News of Note
Chad – Tax Court of Canada finds that the presumption that commercial activity is in pursuit of profit and, thus, a source, was rebutted where there was no real interest in generating profit
Email this ContentIn order to generate a targeted loss of $22 million for use in his 2011 taxation year, Chad agreed to pay a fee of $240,000 to a UK foreign exchange (FX) trading firm (Velocity) to enter into straddle trades (quite similar to those in Paletta) in which he would enter into contracts both for the purchase and sale of US dollars, such that he was close to fully hedged and then, near to the year end, closed out whichever of the “long” or “short” contracts were in a loss position. These trading activities, when completed in 2012, resulted in a net profit to Chad of $6,200.
In finding that these trading activities did not constitute a source of income to Chad, so that the 2011 losses (and the fee) were non-deductible in computing his income, Sommerfeldt J indicated that Paletta had found that “Stewart did not do ‘away with the pursuit of profit as a prerequisite for the existence of a business’” and concluded:
While the “assumption underlying the test in Stewart is that a commercial activity is undertaken for profit,” [Stackhouse, at para. 103] … the documentary evidence calls that assumption into question … .
The documentary evidence … does not give any indication that Mr. Chad … intended, in conducting the FX Activities, to achieve a profit/loss amount great enough to offset the $240,000 fee, which was a significant expense … . Thus … the intention of Mr. Chad … in implementing the Trades, was not to earn a profit … .
Ironically, the Crown argued that the fee had been paid by Chad for the agreement of Velocity to generate the $22 million loss and not for its trading activities. If this argument had succeeded, it would imply that the fee was not an expense of the trading activities which, without that “expense,” generated a profit, i.e., that there indeed was a source of (actual) income.
Neal Armstrong. Summaries of Chad v. The King, 2024 TCC 142 under s. 3(1) – business, and General Concepts - Sham.
Income Tax Severed Letters 30 October 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states sale by 2 equal shareholders of 1/3 of each’s shares to a 3rd unrelated person might not entail an acquisition of control; similarly where 1 of 4 equal shareholders is redeemed
A, B and C were three unrelated individuals. A and B, who were the sole and equal (common) shareholders of Opco, each sold 1/3 of their shares to C, for FMV consideration.
Would a new group (A, B and C) be considered to have acquired control of Opco, or would CRA consider that the group formed by A and B still controlled the corporation?
CRA indicated:
- The CRA position is that the shareholders of a private corporation are rebuttably presumed to act in concert to control the corporation (the “control group presumption”).
- At the 1984 CTF Roundtable, Q.42, regarding the same situation, CRA indicated that the two original shareholders would still be in a position to control the corporation after the disposition of the shares, but that to the extent that the two original shareholders would cease to act in concert to control the corporation, the disposition of the shares could result in the acquisition of control of the corporation. CRA now further commented that that it would be reasonable to consider there to be an acquisition of control by a group of which C was a member if A or B withdrew from control of Opco and that this “could also be the case if, after the disposition of the shares, it was determined that A, B and C formed a group of persons that controls Opco.”
In another fact pattern, A to D (four unrelated individuals) each held 25% of the shares (being common shares) of Opco. Would the repurchase by Opco of D’s shares result in an acquisition of control of Opco?
CRA indicated that such repurchase would result in an acquisition of control by a group consisting of the three remaining shareholders unless the control group presumption could be rebutted by demonstrating, for instance, that control of Opco was exercised by the same group before and after (e.g., by the group consisting only of A to C).
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.17 under s. 251.2(2)(a).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in June of 2001. Their descriptors and links appear below.
