News of Note
CRA indicates it may accept adjusting losses carried back provided that the amendment request is made within the s. 152(4)(b)(i) period and the loss year is not statute-barred
Email this ContentOpco carried back non-capital losses from its 2019 and 2020 taxation years to its 2016 to 2018 taxation years. This had the effect of reducing its GRIP under “B” of the GRIP formula, so that dividends paid by it in its 2020 year, which it had designated as eligible dividends, were excessive and subject to Part III.1 tax.
CRA indicated that it had the discretion to grant a request to reduce the carrybacks so as to eliminate the GRIP reduction and associated Part III.1 tax (so that it might grant such request if it was satisfied that this was “a situation involving a bona fide error and not amounting to retroactive tax planning) provided that the loss years (2019 or 2020) were not statute-barred and that the request to reduce the carryback satisfied “the conditions … in subparagraphs 152(4)(b)(i) and 152(4.01)(b)(i) in respect of the [prior] Years.” The quoted requirement seems to indicate that CRA would consider itself precluded from accepting a carryback reduction request except in the highly unusual circumstance where the request was made before the s. 150 filing deadline (made applicable by s. 152(6)(c)) for the 2019 or 2020 year, as applicable (which did not appear to be the case here, as enough time had passed in order for the Part III.1 tax to have been already assessed).
In the (unlikely) event that such carryback reduction occurred, CRA considered that it would be authorized to make a consequential reassessment to reduce the Part III.1 tax that had been initially assessed “since the reassessment could be considered to be required to be made pursuant to subsection 152(6)” (which explicitly required the acceptance of the initial timely carryback requests).
Neal Armstrong. Summaries of 17 November 2022 External T.I. 2021-0919001E5 F under s. 89 – GRIP – B, s. 152(4)(b)(i), s. 152(6)(c), s. 152(3) and s. 185.1(2),
CRA rules that a trust deed amendment by court order to permit the addition of corporations that were only indirectly owned by family beneficiaries did not trigger proceeds of disposition
A trust deed for a family trust (whose current named beneficiaries were family individuals) was to be amended by court order to expand the range of beneficiaries who could be added in the discretion of the trustees to include inter alia corporations which were wholly-owned indirectly by the family beneficiaries (previously, corporate beneficiaries could only be added if they were directly owned by family individuals). Following such amendment, the trustees would then exercise their discretion to add four corporations as beneficiaries, one of which was directly owned by two of the other corporate beneficiaries.
CRA ruled that (1) these transactions did not trigger a disposition of the trust property, (2) the obtaining of the amending court judgment would not result in a disposition of the interests in the trust of the existing beneficiaries and (3) that the addition of the corporate beneficiaries would not result in their receipt of proceeds of disposition including pursuant to s. 69(1)(b). It did not rule that such addition would not result in a disposition by the existing beneficiaries. The CRA summary states:
The addition of a new beneficiary to a discretionary trust by the exercise of a power to add such beneficiary in the trust deed results in a disposition, by the existing beneficiaries, of a portion of their interest in the trust. However, provided the existing beneficiaries do not direct to whom the interest is transferred, they would not be deemed to have received proceeds of disposition under paragraph 69(1)(b). This is also true for the trustee/beneficiary who, in this particular situation, is not considered to have control over the decision to add a new beneficiary.
Neal Armstrong. Summary of 2021 Ruling 2020-0862431R3 F under s. 248(1) – disposition.
CRA confirms that eligible remuneration for each qualifying period for CEWS purposes includes additional payments for vacation and sick leave pay
CRA confirmed that where mandatory vacation, statutory holiday and sick leave pay provided for in the various collective agreements in the Quebec construction industry is added by the employer (an eligible entity) to the basic salary or wages included in each pay cheque of an eligible employee, it will consider that the eligible entity has paid that additional amount to the eligible employee in respect of the same week as the related salary or wages are paid, so as to be included in determining the CEWS entitlement of that employer for that week.
Neal Armstrong. Summary of 22 December 2022 Internal T.I. 2020-0856411I7 F under s. 125.7(1) – eligible remuneration.
Supreme Court grants leave in Dow ULC
The Supreme Court of Canada has granted leave to appeal in Dow ULC. The Federal Court of Appeal had found that the denial by CRA of a requested “downward” adjustment under s. 247(10) (to increase the interest expense on a loan from a Swiss affiliate) was a matter that could only be reviewed in the Federal Court, so that the Tax Court lacked jurisdiction regarding the taxpayer’s challenge of this denial.
