News of Note

We have published translations of a ruling and interpretation released by CRA last week and a further 6 translations of CRA interpretations released in April and January of 2004. Their descriptors and links appear below.

These are additions to our set of 2,279 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 5^th of each month).

The 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.

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.

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).