News of Note

D & D Livestock – Tax Court finds that stock dividends could be used to double-up on safe income

The safe income on hand (SIOH) of the holding company (HLL) for the taxpayer in respect of its shares of the taxpayer included safe income of $1.0M earned directly by the taxpayer and a further $0.5M earned in respect of a 50% shareholding (RTI shares) held by a subsidiary of the taxpayer (Newco 3).

A stock dividend of $1.5M paid by the taxpayer to HLL reduced such SIOH of HLL to nil.  However, the taxpayer successfully argued that this stock dividend did not reduce its SIOH in respect of its shares of Newco 3.  Accordingly, it could (and did) receive a further stock dividend of $0.5M from Newco 3 free of capital gains tax under s. 55(2).

Through other transactions (relying on ss. 85(1)((g) and (h)) the basis bump from the two stock dividends was combined in the ACB of the shares, held by a successor of HLL, in a replacement holding company for the RTI shares (Newco 2), so that on a sale of Newco 2 to a 3rd-party purchaser, the $0.5M safe income generated in respect of RTI effectively could be double-counted.

In other words, since the 1st stock dividend did not reduce the taxpayer’s SIOH in respect of its indirect investment in RTI, it effectively was able to use that SIOH a 2nd time to reduce a capital gain on a 3rd–party sale.

Neal Armstrong.  Summary of D & D Livestock Ltd. v. The Queen, 2013 TCC 318 under s. 55(2).

Marret Resource adds requirement for annual redemption offer to its common share provisions

Marret Resource Corp., which is a TSX-listed public corporation engaged in lending to resource companies (and which does not appear to be a mutual fund corporation), is proposing to amend its articles to provide for an "annual liquidity right," i.e., an annual offer to redeem its common shares at a discount to NAV (assuming they are trading at least a 3% discount to NAV).  It’s rather like building a requirement for the making of periodic issuer bids into the articles.

The tax disclosure does not suggest any taxable preferred share issues, nor indicate that redemptions would give rise to deemed dividends.  The issued share capital in the financial statements suggests that the shares’ paid-up capital may also be higher than the current trading price.

Neal Armstrong.  Summary of Circular of Marret Resource Corp. for addition of annual redemption feature to its common shares under Other – Liquidity Program.

The interest imputation rule in s. 80.4(1) trumps the general employee benefit rule in s. 6(1)(a)

Charging interest on credit card balances of bank employees at a lower rates than for regular card holders but at higher than the prescribed rate (currently 2%) does not result in a taxable benefit.  CRA considers that the s. 80.4(1) rule, which does not impute income to the employees given the low prescribed rate, trumps s. 6(1)(a), which otherwise would recognize a benefit based on the interest rate differential between employee and regular credit cards.

Scott Armstrong.  Summary of 6 September 2013 T.I. 2012-0463501E5 ("Reduced Interest Rate Credit Cards") under s. 6(1)(a).

A retroactive deemed disposition gives rise to a retroactive s. 116 filing requirement

You are a non-resident who converted your Canadian recreational property to rental use in Year 1, and elected under s. 45(2) for there to be no change-of-use deemed disposition.  In your return for Year 3, you revoke the election so that you are deemed to have disposed of the property at fair market value on January 1 of Year 3.

CRA considers that the deadline for you to apply for a s. 116 certificate is January 11 of Year 3.  Given that you did not make this deadline, this presumably means that you are liable to remit 25% of the property’s FMV to the fisc.

Neal Armstrong.  Summary of 25 September 2013 T.I. 2013-0485751E5 F ("Rescinding 45(2) election by a non-resident") under s. 116(3).

Income Tax Severed Letters 30 October 2013

This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA generally will accept a late eligible dividend designation for an excess capital dividend amount election made within three years

S. 89(14.1) gives CRA the discretion to accept an eligible dividend designation that is up to three years late.  CRA generally will accept a late designation if the reason for the lateness was an honest and non-negligent mistake in calculating the capital dividend account at the time of making a capital dividend election, so that the taxable dividend arises as a result of a s. 184(3) election to deem the excess portion the capital dividend to be a separate taxable dividend.

