News of Note

The postamble to s. 40(3.4) provides that, for purposes of the suspended loss release events listed in s. 40(3.4)(b), a dissolved partnership is deemed to continue to exist and its partners to continue to be partners until immediately before the occurrence of such a release event.  CRA considers that this means that if a capital loss, which was suspended on the disposition of a partnership interest to an affiliated corporation, will continue to be suspended after the dissolution in a subsequent year of the partnership and thereafter until the transferor and transferee cease to be affiliated, or there is an acquisition of control of the transferor – or perhaps some more obscure release event occurs.

Although, at first glance, this looks reasonable, it seems to imply that the loss will remain suspended even if the former partnership business is sold to a third party.

Neal Armstrong.  Summary of 27 October 2014 Memo 2014-0534981I7 F under s. 40(3.4).

Paras. (d) and (e) of the excluded property definition deem the units of a foreign partnership held by a foreign affiliate of a Canadian taxpayer to be foreign shares for purposes of determining whether the partnership is a deemed foreign affiliate of the taxpayer under the excluded property definition.  However, CRA does not consider that this permits one to conclude that such partnership interest is excluded property, even where the partnership is engaged exclusively in an active business, if the equity percentage of the Canadian taxpayer in the partnerships (viewed as a deemed foreign corporation) is under 10% (say, 5%) and a further 5% interest in the partnership is held directly by a related Canadian corporation.  The reason is that the paras. (d) and (e) deeming rule only applies to partnership interests held by a foreign affiliate rather than by a (related) Canadian person – so that the partnership interest does not qualify as shares of a foreign affiliate (because the required 10% threshold under the foreign affiliate definition has not been achieved).  This, in turn, means that the partnership interest cannot qualify as excluded property notwithstanding the active business.

The factually unusual and narrow character of this point may imply that the paras. (d) and (e) deeming rule works quite well in circumstances where an active foreign partnership is held largely within a wholly-owned group.  For instance, there was no quibbling that paras. (d) and (e) do not explicitly go on to deem the active business assets of the partnership to be active business assets of the fictional non-resident corporation, so this would appear not be a sticking point.

Neal Armstrong.  Summary of 15 January 2015 T.I. 2014-0546581E5 under s. 95(1) – excluded property.

The proposed AUSPICE Canadian Crude Oil Index ETF and Canadian Natural Gas Index ETF will each track its designated (Canadian crude or Canadian natural gas) "Underlying Index" by entering into forward agreements with NBC, and pledging cash raised from its Unit offerings to secure its obligations thereunder.  Although the forwards will have terms of five years, they will be extended annually with the consent of the parties – which presumably will occur in order that no income in excess of expenses (to be funded with partial settlements) will be realized.  Accordingly, unitholders likely will anticipate capital gains treatment on their units, so that the introduction of the derivative forward agreement rules (requiring income account treatment on the forwards) has not had a significant impact.

Neal Armstrong.  Summary of Preliminary Prospectus for Units of AUSPICE Canadian Crude Oil Index ETF and Canadian Natural Gas Index ETF under Offerings – Forward Sales/TRS Funds.

As disclosed in a heavily redacted and confusing description, a testator bequeathed half the residue of his estate to a charitable foundation. The executors apparently satisfied this bequest, in part, by having an investment holding company issue notes to them in satisfaction of dividends, and gifted the notes to the foundation, with the notes being paid off with a transfer of marketable securities by the holding company to the foundation.

In finding that the testator was thereby deemed by s. 118.1(5) to have made a gift in his terminal year, CRA first noted that even though the gifted notes were non-qualifying securities, ss. 118.1(13)(c) and (15) deemed there to be a gift at the time of death when the notes were paid off. Furthermore, discretion of the executors as to how to effect the bequest did not detract from their obligation to make it.

Neal Armstrong. Summary of 2 January 2014 Memo 2013-0490141I7 under s. 118.1(5).