News of Note
We have translated 6 more CRA interpretations
Email this ContentWe have translated a further 6 translations of CRA interpretations released in April of 2003. Their descriptors and links appear below.
These are additions to our set of 2,521 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 20 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2003-04-04 | 17 March 2003 External T.I. 2002-0130685 F - Limite inférieure - JVM Participation
Also released under document number 2002-01306850.
|
Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Trust - Paragraph (g) | meaning of vested indefeasibly |
| Income Tax Act - 101-110 - Section 107.4 - Subsection 107.4(4) | purpose of s. 107.4(4) | ||
| 4 April 2003 Internal T.I. 2003-0004387 F - OUTIL ADMISSIBLE APPRENTI MECANICIEN
Also released under document number 2003-00043870.
|
Income Tax Act - Section 8 - Subsection 8(6) - Paragraph 8(6)(b) - Subparagraph 8(6)(b)(ii) | tool that is resold without being used qualifies as “new” to the purchaser | |
| 12 March 2003 External T.I. 2002-0176955 F - Retenu dividende français
Also released under document number 2002-01769550.
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Treaties - Income Tax Conventions - Article 10 | Canadian mutual fund trust or pension fund trust deemed to be the beneficial owner of dividends by Art. 29(7)(a) of the Canada-France Convention | |
| 31 March 2003 External T.I. 2003-0006305 F - Safe Income Discretionary Dividend
Commented on in 2010-0388821E5 F; also released under document number 2003-00063050.
|
Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | questionable to allocate all SIOH to the class of discretionary dividend shares on which a dividend is paid/ cannot attribute pre-issuance safe income to a share | |
| 27 March 2003 External T.I. 2002-0178035 F - HYPOTHEQUE PLACEMENT ADMISSIBLE
Also released under document number 2002-01780350.
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Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(j) | no requirement that the mortgage be a first mortgage or a residential mortgage | |
| 27 March 2003 External T.I. 2002-0180045 F - DEDUCTION DES INTERETS
Also released under document number 2002-01800450.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | s. 245(1) might be applied to transactions to convert non-deductible mortgage interest to deductible interest pursuant to sale of shares to borrowing wife and use of s. 74.1(1) | |
| Income Tax Act - Section 74.1 - Subsection 74.1(1) | s. 74.1(1) attributes income or loss after deduction of interest expense |
Microbjo – Federal Court of Appeal finds that a transaction that split, on the purchaser’s terms, a tax savings purportedly generated by it, was a non-arm’s length transaction
The taxpayers, who were holding companies for partnerships that had recently agreed to sell their farmlands to third parties, were approached by an independent third party (WTC), who proposed that they transfer their partnership interests on a rollover basis to respective Newcos which, after the closing of the farmland sales and after WTC had taken brief de facto control of those subsidiaries and purported to generate “tax shelter” for them, would be sold by the taxpayers to WTC for cash sales prices that reflected a premium over the cash sales proceeds from the farmland sales. Such premium reflected a sharing (on a 46/54 basis) of the purported (but bogus) elimination by WTC of the Newco’s tax liability from the sale.
S. 160 clearly applied to the extraction of the cash by WTC from Newcos in order to fund its payment of the purchase price to the taxpayers. At issue was whether the payment of those cash proceeds by WTC, in turn, to the taxpayers also occurred pursuant to a transaction between persons not dealing at arm’s length, so that there could be a further s. 160 tax debt transfer to the taxpayers. In so finding, Noël C.J. stated:
[B]ecause they were splitting amounts earmarked to pay a tax liability that was bound to become a tax debt rather than their own money, the resulting split does not provide the assurance that it reflects an ordinary commercial dealing between parties acting in their separate interests. Specifically, the tension that provides that assurance did not exist to the extent that it would had the parties been dealing with their own money. …
Further, once the respondents were swayed to buy into WTC’s plan by the thought of turning an unexpected profit out of their crystallized tax liability through what they viewed as a risk-free exercise, they became the instruments through which WTC, acting as the sole mastermind, would lay its hands on the $1.3 million [equal to the tax liability], isolate it with the remaining cash in the subsidiaries and share it with the respondents in the proportion that it imposed.
