News of Note
Mathieu – Tax Court of Canada finds that non-arm’s length stock option surrender proceeds were non-taxable
Email this ContentUntil the introduction of s. 7(1)(b.1), stock option proceeds received from surrendering stock options to a corporate employer with which the employee did not deal at arm’s length were not taxable under s. 7. Paris J has found that, given the "clear and unequivocal" language of s. 7(3)(a), they also were not taxable as a benefit under s. 6(1)(a).
The protestation in the Explanatory Notes that s. 7(1)(b.1) was enacted to "clarify" the existing law clearly was incorrect and (as usual) ignored.
Neal Armstrong. Summaries of Mathieu v. The Queen, 2014 TCC 207 under s. 7(3)(a), s. 251(2)(a), Statutory Interpretation – Specific v. general provisions, Interpretation Act, s. 45(2).
Income Tax Severed Letters 26 November 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
St-Hilaire – Tax Court of Canada finds that the expedited handling of a bankruptcy proposal prejudiced the taxpayer by denying him an ABIL
The definition of a business investment loss includes a capital loss from the a disposition of a debt owing by a small business corporation to which s. 50(1) applies; and s. 50(1) can be elected to apply to a debt owing to the taxpayer at year end which is established to have become a bad debt in the year.
The taxpayer was denied an ABIL, respecting a debt owing to him by his small business corporation which was extinguished due to the acceptance in the year of a proposal made under the Bankruptcy and Insolvency Act, because the debt thereby was no longer owing to him at the end of his taxation year. It seems anomalous that he might have gotten a better result if the corporation had merely been insolvent at year end without formal proceedings having been completed.
Neal Armstrong. Summary of St-Hillaire v. The Queen, 2014 TCC 336 under s. 50(1).
Proposed s. 104(13.3) undercuts use of Alberta trusts to shift income to Alberta
Proposed s. 104(13.3) establishes that ss. 104(13.1) and (13.2) designations, to effectively retain income in a trust, can only be used after 2015 to the extent that the trust taxable income otherwise would be nil (through loss utilization). This undercuts the use of an Alberta trust to have income "inside" the trust taxed at a lower rate than if it were taxed in the hands of its beneficiaries resident in a higher rate jurisdiction.
Neal Armstrong. Summary of Gary I. Biasini, "The Trust is Dead, Long Live The Trust," Tax Topics (Wolters Kluwer CCH), Number 2227, November 13, 2014, p. 1 under s. 104(13.3).
Lyrtech – Federal Court of Appeal confirms that a public company had de facto control of an alleged CCPC which was economically captive and which it essentially managed
Favreau J in the Tax Court had found that the contingent right of each of the beneficiaries of a discretionary trust to receive all the shares of a corporation (the taxpayer) held by the trustees was too nebulous to qualify as a right to acquire those shares for purposes of s. 251(5)(b). However, that corporation was controlled de facto by the public corporation (Lyrtech) which was one of the discretionary beneficiaries (along with some Lyrtech subsidiaries), so that for that reason it did not qualify as a CCPC (and, therefore, was not eligible for enhanced SR&ED credits). In particular:
- the two individual trustees also were the key directors and officers of Lyrtech;
- the taxpayer had virtually no revenues, was under-capitalized, and depended on Lyrtech for financing; and
- Lyrtech determined what R&D work the taxpayer conducted.
This decision has been confirmed in the Federal Court of Appeal, which dealt only with the de facto control issue (with Scott JA noting that different persons can have the de facto and de jure control of a corporation in the face of a bold taxpayer argument to the contrary).
Neal Armstrong. Summaries of Lyrtech v. The Queen, 2013 DTC 1147, 2013 TCC 12, aff'd 2014 CAF 267 under s. 256(5.1) and s. 251(5)(b).
CRA indicates that a second mortgagee must exercise its legal (power of sale or foreclosure) remedies before writing off its mortgage
CRA concluded that a second mortgagee could not take a s. 50 write-down because, following failure to be paid in full, he had not pursued his legal remedies, i.e., selling the property under a power of sale, or foreclosing. There was no issue raised as to whether it would have been reasonable in the circumstances for the second mortgagee to have done this. (Since the first mortgagee must be paid off first, such collection action potentially could result in a further loss.)
