News of Note
S. 50 write-down by the debtor’s controlling shareholder triggers a forgiveness
Email this ContentIf an individual writes-down a debt owing to him by his insolvent corporation under s. 50, the debt parking rules will apply to deem the debt to be forgiven (even if there is no settlement of the debt on general principles).
Neal Armstrong. Summary of 8 August 2014 T.I. 2014-0524951E5 under s. 80.01(8) and s. 80(2)(a).
Reversing position, CRA recognizes that an MRPS redemption premium was proceeds rather than dividend
Luxembourg accommodates the issuance of mandatory redeemable preferred shares ("MRPS"), which are treated as debt for Luxembourg interest-deduction purposes but are shares under Luxembourg corporate law. In 2012-0439741I7, CRA indicated that the premium received on a MRPS redemption was a dividend to the Canadian holder on ordinary principles (i.e., even before applying s. 90(2)).
CRA has now reversed this position (and removed this internal interpretation from its database), stating: "In the absence of an election under subsection 93(1)… redemption proceeds are treated as proceeds of disposition."
Neal Armstrong. Summary of 25 August 2014 T.I. 2014-0528361E5 under s. 90(1).
S. 40(3.6) does not deny capital loss on winding-up a CFA
S. 40(3.6) does not apply to deny a loss realized on the winding-up of a subsidiary (in this case, a controlled foreign affiliate) both because s. 69(5)(d) specifically ousts the application of s. 40(3.6) respecting property (in this case, the CFA’s shares) disposed of on a winding-up, and also because it is unlikely that under the foreign corporate law the CFA would be considered to still exist immediately after that disposition.
Neal Armstrong. Summaries of 15 August 2014 Memo 2014-0538591I7 under s. 40(3.6) and s. 93(2.01).
Income Tax Severed Letters 15 October 2014
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers experimental development of a manufacturing company to potentially qualify as a manufacturing or processing activity for class 29 purposes
CRA considers that a machine which is used by a manufacturing company in experimental development will qualify as a Class 29 asset for CCA purposes provided that it relates to the ultimate sale of commercial product. Jumping over some of the qualifiers, this likely would be the case where the machine is used to create a prototype of equipment that would be used in the manufacturing of such product.
This question now is relevant as s. 37(1)(b), which provided a current deduction for research-related capital expenditures on depreciable property, has been repealed.
Neal Armstrong. Summary of 11 August 2014 Memo 2014-0528231I7 F under Sched. II – Class 29.
CRA will deny FTC for income tax imposed by a foreign jurisdiction on a Canadian employee’s investment earnings sourced outside that county
If a Canadian-resident employee working in "Country A" (a non-Treaty country) is subject to Country A taxes on her worldwide income, Canada will not accord a foreign tax credit for any Country A taxes which thereby are imposed on sources outside Country A. If the Canadian employer reimburses the employee for Country A taxes, then (following Gernhart) such reimbursements will be taxable benefits for Canadian purposes.
Summaries of 11 September 2014 T.I. 2013-0495091E5 under s. 126(1) and s. 6(1)(a).
Bessette – Quebec Court of Appeal uses the “sham” word in denying fees paid to a professional services company
A dental practice paid 70% of its revenues to a professional services company which had no employees and purchased no supplies. In dismissing the taxpayer’s appeal, Gouin JCQ stated that "it is necessary to prove that the management expenses constitute genuine expenses and not a sham in the sense that the concluded agreements represented genuine transactions between the parties."
Neal Armstrong. Summary of Bessette v. ARC (Quebec Revenue Agency), 2014 QCCQ 4329 under s. 18(1)(a) – income producing purpose.
9016-9202 Québec Inc. – Tax Court of Canada finds that CRA used gross negligence penalties as a lever to terminate a tax avoidance structure
In 1995 a Quebec garbage collection company (EBI) had a brilliant idea: its garbage collectors would become incorporated independent contractors. A difficulty was that it is essentially impossible to expect that level of employee to now start behaving like an entrepreneur. Not only were their (highly-supervised) functions essentially unchanged, but EBI completely administered their new companies through its accountants (and used its address as the companies’ address).
While the individual companies’ Notices of Objection for their 2004 to 2006 years were still under review, CRA reassessed their 2007 and 2008 years to not only deny expenses under the personal services business rules but also to impose gross negligence penalties – at which point EBI caved and the individuals became its employees again. Before vacating the penalties (but confirming the application of the PSB rules to all the reassessed years), Favreau J stated: "The sole reason that the penalties were imposed appears to me to have been to force the parties to terminate the structure."
Neal Armstrong. Summaries of 9016-9202 Québec Inc. v. The Queen, 2014 TCC 281 under s. 125(7) – "personal services business" and s. 163(2).
CRA considers SR&ED conducted by a manufacturing company to be manufacturing for enhanced CCA purposes
CRA considers that a building used by a pharmaceutical company for SR&ED likely qualifies as being used in manufacturing or processing of goods for sale, as the SR&ED contributes to its business of selling manufactured pharmaceuticals. Accordingly, the building likely is eligible for the additional 6% CCA provided by Reg. 1100(1)(a.1).
Neal Armstrong. Summary of 9 September 2014 T.I. 2014-0530631E5 F under Reg. 1100(1)(a.1).
CRA indicates that it would not reassess a prior return to apply the cost recovery method to a share sale earnout
A taxpayer sold shares under an earnout. Although he could have used the cost recovery method, he instead reported a gain based on his best estimate of the future proceeds. He now considers this estimate to be faulty and wants to amend his return to use the cost recovery method.
CRA indicated that it would not reassess the return as a change in estimate is not an error.
Neal Armstrong. Summary of 27 August 2014 T.I. 2014-0529221E5 F under s. 12(1)(g).