These are additions to our set of 2,984 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 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 |
|---|---|---|---|
| 2001-06-08 | 10 May 2001 Internal T.I. 2001-0065677 F - SIGNIFICATION DE "MOMENT DONNÉ" | Income Tax Act - Section 6 - Subsection 6(21) | choice of time to calculate the loss is generally that of the taxpayer |
| 28 May 2001 Internal T.I. 2001-0066147 F - ALIMENTS - MACHINES DISTRIBUTRICES | Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(c) | s. 67.1(2)(c) exception would apply to food and beverages sold by employer through vending machines | |
| 31 May 2001 External T.I. 2001-0066215 F - Clause de survie | Income Tax Act - Section 70 - Subsection 70(6) | 30- or 60-day survivorship clause in will does not preclude application of s. 70(6) | |
| 1 June 2001 Internal T.I. 2001-0066297 F - CREDIT EQUIVALENT - PENSION ALIMENTAIRE | Income Tax Act - Section 118 - Subsection 118(5) | legal determination would be required as to whether a subsequent agreement which purported to eliminate a support obligation for a child under a court order, had that effect | |
| 22 May 2001 Internal T.I. 2001-0083987 F - EMPLOYEUR PAYE IMPOT POUR EMPLOYÉ | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | employers’ reimbursement of employees’ reassessments for participating in employer’s scheme were a taxable benefit | |
| 18 May 2001 External T.I. 2000-0040405 F - Revenu protégé - options | Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) | ACB increase to options as a result of s. 52(1) reduced the safe income otherwise allocable to the shares acquired on the options’ exercise | |
| Income Tax Act - Section 52 - Subsection 52(1) | s. 15(1) benefit on stock option grant added to options’ cost under s. 52(1) |
CRA reiterates prior positions on the new GAAR
CRA reiterated some prior guidance on its interpretation of the GAAR following the introduction of s. 245(4.1), including:
- its affirmation in 2024-1008251I7 of IC88-2 and IC88-2S1;
- as per 2023-0987941I7, it will continue to rule on pipeline-type post-mortem transactions that meet its conditions, but not re plans similar to the example provided in the Explanatory Notes re surplus stripping (Example Jane) or similar plans where an individual shareholder of a corporation proposes to undertake non-arm's length transactions, one of the principal purposes of which is to establish an ACB in order to extract retained earnings; and
- as per 2024-1016011E5, it will not generally apply the current GAAR to transactions solely intended to crystallize pre-June 25, 2024 capital gains.
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.16 under s. 245(4).
CRA indicates that payment of trust-related professional fees by a trustee or beneficiary prior to (rather than after) trust settlement does not engage s. 75(2)
CRA indicated that the payment of trust-related professional fees by a trustee or beneficiary prior to trust settlement does not engage s. 75(2), whereas such payments following the settlement “could be considered a contribution or transfer made indirectly to the trust by that other person and could, depending on the circumstances, result in the application of subsection 75(2).”
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.15 under s. 75(2).
CRA considers that losses from a business of Holdco providing admin services to Opco likely would disappear following an acquisition of control and their amalgamation
Holdco, a CCPC, had accumulated non-capital losses (NCLs) arising from the management services it had rendered over the years (i.e., the services of its employee providing administrative services) to its wholly-owned manufacturing subsidiary, Opco. Immediately after an acquisition of control of Holdco by Buyco, Holdco and Opco amalgamated, so that the same services of the employee now occurred within Amalco.
In finding that the NCLs accumulated by Holdco likely could not be deducted in computing Amalco's taxable income in light of the ss. 87(2.1) and 111(5) restrictions, CRA stated:
[O]n the limited basis of the facts submitted … it would be reasonable to consider that the business that generated the losses, namely the management services business that was carried on by Holdco prior to the acquisition of control … ceased to be operated after the amalgamation. This conclusion is based in particular on … the management activities performed by the Amalco employee [being] intended solely to support the corporation in the manufacturing field, and … not in themselves represent[ing] the carrying on of a business. …
Regarding the factual variation where Amalco had two divisions: one carrying on the manufacturing business; and the second division for management services, including those previously rendered by Holdco to Opco, CRA stated:
[C]reating two divisions with a separate financial statement for the management services and manufacturing businesses would not change our conclusion … that it would be reasonable to consider that the management services business that was carried on by Holdco ceased to be carried on after the amalgamation of Holdco and Opco.
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.14 under s. 111(5)(a).
