News of Note
Income Tax Severed Letters 23 November 2022
Email this ContentThis morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an operator with a co-ownership interest in JV lands for condo development could credit the new housing rebate to purchasers
Two affiliated companies (Companies X and Y) contributed lands (held by a nominee through a bare trust agreement) to a joint venture with an unrelated company (Company Z – whose contribution was financing and condo development and marketing) for the development, construction and sale of condominium units. Company X, who was designated as the JV operator, entered into contracts on behalf of the participants with the construction and other suppliers, operated the JV bank account and, together with the nominee, entered into agreements with individuals for sales of the condo units.
CRA indicated that:
- As Company X had an interest in the JV lands and was entitled to a proportionate share of the JV profits, it qualified as a JV “participant” and, therefore, was eligible to elect to be the JV “operator” and, as such, could make supplies on behalf of the other participants and claim ITCs on eligible expenses incurred by it on behalf of the participants.
- Where Company X, as operator, made supplies of the condo units on behalf of the participants during the currency of the election, it would be deemed to have made the supply of the units, so that the other participants would not be required to collect the tax on the condo sales.
- Given that Company X had an ownership interest in the lands and, as operator, engaged suppliers to construct the units, it qualified as a “builder” of the units.
- As a builder, “provided that the purchasers of the Units meet all the eligibility criteria for the New Housing Rebates, and provided that all of the other conditions set out in subsection 254(4) and subsection 41(6) of the Regulations are met, Company X may pay or credit the New Housing Rebates to purchasers of the Units.”
Neal Armstrong. Summaries of 10 May 2022 GST/HST Interpretation 234662 under ETA s. 273(1), s. 123(1) – builder – (a) and s. 254(4).
GST/HST Severed Letters June/July 2022
CRA indicates that a superficial loss was allocated on a pooled basis to the ACB of shares held at the end of the 61-day period by affiliated persons
On March 15, 2022, an individual disposes of all of his shares (being 2,000) of Pubco, and realized a capital loss of $10,000. On March 16, 2022, his spouse acquired 2,000 shares of Pubco. In addition, his RRSP had acquired 1,000 shares of Pubco on March 10, 2022. Finally, the individual acquired 500 shares of ABC Pubco on April 13, 2022.
In addressing the question of how the denied superficial loss of $10,000 should be allocated to the replacement shares pursuant to s. 53(1)(f), CRA stated that, in accordance with IT-456R, para. 12, the loss should be determined as if all the affiliated persons involved were one person, and then prorated on the basis of all the substituted properties held by each person at the end of the 61-day period.
Consequently, the $10,000 superficial loss would be allocated in proportion to the fractions 1000/3500, 2000/3500 and 500/3500 to increase the ACB of the 1,000 shares acquired by the RRSP, the 2,000 shares acquired by the individual’s spouse and the 500 shares acquired by the individual, respectively.
Neal Armstrong. Summaries of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 53(1)(f) and s. 40(3.3).
We have translated 5 more CRA severed letters
We have published a translations of a ruling released by CRA last week and a further 4 translations of CRA interpretations released in January of 2004 (or 7 including duplicates with different document numbers assigned by CRA). Their descriptors and links appear below.
These are additions to our set of 2,287 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 18 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates that the s. 98(3) or (5) rollover provisions can apply to a distribution on the partnership winding-up of a life insurance policy
Where a partnership holding an exempt life insurance policy on the life of individual partners is wound up as described in s. 98(3) or 98(5), can the distribution of the policy on the partnership's winding-up occur on a rollover basis as may be permitted under those provisions, or are its proceeds of disposition determined under s. 148(7)? CRA responded:
[W]here a Canadian partnership that owns an interest in an exempt life insurance policy ceases to exist and all the requirements of subsection 98(3) or 98(5), as the case may be, are otherwise met, it is our general view that those provisions would take precedence over subsection 148(7) such that there would be a tax-deferred rollover of the exempt life insurance policy.
Neal Armstrong. Summary of 29 September 2022 External T.I. 2021-0882411E5 under s. 148(7).
CRA rules on the para. (f) exclusion from disposition re a transfer for no consideration to new trust for the same special-needs minor beneficiary
A special-needs minor child (CC4), who was the sole beneficiary of an inter vivos trust for the child’s exclusive benefit, held non-voting Class A common shares of a holding company (Fco), with CC4’s three siblings holding the other Class A shares directly.
It was proposed that:
- the trust for CC4 exchange its Class A shares of Fco under s. 86 reorganization for newly-created non-voting, non-cumulative redeemable and retractable Class Z shares of Fco.
- Fco increases the PUC of its Class Z shares held by the trust, with the trust including the resulting taxable dividend in its income without taking a s. 104(6) deduction.
- Fco makes a PUC distribution to the trust by distributing a note of a subsidiary in an amount sufficient for the trust to pay the tax on the above taxable dividend.
