News of Note
CRA softens its stance on what constitutes acting in concert
Email this ContentCRA has amended its Folio on the non-arm’s length concept to indicate that "the fact that two or more parties act in a highly interdependent manner (in respect of a transaction of mutual interest) can be an indication of the fact that the parties are acting in concert," whereas the previous version stated that "when there are two distinct parties (or minds) to a transaction, but these parties act in a highly interdependent manner (in respect of a transaction of mutual interest), then it can be assumed that the parties are acting in concert" (emphasis added). This is responsive to a submission in the CBA/CICA Joint Committee Submission on Income Tax Folio S1-F5-C1, 16 June 2014 that the previous statement did not accord with the jurisprudence (see also Mah and Meredith).
Neal Armstrong. Summary of S1-F5-C1 under s. 251(1)(c).
Reversing its published position, CRA now permits a s. 110(1)(d) deduction for a stock option benefit arising on death
Where a s. 7 benefit arises otherwise than from acquisition of the underlying shares, ss. 110(1.1) and 110(1)(d)(i) require that the employer make and file an election to agree to not take any deduction for the benefit amount in order for the employee to be permitted to claim the (1/2) s. 110(1)(d) deduction.
This raises an issue where the benefit arose on death under s. 7(1)(e). Although s. 110(1.1) does not go so far as to require the dead employee to sign the election, it does require the employee to receive a copy of the election and file it with his or her return.
Reversing 2011-0423441E5 F, CRA now states that "on an administrative basis, …an election [may] be made pursuant to subsection 110(1.1)…in circumstances where paragraph 7(1)(e)…applies." CRA dos not explicitly state that a copy of the election should be included in the terminal return, but this would be prudent.
Neal Armstrong. Summary of 4 May 2015 T.I. 2013-0484181E5 under s. 110(1.1).
BP Canada – Federal Court compels production to CRA of taxpayer tax accrual working papers
Campbell J allowed the Minister's demand on BP Canada to produce unredacted copies of its tax accrual working papers (containing descriptions of all the material issues it knew of for which it had exposure). CRA's position had always been that such papers are compellable, and the restraint with which it typically applies that policy is not binding.
Neal Armstrong. Summary of MNR v. BP Canada Energy Co., 2015 FC 714, under s. 231.1(1).
Income Tax Severed Letters 10 June 2015
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Harvest Operations – Alberta Court of Queen’s Bench refuses to rectify a bump transaction, as the correct way of bumping Target’s assets had not been identified at closing
A last-minute requirement of a Target lender for its loan to be repaid on closing resulted in the purchase price being reduced by $35M and that amount being lent by an affiliate of the Buyer to the Target to fund the loan repayment. That was a mistake. The $35M purchase price reduction reduced the s. 88(1)(d) bump for partnership interests held by Target when it was amalgamated with Buyer to form Amalco, so that a capital gain was realized when the partnership interests were then transferred to repay debt owing by Amalco to the affiliate.
The potential bump problem was identified on the closing date, but the solution was not identified until later. Dario J found that this precluded rectification, stating that cases, such as Fairmont, where courts granted "rectification where there was no ‘particular way’ the parties had intended to achieve the tax objective… run contrary to the express views of the Supreme Court of Canada as set out in Performance Industries."
A second problem was that some assets of Amalco, which should have been transferred by Amalco on the debt repayment to the affiliate, were left behind, so that debt forgiveness applied to Amalco, i.e., its debt to the affiliate was settled for less than full repayment. After also denying rectification here as well, Dario J noted that this equitable remedy could also be denied to Amalco on the basis of estoppel, i.e., Amalco had claimed CCA on the non-transferred assets rather than applying to the Court promptly for rectification.
Neal Armstrong. Summary of Harvest Operations Corp v. A.G. (Canada), 2015 ABQB 327 under General Concepts – Rectification and Estoppel.
McKesson transfer-pricing case is settled in principle
The McKesson Corporation 10K for its year that ended on March 31, 2015 disclosed that McKesson Canada has reached an agreement in principle to settle its transfer pricing dispute with CRA for all affected years.
Neal Armstrong. Extract from 10K of McKesson Corporation for 2015 under s. 247(2).
