News of Note
CRA accepts that an executor can make a late election on the deceased’s behalf
Email this ContentCRA accepts that an executor has the capacity to make a late s. 45(2) election (respecting suspension of a principal residence’s conversion into a rental property) "on behalf of" the deceased.
Analogous issues may arise following a corporate merger or dissolution.
Neal Armstrong. Summary of 22 August 2014 T.I. 2014-0541171E5 under s. 220(3.2).
CRA rules on using an LP to avoid application of the anti-hybrid rule to interest paid by a ULC to its S Corp parent
A U.S. S Corp which currently is subject to 25% Canadian withholding tax on interest paid on a note of its wholly-owned ULC subsidiary due to the application of the anti-hybrid rule in Art. IV(7)(b) of the Canada-U.S. Treaty, will avoid that withholding tax by transferring the note to a newly-formed LP between it and one of its individual shareholders (presumably with a much more modest partnership interest than it).
CRA ruled that this would avoid Art. IV(7)(b) on the basis that, for Code purposes, interest on the note "will be reported as income of LP…in the same manner as the interest would be if ULC was not fiscally transparent" under the Code.
Neal Armstrong. Summary of 2014 Ruling 2013-0491331R3 under Treaties – Art. 4.
Otteson – Tax Court of Canada finds that references to a qualifying real estate property could refer only to the qualifying portion of the property
The taxpayers faced a problem in claiming the capital gains exemption on a sale of their property: only about half of the property was being used as a tree farm, so that it was borderline at best as to whether it was a qualified farm property.
Solomon proposed splitting a baby in two. Similarly, Hogan J found that there was no requirement to regard the property as a whole ("otherwise land that has been legally subdivided would be preferred to land that has not been,") and concluded that the taxpayers could claim the exemption on a pro rata portion of the property.
Neal Armstrong. Summary of Otteson v. The Queen, 2014 TCC 250 under s. 110.6(1) - qualified farm property and s. 96.
CRA acknowledges USA relevance to deemed control branch of CCPC definition
CRA has acknowledged that its previous position in ITTN no. 44 that "unanimous shareholder agreements are not to be considered in applying … the definition ‘Canadian-controlled private corporation’" in s. 125(7) para. (b), "cannot be reconciled with the interpretation … by the Courts in Bagtech."
Neal Armstrong. Summary of 2014 CALU Roundtable, Q. 3, 2014-0523301C6 under s. 125(7) – Canadian-controlled private corporation.
CRA considers that investment counselling fees for segregated fund purchases/redemptions are not deductible
CRA considers that investors in segregated funds cannot deduct related investment counselling or management fees under s. 20(1)(bb): "a segregated fund policy is a contract of insurance and … is not a … security."
Neal Armstrong. Summary of 2014 CALU Roundtable, Q. 5, 2014-0523321C6 under s. 20(1)(bb).
Income Tax Severed Letters 3 September 2014
This morning's release of 16 severed letters from the Income Tax Rulings directorate is now available for your viewing.
An amalgamation of Target rather than its winding-up may be preferable from a bump perspective if Target creditors may be prohibited persons – and bump transactions for private equity funds are fraught
Comments of Stepak and Xiao on the s. 88(1)(d) bump rules include:
- The exclusion in s. 88(1)(c.3)(i), from substituted property, for property which "at any time after the acquisition of control" has 10% or less of its fair market value attributable to property distributed on the winding-up should in context be interpreted as being fulfilled if the relative FMV test is met during the bump series of transactions rather than being required to be satisfied during a more extended and indefinite period.
- Although when Target is amalgamated with Bidco, there arguably might be an acquisition by creditors of Bidco (who could be prohibited persons) of debt of a new corporation which, therefore, would not fit within the specified property exclusion in s. 88(1)(c.4)(ii), "paragraph 88(4)(b), when read in context, should reasonably be considered to have the effect of deeming the securities of Amalco to be the same as the securities of the predecessor corporation [here, Target]" so that the exclusion is available. However, if Target is wound-up rather than amalgamated "the above argument with respect to paragraph 88(4)(b) would not apply to debt of [Target] assumed by parent on the winding-up because paragraph 88(4)(b) only applies to amalgamations, not windings-up."
