News of Note
6379249 Canada Inc. – Tax Court of Canada states that even a “slight” product improvement can qualify as SR&ED
Email this ContentThe taxpayer suspended its sales of a new product (a miniature portable printer) when it realized there were problems with curling paper and battery life. Its remedial efforts qualified (per D'Auray J) as experimental development given that the technical solutions were quite unclear, "work will qualify for SR&ED ITC purposes if there is a slight improvement to…products, or processes," and "the filing of…documents proving a systematic investigation is not a requirement."
Neal Armstrong. Summary of 6379249 Canada Inc. v. The Queen, 2015 DTC 1109 [at 638], 2015 TCC 77, under s. 248(1) – SR&ED.
CRA rules that interest on NVCC sub debt is not participating debt interest for withholding purposes
Canadian banks such as Royal Bank and BMO have issued Basle III-compliant "non-viable contingent capital" sub debt, which looks like conventional debt except that it will be automatically converted into common shares, at the point of any "non-viability" as defined by OSFI (subject to regulatory discretion), based on a predetermined conversion formula which caps the number of common shares that may be issued, so that the holder potentially could suffer a loss.
CRA has ruled that this automatic conversion feature does not detract from current interest deductibility, or cause the interest to be participating debt interest for withholding tax purposes.
Neal Armstrong. Summary of 2014 Ruling 2014-0523691R3 under s. 212(3) – participating debt interest.
CRA confirms that the FAT reinstatement rule applies on a year-by-year basis
Reg. 5907(1.4) provides that a payment made by one foreign affiliate (earning foreign accrual property income) within a consolidated group to another in respect of the foreign income taxes it has saved through in effect accessing a group company's active business loss will not be deemed to be foreign accrual tax because that loss was not a foreign accrual property loss. Regs. 5907(1.5) and (1.6) typically allow for reinstatement of the denied FAT deduction when in a subsequent year the active business loss is applied against active business income of that year.
Not surprisingly, CRA has confirmed that when this occurs, the Canadian taxpayer in question will get a FAT deduction (under s. 91(4)) in that subsequent year rather than in the original year.
Neal Armstrong. Summary of 6 February 2015 T.I. 2014-0542281E5 under Reg. 5907(1.5).
Income Tax Severed Letters 8 April 2015
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that rodents are best eaten
CRA now construes "livestock" more narrowly than as stated in IT-427R, so that it considers that raising rodents qualifies as farming only if they are sold as food rather than as pets.
Neal Armstrong. Summary of 13 March 2015 T.I. 2015-0564611E5 under s. 248(1) – farming.
CRA rules on CCPC split-up which was structured to avoid Part IV tax circularity
Where the distributing corporation (DC) in a butterfly is a Canadian-controlled private corporation with refundable dividend tax on hand, a circular computation of Part IV tax under s. 186(1)(b) arises if the butterfly mechanics entail it both paying and receiving a deemed dividend from the transferee corporation (TC), as the resulting generation of a dividend refund to it will trigger Part IV tax and an RDTOH addition to TC which, in turn, will trigger Part IV tax and a dividend refund on the deemed dividend going the other way, and so on.
In a butterfly reorganization for the split-up of DC into three TCs, this circularity problem was solved by having DC transfer its properties to respective new Subcos of each TC, so that no s. 186(1)(b) Part IV tax was generated on the redemption of the prefs received by DC as consideration on this transfer. The Subcos then were wound-up into the respective TCs, and DC was wound-up under s. 88(2) into the TCs, with s. 186(1)(b) applying non-circularly to the resulting s. 88(2)(b)(iii) deemed dividends.
Neal Armstrong. Summary of 2014 Ruling 2013-0513211R3 under s. 55(1) – distribution.
FirstService is proposing a butterfly spin-off of over half its assets
FirstService is proposing its separation into two public corporations (FirstService and Colliers) pursuant to a butterfly spin-off. The residential real estate and property services business of FirstService will be spun-off as New FSV (to be renamed FirstService), and (old) FirstService following its amalgamation with a subsidiary (FCRESI) will carry on the (retained) commercial real estate services division as Colliers. Completion of the arrangement is conditional inter alia on a Canadian tax ruling and a U.S. tax opinion of PWC respecting treatment as a Code s. 355 spin-off.
The spun-off company (FirstService) apparently will have greater value than the distributing corporation (Colliers). A complication relates to there being minority shareholders of FCRESI. Arrangements for a purchase of their holdings in exchange for Colliers shares will be entered into before the Arrangement, but will be timed to occur immediately after the butterfly distribution so as not to run afoul of s. 55(3.1)(a). There is no intended compliance with the types-of-property rules in reliance on s. 55(3.02).
Neal Armstrong. Summary of FirstService Circular under Spin-Offs & Distributions – Butterfly spin-offs.
CRA rules on the s. 85(1) transfer as capital property of farm land potentially held for subdivision and sale
"Eligible property" for s. 85 purposes does not include real estate inventory. Property transferred on a single-wing split up butterfly of a distributing corporation, whose farm land was being used on a share-crop basis to a neighbouring farmer, included a property which had been rezoned to permit the severance and sale of separate lots – which had already occurred and might continue to occur subsequently. The wording of the ruling letter suggests that CRA was not especially troubled by the proposition that it was capital property.
CRA did not comment on whether the property being used on a share-crop basis was a business or investment-type property for butterfly purposes, although in other contexts (e.g., 2015-0567231E5) it has indicated that it regards share-cropping as rental rather than business use.
Neal Armstrong. Summary of 2014 Ruling 2013-0498651R3 under s. 55(1) – Distribution.
Leasing agent commissions are currently deductible
CRA treated commissions paid by an owner of rental buildings to leasing agents as currently deductible, stating that they "gave rise only to short term advantages – immediate or at most limited to the term of the lease" and they "must be renewed each year."
Neal Armstrong. Summary of 23 December 2014 Memo 2014-0535921I7 F under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs or running expense.
CRA will not accept an eligible dividend election conditional on an unsuccessful appeal generating a GRIP balance
If a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), CRA is willing to hold the processing of a s. 184(3) election (to convert the dividend into a taxable dividend so as to eliminate the Part III tax) in abeyance, so that the election will be treated as void if the taxpayer’s objection is successful, and treated as timely filed if the objection (or subsequent appeal) is dismissed.
CRA is unwilling to extend this policy to the payment of a dividend thought to be made out of earnings eligible for the small business deduction (i.e., earnings thought not to generate a GRIP balance), so that no eligible dividend designation was made, where the corporation then is assessed to deny the deduction – so that CRA will not accept and hold in abeyance an eligible dividend designation made shortly after the assessment which is conditional on the corporation being unsuccessful in establishing that the earnings were eligible for the deduction.
Neal Armstrong. Summary of 12 March 2015 T.I. 2014-0541991E5 under s. 89(14.1).