News of Note
We have translated 8 more CRA interpretations
Email this ContentWe have translated 2 CRA interpretations released last week and a further 6 CRA interpretations released during October of 2002. Their descriptors and links appear below.
These are additions to our set of 2,611 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 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
It is unclear what could be meant by “demolishing” a CRA assumption of FMV, which is a matter of opinion
Preston stated: “A statement that an identified property has a particular fair market value at a particular point in time is an assumption (or finding) of fact, notwithstanding that fair market value has a legal definition. Fair market value is predominantly factual … .”
It is suggested that fair market value (FMV) is not a “fact” in the sense provided by Phipson on Evidence, namely, “a statement that can be verified”, i.e., “can be proven to be true or false through objective evidence”, whereas evidence as to FMV is essentially opinion evidence. In other words, “fair market value is not a fact that can be rebutted by proving it to be false.”
This last proposition generates difficulties in applying the dictum of L’Heureux-Dubé J in Hickman Motors that if the taxpayer meets its initial onus of “demolishing” the Minister’s assumptions through making out a prima facie case, the onus shifts to the Minister. Thus:
If a fair value is neither true nor false, nor more likely than not to be true or false, it cannot be proven. The initial onus on the taxpayer to “demolish” the Minister’s assumption by presenting enough evidence to create a rebuttable presumption that the matter assumed is false cannot be met, nor can the subsequent onus on the Minister “to prove” that the assumption is true.
(Note that although this shifting-onus doctrine is well entrenched in the Quebec Court of Appeal, it was suggested to be incorrect by Webb JA in Sarmadi and Eisbrenner, whose comments were endorsed by Monaghan JA in Kufsky.)
Neal Armstrong. Summary of David H. Sohmer, “Is Fair Market Value a Fact?,” Tax Topics (Wolters Kluwer), 10 October 2023, No. 2689, p.1 under General Concepts - Onus.
CRA concludes that adjusted income for RMES purposes does not include income of spouse who died in the year
“Adjusted income” as defined in s. 122.6 is relevant to an individual’s entitlement to the refundable medical expense supplement ("RMES") under s. 122.51 and to the Canada child benefit under s. 122.61. Given that the “adjusted income" is the total of the income for the year of the individual or of the individual's "cohabiting spouse or common-law partner" at the end of the year, CRA unsurprisingly concluded (in the context of the RMES entitlement) that the adjusted income of a surviving spouse for a year does not include the income of a spouse who died during the year.
This reversed 2014-0536771E5 F, which appeared to consider that where the deceased spouse was not living separate and apart from the survivor at the time of death, the deceased spouse was deemed to be a "cohabiting spouse or common-law partner" of the survivor.
Neal Armstrong. Summary of 24 January 2023 External T.I. 2018-0753471E5 F under s. 122.6 – adjusted income.
CRA confirms no withholding where an RCA pays a retiring allowance to the beneficiary’s RRSP that is an s. 60(j.1) eligible amount or within the RRSP deduction limit
The beneficiary of a retirement compensation arrangement (RCA) set up by his employer was entitled on his retirement in 2017 to receive a $50,000 retiring allowance, which was transferred directly to his RRSP. CRA confirmed that, by virtue of Reg. 100(3)(c), no withholding by the RCA custodian was required given that his RRSP deduction limit for his 2017 taxation year, as confirmed by his notice of assessment for his 2016 taxation year, was $30,000, and the eligible portion of the retiring allowance qualifying for the s. 60(j.1) deduction was $20,000.
Neal Armstrong. Summary of 9 June 2017 External T.I. 2017-0700961E5 F under Reg. 100(3)(c).
CRA takes an accommodating approach to determining what is a prescribed amount under Reg. 5907(1.3)
Two LLCs in a US consolidated group beneath Canco made tax compensation payments indirectly to the top CFA in that group in respect of the share of the U.S. taxable income of the US consolidated group earned through those LLCs during their 2011 and 2012 taxation years.