Neal Armstrong. Summaries of Canada v. Dow Chemical Canada ULC, 2022 FCA 70, leave granted 23 February 2023 under s. 247(10), s. 247(11), s. 169(1) and Federal Courts Act, s. 18.5.
Boliden v. FQM – Ontario Court of Appeal finds that the denial of loss carryforwards of the target was covered by an indemnity clause for reasonably foreseeable loss
Under the share purchase agreement (“SPA”) for the purchase of a Finnish mining company (Kevitsa) by Boliden from FQM, FQM represented inter alia that “[t]here are no grounds for the reassessment of the Taxes of [Kevitsa and its subsidiary].” Pursuant to the SPA’s “general indemnification obligation”, FQM was required to indemnify Boliden for any “Losses” arising from any breach or inaccuracy in its representations. The SPA definition of “Losses” specified that consequential or indirect loss was an indemnifiable loss to “the extent it is a reasonably foreseeable consequence of the event or circumstance constituting the ground for the applicable indemnification obligation”.
Following the acquisition in 2016, the Finnish Tax Administration (alleging lack of economic substance) assessed to deny the interest and other deductions arising out of a 2010 reorganization, so that inter alia accumulated tax losses at the time of the acquisition were denied. It assessed €14.4 million of taxes on post-acquisition income of Kevitsa, which was no longer sheltered by such losses.
The Court found that the application judge - who had noted the contrast between the above representation, and other representations and warranties in the SPA which were limited to the knowledge of the sellers – had reasonably concluded that such representation could be untrue as of the time of closing even if the prospect of reassessment was not reasonably expected by FQM. The Court also indicated that there was no error in the judge’s application of the common law concept of reasonable foreseeability to the general indemnification clause, and that the post-closing use by Kevitsa of the accumulated losses (prior to their subsequent denial) was reasonably foreseeable. Accordingly, FQM’s appeal of the finding of liability of it under the SPA for any taxes payable from the denial of the carryforward losses, was dismissed.
Neal Armstrong. Summary of Boliden Mineral AB v. FQM Kevitsa Sweden Holdings AB, 2023 ONCA 105 under General Concepts – Tax Indemnity.
Foix – Federal Court of Appeal confirms that s. 84(2) extends to the indirect distribution of liquid assets of the target through its sale to an arm’s length purchaser cum “facilitator”
The shareholders of a private Canadian company (“W4N”) exploiting a valuable item of software had agreed in principle to sell W4N to a U.S. public company (“EMC”) for U.S.$50 million. However, EMC was amenable to a reorganization being implemented to permit the shareholders to extract the excess cash and investment type assets of W4N. What was implemented was a hybrid transaction in which there was both a sale of the software, goodwill and other business assets of W4N to EMC and a sale of shares of W4N (which continued to hold some Canadian business assets) by its shareholders to a Canadian subsidiary (“EMC Canada”) of EMC.
Although the steps to accomplish this and related safe-income, capital dividend and capital gains deduction planning were quite intricate, Noël C.J. focused for his purposes on the following five steps:
- Trusts for the families of the two principals (Souty and Foix) sold shares of W4N to EMC Canada for notes of EMC Canada, later paid in cash, with the resulting capital gains of $5 million (approximately equaling the proceeds) ultimately being distributed to various family beneficiaries.
- W4N sold its intellectual property, goodwill and some of its other business assets to EMC for consideration including two “capital dividend” notes totaling $22 million (which were later distributed) and a “Balance Note” for $19.75 million.
- Souty and the holding company for Foix (Virtuose) sold special voting shares of W4N to EMC Canada for nominal consideration so as to effect an acquisition of control of W4N.
- The balance of the shares of W4N now were sold directly, or through a sale of shares of Virtuose, to EMC Canada for cash consideration of around $14 million.
- EMC Canada, Virtuose and W4N amalgamated.
Noël C.J. essentially indicated that the final aggregate purchase price for the hybrid transaction had been increased by around the amount of the Balance Note but that the Balance Note was not repaid at any relevant time and that the payment of the cash sales proceeds in Step 4 essentially was funded by a diversion of cash resources of EMC that otherwise could have been used to repay the Balance Note.
