News of Note
CRA indicates that a s. 45 change of use does not restart the 365-day period under the flipped property rules
Email this ContentCRA noted that a deemed disposition and reacquisition under the change-of-use rules in s. 45 apply only for purposes of the capital gains rules in subdivision c of Division B, and not for purposes of the flipped property rules in s. 12, so that the flipped property rules would not be engaged by virtue only of a housing unit having had such a change of use within 365 days of its sale.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.4 under s. 12(13).
CRA considers that the holding period for a housing unit under the flipped property rules commences when it becomes habitable
In general, the “flipped property” rules can apply to a Canadian housing unit that is owned by the taxpayer for a period of less than 365 consecutive days prior to its disposition. In the situation where an individual constructs a housing unit, CRA will not consider the 365-day period to start running until the housing unit becomes habitable.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.3 under s. 12(13).
CRA applies its four conditions for the use of an average exchange rate to the example of a stripped coupon
Regarding when an average exchange rate could be used In the case of foreign-currency denominated stripped coupon, for which interest is deemed to accrue pursuant to ss. 12(3), (4) and (9), CRA indicated that, given the steady and day-to-day accrual of the interest amounts to be translated, the first two of its four conditions for an average exchange rate would be satisfied, namely, that the foreign currency amounts “are relatively stable and evenly distributed” and “are sufficiently frequent and spread out” to avoid distortion. Regarding satisfaction of the third condition (“the relevant exchange rate does not fluctuate significantly over the period”), that would require an assessment of the impact of the exchange rate differences on the amount to be converted.
Regarding the fourth condition (“the average rate is the rate used by the taxpayer each time these conditions are met”), CRA noted that, in this context, this meant that the average rate should be used whenever the third condition was satisfied.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.2 under s. 261(2)(b).
We have translated 8 more CRA severed letters
We have translated a ruling and interpretation released by CRA last week and a further 6 CRA interpretations released in May of 2001. Their descriptors and links appear below.
These are additions to our set of 2,992 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 23 ½ 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 |
|---|---|---|---|
| 2024-10-30 | 2023 Ruling 2023-0986521R3 F - 104(4) and Pipeline | Income Tax Act - Section 84 - Subsection 84(2) | pipeline transfer by inter vivos family trust of preferred shares (stepped-up under s. 104(4)(b)(ii)) to an existing family company for notes |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(b) - Subparagraph 104(4)(b)(ii) | inter vivos chooses to realize gain on its preferred shares on its 21st anniversary, and transfer those shares for notes in a pipeline trnasaction | ||
| 29 May 2024 External T.I. 2019-0819561E5 F - Catégorie d’amortissement 53 de l’Annexe II du Règlement | Income Tax Regulations - Schedules - Schedule II - Class 53 | having equipment owned separately from the services business in which its product is used could permit it to qualify as Class 53 property | |
| Income Tax Regulations - Schedules - Schedule II - Class 29 | having equipment owned separately from the services business in which its product is used could permit the manufactured product to be “sold” to the services business | ||
| 2001-05-25 | 22 May 2001 External T.I. 2000-0021095 F - DEMUTULISATION NON-RESIDENT | Income Tax Act - Section 139.1 - Subsection 139.1(16) | non-resident interest person needs to make the election for s. 139.1(16) to apply – if so, per s. 139.1(16)(k), no Part XIII tax applicable to individual re the cash payment |
| Income Tax Act - Section 139.1 - Subsection 139.1(15) | potential application of Pt. XIII tax to premiums paid by non-resident corporation | ||
| 22 May 2001 External T.I. 2000-0047245 F - Divorce | Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | reciprocal transactions completed after divorce would be non-arm’s length | |
| Income Tax Act - Section 84.1 - Subsection 84.1(1) | sale of ex-wife’s shares of Opco (acquired in marriage settlement) to new Holdco of her ex-husband for Holdco note would engage s. 84.1 if these were “reciprocal transactions” | ||
| 29 May 2001 External T.I. 2000-0055915 F - DEDUCTIBILITE DES COMMISSIONS - ASSURANCE | Income Tax Act - Section 18 - Subsection 18(9.02) | background to s. 18(9.02) | |
| 25 May 2001 External T.I. 2001-0067415 F - CONSOLIDATION DE PERTES | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | related-person loss transfer transactions must be commercially reasonable to satisfy s. 20(1)(c) | |
| Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) | CCRA loss consolidation policy is available where Profitco’s income is FAPI/ requirements re transactions being commercially reasonable | ||