CRA confirms that the use of s. 69(5) in post-mortem planning to realize a trust capital loss is not abusive
2012-0456221R3 concerned a spousal testamentary trust which held all the shares of a Canadian investment holding company (Holdco) on the death of the surviving spouse, so that the trust realized gain and an ACB step-up under s. 104(4)(a)(iii). A portion of the Holdco shares were to be transferred by the trust to a newly-incorporated unlimited liability company (Newco 2), with Holdco then redeeming its shares held by Newco 2 for cash and with Newco 2 then to be wound-up under s. 69(5) to realize a capital loss which would be carried back by the trust to reduce the s. 104(4)(a) gain. The s. 84(2) deemed dividend arising on the wind-up was to be allocated and distributed to the US trust beneficiaries, subject to the Treaty-reduced withholding of 15% pursuant to Art. XXII(2) of the Canada-US Treaty, and the corresponding distribution of paid-up capital distributions received by the trust was to be allocated and distributed to the Canadian-resident beneficiary.
In confirming that this position regarding the realization of the s. 69(5) loss was still valid in the context of such post-mortem planning, even if legal and commercial constraints prevent the winding-up of the corporation within three years of the death of the beneficiary spouse (although, of course, this would not be as good a result), CRA stated:
Where the conditions and technical parameters of subsection 40(3.6) apply, the Trust finds itself in a situation of immediate double taxation (capital gain on the death of the beneficiary spouse and deemed dividend on the redemption of the corporation's shares). … The CRA does not consider that the use of post mortem transactions to eliminate the capital gain arising on the death of the beneficiary spouse in order to limit double taxation at the trust level results in a situation of [GAAR] abuse … .
In 2013-0480361C6, CRA confirmed that s. 129(1.2) did not apply in the above situation. In also confirming this position, CRA stated:
Generally, where, in light of the facts and circumstances of a particular situation, post mortem planning is undertaken primarily to prevent the application of the loss limitation rule in subsection 40(3.6) to limit double taxation and, to the extent that the integration principle is respected, i.e., a corresponding tax is ultimately paid by the Trust on the deemed dividend received, the CRA would be of the view that the specific anti-avoidance rule in subsection 129(1.2) should not apply in those circumstances.
Neal Armstrong. Summaries of 10 October 2024 APFF Roundtable, Q.13 under s. 69(5) and s. 129(1.2).
The October 10, 2024 APFF Financial Strategies and Instruments Roundtable is now available in English
We have uploaded our translation of the written questions posed at the 10 October 2024 APFF Financial Strategies and Instruments Roundtable held in Gatineau and of the Income Tax Ruling Directorate’s provisional written answers. We have also made some minor corrections to our summaries of the questions posed, and of our translation of the full text of the provisional answers given, at the (regular) 10 October 2024 APFF Roundtable.
CRA finds that the testing of a NAL relationship regarding the ACB grind under ss. 84.1(2)(a.1) and 84.1(2)(a.1)(ii) occurs when the shares are acquired, rather than when transferred as described in s. 84.1
In 2020, Mr. X married the daughter of Mr. Y and also acquired the shares of PME Inc. from Mr. Y (who claimed the capital gains exemption). In 2022, Mr. X ceased to be related to Mr. Y by virtue of the death of his spouse or the rupture of their marriage.
If in 2024, Mr. X transferred his shares of PME Inc. on a s. 85 rollover basis to his holding company, would s. 84.1 reduce the ACB of his shares of PME Inc., or is the determination of the non-arm’s length relationship under s. 84.1 to be made, not in 2020, but at the time it is engaged (in 2024 in this rollover transaction)? CRA stated:
At the time Mr. X acquired the shares of the capital stock of PME Inc., there was a non-arm's length relationship between Mr. X and Mr. Y, and the CGD was claimed by Mr. Y in respect of that disposition. There was therefore a non-arm's length relationship both at the time referred to in paragraph 84.1(2)(a.1) and at the time referred to in subparagraph 84.1(2)(a.1)(ii). Consequently, for the purposes of applying section 84.1 to the sale to his holding company, the ACB of the shares of the capital stock of PME Inc. held by Mr. X must be reduced by the CGD claimed by Mr. Y.
Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.12 under s. 84.1(2)(a.1)(ii).