News of Note
CRA indicates that an individual exercising power of attorney for a controlling incapacitated shareholder does not have de jure control of the corporation
Email this ContentCRA confirmed 2012-0454111C6 in finding that a power of attorney under which a designated attorney exercises the voting rights of a controlling shareholder of a corporation as a consequence of the incapacity of that shareholder would not constitute (in contrast to a unanimous shareholders agreement) an external document that has to be taken into consideration in determining the de jure control of the corporation - so that the grant or exercise of such a power of attorney would not give rise to a loss restriction event.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.3 under s. 251.2(2)(a).
CRA relies on s. 248(28) to avoid double taxation under s. 15(1) and s. 5
A corporation pays wages to an individual employee who is not a shareholder but does not deal at arm’s length with a shareholder and a portion of the wages is subsequently determined to be unreasonable pursuant to s. 67. CRA indicated that the overpayment would not be included in the individual’s income under s. 15(1) because the benefit had not been conferred on the individual in a capacity of shareholder. There also would be no deemed inclusion under s. 15(1.4)(c) because the same amount had been included in the individual’s employment income.
Where such non-arm’s length employee was also a shareholder, although the overpayment would otherwise be income under s. 15(1), s. 248(28) would exclude the application of s. 15(1), so that there was no double taxation. (This seems like a departure from the traditional approach of determining whether a benefit was received qua employee or qua shareholder, and then only applying the more applicable provision.) Again, s. 15(1.4)(c) would not apply because of the s. 5 inclusion.
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.2 under s. 15(1).
CRA indicates that a contribution to a spousal trust after the spouse’s death would not cause it to cease to be a spousal trust or affect the deemed disposition dates for its property
We have published the questions which were posed, and summaries of the preliminary oral responses given, at the 2024 STEP CRA Roundtable.
In Q.1, CRA indicated that a contribution to a spousal or common-law partner trust (a “spousal trust”), made after the death of the spouse beneficiary, by a person other than the individual who had settled the trust, would not cause it to cease to be a spousal trust. In addition, the contribution would not have any effect on the timing of the deemed disposition of all the capital property of the trust: on the death of the spouse beneficiary (which had already occurred); and every 21 years thereafter pursuant to s. 104(4)(b)(iii) or (c).
Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.1 under s. 104(4)(a).
Income Tax Severed Letters 5 June 2024
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on using an in-house re-circulating daylight loan to fund a loss-shifting transaction
CRA ruled on routine transactions between two Lossco subsidiaries and one Profitco subsidiary of an immediate Canadian parent company involving Lossco loans to the Profitco and Profitco subscriptions for Lossco cumulative preferred shares. The ruling contemplated that the daylight loan to the immediate parent could be in a somewhat small amount borrowed from a group company, with the funds used in setting up the loss shifting structure moved in a circle up to five times. Using a re-circulating in-house daylight loan would not only likely be cheaper and more expedient, but also could make it easier to give the representation that the daylight loan amount was consistent with that parent’s borrowing capacity.
The rulings included that Profitco could use any non-capital loss arising from these transactions for carryback (for up to 3 years) back to a prior year.
Neal Armstrong. Summary of 2023 Ruling 2023-0964601R3 under s. 111(1)(a).
Entrepôt Frigorifique – Tax Court of Canada finds no obligation of a registrant claiming ITCs to perform supplementary due diligence on its suppliers
The appellant (Frigo) was assessed beyond the normal four-year ETA assessment period to deny input tax credits (ITCs) for GST charged to it by placement agencies though which Frigo had been supplied with temporary workers. The Crown took the position that the agencies which, although registered for GST purposes, had not remitted the GST collected by them from Frigo, were not the actual suppliers of the temporary workers, and that Frigo was complicit in their stratagem to misappropriate GST; and, in particular, alleged that Frigo had sufficient information to be put on guard so that it should have engaged in supplementary inquiries (rather than merely having checked that they had valid GST registrations) before paying the placement agencies’ invoices.
In rejecting this position, Boyle J stated:
I cannot interpret the ETA and the Regulations as imposing an undeclared obligation on every Canadian business purchasing commercial supplies to exercise additional due diligence with respect to each of its duly registered suppliers, which would include, as claims the respondent in this case, the examination of the physical establishment of the new supplier, its agreements with its personnel, its intention to use subcontractors to carry out the supply, and more — all without even being able to know if the duly registered and verified supplier is in arrears in the payment of GST collected, employee withholding taxes or provincial sales tax, or is otherwise not complying with its tax obligations.
Neal Armstrong. Summary of Entrepôt Frigorifique International Inc. v. The King, 2024 CCI 78 under ETA s. 169(4).
