News of Note
CRA finds that property added to a building shell for it to function for housing an M&P operation did not qualify as Class 29 property
Email this ContentThe taxpayer, which subleased premises containing “Shells” consisting essentially of foundations, walls and roofs, installed wall and floor coverings and performed electrical, ventilation and plumbing work to make the premises suitable for use in its manufacturing and processing operations. It took the position that the costs of the property added to the Shells for this work should be included in Class 29 rather than Class 13.
In order to so qualify, such property (before it could be assimilated to Class 29 property) needed to come within the description of a Class 8(b) property (i.e., "tangible property attached to a building and acquired solely for the purpose of (i) servicing, supporting, or providing access to or egress from, machinery or equipment [or] (ii) manufacturing or processing") and not a Class 1(q) property (a building or other structure including component parts). Although the Directorate agreed with the taxpayer that a property which otherwise was a Class 13 (leasehold) property (because at common law the improvements became part of the property of the landlord) could qualify as a Class 8 property, it went on to indicate that the above alterations to the Shells, assuming that they constituted leasehold improvements rather than acquisitions of property that had been agreed to stay separate from the lessor's property, would be sufficient to deem the taxpayer’s such leasehold improvements to be a building or other structure under Reg. 1102(5)(a)(iii), which applies to "alterations to a leased building or structure that substantially changed the nature of the property." It stated:
[A]lterations to a property materially change its nature where the property has no particular purpose before the work is carried out but does have a particular purpose after the work is carried out.
Conversely, it considered that the above alterations to the Shells could not qualify under Class 8(b), stating:
Generally, property is not acquired solely for supporting machinery or equipment and/or to manufacturing or processing for the purposes of paragraph (b) of Class 8 if it is necessary for the proper functioning of the building, such as the walls, roof and electricity of or for a building. …
Neal Armstrong. Summaries of 18 May 2022 Internal T.I. 2018-0788761I7 F under Reg. 1102(5), Reg. 1102(5)(a)(iii), Sched, II, Class 8(b) and s. 13(21) – UCC – A.
CRA rules on applying s. 86 to a corporate continuance
A corporation incorporated under the CBCA (Opco) was continued as a co-operative under the Co-operative Corporations Act (Ontario), so that certificates of discontinuance and continuance were issued under each statute. On the continuance, each common share of Opco was “converted” pursuant to the articles of continuance into a share of the share capital of the co-operative, having the same paid-up capital.
CRA ruled that the continuance did not result in a disposition by Opco of its assets, that there was no deemed dividend under s. 84(1) having regard to the safe harbor in s. 84(1)(c) (i.e., there was no overall increase in PUC), that the s. 86(1) rollover applied to the conversion of the shares on the continuance and that no deemed dividend arose under s. 84(3) having regard to the rule in s. 84(5) (deeming the amount paid for the Opco common shares to be the PUC of the co-operative shares).
Neal Armstrong. Summary of 2021 Ruling 2021-0916821R3 F under s. 86(1).
CRA indicates that a parent paying premiums on a sub’s life insurance policies can engage s. 246(1), and that the premiums are non-deductible even if reimbursed on income account
Two brothers resident in Canada each has a Holdco owning 50% of Opco. In order to fund a buy-sell agreement on the death of an ultimate shareholder, each Holdco has purchased insurance on the life of its sole shareholder, with Opco as the revocable or irrevocable beneficiary of both insurance policies. Suppose further that Opco reimbursed the Holdcos for the premiums. Would the premiums be deductible to the Holdcos? CRA responded:
CRA indicated, consistently with 2010-0359421C6, that it generally considered that s. 246(1) could apply where a parent corporation owns and pays the premiums on a life insurance policy and its subsidiary is designated as the beneficiary so that, here, s. 246(1) could apply in respect of Opco, although the exception in s. 246(2) might apply if the two brothers dealt with each other at arm’s length.
However, CRA indicated that if Opco reimbursed the Holdcos for the premiums, it would become a question of fact as to whether s. 246(1) applies (even in the absence of the s. 246(2) exception) and that such reimbursements potentially could be included in their incomes pursuant to s. 9 or 12(1)(x) – but regardless of whether there was such an inclusion, the premiums would be non-deductible to the Holdcos because “premiums paid under a life insurance policy are not deductible in computing a taxpayer's business income because they are capital expenditures.” Presumably, if the Holdcos charged the premiums through to Opco at cost plus 1%, the premiums would be currently deductible, so that it seems odd that this result changes if there is no markup.
CRA did not discuss the s. 12(2.2) election.
Neal Armstrong. Summaries of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 246(1) and s. 9 - expense reimbursement.
Income Tax Severed Letters 9 November 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA is considering requiring expanded disclosure of crypto-assets
Prior to the October 10, 2022 release by the OECD of its Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard, CRA indicated that it was still considering the question of where a cryptocurrency is located.
