News of Note
CRA rules on a hurried (under one month) loss shift
Email this ContentCRA ruled on loss-shifting transactions which were to be reversed (on a cashless basis) less than a month after being implemented. This likely implies that the intragroup loan amounts were quite large – which is consistent with the unusual absence of a representation that the loans amounts were something which could have been borrowed from a bank.
In order to avoid a daylight loan, the various amounts were split up into bite-sized chunks, with the money being circled.
Neal Armstrong. Summary of 2014 Ruling 2014-0525441R3 under s. 111(1)(a).
Livingston – Tax Court of Canada narrowly construes the replacement property concept
Lyons J found that the use by the taxpayer, who was a co-owner of a dairy farm, of the proceeds of a sale of a part interest in his land co-ownership interest to purchase the interest of the other co-owner in the non-realty farming assets (e.g., the milk quota and farming equipment), which he used in continuing to carry on his dairy farming, did not entitle him to access the s. 44(1) rollover: the purchased farming assets did not "replace" the farmland he sold as required by s. 44(5)(a), as this concept required a "direct substitution" of "the same species of capital property;" and the purchased assets also were not acquired for a "similar" use to that of the farmland, as required by s. 44(5)(a.1).
Neal Armstrong – Summary of Livingston v. The Queen, 2015 TCC 24 under s. 44(5)(a).
Annuitants taint their RRSP share investments as non-excluded property if they sit on the board
Shares are a prohibited investment for an RRSP (or RRIF) if the annuitant has a "significant interest" in, or does not deal at arm’s length with, the corporation, and the shares are not "excluded property." Shares which otherwise would be excluded property will be tainted if the annuitant has "the right to cast at least 10% of the votes…that could be cast regarding the governance of the [corporation]."
CRA considers that this test will be violated if the annuitant is a member of the board of directors (assuming the board has under 11 directors) as he or she would be entitled to cast at least 10% of the votes on a board vote. This also applies to a director/TFSA holder.
Neal Armstrong. Summary of 26 November 2014 T.I. 2014-0545041E5 under s. 207.01(1) – excluded property.
CRA notes that no valuation is required where drilling rights are granted in consideration for a royalty
If the holder of a patent licenses it for a royalty, the royalty is only recognized as it is earned. Contrast this with an individual who grants drilling rights over his freehold property in consideration for annual royalties payable out of any oil and gas production. He will be considered to have acquired a Canadian resource property (i.e., the royalty) giving rise to an immediate addition to his "CCOGPE" account equal to the fair market value of that royalty right; and to have also disposed of a Canadian resource property (i.e., by granting of the drilling rights) so that their fair market value is subtracted from his CCOGPE account. However, CRA recognizes that the drilling rights would be considered to have the same value as what was paid for them (the royalty). Thus the two items would offset so that "a formal valuation of the right is not required."
In the case of a non-resident individual receiving the royalties, CRA was completely non-committal as to whether they were taxable to him under s. 115(1)(a)(ii) or (iii.3) rather than s. 212(1)(d)(v).
Neal Armstrong. Summaries of 23 January 2015 T.I. 2013-0509771E5 under s. 66.4(5) – CCOGPE, s. 115(1)(a)(iii.1), Treaties – Art. 6, Art. 12 and Reg. 805.
An estate cannot claim a s. 42(1)(b) capital loss for settling an indemnity claim against the deceased
Death also results in the loss of the ability to claim a s. 42(1)(b)(ii) capital loss respecting an indemnity payment which becomes payable after death (i.e., neither the deceased nor the estate can claim it).
Neal Armstrong. Summary of 19 January 2015 T.I. 2013-0511381E5 F under s. 42(1).
Repsol Canada – Tax Court of Canada finds that an LNG conversion terminal and jetty were one asset for the processing of goods and not for natural gas distribution
C.Miller J found that the LNG terminal and jetty in St. John were one asset for CCA purposes because the jetty contributed to the process at the terminal of converting the LNG into gas form. Before a change in the rules, that asset qualified as a Class 43 property because it was engaged in "processing" (as conversion from LNG to gas form represented a change in the goods, and rendered those goods more valuable) and it was not a "distribution" asset: distribution did not commence until at least the delivery of the (converted) gas to the transmission pipeline.
Neal Armstrong. Summary of Repsol Canada v. The Queen, 2015 TCC 21 under Sched. II, Class 1.
CRA finds that there is implied receipt of deemed proceeds
S. 69(11) can apply to deem a taxpayer which thought it disposed of property on a rollover basis to have instead received higher proceeds of disposition (without explicitly deeming the taxpayer to have received those additional deemed proceeds) whereas the replacement property rollover in s. 44 potentially applies to "an amount that has become receivable by a taxpayer." CRA has now stated that "while subsection 69(11) does not specifically deem the taxpayer to have an amount receivable as proceeds of disposition… CRA will generally accept that this will not, in and by itself, prevent a taxpayer from making [the replacement property] election."
Essentially the same point arises elsewhere, e.g., presumably deemed proceeds of a REIT should also be considered to be "gross REIT revenue," i.e., amounts which are "received or receivable" by it.
Neal Armstrong. Summary of 23 December 2014 T.I. 2014-0551841E5 under s. 44(1).
CRA considers that a corporation can claim a s. 42(1)(b) loss after (per IT-126R2) it has been wound up
In IT-126R2, CRA indicates that it will accept that a corporation "has been wound up" if it has been liquidated and the only reasons for not yet filing articles of dissolution is outstanding litigation. CRA considers that if the corporation subsequently settles the litigation by making a payment that otherwise qualifies as a deemed capital loss under s. 42(1)(b)(ii) (e.g., pursuant to a previous share sale indemnity), it can claim that capital loss in the year of payment thereof (i.e., after it is considered for s. 88 purposes to have been wound up).
Neal Armstrong. Summary of 26 November 2014 T.I. 2014-0551641E5 F under s. 88(2).
CRA rules that a negative participation make-whole is not participating debt interest
CRA has ruled that a convertible debenture on which interest was payable in shares or cash did not give rise to participating debt interest, or to interest withholding to an arm’s length holder.
On conversion, a holder was entitled to receive a make-whole (generally payable in shares) computed as the value of foregone future interest but reduced by a percentage of the gain enjoyed by the holder on conversion – so that in a sense it had a negative participation feature. CRA also effectively ruled that the make-whole was not participating interest.
Neal Armstrong. Summary of 2014 Ruling 2013-0514551R3, amended by 2014-0536001R3 under s. 212(3) - participating debt interest.
CRA treats the granting of an emphyteusis as a part disposition of property rather than as a lease
CRA now considers that the entering into of an emphyteutic lease represents a part disposition of property rather than something analogous to the entering into of a common law lease. Therefore, any "rents" receivable must be recognized as proceeds of disposition at the time of grant rather than as amounts which can be recognized over time as they become receivable (although a s. 40(1) reserve may be available). This represents a reversal of a 2012 technical interpretation.
Neal Armstrong. Summary of 23 December 2014 T.I. 2013-0487791E5 F under s. 248(1) – disposition.