| 29 May 2001 External T.I. 2001-0075245 F - SOCIETE DE GESTION DE PENSION | Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(o.2) - Subparagraph 149(1)(o.2)(i) | s. 149(1)(o.2)(i) corporation can be incorporated for the administration of more than one RPP – but cannot be incorporated to provide management services to other RPPs | |
| Statutory Interpretation - Interpretation Act - Subsection 33(2) | reference to administration of one pension plan included two or more | ||
| 23 May 2001 External T.I. 2001-0077855 F - PLACEMENT ADMISSIBLE REER | Income Tax Regulations - Regulation 4900 - Subsection 4900(8) | did not extend to services rendered in connection with the company’s incorporation |
Harvard Properties – Tax Court finds that s. 160 applied where the vendors were wilfully blind to their sale price reflecting non-payment by the purchaser of triggered asset-sale tax
A Calgary shopping mall was sold by Harvard Properties and the other co-owners to a third party (“Abacus”) in a share sale transaction but at a price representative the mall’s asset value and, thus, at a premium to its share-sale value. This was accomplished by transferring their co-ownership interests on a s. 85(1) rollover basis to respective Newcos (“HP Newco”, in the case of Harvard Properties) in consideration inter alia for voting and non-voting shares, followed by a sale of those voting shares to an Abacus subsidiary (NH Properties) for promissory notes for under half of the sale price. The Newcos then sold the shopping centre to a third party (Bentall), and the co-owners then sold their Newco non-voting shares to NH Properties for the balance of the purchase price (receiving, by direction, the Bentall sales proceeds), at no gain due to an ACB step-up pursuant to a stated capital increase coming out of the newly-created capital dividend accounts of the Newcos. Real estate counsel for the vendors negotiated for these transactions to all occur in one integrated interdependent closing.
Boyle J referred to the finding in Microbjo that the purpose of the arm’s length test is to render assurances that the terms reflect ordinary commercial dealings, and that there was not such assurance here, as the vendors were wilfully blind to the source of their premium and the Abacus transaction profit being a tax liability on the Newcos’ sale to Bentall “that would not be paid”. Boyle J found that the vendors and NH Properties were not dealing with each other at arm’s length on the basis both of this absence of “ordinary commercial dealings” and that the parties “clearly acted together to dictate [the] Newcos’ actions from their inception and throughout the closing of this series of transactions”.
In finding that the cash proceeds received by Harvard Properties exceeded the FMV of the Newco shares sold by it (the first element of its s. 160 assessment), Boyle J stated:
There appears to be little to no chance that any arm’s length party unrelated to these transactions would agree to accept, much less pay for, the HP Newco shares at the relevant time as the Newcos would moments in time later have no assets, no business, and the possibility of a significant liability for their roles in these transactions … .
Accordingly, s. 160 applied to the transactions in the cash amounts referenced by him, subject to a determination in still-pending proceedings as to the quantum of any unpaid tax liability of NH Properties.
Boyle J found, in the alternative, that if the series of transactions had avoided the application of s. 160, there was an abusive avoidance of s. 160 through the structuring of a supposed arm’s-length through a sale of the voting shares of the Harvard Properties’ Newco (HP Newco) before the asset sale, capital dividend and sale of the non-voting Newco shares. Furthermore, he considered that the reasonable way in the circumstances to deny the tax benefit was to treat s. 160 as applying to the extent of the shortfall in consideration given on the transfer.
Harvard Properties had been assessed under s. 160 beyond the normal reassessment period, as permitted by s. 160(2). In rejecting the taxpayer’s submission that the assessment of it in the alternative under s. 245(2) was statute-barred because it was made beyond the normal reassessment period, Boyle J stated:
[T]here is no “normal reassessment period” applicable to the application of the GAAR … . The only requirement is that GAAR be involved or taken into account in a timely and otherwise validly issued assessment under the Act.
Neal Armstrong. Summaries of Harvard Properties Inc. v. The King, 2024 TCC 139 under s. 160(1), s. 251(1)(c), s. 245(4), s. 245(2) and General Concepts – FMV - shares.
CRA rules on a pipeline transfer by an inter vivos trust of preferred shares (stepped-up under s. 104(4)(b)(ii)) for notes
A discretionary inter vivos family trust, settled almost 21 years ago, decided that it would distribute only a portion of its preferred shares of Holdco 2 (with an investment portfolio) to its two principal beneficiaries (Child 1 and Child 2), so that it would realize a capital gain on the remaining shares on the 21st anniversary.