Pellerin – Tax Court of Canada finds that relatedness under the 24-month QSBC test need only be tested at the disposition time
Para. (b) of the "qualified small business corporation share" definition requires that "throughout the 24 months immediately preceding the [disposition] time, [the share] was not owned by anyone other than the [disposing] individual or a person or partnership related to the individual." Boyle J found that this test is applied by looking at whoever owned the share during the 24-month period and asking whether they were related at the time of the disposition, so that it does not matter whether they were related at the beginning of the 24 months. For example, if an individual sold her shares to an unrelated individual, and less than 24 months later they married and he sold the shares, the test would be satisfied (subject to a proviso (at para. 21) about "abusive tax avoidance stratagems"!)
The case concerned Mika Pellerin who, at approximately 18 months of age, received a distribution under s. 107(2) of small business corporation shares from the family trust and immediately sold them at a gain. S. 110.6(14)(c)(i) deems a beneficiary of a personal trust to be related to the trust. Boyle J found that under the Quebec general law, when Mika was born he was retroactively deemed to have been a trust beneficiary for his previous nine months as a fetus. However, given the above interpretation of the QSBC definition, this finding appears unnecessary to the conclusion that Mika enjoyed the capital gains exemption.
Neal Armstrong. Summary of Pellerin v. The Queen, 2015 CCI 130 under s. 110.6(1) - "qualified small business corporation share."
Staltari – Tax Court of Canada finds that a property which otherwise might have been held as an adventure in the nature in trade was converted to capital property on donation
A commercial real estate broker donated land to the City of Ottawa, received a charitable receipt for its appraised value and claimed that his (substantial) gain was exempted under s. 38(a.2) (respecting "ecological gifts" of capital property).
Owen J found that the taxpayer’s application for subdivision approval before donating suggested that a secondary intention of developing and selling the land may have partly motivated the taxpayer’s original purchase. However, per Zelinski, "a secondary intention to resell at a profit only acquires importance where a taxpayer follows through on that intention," whereas the land was donated instead, i.e., "any secondary intention to profit that he may have had became irrelevant once he chose to donate the Land."
This suggests that real estate whose sale would be on income account potentially is converted to capital property if it is donated instead.
Neal Armstrong. Summaries of Staltari v. The Queen, 2015 TCC 123 under s. 9 – capital gain v. profit – real estate, General Concepts – Evidence, and s. 39(1)(a).
CRA maintains its policies on principal-business corporation status under the resource rules
Although it replaces an IT Bulletin that (mostly) is almost 40 years old, the Folio on (resource) principal-business corporation status is largely a continuation of IT-400, with the addition of some largely routine discussion regarding provisions in which the PBC concept is used. The interpretive points that have been carried forward include:
- Generally, only the business operations in a year will be considered, but exceptionally a longer period may be considered, e.g., where there has been a temporary mine shut down;
- Management functions necessary to carry on the listed qualifying activities will be assimilated to those activities rather than treated as a separate non-qualifying function;
- To qualify as a PBC it need not perform the required activities on its own property; and
- Activities carried on through a partnership retain their character.
Neal Armstrong. Summaries of S3-F8-C1: "Principal-business Corporations in the Resource Industries" under s. 66(15) – principal business corporation, s. 66.1(3), s. 66(11.4.) and Sched. II, Class 43.2.
The deeming by s. 212(3.1) of Part XIII tax on a back-to-back loan to be payable by the lender to the intermediary rather than by the intermediary may result in loss of a FAT deduction where the loan from the intermediary generates FAPI
Where a subsidiary of CanCo in a Treaty-country (Treaty Co) makes an interest-bearing loan to CanCo that is funded by a non-interest-bearing loan from a subsidiary of Treaty Co in a non-Treaty country (Non-Treaty Co), s. 212(3.1)(d) deems the interest on the loan to CanCo from Treaty Co (which generally will be foreign accrual property income) to be subject to 25% withholding. There is a concern that CanCo will not receive a "FAT" deduction for this Part XIII tax under s. 91(4) given inter alia that s. 212(3.1) may deem this income tax to be payable by an entity (Non-Treaty Co) which did not earn the FAPI.
Neal Armstrong. Summaries of Mark Coleman, "Treaty Shopping and Back-to-Back Loan Rules," Power Point Presentation for 28 May 2015 IFA Conference in Calgary under s. 95(1) – foreign accrual tax, s. 212(3.1)(d) and s. 212(3.1)(c).