News of Note
CRA finds that a partnership can enjoy qualifying interests in its non-resident subsidiaries for FAPI purposes notwithstanding that s. 95(2)(y) deems its Canadian parent to (also) own those shares directly for s. 95(2)(a) purposes
Email this ContentWhere Canco holds foreign affiliates (Forco1, and its subsidiary, Forco2) through a partnership, s. 95(2)(a)(ii)(B) can still operate to deem interest paid by Forco2 to Forco1 to be active business income and not FAPI to the partnership. The partnership (which is a separate person for FAPI computation purposes) itself has a qualifying interest in Forco1 and Forco2 – notwithstanding that s. 95(2)(y) deems Canco to hold the shares of Forco1 directly for purposes of determining whether Forco1 and Forco2 are foreign affiliates of Canco for s. 95(2)(a) purposes.
Neal Armstrong. Summary of 12 July 2013 T.I. 2011-0415911E5 under s. 95(2)(m).
Income Tax Severed Letters 24 July 2013
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that grandfathering generally will be lost if an RRSP redeems its prohibited investment shares rather than selling
The post March 22, 2011 prohibited investment rules for RRSPs effectively grandfathered the value of various prohibited investments which were held on March 22, 2011 by providing that generally only capital gains representing appreciation over the investment’s fair market value on that date would give rise to a taxable advantage.
CRA has confirmed that this grandfathering does not work where the RRSP subsequently redeems prohibited investment shares thereby giving rise to a deemed dividend – so that the full amount of the deemed dividend generally will be subject to a 100% tax. It is now too late to access further temporary relief in s. 207.01(4).
Neal Armstrong. Summary of 6 June 2013 T.I. 2012-0451801E5 F under s. 207.01(1) – Advantage.
QSBC purification transactions must respect the FIFO rule in s. 110.6(14)(a)
In order that shares of a Canadian-controlled private corporation will qualify for the enhanced capital gains exemption, taxpayers may engage in "purification" transactions so that the CCPC does not have excess cash at the time of sale to the purchaser.
A technical interpretation points out a trap. The individual taxpayers transfer recently-purchased shares of their CCPC (the "new shares") on a rollover basis to a Holdco, with Holdco then redeeming those shares to extract the excess CCPC cash. The taxpayers then sell their "old" shares of the CCPC to the purchaser, thereby satisfying the 24-month holding period requirement in the qualified small business corporation share definition.
Wrong! S. 110.6(14)(a) deems identical shares to have been disposed of on a FIFO basis for QSBC purposes, so that the taxpayers will be deemed to have disposed of all of their new shares to the purchaser, thereby flunking the 24-month holding period test for those shares.
Neal Armstrong. Summary of 2 May 2013 T.I. 2013-0481361E5 F under s. 110.6(14)(a).
Morgan - Tax Court vacates a s. 163(1) penalty where the taxpayer had a reasonable misunderstanding of the Act
The taxpayer was assessed a s. 163(1) penalty (repeated failure to report income) for the portion of a pension plan withdrawal that he had transferred to his wife's RRSP. Woods J found that the penalty should be vacated under the due diligence defence notwithstanding a "troubling" lack of evidence. This admittedly represented a "generous interpretation of the facts," but it was not intuitively obvious that funds transferred from one tax-exempt vehicle to another would give rise to income.
As stated by Woods J, the due diligence defence "can apply to [reasonable] mistakes of fact or if all reasonable measures have been taken to prevent the failure." Given the absence of "reasonable measures" evidence, the taxpayer in effect got relief for a mistake of law.
Scott Armstrong. Summary of Morgan v. The Queen, 2013 TCC 232, under s. 163(1).
CRA considers that there’s no rollover to the extent that a trust property distribution satisfies debt owing to the beneficiary
CRA interprets the preamble to s. 107(2) as establishing that there is a rollover under s. 107(2)(a) only for that portion of the property distributed by a personal trust to a beneficiary which satisfies the beneficiary’s capital interest in the trust. Accordingly, if a personal trust distributes an appreciated parcel of real estate to a capital beneficiary, and 10% of the property repays debt owing by the trust to the beneficiary, with only the balance of 90% satisfying the beneficiary’s capital interest, the trust will realize a capital gain on the distribution of the 10% portion.
Neal Armstrong. Summary of 2 July 2013 T.I. 2013-0488061E5 under s. 107(2).
Horizons Leveraged Commodity ETFs will replace share sale forwards with cash-settled forwards in response to Budget character conversion rules
The Horizons Leveraged Commodity ETFs have made s. 39(4) elections and entered into forward sales of their Canadian portfolio share investments to a Canadian bank at prices which are tied to the performance of notional long or short rolling futures positions in the underlying commodity rather than on the value of the shares, thereby achieving capital gains treatment. The March 2013 federal budget provided that this type of "derivative forward agreement" will now give rise to income account gains, subject to transitional relief (with modest additional transitional relief announced on July 11, 2013).
After running through the applicable transitional periods, the ETFs will now replace the existing forward contracts with cash-settled forward contracts, and will use any new unit issuance proceeds to invest in cash equivalents (to be pledged under the cash-settled forwards) rather than in Canadian equities.
Any gains on the new contracts will be on income account. This may not be a concern to taxable investors (who for other reasons are encouraged to trade rather than invest in their units) if they do not hold units on the record date for any distribution of any net annual gains.
Neal Armstrong. Summary of Prospectus for Leveraged Horizons Commodity ETFs under Forward Sale Funds.
Disaster relief payments from an employer are not income
An employer proposed to match donations from its employees to any of its employees affected by the Calgary floods, to be distributed on the basis of need and magnitude of damage. CRA stated that such payments would not be subject to income tax provided that "the individual received the Payment in his or her capacity as an individual, as opposed to his or her capacity as an employee." For the payments to be tax-free, they must be philanthropic in purpose and their quantum must not relate at all to the individual's performance or pay grade.
Scott Armstrong. Summary of 12 July 2013 T.I. 2013-0496281E5 under s. 6(1)(a).
Income Tax Severed Letters 17 July 2013
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Threshold Power Trust extends the cross-border income fund model to wind projects
Threshold Power Trust will indirectly acquire the interests of US tax shelter investors in US LLCs generating electricity from wind through a structure similar to that used by Argent Energy Trust to invest in a U.S. oil and gas business: it will hold the underlying project LLCs (and Delaware LLPs) through a subsidiary Ontario trust on top of a Canadian holding company on top of a US C-Corp. holding company, with interest paid at 7.5% on a note owing directly by the C-Corp. to it.
Although no view is expressed on whether the foreign accrual property income rules will apply (which is relevant for surplus purposes even if the underlying project LLCs are not considered to be controlled foreign affiliates), presumably the position will be taken that producing and selling electricity does not generate income from property.
The U.S. inversion rules are not expected to apply to the Trust since none of the vendors of the project LLC interests will receive Trust units in consideration for the sale nor will their continuing interests in the project LLCs have dividend, redemption or liquidation rights that are substantially similar to the rights of a holder of Trust units.
Neal Armstrong and Abe Leitner. Summary of Preliminary prospectus for IPO of Threshold Power Trust under Foreign Asset Income Funds and LPs.