News of Note
CRA is willing to adapt a prescribed requirement, that an election be made by letter attached to the return, to internet filings
Email this ContentA taxpayer must file an election pursuant to Reg. 1101(5b.1) for each eligible non-residential building for which the taxpayer intends to claim the additional CCA. CRA rejected the suggestion that classification of a qualifying non-residential building in a separate Class 1(a) or 1(b) on the taxpayer’s return was sufficient for the it to be considered to have made the election, noting that the text of Reg. 1101(5b.1) effectively indicated that the “taxpayer must … send to the Tax Centre … a letter attached to the taxpayer's income tax return stating the taxpayer's election for each eligible non-residential building for the taxation year in which the subject building is acquired.” However, CRA further stated:
[I]t is possible for the taxpayer to make the election under subsection 1101(5b.1) I.T.R. over the Internet using either of the following methods:
- by using the "T2 Attach-a-doc" service
- indicating this election in the notes to the financial statements in the General Index of Financial Information (GIFI) of the tax return.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.4 under Reg. 1101(5b.1).
CRA obliquely confirms that there is no adverse CEWS impact of a non-resident parent paying dividends to individuals
CRA was presented with the proposition that publicly traded companies or their subsidiaries are not entitled to any CEWS grants for the claim period in which dividends were paid to individuals who are holders of common shares, and with the example of a parent company listed on the Paris stock exchange, with a Canadian subsidiary in Canada and an individual shareholder, which declares a dividend to be paid on March 31, 2022. CRA effectively indicated that the payment of a dividend at the parent level was irrelevant, and there would only be an adverse CEWS impact under the rules in ss. 125.7(2.01) and (14.1) if the Canadian subsidiary itself paid a dividend to an individual.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.3 under s. 125.7(2.01).
CRA declines to comment on whether a right to a top-up in the event of an IPO is inconsistent with receiving FMV proceeds
There is an exception in s. (f)(ii) of the taxable preferred share definition to accommodate inter alia a clause under which a person agrees to acquire the share for an amount not exceeding the FMV of the share at the time of the acquisition, and a comparable exception in s. (a) of the short-term preferred share definition. CRA was asked various questions including whether, where a clause permits a shareholder to redeem its common shares at FMV, the provision for further compensation in the event that there was a public offering within 12 months at a higher price would cause the exception to not be available.
CRA gave a non-committal response - which is better than a negative response.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.2 under s. 248(1) – taxable preferred share – s. (f)(ii).
CRA indicates that contingent liabilities that reduce shares’ FMV should also reduce safe income on hand
We have published summaries of the questions posed at the 7 October 2022 APFF Roundtable together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers.
Q.1 dealt with an example where the FMV of Holdco’s shares of Opco (having a nil ACB) is $1,000,000, consisting of shareholder’s equity (i.e., share capital and retained earnings, also equaling safe income earnings) of $800,000, unrealized gains of $500,000 and contingent liabilities and accounting provisions valued at $300,000. It was suggested to CRA that in determining safe income on hand, the accounting contingencies and reserves should be considered to reduce first the unrealized gains rather than the safe income on hand.
CRA maintained its “longstanding position that to the extent that contingencies and accounting reserves have the effect of reducing the inherent gain on a corporation's share, such amounts should reduce the corporation's safe income on hand” – but indicated that it would “be prepared to consider more specific situations in the context of a request for advance rulings… .”
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.1 under s. 55(2.1)(c).
CRA indicates it can choose under s. 118.1(17) which gifts to apply loanbacks
A corporation made charitable gifts in 2007, as well as in 2015 to 2017, to a private charitable foundation. Interest-bearing loans were made in 2012 and 2015, by the foundation to the corporation and persons not dealing at arm’s length with it, contrary to s. 118.1(16)(c)(ii).
S. 118.1(16) provided that the gift amounts were to be reduced by a loan made back to the corporation by the charity within the following 60 months – so that, for example, the 2007 gift amount could be reduced by the 2012 loanback amount. S. 118.1(17) provided an ordering rule whereby, if a loss amount “has been applied under [s. 118.1(16)]” to reduce a gift amount, it cannot be applied to reduce another gift amount.
The Directorate confirmed that since CRA in fact had not applied the 2012 loanback amount to reduce the 2007 gift amount (presumably, because of statute-barring), the 2012 loanback amount was available to be applied to reduce the subsequent gift amounts.
Neal Armstrong. Summary of 18 July 2022 Internal T.I. 2021-0921671I7 under s. 118.1(17).