- Where the 10% attributed property safe harbour will not clearly be met, the funding of Bidco by a private equity fund will be problematic, as PE funds (which potentially could have prohibited persons as investors) will be loathe to disclose their investors and because for confidentiality reasons the PE fund manager typically will not be able to approach the fund investors to inquire as to any cross-ownership in the Target until after a deal has been announced.
- Where following the amalgamation of Bidco and Target, Amalco sells one of Target's subsidiaries (Spinco) to a third party (Spinco Buyer) which, in turn and as part of the same series of transactions, sells Spinco to a fourth party, that final sale could taint the bump if the fourth party (or perhaps its shareholders) is a prohibited person – so that it is insufficient that diligence was performed on Spinco Buyer and its shareholders to assess whether they were prohibited persons. This will be the case even if Spinco itself was not bumped.
- In light of the foreign affiliate dumping rules, it is appropriate for bumped shares of a foreign subsidiary of Target to be distributed to their ultimate resting place beneath the new foreign parent through a PUC distribution by Amalco rather than in repayment of an intra-group loan made to Bidco.
- Under the scheme of the Act, "significant" in s. 88(1)(c.2)(iii)(A) means 10% or more, so that a toehold in Target of less than 10% (in the context of there being an indirect third-party participant in the bid who is not a specified person) should be exempted.
Neal Armstrong. Summaries of Paul Stepak and Eric C. Xiao, "The 88(1)(d) Bump – An Update," Draft paper for 2013 Conference Report (annual CTF conference) under s. 88(1)(c.3)(i), s. 88(1)(c.4)(ii), s. 88(1)(c)(vi)(B)(II), s. 88(1)(c)(vi), s. 212.3(9) and s. 88(1)(c.2)(iii)(A).
Gariepy and Chriss – Tax Court of Canada finds that unsigned directors’ resignations were effectual
Boyle J found that written resignations of corporate directors were effective (so as to start the two-year time limitation for directors’ liability under s. 227.1 running) notwithstanding that the lawyers never provided the resignation forms to the directors for signature. (This may bear on other written instruments such as elections made on a non-prescribed form.)
He further found that where there was a reasonable belief that a director had resigned, that would constitute a due diligence defence for her failure thereafter to do anything about source deductions even if her resignation instead had been ineffectual.
Neal Armstrong. Summaries of Gariepy and Chriss v. The Queen, 2014 TCC 254 under s. 227.1(4) and s. 227.1(3).
Canadian financial institutions are permitted under the FATCA rules to open up accounts for recalcitrant account holders
Findings of Candice Turner on the application of the FATCA rules to Canadian financial institutions include:
- The institution likely can open up an account for a recalcitrant account holder who fails to provide a U.S. tax information number (although withholding tax would be imposed on U.S.-source withholdable payments).
- When a holder of a pre-existing individual account opens a new account with the same financial institution, there is no need to re-document the account so long as the required due diligence has been (or is being) conducted and, where a threshold has been applied to the pre-existing account, the institution's computer is able to link the new account to the pre-existing one.
- Respecting the measurement of account threshold levels corresponding to different due diligence levels, the previous balances of closed accounts should be ignored.
Neal Armstrong. Summaries of Candice M. Turner, "Answers to Practical FATCA Questions for Canadian Financial Institutions," Tax Management International Journal, Vol. 43, No. 8, August 8, 2014, p. 484 under FATCA IGA, Art. 4. s. 2, Annex 1, s. IV, para. A and Annex 1, s. VI, para. C.
CRA does not require the filing of amended returns if a late PLOI election is made
When a Canadian corporation (a CRIC) and a (non-resident) "subject corporation" file a late "PLOI" election to have imputed interest accrue on a loan owing to the CRIC by the subject corporation rather than having Part XIII tax apply to the loan amount, CRA will assess the additional imputed interest income for the years for which CRIC returns already have been filed on the basis of the election particulars required at Pertinent loans or indebtedness, rather than expecting the CRIC to file amended returns.
However, if the late election has not yet been filed by the technical triggering of the Part XIII tax, CRA does not consider that it can wait and see if a late election is filed within the three-year period specified in s. 15(2.12), and considers itself obligated to assess the withholding tax – and will reassess if the late election subsequently is filed.
Neal Armstrong. Summary of 6 August 2014 T.I. 2014-0519431E5 under s. 15(2.11).