News of Note
CAE – Federal Court of Appeal confirms that an unconditionally repayable loan with below-market yield was government assistance
Email this ContentCAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.
Boivin JA found that Ouimet J had not made a reversible error in finding “that the amounts received by CAE were not made pursuant to an ordinary commercial agreement, having regard to the terms of the agreement and, in particular, the implicit rate of return, which he found to be substantially lower than the market rate for a comparable loan and therefore contrary to the commercial interests of a private lender,” and in then applying Consumers' Gas, CCLC Technologies and Immunovaccine Technologies to conclude that the amounts received in the reassessed years were “government assistance,” as defined in s. 127(9).
Neal Armstrong. Summary of CAE Inc. v. Canada, 2022 CAF 178 under s. 127(9) – government assistance.
Our translations of the answers at the 2022 APFF Financial Strategies and Instruments Roundtable are available
We have published summaries of the questions posed at the 7 October 2022 APFF Financial Strategies and Instruments Roundtable together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers. We will provide comments on these answers after we have finished commenting on the (regular) 7 October 2022 APFF Roundtable, which we published in similar form a week ago.
CRA indicates that forgiveness under a Bankruptcy proposal occurred when it was court-approved
Pursuant to a proposal under the Bankruptcy and Insolvency Act, Opco and its creditor agreed to write off $600,000 of its $1 million debt and to revise the terms of repayment of the new balance of $400,000, including providing for payments over four years.
The proposal was signed on September 30, 2022, the Superior Court of Quebec approved it on January 20, 2023, the first payments are made in February 2023 and the last payment is made in December 2026 (with a discharge). In finding that the forgiveness for s. 80 purposes occurred at the time of the Court approval, CRA stated:
[A] debt or obligation is settled or extinguished when the obligation to pay ceases to exist, and payment, cancellation, set-off, substitution of debtors and release are among the means of settlement. …
Furthermore … Richer indicat[ed] that "in the context of section 80, the word 'settle' connotes a final and legally binding resolution that terminates or reduces the debtor’s obligations” … .
CRA also indicated that the resulting tax applicable to the income under s. 80(13) did not arise until such time of forgiveness, rather than being treated as a provable claim in the proceeding.
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.9 under s. 80(2)(a) and s. 80(13).
CRA indicates that incorporating a sub through which a share sale will occur so as to avoid s. 84.1 is not per se GAARable
In order for Brother to avoid the application of s. 84.1 to his sale of half the shares of Opco to his sister’s corporation (Sister-Holdco), he first transfers those shares on a s. 85(1) rollover basis to a Newco formed by him (Brother-Portfolioco), which then sells the shares to Sister-Holdco, and claims the capital gains reserve because most of the sales proceeds are deferred.
CRA indicated that it would not apply s. 245(2) because of the specific creation of Brother-Portfolioco to avoid s. 84.1.
After noting that, under s. 40(1)(a)(ii), the availability of the reserve turned on Brother-Portfolioco and Brother not having de facto control of Sister-Holdco and on Sister-Holdco not having de facto control of Brother-Portfolioco, CRA commented on the expansion of de facto control under s. 256(5.11) stating:
As provided for in subsection 256(5.11) and the applicable jurisprudence, any factor, whether contractual, commercial, economic, moral or familial, may be taken into consideration in order to determine whether a person or group of persons has influence, direct or indirect, the exercise of which would result in de facto control of a corporation … .
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.8 under s. 84.1(1) and s. 256(1.11).
Income Tax Severed Letters 19 October 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that an employee, with general authority to contract, may not be an employer PE while teleworking at his cottage
Mr. X, who while living in Quebec, had been commuting to the sole permanent establishment of his employer in Quebec, from which he was paid, will now telework at his Ontario cottage three days a week, and commute to the Quebec office two days a week. He has the authority to enter into contracts for his employer.
Regarding whether Reg. 400(2) would deem Mr. X's employer to have an Ontario permanent establishment at Mr. X’s cottage, CRA indicated that the “fact that an employee works from home is generally not sufficient to create a fixed place of business of the employer in the province,” and further stated, regarding the “general authority to contract rule” in Reg. 400(2)(b):
[I]n order for the presumption in [Reg.] 400(2)(b) to apply, the employee must not only have general authority to contract for the employer, but the employer must also carry on business in the province through the employee's place of business.
