News of Note
CRA presumes tailored benefits to be received qua shareholder
Email this Content"When a person who is at the same time a shareholder and employee receives a benefit which is not offered to other employees, the CRA presumes that the person has benefited therefrom qua shareholder."
This position (on what is a question of fact) appears to be contrary to Pellizzari and Del Grande, and could be problematic where a key employee who requires special incentives or other accommodation also happens to be a shareholder.
Neal Armstrong. Summary of 4 December 2013 T.I. 2012-0465891E5 F under s. 15(1).
Roszko – Tax Court of Canada finds that “interest” received under a Ponzi scheme was non-taxable
Purported interest payments which the taxpayer received under promissory notes issued to him in a Ponzi scheme were not taxable. C Miller J valiantly distinguished Johnson on the basis of "a distinction between earning income based on a fraudulent act or illegal activity versus a finding that the contract itself is a fraud," stating that in the latter situation there is no source of income.
Neal Armstrong. Summary of Roszko v. The Queen, 2014 TCC 59 under s. 3 – reasonable expectation of profit/business activity.
CRA references constructive receipt doctrine
In the course of a general discussion of the meaning of "received," CRA stated that Innovative Installation, 2009 TCC 580, found that "received" does not require "proceeds to pass directly to the taxpayer. The taxpayer can notionally or constructively receive it."
"Notional" is too broad. The Federal Court of Appeal in the same case (2010 FCA 285) clarified that receipt includes indirect receipt, such as receipt by a mere conduit through which the funds flow.
Neal Armstrong. Summary of 11 December 2013 T.I. 2013-0474161E5 under General Concepts – Payment and Receipt.
S. 107(2) rather than 118.1 potentially can apply to an estate distribution to a charity
Respecting which of s. 118.1(3) and 107(2) should apply on the distribution of capital property of a testatmentary trust to discretionary capital beneficiaries including charities, CRA stated that this determination should be made based on the "specific wording of the trust agreement and ... whether the intention of the trustee was to have the trust make a distribution to the charity as a donation of capital property of the trust, or in settlement of a capital interest which the charity may have in the trust." A similar approach is taken in determining whether s. 104(6) or 118.1 applies to an income distribution.
Summaries of 27 January 2014 Memo 2012-0472161I7 under s. 118.1(1) – total charitable gifts, and s. 107(2).
Income Tax Severed Letters 5 March 2014
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Pallen - B.C. Supreme Court rescinds dividends which no longer worked for surplus-stripping following Sommerer
A plan (similar to Brent Kern) was designed to permit a family trust to extract corporate dividends free of tax by engaging s. 75(2) to attribute those dividends to a personal holding company (a trust beneficiary), which would enjoy the s. 112(1) deduction. This plan did not work given the subsequent finding in Sommerer that s. 75(2) did not apply to fair market value sales to a trust.
The Court applied Pitt to find that it generally will be appropriate to rescind a "voluntary disposition" (such as a gift, trust settlement or dividend) for a mistake of fact or law (including a mistake as to tax consequences) where the consequences of that mistake are sufficiently grave. The dividends were rescinded.
Neal Armstrong. Summary of Re: Pallen Trust, 2014 BCSC 305 under General Concepts – Rectification.
Smaller isn’t simpler: TitanStar Properties proposes simultaneous public offering, REIT conversion and s. 86 spin-off
TitanStar Properties Inc. simultaneously issued a preliminary short form prospectus for an offering of subscription receipts and a circular for its subsequent conversion to a cross-border REIT. It also is spinning off a BC company that indirectly holds a Nevada property (the Deer Springs property) which is not a rental property. The plumbing entails using a s. 86 reorg to distribute the Deer Springs holding company (which will not be listed) as well as the REIT, which will hold the balance of its properties. The resulting REIT structure will be conventional: REIT, on top of Canadian holdco, on top of leveraged US holdco (which is not a US private REIT), on top of Nevada or Delaware LPs earning FAPI (net of the interest expense, depreciation and any foreign accrual tax deduction). Although the REIT relies on holding only portfolio investment entities, it might also be a Canadian REIT, given that it will have gotten rid of its questionable property.
Even with some bulking up under its subscription receipt offering, the REIT will still be quite small. This sort of approach likely represents a more cost effective approach for creating (initially small) public vehicles to hold U.S. real estate than trying to do a U.S. IPO.
Neal Armstrong. Summary of TitanStar Properties Inc. Circular and Preliminary Short Form Prospectus under Offerings – REIT and LP Offerings – Cross-Border REITs.
CRA will not open up statute-barred years to apply a subsequent favourable judicial development
CRA will not accede to a request to open up a statute-barred year to reassess based on a favourable decision involving another taxpayer (here, apparently, Craig on farming losses). This accords with Abraham.
Neal Armstrong. Summary of 10 January 2014 Correspondence 2013-0513401M4 F under s. 152(4.2).
CRA continues to consider that form largely governs the sale/lease distinction
Although ITTN, No. 21 has been cancelled, last month CRA quoted approvingly a statement therein that "in the absence of sham, it is our view that a lease is a lease and a sale is a sale."
Neal Armstrong. Summary of ITTN, No. 21: cancelled, but confirmed in 2014-0516921E5 F, under s. 13(21) – depreciable property.
Barnicke/Huynh disagree with CRA that a contribution of capital to a sub is not a qualifying use under s. 95(2)(a)(ii)(D)(II).
There is a subtle difference in the wordings of s. 20(1)(c)(ii) and ss. 95(2)(a)(ii)(D)(II) and (II): the former refers to "an amount payable for property acquired for the purpose of ... producing income from the property;" the latter, to "an amount payable for property acquired for the purpose of ... producing income from property [not "the" property] where ... the property is excluded property [foreign affiliate shares of the payor]."
Barnicke and Huynh think that 2013-0496841I7 is wrong. Where NR2 issues Note2 in consideration for its acquisition of Note1, which it then promptly contributes to its wholly-owned sub, NR3, it is appropriate to consider that it issued Note2 for the purpose of earning income from its shares of NR3: if it had exchanged Note1 for the issuance of shares of NR3, those NR3 shares clearly would represent the current use of the financing represented by Note2; and it should not make any difference that it instead contributed Note1 to NR3 (per IT-533, para. 25).
Neal Armstrong. Summary of Paul Barnicke and Melanie Huynh, "TI Denies Cap D Rule", Canadian Tax Highlights, February 2014, p. 12 under s. 95(2)(a)(ii)(D).