News of Note
CRA accepts that the FMV of a professional partnership interest can be discounted for some portion of the deferred income tax on the work-in-progress?
Email this ContentAn interest in a professional partnership, which had elected to exclude work-in-progress from income, is transferred on a rollover basis. Should the valuation of that interest be reduced for the deferred income tax liability on the work-in-progress?
CRA acknowledged that a potential purchaser likely would discount for such taxes, while at the same time noting its "general" position that "deferred taxes respecting a property which is the subject of a rollover should not be considered for the purposes of determining the FMV of such property."
Neal Armstrong. Summary of 13 August 2013 T.I. 2012-0471401E5 F under General Concepts – FMV – Other.
There is an automatic cost bump on the sale of corporate property at an undervalue to a controlling shareholder?
Although s. 69(1)(b)(i) is widely viewed as producing a one-sided adjustment (i.e., no increase in cost to the non-arm’s length purchaser to match the increased proceeds to the vendor), this effectively is not the case where an estate sells trust property to a beneficiary at an under-value (apparently without a price adjustment clause), as the resulting taxable benefit will increase the beneficiary’s cost under s. 52(1). Although not mentioned by CRA, the same logic appears to apply on a sale of corporate property to a non-arm's length shareholder.
This still is a bad result, as the under-valuation amount is taxable immediately on income account.
Neal Armstrong. Summary of 6 August 2013 T.I. 2012-0469481E5 F under s. 52(1).
CRA finds that the non-qualifying security rule in s. 118.1(13) effectively amends the wording of s. 70(5)
S. 118.1(5) deems a gift made under a will to be made in the deceased’s terminal year, so that the executor can then designate under s. 118.1(6) an amount (generally between the gifted property's adjusted cost base and fair market value) at which the property is deemed to be disposed of at the end of the terminal year. However, s. 118.1(13) provides that where the gift was of non-qualifying securities (other than an excepted gift), there is deemed to have been no gift except for purposes of determining the securities' proceeds of disposition under s. 118.1(6). This means that they are deemed to have been disposed of immediately before death under s. 70(5) rather than under s. 118.1(5). However, s. 70(5) deems the securities to be disposed of for their fair market value rather than an ACB designation under s. 118.1(6).
CRA's solution to this dilemma: the non-qualifying securities are deemed to be disposed of immediately before death under s. 70(5) for the amount designated under s. 118.1(6).
Neal Armstrong. Summary of 15 July 2013 T.I. 2013-0486701E5 under s. 118.1(13).
There’s no requirement to file an amended s. 85(1) election if you breach the PUC limit in s. 85(2.1)
The Rulings Directorate has confirmed that, where shares were issued by a Canadian corporation to its shareholders including a non-resident corporation on a contribution of property for which a s. 85(1) election was filed, there was an automatic downward adjustment under s. 85(2.1) to the paid-up capital of such shares if their stated capital exceeded the limit in s. 85(2.1). CRA initially had considered instead that this downward adjustment could not take place because it was too late to file an amended s. 85(1) election form – so that a deemed dividend arose to the non-resident under s. 84(1).
Neal Armstrong. Summary of 17 June 2013 Memorandum 2013-0475621I7 under s. 85(2.1).
Income Tax Severed Letters 11 September 2013
This morning's release of 25 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The appointment of a large-business operator of an Ontario joint venture can cause the denial of provincial input tax credits
When Ontario (and other provinces) agreed to join the HST system, one of the added features of the provincial component of the HST system was that input tax credits to which "large businesses" otherwise would be entitled for various categories of purchases (such as fuel, electricity, telecommunications services, food and entertainment) were "recaptured" (i.e., effectively denied).
CRA has confirmed that because the operator under an effective joint venture election is deemed to have itself acquired the property and services supplied to the joint venture, the provincial component of HST on the specified types of supplies to the joint venture will be recaptured if the operator is a large business, even if all the joint venture participants are smaller businesses.
Neal Armstrong. Summary of 28 March 2013 Interpretation Case No. 141341 under ETA – 236.01(2) and New Harmonized Value-Added Tax System Regulations, No. 2 - s. 27(6).
PUC reinstatement rule in FAD rules may not accommodate distributions of sales proceeds of an indirect FA of a CRIC
The foreign affiliate dumping rules contemplate that the paid-up capital of a Canadian corporation controlled by a non-resident parent (a CRIC), which has been suppressed as a result of making an investment in a foreign affiliate, may be reinstated to the extent that the CRIC makes a capital distribution to the parent of proceeds of the sale of the foreign affiliate received by it "directly or indirectly."
This rule may not work in the situation where the CRIC indirectly invested in the foreign affiliate by purchasing the shares of a Canadian holding company, with the Canadian holding company subsequently selling the foreign affiliate and distributing the proceeds to the CRIC as a dividend. In this scenario, the CRIC itself will not be receiving proceeds of disposition of the foreign affiliate's shares - although it could be argued that such dividend represents the indirect receipt of such proceeds. See Example 9-F.
Neal Armstrong and K.A. Siobhan Monaghan. Discussion of indirect proceeds test in draft s. 212.3(9)(c)(ii) under Distribution of sales proceeds by an indirect CRIC.
Cross-border PUC/stated capital differences should be maintained on an amalgamation
Where the cross-border paid-up capital of a CRIC (a Canadian corporation controlled by a non-resident parent) has been suppressed under the foreign affiliate dumping rules as a result of making a direct or indirect investment in a non-resident "subject corporation," so that such PUC is now lower than the stated capital of those shares, and the CRIC then amalgamates with a Canadian subsidiary, it generally will be a mistake to set the PUC of the shares of Amalco at an amount equal to the PUC of the CRIC’s shares going into the amalgamation. The likely effect of this will be to preclude Amalco from subsequently fully accessing the PUC-reinstatement rule in s. 212.3(9). See Example 9-E.
Neal Armstrong. Discussion of need for stated capital to effect a PUC reinstatement under s. 212.3(9) under Maintenance of stated capital/PUC discrepancy.
A deemed dividend may arise if the parent funds a CRIC by way of contributions of capital
In light of the foreign affiliate dumping rules, it often will be inadvisable for a non-resident parent to fund the investment of a Canadian holding company (a "CRIC") in foreign affiliates with a contribution of capital rather than with a share subscription. Although s. 84(1)(c.3) will not prohibit subsequently converting the contributed surplus of the CRIC arising from this contribution into cross-border paid-up capital, this will not retroactively eliminate any cross-border deemed dividend otherwise arising at the investment time. See Example 7-G.
Neal Armstrong. Discussion of s. 84(1)(c.3) under s. 212.3(7) - Contributions of capital.
Simultaneous exchanges of consideration on a Canadian Buyco indirect acquisition of a subject corporation generally are a bad idea
When a Canadian corporation controlled by a non-resident parent (a CRIC) makes a direct or indirect investment in a foreign "subject corporation," a corresponding deemed dividend to the parent generally can be avoided only to the extent of the cross-border paid-up capital immediately before the investment time. Accordingly, if the non-resident parent accomplishes an acquisition of a Canco holding the subject corporation by using a Canadian Buyco and – in order to avoid extra cash movements – structures the acquisition so that there are simultaneous (i) transfers of the shares of Canco to Buyco, (ii) payments of the cash purchase price to the Canco shareholders by it on behalf of Buyco, and (iii) issuance of shares by Buyco to it in consideration for such cash payment, there generally will be a deemed dividend to it rather than a suppression of the PUC of the shares it holds in Buyco. See Example 7-F.
Neal Armstrong. Discussion of s. 212.3(7) timing requirements under s. 212.3(7) - Need for timely cross-border PUC.