News of Note
Income Tax Severed Letters 25 January 2023
Email this ContentThis morning's release of 12 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on two successive butterflies spin-offs to accomplish a public company spin-off
Parent, a listed corporation with a specified shareholder (and perhaps with two classes of multiple voting and single voting shares), wishes to spin off one of its subsidiaries, whose shares are held, in part, through a subsidiary of Parent (Sub1) and partly by Parent directly. CRA provided butterfly and other ruling on two successive spin-off butterflies pursuant to which Sub1 spins-off its shares of the subsidiary to Parent, then Parent drops all of its shares of the subsidiary into a Newco which then is spun-off to its shareholders.
In addition:
- Employee stock options continues to apply only to the shares of Parent, but with a reduced exercise price to reflect the valuation impact of the spin-off, such that the s. 7(1.4) rollover would apply.
- S. 85.1 applies to the component of the second spin-off pursuant to which the Parent shareholders exchange special shares of Parent received by them under a s. 86 reorg to Newco in exchange for Newco shares (unless they choose to jointly elect with Newco under s. 85(1)).
- Newco will elect in its first return pursuant to the postamble in the definition of “public corporation” in s. 89(1) to have been a public corporation from the beginning of it first year.
Neal Armstrong. Summary of 2021 Ruling 2020-0852951R3 under s. 55(3.02).
We have translated 7 more CRA severed letters
We have published a translation of a recently-released CRA ruling and a further 6 translations of CRA interpretations released in November and October of 2003. Their descriptors and links appear below.
These are additions to our set of 2,346 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 19 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 |
|---|---|---|---|
| 2023-01-11 | 2021 Ruling 2020-0852541R3 F - Split-up XXXXXXXXXX Butterfly | Income Tax Act - Section 55 - Subsection 55(1) - Distribution | one-wing split-up butterfly with a preliminary cash distribution of life insurance proceeds |
| Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) | resolution of Part IV tax circularity issue on butterfly to be resolved by local TSO | ||
| 2003-11-07 | 27 October 2003 Internal T.I. 2003-0022887 F - CII-PECHEURS
Also released under document number 2003-00228870.
|
Income Tax Act - Section 127 - Subsection 127(9) - Specified Percentage - Paragraph (a) - Subparagraph (a)(iii) | Gaspé Peninsula includes St. Lawrence |
| 29 October 2003 External T.I. 2003-0026355 F - ECHANGE D'ACTIONS
Also released under document number 2003-00263550.
|
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(i) | s. 110.6(14)(f)(i) applies to shares issued as part consideration for shares of a different class transferred to the corporation on a dirty s. 85 exchange | |
| 5 November 2003 Internal T.I. 2003-0037977 F - FRAIS POUR ANNULER UNE OFFRE D'ACHAT
Also released under document number 2003-00379770.
|
Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) | legal fees incurred to defend a repudiation of a purchase contract might be a disposition expense (of the rights to purchase) | |
| 31 October 2003 Internal T.I. 2003-0040997 F - CHANTIER PARTICULIER REPAS CONJOINT
Also released under document number 2003-00409970.
|
Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) | s. 6(6)(a) does not extend to covering meal expenses of visiting spouses | |
| 2003-10-31 | 29 October 2003 External T.I. 2003-0033435 F - CREDIT POUR INTERET SUR PRETS ETUDIANTS
Also released under document number 2003-00334350.
|
Income Tax Act - Section 118.62 | exclusion for amount paid in satisfaction of a judgment applies to interest that was paid during the course of the legal proceedings resulting in the judgment |
| 29 October 2003 External T.I. 2003-0037435 F - REMBOURSEMENT DE PAIMENTS D'UN REEE
Also released under document number 2003-00374350.
|
Income Tax Act - Section 146.1 - Subsection 146.1(2) | subscriber can assign or pledge the right to receive repayments of payments |
CRA indicates that lump sum RRSP payments to a New Zealand resident are subject to Part XIII tax at a 25% rate
CRA noted that, although IC76-12R6 stated up until its correction on June 21, 2021 that a lump sum RRSP payment to a resident of New Zealand was subject to a 15% Canadian withholding tax, under the current New Zealand-Canada Treaty that became effective on August 1, 2015, the reduced 15% Canadian withholding tax rate under Art. 17 only applies to periodic pension payments, and lump sum RRSP payments to New Zealand resident are subject to Part XIII withholding at the rate of 25% under s. 212(1)(l).
Neal Armstrong. Summary of 22 December 2021 External T.I. 2021-0878661E5 under Art. 18.
Gagné Estate – Federal Court of Appeal rejects arguments that a defective appointment of the taxpayer as a director meant that he was not liable for corporate remittance failures
The deceased (Gagné) was assessed less than two years after the registry under the Act respecting the Legal Publicity of Enterprises (Quebec) (the “ALPE”) showed him as ceasing to be the director of his majority-owned corporation. A few days before the hearing of the appeal by his estate, its notice of appeal was amended to allege inter alia that Gagné had never been a director (given that the proper corporate procedures had not been followed for his appointment, including his consenting to such appointment. and there being an absence of any resolution appointing him) – an argument never made by Gagné.