Accordingly, each taxpayer was liable for the tax debt of the respective Newco to the extent of the purchase price received by it in excess of the after-tax value of the assets of the Newco (i.e., for an amount equaling 46% of Newco’s tax debt).
However, Noël C.J. rejected the Crown’s argument that GAAR should be applied to make each taxpayer liable for all of the respective tax debt of the Newco. He found no reversible error in the Tax Court’s finding that the taxpayers “did not undertake the transactions in order to avoid the application of subsection 160(1)”.
Neal Armstrong. Summaries of Canada (The King) v. Microbjo Properties Inc., 2023 FCA 157 under s. 160(1), s. 160(5) and Statutory Interpretation – Interpretation Act, s. 45(2).
CRA summarizes its policy for one-time acceptance of a late-filed s. 216 return
CRA indicated that it has a policy allowing non-residents a one-time opportunity to late-file their s. 216 returns and have them treated as though they were filed on time (so as to be taxed on a net basis). A late-filed s. 216 return will not be accepted under this policy where CRA: has already advised the taxpayer of its responsibilities under Part XIII regarding the Canadian rental income; has already initiated action because of the failure to comply with Part XIII; or has approved Form NR6.
Where a taxpayer is not eligible for relief under this policy, it may be possible to get an extension, regarding a s. 216 return, where the taxpayer can sufficiently demonstrate that circumstances of an extraordinary manner existed.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.11 under s. 216(1).
CRA accepts that the benefit to a non-resident shareholder from personal use of a non-resident corporation’s Canadian cottage is reduced by an interest-free loan from the shareholder
A non-resident corporation owned by a non-resident individual purchases a Canadian vacation home that is available for use by that individual and family members. After noting that the benefit from rent-free use of the property would generate Part XIII tax under ss. 15(1), 15(1.4)(c) and 214(3)(a), CRA indicated that, where the fair market rent did not provide a reasonable return on the value of the property, the amount of the benefit was to be determined using the imputed rent approach – which in general entailed multiplying a normal rate of return for the non-resident corporation by the greater of the cost and fair market value of the property, and adding operating costs other than interest paid on liabilities connected with the property.
CRA accepted (more or less following Youngman) that an interest-free loan from the shareholder to fund the property’s acquisition may be deducted from the amount on which the rate of return was applied.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.10 under s. 15(1).
CRA publishes a webpage on the mandatory disclosure rules
Positions of CRA on the mandatory disclosure rules include:
- A fee does not come within (a) of reportable transaction where the fee that is based solely on the value of the services provided in respect of a transaction or series and is determined without reference to the tax results of the transaction or series; this would cover, for example, the practice of value billing by professionals such as lawyers and accountants in which a fee is agreed to at the time of billing and is based on criteria (other than the value of the tax benefit resulting from the transaction or series).
- The contractual protection hallmark does not extend to “standard representations, warranties and guarantees between a vendor and purchaser, as well as traditional representations and warranties insurance policies, that are generally obtained in the ordinary commercial context of mergers and acquisitions transactions to protect a purchaser from pre-sale liabilities (including tax liabilities), are not expected to give rise to reporting requirements for reportable transactions”
- Examples include:
- “Indemnities related to existing pre-closing tax issues, or the amount of existing tax attributes (tax pools, capital cost allowance, etc.)”
- A public-company acquiror “obtains specific contractual covenants and/or indemnities from the Target and the significant shareholders of the Target … that are intended to ensure the Target and/or the significant shareholders do not take certain steps that may cause the bump denial rules to apply … .”
- Tax insurance is provided to the purchaser of taxable Canadian property from a non-resident regarding its liability for 25% or 50% of the purchase price absent a s. 116 certificate being issued by CRA.
- Where there was a pre-sale payment of a safe income dividend, contractual protection is obtained regarding the calculation of safe income on hand.