Kone Inc. – Quebec Court of Appeal confirms that a cross-border repo was not an abuse of the s. 17 rule
The taxpayer (“KQI”), a Canadian operating subsidiary in the Kone multinational group, used group funds advanced to it by a group company (Kone Canada), in part as an interest-bearing loan, to purchase, for a cash purchase price of $394 million, cumulative preferred shares of a US affiliate (Kone USA) from the non-resident affiliated company (Kone BV) to which such shares had recently been issued as a stock dividend. At the same time, KQI agreed to resell such preferred shares at pre-agreed higher prices, to Kone BV in three and five years’ time, which in fact occurred. The gain arising under this resale was deemed under s. 93 to be dividends coming out of exempt surplus of Kone USA.
The ARQ sought to impute interest income to KQI under TA s. 127.6, the Quebec equivalent of ITA s. 17(1), on the basis that the above “repo” transaction was a sham that should instead be characterized as an interest-free loan by KQI to Kone BV or, alternatively, that the repo transaction represented an abusive avoidance of such s. 17 equivalent for Quebec GAAR purposes.
After rejecting the sham argument, the Court also rejected the application of the Quebec GAAR, stating:
One cannot ignore the fact that financing transactions that are not loans will not generate interest but may provide for other forms of return. … A repo with a reasonable return in the form of dividends does not defeat the OSP [object, spirit and purpose] of Section 127.6.
… KQI is taking advantage of … a mismatch between the tax treatment of its income (the dividends from Kone US are not taxable because they are paid out of its exempt surplus) and its expense (the interest in pays to Kone Canada is deductible). …
However, the mismatch arises from the Taxation Act and the policies underlying it … . The exempt surplus in Kone US is made up of its earnings from an active business on which it has already paid income taxes.
Neal Armstrong. Summaries of ARQ v. Kone Inc., 2024 QCCA 678 under s. 245(4) and General Concepts - Sham.
We have translated 8 more CRA interpretations
We have translated 2 interpretations released by CRA last week and a further 6 CRA interpretations released in November of 2001. Their descriptors and links appear below.
These are additions to our set of 2,852 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 22 2/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA rules on absorptive foreign mergers
After giving effect to some preliminary transactions, a U.S. corporation which was a qualifying person for purposes of the Canada-US Treaty (the “Treaty”) wholly-owned four stacked corporations in Country 1. The “bottom” Country 1 corporation, in turn, wholly-owned a resident of Canada (Canco). The shares of Canco and of the above Country 1 corporations were taxable Canadian property (TCP).
The proposed transactions include:
- The US corporation will contribute its shares of a Country 1 corporation to a newly-formed wholly-owned US corporation (Taxpayer 6), which is a qualifying person.
- Three downstream absorptive mergers of Country 1 corporations will occur.
- In addition, there will be an upstream merger of a Country 1 corporation which is a subsidiary of one of the above Country 1 corporations but whose shares are not TCP (because it is not “above” the Canco) into its Country 1 parent as the survivor.
Where there is a downstream absorptive merger under the Country 1 corporate law of a parent into its wholly-owned subsidiary: the subsidiary as the surviving entity does not dispose of its assets or liabilities (other than amounts owing between it and the parent); all of the assets and liabilities of the parent (other than such intercompany amounts and the shares of the subsidiary) are transferred to the subsidiary; the shares in both parent and subsidiary are cancelled; and the subsidiary allocates new shares to the current shareholder(s) of the parent.
An upstream absorptive merger is similar (in reverse) except that the shares of the subsidiary are cancelled and the current shareholder(s) of the parent continue to hold their shares of the parent.
CRA ruled that the disposition in 1 above will be exempted under Art. XIII(4) of the Treaty (presumably, because the transferred TCP was not shares of a company resident in Canada).
CRA gave rulings based on the mergers qualifying as absorptive mergers under s. 87(8.2) (so that the s. 87(4) rollover, and the para. (n) of “disposition” exclusion, applied). For instance, on each downstream merger, the shareholder of the parent will dispose of its shares of the parent for their ACB and will have an ACB for its shares of the surviving subsidiary for the same amount, and the parent will be deemed by para. (n) not to have disposed of its shares of the subsidiary.
Neal Armstrong. Summaries of 2023 Ruling 2022-0958521R3 under s. 87(8.2) and Treaties – Income Tax Conventions – Art. 13.
CRA indicates that its practice is to not apply s. 18(9) where the adjustments would be minimal
CRA indicated that an expenditure incurred for the anti-theft marking of an automobile used in carrying on a business (entailing engraving a code on the principal parts of the automobile), likely would be incurred on current account assuming that the only benefit resulting from the expenditure related to insurance premiums, and it did not improve the automobile (for example, in improving its performance or lifespan. Although, s. 18(9) might be applicable, “the current practice is to disregard adjustments for minimal amounts.”
Neal Armstrong. Summaries of 14 March 2024 External T.I. 2015-0596761E5 F under s. 18(1)(b) – capital expenditure v. expense – improvements v. running expense, s. 18(9) and s. 6(1)(k) – A(iv).