In finding that those payments by the LLCs (which were disregarded for US tax purposes) qualified under Reg. 5907(1.3)(a) as amounts that could reasonably be regarded as being in respect of income tax that would otherwise have been payable by the CFA single members of those LLCs in respect of the FAPI earned by those CFAs had their US tax liabilities been determined for US purposes on an unconsolidated basis, CRA indicated that:
- although it was only the regarded CFAs and not LLC1 and LLC2, as disregarded entities, who severally bore the liability to pay the US consolidated group’s tax liability, the payments made by the LLCs were made on behalf of their respective sole members
- although the payments for the 2011 taxation years were not made pursuant to a written agreement, there was no requirement that tax sharing payments be made pursuant to a written agreement
- the fact that the tax sharing payments were paid in June 2014, i.e., well past the end of the 2011 and 2012 taxation years, did not prevent Reg. 5907(1.3)(a) from applying to these amounts for the purposes of Canco’s 2011 and 2012 taxation years
- in particular, the amounts constructively paid by the single-member CFAs (through their LLCs) were determined in a manner that supported that they could reasonably be regarded as being in respect of the income tax that these foreign affiliates would have paid in respect of FAPI earned by their disregarded (LLC) subsidiaries if those tax liabilities of had not been determined as members of the US consolidated group, but rather had been determined separately
However, given that the income from LLC1 and LLC2 was offset for US purposes by reported operating losses from the active businesses of other members of the US consolidated group, Reg. 5907(1.4) reduced the prescribed amounts recognized for Canco’s 2011 and 2012 taxation years to nil, resulting in no FAT being recognized regarding the above tax sharing payments until (and to the extent that) Regs. 5907(1.5) and (1.6) applied in respect of one or more of Canco’s five subsequent taxation years.
Neal Armstrong. Summaries of 3 March 2023 Internal T.I. 2016-0662221I7 under Reg. 5907(1.3)(a) and Reg. 5907(1.091).
Income Tax Severed Letters 11 October 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
There is a concern that redeeming the preferred shares of a related individual at the commencement of a butterfly reorganization would oust the butterfly exception
Suppose that the distributing company (“DC”) has three shareholders: Dad owning frozen preferred shares; and his two sons, each owning 50% of the common shares. Dad’s shares are redeemed and the sons then butterfly the DC assets to their respective transferee companies (“TCs”).
There is a concern that the test in s. 55(3.1)(b)(i)(C) would not be met, so that s. 55(3.1)(b)(i) will applies to deny butterfly treatment. S. 55(3.1)(b)(i)(C) might apply on the basis that the redemption of Dad’s preferred shares constitutes an acquisition of property by a person (DC) who ceased to be related to the vendor (Dad) as part of the series (DC will be wound-up as part of the series and, therefore, will cease to be related to Dad). The particular issue is that it might be considered that this redemption entailed the acquisition of property by DC.
There is greater certainty if Dad instead transfers his DC preferred shares to each of the TCs in consideration for voting shares of the TCs, with the TCs then redeeming those preferred shares. In particular, this would appear to satisfy the technical requirements of ss. 55(3.1)(b)(i)(C), 55(3.1)(b)(iii)(A) and 55(3.2)(c).
Neal Armstrong. Summary of David Carolin, Manu Kakkar and Paola D’Agostino, “To Redeem or Not To Redeem a Specified Shareholder: That Is the 55(3)(b) Question,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 6 under s. 55(3.1)(b)(i)(C).
Québecor – Tax Court of Canada finds that a yo-yo transaction to utilize the accrued capital loss of an indirect subsidiary to step-up nil-basis shares to FMV was not a GAAR abuse
Québecor held 54.72% of the shares of another holding company (Québecor Media) which, in turn, held all the common shares of a third holding company (“366”) directly, and preferred shares of 366 through a fourth holding company (“9101”). In order to utilize an accrued loss of 366 on its shares of an operating company, Québecor transferred its shares of Abitibi, having an FMV of $191.8 million and a nominal ACB, to 366 on a s. 85(1) rollover basis in exchange for preferred shares of 366, then immediately redeemed those preferred shares for a note, which was repaid through the transfer back to Québecor of the Abitibi shares. 366 realized a capital loss to offset its capital gain on the Abitibi shares by being wound up into its two shareholders (Québecor Media and 9101) pursuant to s. 69(5). (The common shares of 366 held by Québecor Media were treated as having no value, so that Québecor Media received no winding-up distribution and realized a large capital loss on the wind-up; all the property of 366 instead was distributed as a s. 84(2) dividend to 9101.)
In finding that it was no abuse of ss. 88 and 69(5) for 366 to have been wound-up on a non-rollover basis so as to realize a capital loss, Ouimet J noted that the scheme of s. 88 was to provide for both wind-ups on a rollover basis under s. 88(1) and for wind-ups on a taxable basis under ss. 88(2) and 69(5), with the application of stop-loss rules being expressly excluded in ss. 69(5)(c) and (d).