Neal Armstrong.  Summary of 2 August 2013 T.I. 2013-0475261E5 ("Eligible Dividend - Late Filing 89(14.1) & 184(3)") under s. 89(14.1).

The Rulings Directorate leaves it for the TSOs to figure out who pays the Part IV tax on a RDTOH circularity problem

A Canadian-controlled private corporation (ACo) held a minority interest in another corporation (BCo) in the form of two classes of shares, one of which had been held on V-day (December 31, 1971), so that the accrued capital gain on the V-day shares represented potential pre-1972 CSOH which could be distributed under s. 88(2) as a capital distribution on the winding-up of ACo.  CRA ruled, based on previous GAAR committee deliberations, that it was acceptable for ACo to distribute this incipient surplus to its individual shareholders without itself being wound-up.  This was to be accomplished by ACo spinning-off the V-day shares to a Newco held by its shareholders, with BCo then being wound up in the hands of its shareholders including Newco and ACo (which until then continued to hold the post-72 shares of BCo), and with Newco itself then being wound up (so that the Newco shareholders accessed 100% of the pre-1972 CSOH under s. 88(2).)

The spin-off mechanics entailed ACo and Newco receiving equal deemed dividends from each other.  This gave rise to a RDTOH circularity problem, as ACo had a RTOH balance.  The Rulings Directorate stated that the district CRA offices "will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b)."

Neal Armstrong.  Summary of 2013 Ruling 2012-0443081R3 ("Distribution of pre-72 Capital Surplus on Hand") under s. 186(1).

CRA permits a Canadian public company to effect a separate s. 84(2) distribution of non-sale cash

Most or all s. 84(2) rulings for paid-up capital distributions by a public company have described a distribution of the shares of one or more subsidiaries of the public company, or the distribution of proceeds of the sale of such shares or of the assets of a business carried on directly.

CRA has issued a ruling letter that permits a public corporation, engaged in a refocusing of its business, to make two separate PUC distributions of both the proceeds of sale of a business and of surplus cash on hand.

Neal Armstrong.  Summary of 2013 Ruling 2012-0470281R3 ("Reduction of paid-up capital") under s. 84(2).

Brent Kern Trust – Sommerer robs humankind of an interesting surplus-stripping Tax Court case under GAAR

Some surplus-stripping transactions involved a company (Opco) paying a dividend to Trust 1, which distributed the dividend to a related corporation (Holdco) qua beneficiary which, in turn, paid the same dividend amount to Trust 2 (the taxpayer).  The "trick" was that Holdco had previously undergone an estate-freeze style of reorg so that Trust 2 had been able to purchase all of Holdco’s common shares from Opco for their nominal fair market value.  Therefore (the taxpayer argued), s. 75(2) applied to deem the dividend received by it from Holdco to instead be dividend income of Opco, which was eligible for the s. 112 intercorporate dividend deduction.

However, Sommerer was decided before judgment – so that Bocock J found that s. 75(2) did not apply to the dividend income on the Holdco common shares, as they had been sold, rather than contributed, to the taxpayer.  Hence, GAAR was moot.

He did not comment on new (draft) s. 75(2).

Neal Armstrong.  Summary of Brent Kern Family Trust v. The Queen, 2013 TCC 327, under s. 75(2).

JP Morgan - Federal Court of Appeal provides a primer on administrative law remedies (which are a "last resort")

"Armed with sophisticated wordsmithing tools and cunnng minds, skilful pleaders can make Tax Court matters sound like administrative law matters..." (para. 49).

Stratas JA wasn't fooled.  The taxpayer was unsuccessful, in its application for judicial review, to have some Part XIII tax assessments set aside on the basis that they were contrary to the Minister's policy to not go back more than two years on audit.

He thoroughly reviewed administrative law in an income tax context (perhaps to discourage taxpayers from bringing further clear-loser applications).

Neal Armstrong.  Summary of MNR v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250 under Federal Court Act, s. 18.5.