partnerships and the shares of the GPs) under s. 107.4 to a newly-formed subsidiary unit trust ("MFT") of the REIT, with a small percentage of MFT's units then being distributed to the REIT unitholders in order to qualify MFT as a mutual fund trust. MFT then will be merged into the REIT under s. 132.2. These same general mechanics have been ruled on previously (see s. 132.2 – qualifying exchange).
It was contemplated that the transaction would be implemented without a plan of arrangement (e.g., the second stage of the s. 132.2 merger is to be implemented through a unilateral redemption of units). The proposed transactions specify that the MFT’s Canadian-resident trustee will not be a director of any of the GPs.
Neal Armstrong. Summary of 2013 Ruling 2013-0492731R3, amended by 2014 Supplement 2014-0518511R3 under s. 107.4(1).
CRA finds that a day-trading MFT can allocate capital gains to its unitholders
A mutual fund trust which engages in day trading on margin in Canadian securities nonetheless can make the election under s. 39(4) for capital gains treatment, and make a s. 104(21) designations on its distributions so that its unitholders (including, apparently, traders such as investment dealers) will receive capital gains treatment on the distributions. However, making the election may suggest that the mutual fund trust's expenses do not satisfy the income-producing purpose test in s. 18(1)(a) (although this may not matter in light of specific expense deduction provisions such as s. 20(1)(bb)).
Day trading generally would not be inconsistent with having an undertaking of investing its funds in property as required by s. 132(6).
Neal Armstrong. Summaries of 24 March 2015 T.I. 2012-0470991E5 F under s. 39(5)(a), s. 132(6) and s. 9 – capital gain v. profit – shares.
CRA implicitly finds that creditors’ approval of a CCAA plan of compromise for a trust which was economically captive to them did not cause them to act in concert
CDS trusts entered into credit default swaps with counterparties desiring credit protection for their bond portfolios and funded their purchase of the required collateral for their CDS obligations by issuing short-term notes. Most or all of these trusts defaulted on their notes in the 2008 financial crisis.
One such trust settled litigation with its non-resident CDS counterparty (the "Bank") under a compromise which was voted on and approved by the Noteholders under a CCAA plan. Under this settlement, the Bank made payments under the CDS, which were applied by the Trust to repay all of the unpaid Note principal but only a portion of the unpaid interest (with recourse for such interest obligations being specified in the CCAA plan to be only to the Trust assets.) In the meantime, the Bank had acquired some of the Notes directly and through non-resident subsidiaries.
CRA ruled that interest so paid to the Bank and its subs was not "participating debt interest," stating that the fact that the interest paid was "based on the available cash in the Trust…does not impact the conclusion that the interest… is not being computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion."
CRA also ruled that the entering by the Bank and its subs into the settlement would not by itself result in their being considered to not deal at arm's length with the Trust. This did not directly address the more interesting issue of whether the Noteholders collectively (and, therefore, perhaps each Noteholder, such as the Bank, individually) should be considered to be not dealing at arm’s length with the Trust having regard to the Trust being economically captive to its Noteholders (i.e., no one else in the circumstances could receive any Trust distribution). However, this ruling may imply that CRA was comfortable with this issue, which sounds right given that voting on the Plan and entering into the settlement should not by itself be sufficient to conclude that the Noteholders acted in concert respecting the Trust.
Neal Armstrong. Summary of 2014 Ruling 2014-0539791R3 under s. 212(1)(b).