In confirming the application of s. 84(2) to proceeds received under Step 2 that were distributed to a beneficiary of the Souty Trust and to some cash proceeds received by the two principals in Step 4, Noël C.J. first accepted the submission of the taxpayers “that the target corporation must be impoverished to the benefit of its shareholders for there to be a distribution or an appropriation,” but indicated that, here, there had been such impoverishment since the Balance Debt was not paid, and “the nonpayment of the debt in the course of the hybrid sale freed up the necessary funds to defray the cost of W4N’s and Virtuose’s shares.”
He went on to indicate that “the scope of subsection 84(2) is sufficiently broad to counter this type of distribution when the property being distributed is fungible and a third-party facilitator is involved in the extraction process” and that “it would be contrary to Parliament’s intention to turn a blind eye to the existence of a distribution or appropriation for the sole reason that, for example, the shareholder received the target corporation’s property as a creditor rather than as a shareholder … or, as in the present case, that the funds received by the shareholder originate directly from a third party but indirectly from the target corporation.” The presuppositions in McNichol and Descarries “that subsection 84(2) cannot apply to indirect distributions of property or funds because in such cases, the property distributed to the shareholders is not that of the target corporation, but property of the same quality and quantity” were incorrect. Furthermore, contrary to Robillard, the proper interpretation of s. 84(2) has not narrowed in its modern context.
He also confirmed that these indirect distributions had occurred on a “reorganization” of the business of W4N (its splitting into two pieces) and on a discontinuance of Virtuose’s business (it ceased to be a holding company).
Neal Armstrong. Summary of Foix v. Canada, 2023 FCA 38 under s. 84(2).
Income Tax Severed Letters 22 February 2023
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Ahamed TFSA – Tax Court of Canada finds that a TFSA is not exempted on profits of a business of trading in qualified investments
The self-directed TFSA of a professional investment advisor, which actively traded qualified investments (mostly, penny stocks listed on the TSX Venture Exchange), was assessed under s. 146.2(6) for its 2009 to 2012 taxation years (during which $15,000 in contributions grew to $564,483) on the basis that its net gains were income from carrying on a business.
The TFSA noted that s. 146(4)(b) effectively exempted from Part I tax any income earned by an RRSP from carrying on a business of trading qualified investments, and submitted that “there would have been no rational legislative purpose for Parliament to tax a TFSA trust carrying on a business of trading qualified investments while exempting an RRSP carrying on the very same business.”
In dismissing the TFSA’s appeal, Spiro J stated:
So long as the business is one that may be “carried on” (i.e., not an “adventure in the nature of trade”) all businesses — without statutory exception — fall within the scope of subsection 146.2(6) of the Act, including a business of trading qualified investments.
Had one of Parliament’s purposes been to extend the scope of the tax exemption to TFSA trusts carrying on a business of trading qualified investments, Parliament would have said so. It had already done so in the context of a different statutory scheme when it amended the RRSP legislation in 1993 to make such an exception for RRSPs.
Neal Armstrong. Summaries of Canadian Western, Trustee of Ahamed TFSA v. The King, 2023 TCC 17 under s. 146.2(6) and s. 146(4)(b).
Joint Committee comments on August 2022 FA technical amendments
Some of the comments of the Joint Committee on some foreign affiliate measures included in the August 2022 draft technical amendments include:
Regarding the proposed expansion of the anti-avoidance rule in s. 85.1(4) (and a similar draft s. 87(8.3) rule, given the breadth of the “series of transactions” concept, the proposed elimination of the purpose test could result in significant uncertainty.
Relevant subsequent dispositions should not extend to dispositions of foreign affiliate shares by a Canadian taxpayer (even if such shares derive value from the shares of the first affiliate) - nor to dispositions of shares of the Canadian taxpayer or of shares further up the chain, since these would be taxable transactions.
Further, proportionality should apply, so that a disposition of shares of another foreign affiliate deriving any of their FMV from the shares of the first affiliate (or substituted property) should only lead to a denial of rollover treatment on a proportionate basis.
The excluded property test should be applied regarding the excluded property status of the property that is disposed of on the subsequent disposition, and the (existing) requirement to test the excluded property status of the property of the first affiliate at the time of the initial transfer should be eliminated.