In finding that the transfer of the Abitibi shares on a rollover basis to 366 did not constitute an abuse of s. 85(1), Ouimet J stated that “this provision allows two related corporations ... to transfer a capital gain to be realized on a property from one corporation that does not have a capital loss to another that does have a capital loss, so that the latter can deduct it from the capital gain to be realized on the transferred property.” Although he accepted that the object of s. 85(1) was to provide for the deferral rather than the elimination of tax, here the step-up of the ACB of the Abitibi shares in the hands of Québecor entailed the receipt by it of a deemed dividend that was included in its income (albeit, eligible for the s. 112(1) deduction), and the capital gain realized by 366 on disposing of the Abitibi shares was included in computing its income.
Québecor’s GAAR appeal was allowed.
Neal Armstrong. Summary of Québecor Inc. v. The King, 2023 CCI 142 under s. 245(4).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released during November of 2002. Their descriptors and links appear below.
These are additions to our set of 2,603 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 20 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-11-08 | 15 November 2002 Internal T.I. 2002-0162427 F - Price Adjustment Clause & 85(7.1) | General Concepts - Effective Date | large FMV discrepancy suggested lack of bona fide valuation so that price adjustment clause need not be applied/ if applied, s. 85(1) election must be amended |
| Income Tax Act - Section 85 - Subsection 85(7) | amended s. 85(1) election must be filed if price-adjustment clause applied | ||
| Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e.2) | significant FMV shortfall suggested that a benefit was desired to be conferred | ||
| 14 November 2002 Internal T.I. 2002-0169957 F - "Exercice" - Effet de 134.2 | Income Tax Act - Section 134.2 - Subsection 134.2(2) | s. 134.2 election has no effect on corporation’s fiscal period | |
| Income Tax Act - Section 249.1 - Subsection 249.1(1) | s. 134.2 election affects only the corporation's current taxation year and not its fiscal period | ||
| 6 November 2002 External T.I. 2002-0170545 F - Section 55(3)(a) - Exception55(3)(a) | Income Tax Act - Section 55 - Subsection 55(4) | s. 55(4) inapplicable where parent retained de jure control primarily for protection of their economic interest | |
| 6 November 2002 External T.I. 2002-0132395 F - Robot Class 10 Catégorie 10 | Income Tax Regulations - Schedules - Schedule II - Class 10 - Paragraph 10(a) | cost of remote-controlled duct-inspecting robot to be allocated between Class 10(a) (“automotive equipment” – which is broadly construed) and Class 8(j) (“radiocommunication equipment”) | |
| Income Tax Regulations - Schedules - Schedule II - Class 8 - Paragraph 8(j) | cost of remote-controlled duct-inspecting robot to be allocated between Class 10(a) (“automotive equipment”) and Class 8(j) (“radiocommunication equipment” – informed by IA meaning of “radiocommunication”) | ||
| 27 November 2002 Internal T.I. 2002-0149207 F - INTERETS ET FRAIS LEGAUX | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) | prejudgment interest included in damages received for defective work on the recipients’ personal homes was taxable | |
| 5 December 2002 Internal T.I. 2002-0155187 F - DEPENSES PERSONNELLES | Income Tax Act - Section 248 - Subsection 248(16) | ITRs, like ITCs, treated as government assistance, so that included under s. 12(1)(x) unless s. 12(2.2) election made | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(hh) | repayment of ITRs would result in deduction under s. 20(1)(hh)(i) or (ii) depending on whether or not an s. 12(2.2) election had been made |
The domestic exception for an EIFEL excluded entity contains potential traps
The third condition in the “domestic exception” in para. (c) of the definition of “excluded entity” regarding the EIFEL rules is essentially that (i) no non-resident “specified shareholder” or “specified beneficiary” of the taxpayer or any eligible group entity, and (ii) no partnership, the majority of the FMV of the interests in which are owned by non-residents, may own more than 25% of the equity in the taxpayer or any eligible group entity.
This condition would apply, for instance, if:
- a non-resident person is the beneficiary of a discretionary family trust that is an eligible group entity, given that the “specified beneficiary” definition in s. 18(5) generally deems a beneficiary of a discretionary trust to own a 100% interest in the trust.
- a non-resident family member owns one share of an eligible group entity and, together with other family members, has 25% of the votes or value in respect of the eligible group entity (by virtue of being a non-resident “specified shareholder” of the eligible group entity).
- a large, wholly domestic CCPC with a relatively small subsidiary (but whose shares have an FMV exceeding $5 million) sells a 25% interest in the subsidiary to a non-resident investor (but this result would be avoided if the non-resident were to invest through a Canadian acquisition company).
Neal Armstrong. Summary of Kyle A. Ross and Trent J. Blanchette, “Issues with the ‘Excluded Entity’ Exception to the EIFEL Rules,” Tax for the Owner-Manager, Vol. 23, No. 4, October 2023, p. 4 under s. 18.2(1) – excluded entity – (c).