News of Note
CRA rules on post-mortem pipeline
Email this ContentCRA ruled on a conventional post-mortem pipeline: following preliminary transactions to generate a capital loss for carryback to the terminal year pursuant to s. 164(6), the estate sold its shares of “Investco” (described as carrying on a “business” of investing in GICs and other portfolio investments) to a Newco for consideration consisting mostly of a note, with Newco amalgamating with Investco after at least one year, and the note repaid on a quarterly basis thereafter.
Neal Armstrong. Summary of 2022-0955451R3 F under s. 84(2).
CRA rules on the application of the FAT and underlying foreign tax rules to the investment of a CFA in a US private REIT (holding LLC rental properties) through tiered US partnerships
Canco wholly-owns a US corporation (FA1), which (with third parties) holds the units of a US limited partnership (USLP1), whose only significant asset is its holding of all of the USLP2 units. USLP2 holds all the common shares of a US private REIT (FA2) which holds rental properties through subsidiary LLCs (which are disregarded for US purposes unless owned jointly with a third party) or LPs. FA2 generates FAPI for Canadian purposes.
FA1 will include in its US taxable income its share of the US taxable income of USLP1, which will include the distributions received by it from FA2. In addition to actual distributions, FA2 might declare a consent dividend, i.e., a dividend that is not actually paid but is deemed under US tax law to be distributed and then contributed back to FA2 (as additional paid-in capital).
The proportionate economic interest of FA1 directly or indirectly in USLP2 is expected to decline over time due to arm’s length investors subscribing for USLP1 or USLP2 units, so that FA2 and the underlying LLCs will eventually cease to be foreign affiliates of Canco.
CRA ruled:
- US income tax paid by FA1 on FA1’s share of the distributions paid by FA2 and on any consent dividends will be “foreign accrual tax” (as defined in s. 95(1)) applicable to amounts that are included in Canco’s income under s. 91(1) in respect of the FA1 shares, to the extent that those distributions (and any consent dividends) can reasonably be regarded as distributions of amounts that are included, directly or indirectly, in computing income of USLP2 under s. 91(1).
- Provided that, at any time in a particular taxation year, the total equity percentage in FA2 of Canco, and of persons related to Canco taking into account the rules in s. 93.1(1) is at least 10%, such US income taxes paid by FA1 will not be underlying foreign tax of FA1 in respect of Canco by reason of the application of Reg. 5907(1.03).
- Conversely, if this 10% test is not met, such US income tax will be underlying foreign tax of FA1 in respect of Canco to the extent that FA1’s share of the FA2 distributions (and of any consent dividends) can reasonably be regarded as distributions of amounts that are included, directly or indirectly, in computing income of USLP2 under s. 91(1).
Neal Armstrong. Summary of 2022 Ruling 2020-0859851R3 under s. 95(1) – foreign accrual tax.
CRA finds that a discretionary trust can wholly allocate each of an eligible and a non-eligible dividend to each of two recipient beneficiaries
A discretionary trust received an eligible dividend in a year and immediately allocated and distributed it to a beneficiary; and later in the same year, received an ordinary (non-eligible) dividend which it immediately allocated and distributed to a second beneficiary, also in accordance with the discretions accorded by the trust deed. CRA found that the two respective dividends could be designated under s. 104(19) exclusively to the respective beneficiaries rather than being required to be designated on a pro rata basis.
Neal Armstrong. Summary of 22 June 2023 External T.I. 2018-0746741E5 F under s. 104(19).
Income Tax Severed Letters 31 January 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Windsor Clinical Research – Tax Court of Canada notes that the taxpayer or Crown can amend their pleading to change the process or reasoning underlying their position
SR&ED claims of the taxpayer for various projects had been denied. The Crown now sought to amend its Reply to allege that the work conducted was in the field of psychology rather than dermatology and make related submissions.
In rejecting the submission of the taxpayer that these amendments “would deprive [it] of its right to rely on the specific approach taken by the auditors and appeal officers”, Jorré J stated:
[T]he ultimate issue on an appeal is: whether the amount of tax is too high, not the process or reasoning by which it was reached? …
[N]either party is bound by their approach prior to the court appeal.
Regarding the statement in Continental Bank ([1998] 2 SCR 298) that “[t]he Crown is not permitted to advance a new basis for reassessment after the limitation period has expired,” Jorré J found (without need to refer to s. 152(9)) that the “proposed amendments do not constitute a new or additional basis of assessment.”
Neal Armstrong. Summary of Windsor Clinical Research Inc. v. The King, 2023 TCC 179 under Rule 54 and s. 152(9).
Castro – Tax Court of Canada finds that a lender-required property transfer to a subsidiary whose shares were pledged, was non-arm’s length
As a condition to receiving a loan to fund the renovation of a property of the Castros, they were required to transfer the property to a corporation of which they were equal shareholders and to pledge the voting shares of the corporation to the lender. Later, in settlement of a dispute, the shares of the corporation were transferred to the lender. The Castros were subsequently assessed for failure to charge GST on the fair market value of the property on the basis that the transfer was a taxable supply, rather than an exempt supply, as reported. The Castros unsuccessfully tried to recover such tax from the corporation, and then claimed a bad debt deduction pursuant to ETA s. 231 to offset the assessment.