CRA ruled on pipeline transactions in which the trust would transfer its remaining Holdco 2 preferred shares to another existing family holding company (Holdco 1) in consideration for Notes 1, 2 and 3 of Holdco 1, and then distribute (apparently, immediately) Notes 2 and 3 pursuant to s. 107(2) to Child 1 and 2, respectively and receive repayment of Note 1 to fund its capital gains tax. The trust will then be wound-up pursuant to s. 107(2) and, after [one?] year, Holdco will commence to repay Notes 1 and 2, in tranches not exceeding specified maximums.
Neal Armstrong. Summary of 2023 Ruling 2023-0986521R3 F under s. 84(2).
CRA announces that no bare trust returns are required for the 2024 taxation year
On October 29, 2024, CRA updated its webpage on bare trust reporting to state:
Updated 2024 Tax year: As announced in the Tax Tip issued October 29, 2024, the Canada Revenue Agency (CRA) will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust) for the 2024 tax year, unless the CRA makes a direct request for these filings. This is a continuation of the exemption from the trust reporting requirements that was issued for bare trusts for the 2023 tax year.
Neal Armstrong. Summary of CRA Webpage, New reporting requirements for trusts and bare trusts: T3 returns filed for tax years ending after December 30, 2023, updated on 29 October 2024 under s. 150(1.2).
CRA indicates that having equipment owned separately from the services business in which its product is used could permit it to qualify as Class 53 property
Equipment was acquired by a corporation (“Aco”), wholly-owned by a dental surgeon, to manufacture dental restorative products for use as part of its dental services. Alternatively, the surgeon could incorporated a second wholly-owned corporation (“Bco”) to acquire the equipment and sell, to Aco, the dental restorative products it manufactured using the equipment.
CRA indicated that the first alternative did not satisfy the requirement, for the equipment to qualify as Class 53 property, that it be used in the manufacturing or processing of goods for sale – as the goods (the dental restorative products) instead were used in providing a dental service.
Under the second alternative, assuming that there indeed was a sale of the manufactured products by Bco to Aco under the governing provincial law, the equipment could qualify as Class 53 property to Bco assuming that the other Class 53 requirements were satisfied.
Neal Armstrong. Summary of 29 May 2024 External T.I. 2019-0819561E5 F under Schedule II - Class 53.
CRA confirms that it generally does not consider a benefit to be conferred as a result of a bona fide interest-free intercorporate loan
Regarding whether an interest-free loan between two corporations owned by different shareholders gives rise to a taxable benefit under s. 15(1) or 246(1), CRA first stated:
[S]ubsection 15(1) could apply to the extent that it is established that a benefit is conferred by a particular corporation (“Aco”) on, for example, an individual who does not deal at arm's length with, or is affiliated with, a shareholder of Aco or its contemplated shareholder. That said, our Directorate does not generally consider that a benefit is conferred under subsection 15(1) in the context of a bona fide inter-corporate loan made in the ordinary course of the corporations' business. … Subsection 15(1) could apply, for example, if at the time the loan is made by Aco, the other corporation (“Bco”) is unable to repay the loan and/or provide reasonable security, with the result that the value of Aco would be impaired [see Vine Estate].
Turning to s. 246(1), CRA stated:
[T]o the extent that it were determined that the shareholder of Bco and/or Bco would not have an interest in Aco (and, among other things, that the shareholder of Bco and/or Bco would not be shareholders or contemplated shareholders of Aco), it would appear that the last condition for the application of subsection 246(1) [regarding income inclusion if a direct payment] would not be satisfied. On that basis, subsection 246(1) would be inapplicable … .
CRA also indicated, if the loan was not bona fide, the applicability of s. 56(2) should also be considered.
Neal Armstrong. Summaries of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.1 under s. 15(1) and s. 246(1).
CRA indicates that vacant land which previously had been rented-out did not qualify as a “former business property” for s. 44 purposes
CRA indicated that a property, which apparently was sold by the taxpayer because it could no longer be rented out to third parties, did not qualify as a “former business property” for purposes of the replacement property rollover in s. 44, stating that property which “is vacant but would otherwise earn rent, would not qualify.”
Neal Armstrong. Summary of 26 July 2024 External T.I. 2024-1014761E5 under s. 248(1) – former business property.