It went on to state:
[C]rypto-assets … carry a material risk of tax evasion or non-compliance, regardless of their situs. The CRA believes that, in general, reporting of crypto-assets would facilitate tax compliance in this growing sector. The CRA is currently considering several options, including changes to certain forms, schedules and guides that would increase disclosure for this type of asset and promote tax compliance.
Neal Armstrong. Summary of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.1 under s. 233.3(1) – specified foreign property – (a).
Wallster – Tax Court of Canada finds that the failure of an issuer to comply with CRA’s demand to allocate its over-renunciation of CEE precluded extending the normal reassessment period
The taxpayer was renounced Canadian exploration expense (CEE) by an issuer (Quattro) that the Minister subsequently determined had substantially overstated the renounced CEE. Although the Minister gave a notice to Quattro pursuant to s. 66(12.73)(a)(i) requiring it to issue the prescribed form allocating the CEE reduction amongst its flow-through subscribers, Quattro never did so. The Minister reassessed the taxpayer shortly after the expiry of the normal reassessment period to deny the applicable amount of CEE claims of the taxpayer, taking the position that the period for reassessing had been extended by 3 years pursuant to s. 152(4)(b)(v) on the basis that such reassessment was “made as a consequence of a reduction under subsection 66(12.73)” of the purportedly renounced CEE.
Russell J found that the normal reassessment period was not so extended due to such failure of Quattro to allocate the reduced CEE. In this regard, he noted that, in contrast to the prior version of s. 66(12.73), the current version did not explicitly authorize the Minister to reduce the renounced amounts if the issuer failed to do so, and stated (at para. 45) that “[t]here must be finality in the taxation appeal process.”
Neal Armstrong. Summary of Wallster v. The King, 2022 TCC 124 under s. 152(4)(b)(v).
We have translated 8 more CRA severed letters
We have published 2 translations of rulings released by CRA last week and a further 6 translations of CRA interpretations released in January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,271 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).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2022-11-02 | 2022 Ruling 2022-0925601R3 F - Post-mortem Pipeline | Income Tax Act - Section 84 - Subsection 84(2) | pipeline accomplished through the Newco purchaser issuing 8 instalment notes to the estate as a PUC reduction |
| 2022-10-12 | 2021 Ruling 2021-0895071R3 F - Partnership Reorganization | Income Tax Act - Section 98 - Subsection 98(3) | conversion of a carry to a straight-up interest |
| Income Tax Act - Section 40 - Subsection 40(3.12) | no s. 40(3.12) ruling given re loss on fund LP wind-up | ||
| Income Tax Act - Section 40 - Subsection 40(3.3) | refusal to rule where shares received on LP s. 98(3) wind-up immediately sold to Carry LP owned by owners of former general partner | ||
| 2004-01-30 | 19 January 2004 Internal T.I. 2003-0045911I7 F - Camionnette et définition de automobile | Income Tax Act - Section 248 - Subsection 248(1) - Automobile | application of s. 13(5) where extended-cab pick-up truck ceased to be an automobile |
| Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(g) | s. 13(7)(g) limitation was preserved when pick-up truck transferred from Class 10.1 to 10 | ||
| Income Tax Act - Section 13 - Subsection 13(5) - Paragraph 13(5)(a) | when truck is transferred from Class 10.1 to 10, the capital cost as originally limited under s. 13(7)(g) is used for Class 10 purposes | ||
| 22 January 2004 Internal T.I. 2003-0054781I7 F - Reçu de don pour une partie de la valeur | Income Tax Act - Section 248 - Subsection 248(32) | de minimis threshold policy inapplicable where meal was part of what the ticket to the event was paid for | |
| 2004-01-23 | 14 January 2004 External T.I. 2003-0026011E5 F - Contrat à terme sur indice boursier | Income Tax Act - Section 54 - Adjusted Cost Base | unrealized gains or losses on stock index futures contracts not included in the ACB of such property |
| Income Tax Act - Section 233.3 - Subsection 233.3(1) - Specified Foreign Property - Paragraph (a) | foreign currency "variable margin" accounts held by registered plans with dealers are foreign property | ||
| 14 January 2004 External T.I. 2003-0029571E5 F - Attribution - société de personnes | Income Tax Act - 101-110 - Section 103 - Subsection 103(1.1) | allocation of farming partnership income did not appear reasonable | |
| Income Tax Act - Section 74.1 - Subsection 74.1(1) | s. 74.1(1) would not apply where farming income is transferred to spouse where she subscribed a nominal amount for farm partnership interest | ||
| 16 January 2004 External T.I. 2003-0046491E5 F - Allocation de retraite | Income Tax Act - Section 60 - Paragraph 60(j.1) | severance pay was not retiring allowance | |
| 14 January 2004 Internal T.I. 2003-0049531I7 F - Valeur de rachat - police d'assurance | Income Tax Act - Section 181 - Subsection 181(1) - Long-Term Debt - Paragraph (b) | insurance policy is not long-term debt of the insurer, although prepaid premium deposits might be |
CRA indicates that dematerialization of a corporation’s shares would not cause their disposition
Pursuant to a provision of a Business Corporations Act (similar to s. 54 of the Ontario Business Corporations Act), certificated securities (represented by share certificates) of a corporation may be replaced with uncertificated securities (represented by electronic records), by way of a notice (a notice of shareholder interest) to each shareholder setting out the information required to be stated on a share certificate (a process known as dematerialization) or, conversely, uncertificated securities or notices of shareholder interest, may be replaced with share certificates. Furthermore, a shareholder, who has lost its share certificate and has signed a declaration of loss and indemnity, can receive a replacement share certificate or a notice of shareholder interest from the corporation.