- the father of CC4 settles a new trust for the exclusive benefit of CC4, with the old trust transferring its Class Z shares of Fco to the new trust for no consideration, and with the new trust not electing out of the application of para. (f) of the definition of "disposition" in s. 248(1).
- the old trust is wound up after paying its taxes, on the deemed dividend received by it, with the proceeds of the note.
Rulings included that the para. (f) exclusion from "disposition" would apply to the trust-to-trust transfer and that s. 104(4) would not apply to the new trust because of the exclusion in para. (g) of the s. 108(1) definition of "trust." Thus, regarding the second ruling, the interests in the new trust were accepted as being vested indefeasibly in the beneficiary even though the latter was presumably lacking in legal capacity.
Neal Armstrong. Summary of 2022 Ruling 2021-0904611R3 F under s. 248(1) – deposition – (f).
Des Groseillers – Supreme Court of Canada finds that s. 7(3)(a) does not override s. 69(1)(b)
An individual who donated some of his employee stock options on the shares of a public company to arm's length registered charities, claimed the $3M fair market value of the donated options for charitable tax credit purposes, but did not include any portion of the donated options in his income under the equivalent of ITA s. 7(1)(b). This reporting was accepted by in the Court of Quebec on the basis inter alia that the equivalent of ITA s. 7(3)(a) established that the stock option rules constituted a “complete code” so that the equivalent to ITA s. 69(1)(b) did not apply to deem the “value of the consideration for the disposition” received by the taxpayer to be equal to the options’ fair market value of $3M, rather than the nil proceeds in fact received.
In allowing the ARQ’s appeal, Cournoyer JCA indicated inter alia that:
- It was “telling” that the s. 69 rule did not explicitly exclude the employee stock option rules from its application, given the presence of other carve-outs from s. 69.
- The only effect of the s. 7(3)(a) rule was to give precedence to the stock option rules over any other charging provisions, and did not prevent the ARQ from applying the s. 69 deeming rule, and “in the absence of clear legislative indicia to this effect” those rules did not “constitute a code so complete and so hermetic that the application of [the s. 69 rule] is excluded."
After quoting extensively from his reasons, the Supreme Court briefly stated that “[w]e agree with Cournoyer J.A.’s view.”
Neal Armstrong. Summary of Des Groseillers v. Quebec (Agence du revenu), 2022 SCC 42 under s. 69(1)(b).
Significant changes have been made to the draft EIFEL rules
Observations on the revised EIFEL rules include:
- The amounts that would be the interest and financing revenues (IFRs) or interest and financing expenses (IFEs) of a controlled foreign affiliate (CFA) in computing its capital gain or foreign accrual property income are to be included in the taxpayer’s IFR (net of foreign accrual tax deductions) or IFE, and the FAPI of such CFA remaining after such carve-outs of the CFA’s “relevant affiliate IFR” or “relevant affiliate IFE” is simply included in the taxpayer’s adjusted taxable income (ATI) (i.e., generally the tax EBITDA amount to which the 30% deductibility limitation in s. 18.2(2) is applied).
- Furthermore, per s. 95(2)(f.11)(ii)(A), the EIFEL rules should not restrict the IFE of the CFA for the purposes of calculating its FAPI.
- Per s. 95(2)(f.11)(ii)(D), where a portion of a taxpayer’s IFE for a taxation year is denied under s. 18.2(2), the same proportion of a CFA’s relevant affiliate IFE is similarly denied for purposes of computing its FAPI for the relevant taxation year – but, unlike the treatment of restricted IFE (which may be carried forward to a subsequent year depending on the availability of excess capacity), the denied deduction for purposes of computing FAPI of a foreign affiliate apparently cannot be carried forward.
- “Earnings” under para. (b) of the Reg. 5907 definition (essentially, FAPI recharacterized as active business income) is unaffected under the revised EIFEL rules.
- Given the potential to carry forward losses from pre-EIFEL years, taxpayers may be required to determine what their hypothetical IFE and IFR, as well as other ATI adjustments would have been, respecting all pre-regime loss years.
- The EIFEL revisions have removed the requirement that cumulative unused excess capacity could only be transferred between eligible group corporations that have the same functional currency – and transfers of capacity respecting a “fixed interest commercial trusts” (e.g., most REITS) can now be made.
- Like the previous version, where the designated amount exceeds the cumulative unused excess capacity by even $1, the entire transfer election apparently is invalidated.
- Unlike the previous version, all interest received or receivable from nonresident corporations is included in IFR.
Neal Armstrong. Summaries of EY, “Revised EIFEL proposals,” Tax Alert 2022 No. 43, 10 November 2022 under s. 18.2(1) - relevant affiliate interest and financing expenses, interest and financing revenues, adjusted taxable income – B - (h), s. 18.2(4), s. 95(2)(f.11)(ii)(A), s. 95(2)(f.11)(ii)(D), Reg. 5907 – earnings – (b), s. 18.21(1) – group ratio, s. 18.21(2)(a).
Income Tax Severed Letters 16 November 2022
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.