News of Note
CRA will apply GAAR to any future D&D cases
Email this ContentCRA, after noting that it failed to apply GAAR in D & D Livestock (which entailed "the double utilization of the same amount of safe income in order to reduce a capital gain realized on an ultimate disposition of shares"), stated that it "would not hesitate to invoke the GAAR in similar files." More generally, it will challenge planning resulting in "in an unjustified duplication of fiscal attributes."
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 20, 2014-0534671C6 F under s. 245(4).
Swirsky has not affected the CRA policy on interest deductibility
Notwithstanding, Swirsky CRA considers that there generally will be no interest deductibility on loans incurred to acquire common shares only where there is a "permanent" corporate policy of not paying dividends.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 1, 2014-0534811C6 F under s. 20(1)(c).
CRA finds that forgiveness of source deductions would occur on income account
CRA considered that in the unusual event of a settlement by it of an amount of unremitted source deductions of an incorporated business for less than the amount owing, this would give rise to s. 9 income to the extent of the forgiveness.
Although such amounts are similar to other accrued liabilities and trade payable arising out of current operations, this position is not necessarily correct given that the settlement would have occurred outside the "normal trading operations of the business" (Queenswood), and by the time of their settlement the unremitted amounts might represent "past due debt incurred in a preceding year") (Oxford Motors, cf. Alco).
Neal Armstrong. Summaries of 2012 Annual CTF Roundtable, Q. 8, 2012-0453381C6 under s. 9 – forgiveness of debt, s. 80(1) – forgiven amount, and s. 12(1)(x).
CRA confirms that a majority-interest beneficiary of a trust does not have to be a beneficiary
CRA has confirmed that a "majority-interest beneficiary" of a trust includes a person which is not itself a beneficiary, but is affiliated with an actual majority interest beneficiary.
Although not discussed, this would suggest, for example, that there will be a loss restriction event respecting a subsidiary unit trust of a REIT every time that another person becomes affiliated with the REIT, e.g., the REIT incorporates a real estate nominee (the exclusions in s. 251.2(3) are not much help) or, respecting a family trust, when a family member has the misfortune to wed or give birth (see s. 251.1(5)(a)(ii)).
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 3, 2014-0534841C6 F under s. 251.1(3) - majority-interest beneficiary.
Mathieu – Tax Court of Canada finds that non-arm’s length stock option surrender proceeds were non-taxable
Until the introduction of s. 7(1)(b.1), stock option proceeds received from surrendering stock options to a corporate employer with which the employee did not deal at arm’s length were not taxable under s. 7. Paris J has found that, given the "clear and unequivocal" language of s. 7(3)(a), they also were not taxable as a benefit under s. 6(1)(a).
The protestation in the Explanatory Notes that s. 7(1)(b.1) was enacted to "clarify" the existing law clearly was incorrect and (as usual) ignored.
Neal Armstrong. Summaries of Mathieu v. The Queen, 2014 TCC 207 under s. 7(3)(a), s. 251(2)(a), Statutory Interpretation – Specific v. general provisions, Interpretation Act, s. 45(2).
Income Tax Severed Letters 26 November 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
St-Hilaire – Tax Court of Canada finds that the expedited handling of a bankruptcy proposal prejudiced the taxpayer by denying him an ABIL
The definition of a business investment loss includes a capital loss from the a disposition of a debt owing by a small business corporation to which s. 50(1) applies; and s. 50(1) can be elected to apply to a debt owing to the taxpayer at year end which is established to have become a bad debt in the year.
The taxpayer was denied an ABIL, respecting a debt owing to him by his small business corporation which was extinguished due to the acceptance in the year of a proposal made under the Bankruptcy and Insolvency Act, because the debt thereby was no longer owing to him at the end of his taxation year. It seems anomalous that he might have gotten a better result if the corporation had merely been insolvent at year end without formal proceedings having been completed.
Neal Armstrong. Summary of St-Hillaire v. The Queen, 2014 TCC 336 under s. 50(1).
Proposed s. 104(13.3) undercuts use of Alberta trusts to shift income to Alberta
Proposed s. 104(13.3) establishes that ss. 104(13.1) and (13.2) designations, to effectively retain income in a trust, can only be used after 2015 to the extent that the trust taxable income otherwise would be nil (through loss utilization). This undercuts the use of an Alberta trust to have income "inside" the trust taxed at a lower rate than if it were taxed in the hands of its beneficiaries resident in a higher rate jurisdiction.
Neal Armstrong. Summary of Gary I. Biasini, "The Trust is Dead, Long Live The Trust," Tax Topics (Wolters Kluwer CCH), Number 2227, November 13, 2014, p. 1 under s. 104(13.3).
Lyrtech – Federal Court of Appeal confirms that a public company had de facto control of an alleged CCPC which was economically captive and which it essentially managed
Favreau J in the Tax Court had found that the contingent right of each of the beneficiaries of a discretionary trust to receive all the shares of a corporation (the taxpayer) held by the trustees was too nebulous to qualify as a right to acquire those shares for purposes of s. 251(5)(b). However, that corporation was controlled de facto by the public corporation (Lyrtech) which was one of the discretionary beneficiaries (along with some Lyrtech subsidiaries), so that for that reason it did not qualify as a CCPC (and, therefore, was not eligible for enhanced SR&ED credits). In particular:
- the two individual trustees also were the key directors and officers of Lyrtech;
- the taxpayer had virtually no revenues, was under-capitalized, and depended on Lyrtech for financing; and
- Lyrtech determined what R&D work the taxpayer conducted.
This decision has been confirmed in the Federal Court of Appeal, which dealt only with the de facto control issue (with Scott JA noting that different persons can have the de facto and de jure control of a corporation in the face of a bold taxpayer argument to the contrary).
Neal Armstrong. Summaries of Lyrtech v. The Queen, 2013 DTC 1147, 2013 TCC 12, aff'd 2014 CAF 267 under s. 256(5.1) and s. 251(5)(b).
CRA indicates that a second mortgagee must exercise its legal (power of sale or foreclosure) remedies before writing off its mortgage
CRA concluded that a second mortgagee could not take a s. 50 write-down because, following failure to be paid in full, he had not pursued his legal remedies, i.e., selling the property under a power of sale, or foreclosing. There was no issue raised as to whether it would have been reasonable in the circumstances for the second mortgagee to have done this. (Since the first mortgagee must be paid off first, such collection action potentially could result in a further loss.)
Thus, no nod was given to the principles that deference should be given to taxpayer's judgment where its exercise was reasonable in the circumstances (Litowitz) and that there is no obligation to take collection steps if collection is not reasonably possible (Keating).
Neal Armstrong. Summary of 17 October 2014 Memo 2014-0535121I7 F under s. 50(1).