CRA indicated that these processes would not in themselves trigger a disposition, stating:
[A] share certificate or notice of shareholder interest is simply evidence of the ownership of a share (or shares). … [Y]ou have advised … that … there is no change in the capital structure of the Corporation, the number of outstanding shares, the number of shares held by any shareholder, or the interest, rights, or privileges attached to any share.
[Accordingly] …. the actions undertaken would not, in and of themselves, constitute a redemption, acquisition, or cancellation of any share of the Corporation, or otherwise result in a disposition of a share of the Corporation.
Neal Armstrong. Summary of 28 June 2022 External T.I. 2022-0933661E5 under s. 248(1) – disposition.
CRA rules on pipeline accomplished through the Newco purchaser issuing 8 instalment notes to the estate as a PUC reduction
CRA provided s. 84(2) and 84.1 rulings on a pipeline transaction in which the estate sells the investments company, which it acquired on the death of the deceased, to a Newco formed by it in consideration for high-PUC shares. Then, after the specified delay (presumably, one year), Newcos effect a distribution to the estate of that PUC through the issuance of eight (presumably equal-amount) promissory notes payable at successive quarterly intervals at the beginning of each of the 8 quarters commencing at that one-year mark. Later, Newco and the investments company amalgamate.
Neal Armstrong. Summary of 2022 Ruling 2022-0925601R3 F under s. 84(2).
CRA rules on the conversion of a carry to a straight-up interest
A limited partnership (Carry LP), that was owned directly or indirectly by two unrelated individuals (A and B) and their families, held a carry with an accrued gain in a Canadian fund (Fund LP), whose general partner was owned by A and B, and one of whose limited partners was a CCPC owned by A. Fund LP held a significant stake in a listed Canadian public corporation (Pubco) consisting of “Rollover Shares” (with accrued gains) and “Non-Rollover Shares” (which may have had accrued losses), as well as other investments (the “Other Investments”), and had no debt. In order to inter alia effectively convert the limited partnership interests in Fund LP to a single class of plain vanilla units:
- Fund LP sells enough of its shares on the stock exchanges in order to generate proceeds sufficient to distribute the amount of the contributed capital and preferred return thereon to all the non-carry partners, such that Carry LP and the other limited partners will now be entitled to share in future distributions on a pro rata basis.
- Fund LP transfers its Rollover Shares and Other Investments on a s. 97(2) rollover basis to a new subsidiary LP (New LP) in consideration for the plain-vanilla units.
- Within 30 days of 2 above, Fund LP is wound up such that its partners receive undivided interests in all its property (essentially, the Non-Rollover Shares and the units of New LP), with a joint s. 98(3) election filed.
- Pursuant to a partition agreement, each of the former partners receives a pro rata fraction of each Non-Rollover Share and each New LP Unit.
- The other former partners sell their respective fractions of Non-Rollover Shares to Carry LP for cash consideration equaling the FMV thereof.
CRA ruled inter alia re the application of s. 97(2) to the Fund LP wind-up, and as to s. 248(21) deeming there to be no disposition on the partition.
The CRA summary discloses that the requested rulings also included: that s. 40(3.4) did not apply to suspend the capital loss realized on the sale of the Non-Rollover Shares to Carry LP; and that an s. 40(3.12) election could be made with respect to the last fiscal period of Fund LP where the provisions of s. 98(1)(a) applied - as to which CRA noted:
No conclusion reached; ruling withdrawn.
and
Unable to rule. The question does not relate to a proposed transaction and will be further analysed in XXXXXXXXXX, if necessary. May result in timing issues with respect to adjusted cost base adjustments to the partnership interest.
Neal Armstrong. Summary of 2021 Ruling 2021-0895071R3 F under s. 98(3).