CRA indicates that periods of farming use of a property as a rental property can count towards the principally-used test in s. 73(3)(c)
S. 73(3)(c) specifies that one of the requirements for the rollover in s. 73(3.1) to be available for a parent-to-child transfer of farmland is that
the property has been used principally in a farming … business in which the taxpayer, the taxpayer’s spouse or common-law partner, a child or a parent of the taxpayer, was actively engaged on a regular and continuous basis … .
CRA indicated:
- The “principally” test could be measured by relative years of use, so that the test would be satisfied if over the total relevant period, the active farming use test was satisfied during a majority of the years during that period.
- Years of active use by the taxpayer or one of the listed related persons in the farming business would count for these purposes even if the taxpayer was merely renting rather than owning the property for those years.
CRA appeared to accept that this test was satisfied, for instance, where the taxpayer rented the property for 14 years for active use by him in his farming business, then owned the property for a further 20 years (including 3 years of active use by him in his farming business before then starting to rent out the property for the remaining 16 years) before the mooted rollover to his child: the 17 years of active use in his farming business (including 14 years of use as a rental property) represented a majority of the 33-year period.
Neal Armstrong. Summary of 12 September 2022 External T.I. 2020-0863671E5 under s. 73(3)(c).
Income Tax Severed Letters 12 October 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA is reviewing whether it will permit critical mineral status to be certified after the related flow-through share agreement is made
Regarding the draft rules for an enhanced mineral exploration credit for individuals’ investing in flow-through shares, CRA noted in relation to the stipulation in draft para. (e) of the “flow-through critical mineral mining expenditure” definition that the required certification by a “qualified engineer or geoscientist” be “completed … no more than 12 months before the time that the agreement is made”:
This wording suggests that the Certification is to be completed before the time the flow-through share agreement is made (but not more than 12 months before that time), although it doesn’t expressly mandate that the Certification be completed before the flow-through share agreement is made (rather than after). We have raised this issue with the Department of Finance.
While the prescribed form for the certification had not yet been released, CRA will accept a letter signed by the qualified engineer or geoscientist that includes inter alia “a brief explanation of why it is expected that the mineral deposit(s) being explored will contain primarily (i.e., more than 50%) critical minerals” and the certifier’s professional qualifications.
Neal Armstrong. Summaries of 29 September 2022 External T.I. 2022-0949081E5 under s. 127(9) - flow-through critical mineral mining expenditure and General Concepts - Transitional Provisions.
Peach – Federal Court of Appeal distinguishes between not challenging a taxpayer’s business acumen and measuring by what a reasonable business person would have done
In his 2011 taxation year, the taxpayer earned $27 in revenue and deducted over $19,600 in business expenses from a business of selling life insurance and mutual funds to a client base largely consisting of friends and family. In confirming the findings of the Tax Court that the taxpayer’s business expenses, beyond those allowed by CRA, were unreasonable, Rennie JA stated:
The appellant relied on Keeping to argue that the Tax Court erred in holding that his business expenses were not deductible based on his poor business judgment. This case does not assist the appellant. Keeping establishes that the Tax Court’s role is not to evaluate a taxpayer’s business acumen, a principle the Tax Court respected … . The Tax Court evaluated what a reasonable business person would have done in the appellant’s position, without relying on hindsight or second-guessing the appellant’s choices.
Perhaps this could be paraphrased as saying that a taxpayer’s business acumen can be challenged, but only indirectly by measuring against a reasonable business-person standard.
Neal Armstrong. Summaries of Peach v. Canada, 2022 FCA 163 under s. 67, s. 3(a) – business and s. 152(4)(a)(i).
Colmvest – Tax Court of Canada finds that a minority shareholder could not use the ETA s. 186(1) rule to access ITCs
Colmvest, which was the 25% shareholder of a corporation (“443307”), incurred legal fees in an arbitration between it and the 75% shareholder (“QF,” which was owned by an individual unrelated to Colmvest’s shareholder) regarding dividend distributions by 443307. Colmvest claimed ITCs relating to the legal fees in reliance on ETA s. 186(1), which required inter alia that Colmvest be “related” to 443307 by virtue of ITA ss. 251(2) to (6).
In finding that Colmvest was not so related to 443307, so that its ITC claims were properly denied, Graham J indicated that:
- QF, not Colmvest, prima facie had de jure control of 443307.
- Although there was a unanimous shareholders’ agreement, “[i]t appear[ed] that none of the governance provisions requiring unanimous consent was ever followed,” so that it was unnecessary to consider what effect those provisions would have on the control of 443307. (It is not at all apparent what difference this would have made even if he had considered those clauses.)
- The referenced phrase in s. 256(5.1) was not used in ss. 251(2) to (6), so that it was unnecessary to consider whether Colmvest had de facto control of 443307.
Neal Armstrong. Summary of Colmvest Holdings Corporation v. The Queen, 2022 TCC 70 under ETA s. 186(1).