- Also excluded is “contractual protection in the form of insurance that is integral to an agreement between persons acting at arm’s length for the sale of a business where it is reasonable to conclude that the insurance protection is intended to ensure that the purchase price paid under the agreement takes into account any liabilities of the business immediately prior to the sale and the insurance is obtained primarily for purposes other than to obtain a tax benefit from the transaction or series.”
Neal Armstrong. Summaries of Mandatory disclosure rules – Guidance, 7 June 2023 CRA Webpage under s. 237.3(1) – reportable transaction – (a), confidential protection, contractual protection, s. 237.4(6), s. 237.4(7), s. 237.5(1) - reportable uncertain tax treatment.
Income Tax Severed Letters 5 July 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a purported reassessment that does not change tax payable is not an assessment
A taxpayer whose T2 return had been assessed as filed, later, within the prescribed time limit under s. 37(11), filed a request to amend that return to claim SR&ED expenses. CRA denied the SR&ED claim in its entirety.
Headquarters concluded that if CRA issued a “Notice of Reassessment” showing no changes from the initial Notice of Assessment, this would not provide something to which the taxpayer could validly object pursuant to s. 165(1). In this regard, Headquarters observed that inter alia Clibetre and Orlando indicated that “where requested changes to elements of the taxpayer’s return of income are denied, and there is no change to the tax payable previously assessed … there has been no ‘reassessment’ of tax by the Minister,” and such denial is instead “simply a notification that a reassessment has not been done” (“even if the notification is titled a ‘Notice of Reassessment’.”)
Neal Armstrong. Summary of 28 February 2023 Internal T.I. 2019-0791421I7 under s. 165(1).
CRA confirms that an s. 20(1)(ww) deduction is available for a TOSI taxable capital gain even where an offsetting allowable capital loss
Although, where an individual is subject to the tax on split income (“TOSI”) under s. 120.4(2) for a particular year, and the amount of split income is also included in the individual’s income under Division B of Part I, double taxation is avoided pursuant to s. 20(1)(ww), which provides a deduction, in computing an individual’s income from a business or property, for an amount equal to that of the individual’s split income.
CRA confirmed that the s. 20(1)(ww) deduction is available for a taxable capital gain that is included in TOSI even where the individual realized an offsetting allowable loss from an unrelated transaction in the same year.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.9 under s. 20(1)(ww).
CRA applies Consolidated Holding to the related corporation rules
CRA essentially followed Consolidated Holding (which, strictly speaking, dealt with the associated corporation rules) in finding that where one corporation is controlled by A and B, as trustees of a trust and another corporation is controlled by A and B in their own right (not as trustees), the two corporations are related pursuant to s. 251(2)(c)(i) (two corporations controlled by the same group of persons).
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.8 under s. 251(2)(c)(i).
Chen – Federal Court of Appeal follows Cheema regarding purchasers including those with no beneficial entitlements
In order to satisfy lender requirements, the agreement for the purchase by Ms. Chen of a new home added her two (unrelated) godparents as named purchasers. LeBlanc JA found that their addition meant that the purchase did not qualify for the new housing rebate given that, prior to a 2021 amendment to s. 262(3), every purchaser of a new home was required to be acquiring for own occupation or to be related to such an occupier. In this regard, he referred to Cheema as standing for the proposition that:
The fact that someone was acquiring a new house only as a trustee and with no beneficial interests in the property was of no consequence; there was no exception for trustees … . What mattered at the time … was “the relationship of the person acquiring the [house] to the builder—one of purchase and sale—[…], not the relationship between co-purchasers” ... .
He further stated:
[T]he principle of horizontal stare decisis … dictates that decisions of a panel of an appellate court bind future panels of that court … .
It is only in “exceptional circumstances” that the Court will overrule the decision of another panel. This will generally occur when “the previous decision is manifestly wrong, in the sense that the Court overlooked a relevant statutory provision, or a case that ought to have been followed” … .
Cheema, which seems to suggest that a named purchaser is the recipient of a supply of property even where it has no entitlement to acquire beneficial ownership, is here to stay.
Neal Armstrong. Summaries of Chen v. Canada, 2023 FCA 146 under ETA s. 254(2)(b) and General Concepts – stare decisis.