Thus, no nod was given to the principles that deference should be given to taxpayer's judgment where its exercise was reasonable in the circumstances (Litowitz) and that there is no obligation to take collection steps if collection is not reasonably possible (Keating).
Neal Armstrong. Summary of 17 October 2014 Memo 2014-0535121I7 F under s. 50(1).
CRA is not yet assessing interest for failure of an inter vivos trust to make instalment payments
CRA has published its statement at the 2014 STEP Roundtable that, pending the "transparent" communication of changes to this policy, "the CRA does not assess penalties or interest where an inter vivos trust fails to make sufficient instalment payments."
Neal Armstrong. Summary of 16 June 2014 STEP Roundtable Q.9, 2014-0526591C6 under s. 156(1).
CRA states that failure to circularly calculate Part IV tax and dividend refund is carelessness
As a result of a tuck-under transaction, two CCPCs each held shares in the other. As one of them had an RDTOH balance, and each paid a deemed dividend or actual dividend to the other, this gave rise to a circular calculation of dividend refunds and Part IV tax: (1) the deemed dividend paid by Corp 1 generated a dividend refund to it which, in turn, generated Part IV tax to Corp 2 under s. 186(1)(b), thereby generating RDTOH to Corp 2; (2) this RDTOH of Corp 2 meant that it generated a dividend refund on the deemed dividend paid by it to Corp 1; which (3) generated Part IV tax and an increase to the RDTOH account of Corp 1, thereby increasing its dividend refund in step 1; and so on.
The Directorate noted that "in general, the circular calculation of the dividend refund and Part IV tax liability of the affected corporations ceases when the dividend refund of the corporation having paid the smaller dividend is equal to 1/3 of the taxable dividend which it is deemed to have paid in the year."
In finding that the transactions could be reassessed beyond the normal reassessment period for carelessness, the Directorate stated that "the necessity to effect the circular calculation…is well known."
Summaries of 30 June 2014 Memo 2013-0508411I7 F under s. 186(1) and s. 152(4)(a)(i).
CRA indicates that interest on a mortgage assumed by a beneficiary on a trust or estate distribution of a rental property generally will be deductible
Where an inter vivos trust (or estate) distributes a rental property charged with a mortgage (or hypothec in Quebec) to a beneficiary (A), CRA considers that the mortgage will represent an amount payable by the beneficiary for the property (so that the interest thereon will be deductible under s. 20(1)(c)((ii), subject to the usual conditions) provided "the assumption by A of the hypothec loan charging the property is a condition of the distribution."
This begs the question as to what happens if the beneficiary doesn’t do anything in particular to assume the mortgage, e.g., the mortgage continues as a charge on registered title held by a nominee. Furthermore, at common law, a devisee of real property of an estate takes the property subject to the charge without any requirement for the devisee to specifically assume the mortgage, in the absence of any contrary indication in the will.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 8, 2014-0538141C6 F under s. 20(1)(c)(ii).
Reversing position, CRA finds that for s. 55 purposes a beneficiary includes a (potentially) “beneficially interested” person
S. 55(5)(e)(ii) provides that for s. 55 purposes a person is related to a trust if it is related to "each beneficiary (other than a registered charity) under [the] trust who is or may (otherwise than by reason of the death of another beneficiary under the trust) be entitled to share in the income or capital of the trust." In 2004, CRA stated (in 2004-0086961C6) that the expansive definition of "beneficially entitled" in s. 248(25)(a) "is irrelevant for the purposes of subparagraph 55(5)(e)(ii)."
After having studied Propep and reread s. 55(5)(e)(ii), CRA has now reversed position, so that the concept of who is a beneficiary under s. 55(5)(e)(ii) is expanded by s. 248(25)(a). This will make the interpretation of the exemptions in s. 55(3)(a) tricky where there is an inopportune presence or participation of a family trust whose trustees have a power to add beneficiaries - and CRA's cottoning onto the Propep dictum on "beneficiary" is generally fraught.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 3, 2014-0538021C6 F under s. 55(5)(e)(ii).