The s. 95(2)(b)(i)(B) amendments address that, under current legislation, a disproportionate amount of FAPI can arise where the participating percentage in the payee affiliate is higher than the participating percentage in the payer affiliate. However, inequitable results can arise where partnerships are involved, and it is suggested that there could be, for instance, a look-through rule for partnership structures.
Although proposed s. 95(3.03) regarding relief where inter-affiliate services fees are paid by FA Holdco rather than by the underlying FA Opco is modelled on the provision of relief in existing s. 95(2)(a)(ii)(D) where inter-affiliate interest is paid by an FA Holdco rather than being paid by the underlying FA Opco, it is problematic that the various ancillary rules applying for the purposes of s. 95(2)(a) do not extend to proposed s. 95(3.03) to ensure its proper operation, including inter alia regarding the “throughout the year” requirement (ss. 95(2.2) and (2.01)), qualifying interest status (s. 95(2)(n)), and deeming rules for intervening partnerships (ss. 95(2)(y) and 93.1(5) and (6).)
It is problematic that para. (c) of proposed s. 95(3.03) requires that the services fees be paid or payable “by the second affiliate,” since services fees that are paid or payable by a holding partnership in which a FA is a member can be subject to s. 95(2)(b) (i.e., if they are deductible in computing the FAPI of the FA member). Accordingly, a corresponding rule to s. 93.1(4) should be introduced (although “the requirement in subsection 93.1(4) that all members of the partnership be foreign affiliates should not be extended to paragraph 95(2)(b), given that the latter only applies to the extent that the amounts are deductible by a foreign affiliate.”)
While the “subject to tax” requirement in s. 95(3.03) is modelled on the requirements of existing s. 95(2)(a)(ii)(D), there appears to be no policy rationale to base the application of subsection 95(3.03) on whether the payer affiliate and its directly held subsidiaries are subject to tax.
Neal Armstrong. Summaries of Joint Committee, "August 2022 legislative proposals relating to the Income Tax Act and the Income Tax Regulations", 16 February 2023 Joint Committee Submission under s. 85.1(4), s. 95(2)(b)(i)(B) and s. 95(3.03).
We have translated 6 more CRA interpretations
We have published a further 6 translations of CRA interpretations released in October of 2003. Their descriptors and links appear below.
These are additions to our set of 2,382 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 19 1/3 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 |
|---|---|---|---|
| 2003-10-17 | 25 September 2003 External T.I. 2002-0180905 F - Cessation de résidence-Conséquences fiscales
Also released under document number 2002-01809050.
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Income Tax Act - Section 128.1 - Subsection 128.1(4) - Paragraph 128.1(4)(b) | overview of consequences of emigration to Switzerland |
| 3 October 2003 External T.I. 2003-0004575 F - ASSURANCE-INVALIDITE
Also released under document number 2003-00045750.
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Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | premiums paid by corporation for disability policy on shareholder-employee are non-deductible | |
| Income Tax Act - Section 3 - Paragraph 3(a) | disability benefits received by corporation for disability policy on shareholder-employee are not income | ||
| 3 October 2003 External T.I. 2003-0028385 F - EXONERATION DU REVENU IMPOSABLE
Also released under document number 2003-00283850.
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Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(d.3) | non-share corporations do not have shares | |
| 6 October 2003 External T.I. 2003-0040145 F - TRANSFERT D'UNE POLICE D'ASSURANCE-VIE
Also released under document number 2003-00401450.
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Income Tax Act - Section 148 - Subsection 148(7) | loss on transfer of universal life policy to wholly-owned subsidiary not recognized | |
| Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis - Element A | no taxable benefit when life insurance policy transferred to wholly-owned corporation at less than its FMV | ||
| Income Tax Act - Section 246 - Subsection 246(1) | no taxable benefit when life insurance policy transferred to wholly-owned corporation at less than its FMV | ||
| 3 October 2003 External T.I. 2003-0030585 F - PENSIONS ETRANGERES
Also released under document number 2003-00305850.
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Treaties - Income Tax Conventions - Article 18 | degree of exemption for social security pension payments from Germany, Belgium or France | |
| 2 October 2003 External T.I. 2003-0033415 F - FRAIS D'ACCES INTERNET
Also released under document number 2003-00334150.
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Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | reimbursement of high-speed internet access fees to employees who must work from home likely not a taxable benefit |