In confirming the denial of such claim, Smith J found that the share pledge did not remove the right of the Castros to elect the board of the corporation, so that the corporation and they were related persons pursuant to ITA s. 251(2)(b)(ii) and, thus, did not deal with each other at arm’s length pursuant to ETA ss. 126(1) and (2). Furthermore, in addition to thus not satisfying the requirement of s. 231(1) that the recipient was dealing at arm’s length with the supplier, the Castros had not satisfied the requirement in s. 231(1.1) that they had declared and remitted the tax on the supply. Smith J stated:
It would be altogether too easy to avoid paying the tax if there was simply a failure to include it in the return, followed by a wait of several years for the tax authorities to assess it, only to claim a deduction at that point because the passage of years had rendered the claim uncollectible.
Neal Armstrong. Summary of Castro v. The King, 2024 CCI 3 under ETA s. 231(1).
We have translated 10 more CRA interpretations
We have translated 4 translations of CRA interpretations issued last week and of a 6 further CRA interpretations released during May and April of 2002. Their descriptors and links appear below.
These are additions to our set of 2,710 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 3/4 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Arrbab - Court of Appeal of England and Wales restrictively interprets a power accorded in subordinate legislation to amend the primary legislation
Section 124 of the Finance Act 2008 (UK) provided inter alia that Treasury could by statutory instrument make an order in connection with appeals against HMRC decisions which amended the provisions of any Act, provided that a draft of the order had been laid before and approved by resolution of the House of Commons. Treasury made such an order, amending the Tax Credits Act 2002 (UK), which effectively took away the jurisdiction of the First-tier Tribunal to extend the deadline for a taxpayer to challenge a denial by HMRC of working tax credits. Before concluding that such amendment was ultra vires, Falk LJ stated:
Section 124 … is an example of what has come to be referred to as a "Henry VIII power", meaning a provision of primary legislation which permits subordinate legislation to be used to amend primary legislation.
It is now well established that any genuine doubt about the scope of the power conferred by such a provision should be resolved in favour of a restrictive approach. …
(This case broadly accords with the reluctance in Société des alcools and B.C. Ferry to permit Regulations to be applied so as to depart from the intent of the governing legislation.)
A few days before the taxpayer’s appeal was heard before the Court of Appeal, HMRC realized that its denial of the taxpayer’s credits was mistaken, and reversed such denial, so that the appeal was rendered “academic.” Falk LJ stated that the “conditions that will generally need to be met before this court may exercise its discretion to entertain an academic appeal” are that (quoting an earlier decision):
"(i) the court is satisfied that the appeal would raise a point of some general importance; (ii) the respondent to the appeal agrees to it proceeding, or is at least completely indemnified on costs and is not otherwise inappropriately prejudiced; (iii) the court is satisfied that both sides of the argument will be fully and properly ventilated." …
She found that these conditions were satisfied here.
Neal Armstrong. Summaries of Commissioners for His Majesty's Revenue and Customs v Arrbab [2024] EWCA Civ 16 under Statutory Interpretation – Regulations/ Statutory Delegation, and Federal Courts Act, s. 27(1.1).
Parent – Court of Quebec finds that building repair work that matched the cost of the whole building was currently deductible
The taxpayer acquired a rental property in run-down condition for $275,000 and then incurred $290,074 in expenditures in order to restore the building. Subject to a concession at trial that $34,900 of this amount (spent on constructing a new exterior stairwell) was a capital expenditure, Vaillant JCQ found these to be currently deductible expenses, stating:
[T]he work carried out on the building consisted of correcting defects or deficiencies in the building created over time by a lack of maintenance. The problems were serious because the lack of maintenance dated back a number of years.
…What needed to be replaced was done, and without extravagance, only the minimum.
… [T]he work done … was in the nature of repairs.
Neal Armstrong. Summary of Parent v. Agence du revenu du Québec, 2023 QCCQ 10440 under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs.
Sussex Group – Tax Court of Canada reverses a s. 227(9) penalty in full because its amount was established by the taxpayer to be partially incorrect
The appellant determined that the remuneration paid to its two employees (the Suttons) would be allocated as to $165,000 and $192,000 to Mrs. and Mr. Sutton, respectively. CRA noted that all but $12,675 of such remuneration had been deposited into the bank account of Mr. Sutton, considered that all of such deposits to his account were remuneration received by him, and imposed a late source-deductions remittance penalty under s. 227(9) on the appellant regarding its computed under-remittance.
In finding that Mrs. Sutton had constructively received remuneration in excess of the $12,675 deposited into her account, Gagnon J stated:
Case law has noted that the word “receive” means to get or to derive benefit from something, therefore to “enjoy its advantages without necessarily having it in one’s hands”. Moreover, an amount of money is deemed received by an employee when it is available to the employee. …
[A]lthough this Court cannot confirm the exact remuneration received by Mrs. Sutton, and indirectly by Mr. Sutton, it remains clear that the remuneration used by the CRA to assess the penalty is incorrect.
After having noted that “the Crown bears the onus for the penalty,” and in reversing the penalty, Gagnon J stated:
The role of the Court is to determine whether the penalty was either validly imposed or not. …. And adjusting the quantum of a given penalty would be beyond the jurisdiction of this Court. On that basis, it is determined that the evidence in the present case does not support that the conditions to levy the penalty as determined by the Minister have been established.
Neal Armstrong. Summary of Sussex Group - Allan Sutton Realty Corp. v. The King, 2024 TCC 1 (Informal Procedure) under s. 227(9) and General Concepts – Payment and Receipt.