The operation of the source deduction rules turns on whether an employee is considered to “report for work” at an actual establishment of the employer as per Reg. 102(1), or is deemed by Reg. 100(4) to report for work at the establishment of the employer from which the remuneration is paid. CRA went on to indicate that even if the employer were deemed to have a PE in Ontario by Reg. 400(2)(b), this would not be relevant to the question of whether the employee reported for work at an establishment of the employer located in Ontario. Thus, the employee likely would continue to be subject to source deductions on the Quebec scale.
Neal Armstrong. Summaries of 7 October 2022 APFF Federal Roundtable, Q.7 under Reg. 400(2)(b) and Reg. 102(1).
GST/HST Severed Letters April 2022
This morning's release of 15 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their April 2022 release) is now available for your viewing.
CRA indicates that charitable gifts by a spousal trust will disqualify it
S. 70(6)(b)(ii) requires that, in order for there to be a rollover to a spousal testamentary trust under s. 70(6), “no person except the spouse or common-law partner may, before the spouse’s or common-law partner’s death, receive or otherwise obtain the use of any of the income or capital of the trust.” CRA stated:
The mere possibility that a person other than the spouse or common-law partner may, before his or her death, receive or otherwise obtain the use of any of the income or capital of the trust is sufficient to disqualify the trust for purposes of the rollover under subsection 70(6).
Accordingly, the making of charitable donations by such a trust (which essentially were just a continuation of the gifts the surviving spouse had been making before the death of her husband) would disqualify the mooted spousal trust.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.6 under s. 70(6)(b)(ii).
We have translated 9 more CRA interpretations
We have published a further 9 translations of CRA interpretations released in February of 2004. Their descriptors and links appear below.
These are additions to our set of 2,249 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 guarded acceptance of distributions of LP profits as loans, followed by set-off against draws in January
When will CRA treat loans from a limited partnership received by a limited partner in order to avoid a gain under s. 40(3.1) as a distribution of partnership capital or profits per s. 53(2)(c)(v), so that such negative-ACB gain is not avoided?
CRA responded that it “will generally” not do so where the following five tests are satisfied:
1. “The loan is not made on account of or in full or partial payment of a withdrawal of a limited partner's capital contribution.”
2. The total amount of all loans received by the limited partner in respect of a fiscal period of the partnership does not exceed the total of (i) the limited partner's share of the adjusted net income of the partnership for the fiscal period (i.e., s. 53(1)(e)(i) additions minus 53(2)(c)(i) year losses), and (ii) the ACB of the limited partner's interest at the end of the fiscal year - “or, if there is an excess amount, it is not material in the circumstances”.
3. “Shortly after the end of the fiscal period, the partnership declares a distribution payable to the limited partner in an amount equal to the total amount of the loans received by the limited partner during the fiscal period and the distribution is used to settle the loans to the limited partner (in cash or by way of set-off).”
4. The loan (made in lieu of the cash payment of the distribution) is made primarily for the purpose of avoiding a deemed gain to the limited partner pursuant to s. 40(3.1) that would be realized at the end of the fiscal period of the partnership caused solely by the difference between the time of the addition of the limited partner's share of the adjusted net income of the partnership for the fiscal period, and the time of the deduction of distributions to the limited partner for the fiscal period pursuant to s. 53(2)(c)(v) (other than the mooted loans).
5. The partnership interest is not a tax shelter, and this is not part of a larger series of transactions that includes an avoidance transaction to which s. 245(2) should apply.
These tests are perhaps too corporate. Re the 1st test (and assuming that it is saying something more than the 2nd test), there is no clear distinction (or perhaps none at all) between capital and operating draws for partnerships as contrasted to corporations. Re the 3rd test, the general partner of a limited partnership usually has general authority to act alone regarding all but extraordinary matters, so that it typically would not make the catch-up distribution pursuant to a partnership resolution.
That said, the general thrust appears to be accepting of loans to solve only the problem that cash distributions grind partnership interest ACB right away, whereas the ACB is not righted through an income allocation until the beginning of the following year.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.5 under s. 40(3.1).