Before dismissing the estate’s appeal, LeBlanc JA noted the rebuttable presumption under s. 62 of the ALPE as to the accuracy of the registry, and that the absence of a resolution appointing Gagné should be given little weight given the absence of corporate records since before his mooted appointment as director. He further stated:
In the context of this case, the problem is that the Estate is seeking to exploit a governance defect that the principal never even raised when, on more than one occasion, he had ample opportunity to do so.
Neal Armstrong. Summary of Gagné Estate v. Canada, 2023 CAF 9 under ETA s. 323(5).
CRA finds that reimbursements received under the first-time home buyer incentive program were not income
As a result of changes to the first-time home buyer incentive (“FTHBI”) program, first-time homebuyers - who had been required to pay to the federal government, on the subsequent sale of their home, part of the appreciation in the home’s value as a return to the government on its contribution towards part of their down payment on the home purchase - received a refund of a portion of such payments as a result of the government retroactively limiting its return to 8% per annum.
CRA found that these refunds were not income to the home sellers because they were essentially amounts received as “a reimbursement of a borrowing cost incurred with respect to the purchase of the homebuyer’s personal residence.” CRA also indicated that the amounts should not be regarded as adjustments to the proceeds of disposition that had been received on the home sales.
Neal Armstrong. Summary of 10 November 2022 External T.I. 2022-0932331E5 under s. 3(a).
9158-9853 Québec – Court of Quebec finds that incurring 90% of construction costs did not equate to “substantial completion” of an apartment building for QST self-supply purposes
The appellant (“9158”), which had constructed a 14-storey apartment building, took the position that its self-supply of the building occurred in an earlier reporting period, when 90% of the construction costs had been incurred (a reporting period which was now statute-barred), rather than during a subsequent reporting period, which the ARQ had treated as the proper time for self-assessment. Under QSTA s. 225 (similarly to ETA s. 191(3)), 9158 was required to self-assess QST on the FMV of the building at the later of the time that the construction of the building was “substantially completed” and the time that the first tenant moved in.
Lareau JCQ accepted the ARQ evidence that, even after 9158’s mooted substantial completion date, “35 out of 88 units were not ready for rental” and “a significant portion of the underground parking garage was used to store materials and equipment such as, for example, bathroom vanities [and] kitchen countertops.” In dismissing 9158’s appeal, he stated:
Although the rule of thumb of 90% of the costs incurred may be appropriate in the vast majority of cases, for formulating, without further effort, an equivalence between a specific percentage of costs incurred and the concept of a "substantially completed" building, this does not seem justified under these circumstances.
Neal Armstrong. Summary of 9158-9853 Québec Inc. v. Agence du revenu du Québec, 2022 QCCQ 9851 under ETA s. 191(3).
CRA has officially released the 2022 APFF Roundtable
This morning, CRA released its official version of the questions and answers at the (regular) 7 October 2022 APFF Roundtable. (Its official version of the 7 October 2022 Financial Strategies and Instruments Roundtable has not yet been released by it.) We translated the full text of the preliminary answers, and summarized the questions posed, in October.
The table below provides links to our translations of the full text of both questions posed and answers given to the official version of the regular Roundtable, as well as links to our summaries. We did not notice any changes going from the preliminary to final version, other than that the following paragraph was deleted from the end of the answer to Q.11 (perhaps because, in context, it was gratuitous, rather than suggesting a repudiation of this position):
It should be noted that once the taxpayer has filed the taxpayer’s return for the year, an election as to the fiscal period end has been made. In this regard, we are of the view that an amended tax return with a different fiscal period end, filed before a notice of assessment is issued, constitutes a request for a change of fiscal period end that must be accepted by the Minister.
Neal Armstrong. 7 October 2022 APFF Roundtable.
Income Tax Severed Letters 16 January 2023
This morning's release of 16 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on a one-wing split-up butterfly with a preliminary cash distribution of life insurance proceeds and Part IV tax circularity issues
proceeds and Part IV tax circularity issues
CRA provided standard rulings for a one-wing split-up butterfly respecting the “Transferor,” which computed the income from what likely was a farming business under s. 28(1) in which two brothers, A and B (survivors of their father, C), were both actively involved. They held the common shares, and the estate of C and their mother held preferred shares.
As provided for in the shareholders agreement, the transactions were to commence with the Transferor paying a capital dividend equal to the excess of the proceeds received by it on the policy on the life of C over the adjusted cost basis of the policy, with the Transferor then redeeming the preferred share held by the estate for its redemption value.
A will then transfer his common shares of the Transferor to a newly incorporated “Transferee” on a s. 85(1) rollover basis for shares of the Transferee. There then will be a pro rata spin-off of the two types of property of the Transferor (cash and near cash assets, and business property) on a net asset basis to the Transferee using the usual mechanics.
As might be expected, CRA implicitly regarded the cash distribution of the life insurance proceeds to the estate as being separate and apart from the pro rata distribution occurring on the butterfly. It provided its usual ruling that the strict requirements of s. 85(1)(e) could be ignored, so that there could be a pro rata division of the UCC of the depreciable property, rather than disproportionate UCC going to the transferee corporation.
In its closing comments, CRA indicated that the transactions may give rise to circular Part IV tax issues and that the Transferor and Transferee should consult their local TSO to determine which corporation should receive the dividend refund and which corporation would be subject to Part IV tax.
Neal Armstrong. Summary of 2021 Ruling 2020-0852541R3 F under s. 55(1) – distribution.