News of Note
CRA indicates that dematerialization of a corporation’s shares would not cause their disposition
Email this ContentPursuant 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).
CRA finds that an accrued dividend refund, as a contra to accrued gains taxes, increased the safe income from a sale
A corporation, with a December 31 year-end, sold all of its assets on November 30 (thereby resulting in a capital gain and refundable dividend tax on hand ("RDTOH")) and, the next day, made a dividend payment of its net asset value. It was suggested (based on 9429465) that CRA would consider the resulting dividend refund (“DR”) to not be includible in safe income until the end of the year (December 31), so that the dividend resulted in a partial capital gain on December 1, equaling the unrealized safe income related to the DR.
To the contrary, CRA stated:
In the context of a situation as described in the question and to the extent that it is reasonable to consider that the DR contributes to the hypothetical capital gain in respect of the shares on which the dividend was received (assuming a disposition at FMV of the shares immediately prior to the dividend), the CRA would be willing to take the position that the DR receivable is to be considered in computing income earned or realized as of December 1.
Consequently, it was only the net taxes payable that reduced the safe income on hand.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.15 under s. 55(2.1)(c).
Income Tax Severed Letters 2 November 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates no need for CRA flexibility re safe income issues from early Buyco formation
A purchaser incorporated a Buyco to acquire the assets of the vendor corporation and then, a few weeks later, the net asset proceeds on the closing of the sale were dividended by the vendor to its corporate shareholders. Did Buyco’s incorporation trigger a "safe-income determination time" such that the taxable income from the sale was not included in computing safe income, thereby resulting in a capital gain on the associated dividend of that taxable income? CRA responded:
Assuming that the incorporation of the corporation is part of the same series of transactions that may create an increase in the total direct interest in a corporation of an unrelated person, we agree that the "safe-income determination time" defined in subsection 55(1) could be the time after that first increase in interest.
However, practical solutions to these types of technical issues exist and therefore the CRA does not consider that a flexible approach is necessary in the[se] circumstances … .
As to whether safe income from the sale would be permanently lost, CRA stated:
If the safe income from the sale of the assets is not included in safe income for the purposes of the dividend paid following the sale, this safe income is generally not lost and may be used in the subsequent payment of dividends to the extent that such subsequent dividends are not part of the same series of transactions as the sale of the assets.
A mechanical application of the “in contemplation of” extension of “series” in s. 248(1) under Copthorne would suggest that a subsequent payment of a dividend out of such safe income would take that safe income into account and, therefore, would necessarily be part of the same series – so that these words provide some encouragement that CRA can apply the “series” concept more narrowly than this.
CRA further indicated:
[I]n situations of a total sale of assets of a corporation followed by a winding-up dividend pursuant to subsection 88(2), the CRA would be prepared to consider, after a detailed analysis of a file, that the subject matter of the dividend would not fall within paragraph 55(2.1)(b).
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.14 under s. 55(1) - safe-income determination time.
CRA indicates that an amount paid by an estate of the deceased’s RRSP to satisfy the claim of his separated surviving spouse did not qualify as a refund of premiums
The estate of the deceased distributes $100,000 from his RRSP (which had not matured at the time of his death) in settlement of the claim against him of his separated wife.
CRA indicated that s. 248(23.1)(a) would have the effect of deeming such transfer to her to occur as a consequence of his death, but would not also satisfy the requirement in s. 146(8.1) that she be a beneficiary of Mr. X's estate. Consequently, as she received the RRSP proceeds from the estate as a creditor rather than a beneficiary, the amount paid to her would not qualify as a refund of premiums that could be rolled over into her RRSP.
CRA noted that this contrasted with the result that would have obtained if the deceased taxpayer had instead been the annuitant of a RRIF (see 2017-0707801C6), and had advised Finance of this inconsistency.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.13 under s. 248(23.1)(a).
We have translated 6 more CRA interpretations
We have published translations of two interpretations released by CRA last week and a further 4 translations of CRA interpretations released in January of 2004. Their descriptors and links appear below.
These are additions to our set of 2,263 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).
Mony – Tax Court of Canada follows Gervais to find that avoiding capital gains attribution through ACB averaging abused ss. 73(1) and 74.2(1)
The taxpayer, agreed to sell his shares of a Canadian-controlled private corporation, having a nominal ACB, to third parties. On the day of the closing of the sale, about two months later, the following transactions occurred:
- He donated ½ of his shares, having an FMV of approximately $1M, to his wife, with s. 73(1) applying for this to occur on rollover basis.
- He assigned the other ½ of his shares to her in consideration for a promissory note of approximately $1M, and elected out of the application of s. 73(1), so that he realized a capital gain of approximately $1M and her ACB increased by this amount.
- She completed the sale of all the shares to the purchaser and used ½ the proceeds to repay the note.
As a result of the ACB-averaging under s. 47(1), she realized a taxable capital gain (of around $250,000) on the sale of the ½ of the shares which she had purchased at full cost, so that the exception in s. 74.5(1) for FMV purchases allowed her to retain that half of the taxable capital gain and claim the capital gains deduction under s. 110.6(2.1), rather than such gain being attributed to him. The other half of the taxable capital gain realized by her (from her sale of the donated shares) was attributed to him pursuant to s. 74.2(1).
Favreau J found that the sale of ½ of the taxpayer’s shares to his wife for a note clearly was a tax avoidance transaction:
[T]he proceeds from the sale of the shares she purchased were used in full to repay the note ... . The appellant received the same amount by selling these shares to Ms. Vitté as if he had sold them directly to the third parties.
Favreau J went on to find that there was an abuse under s. 245(4), noting in this regard (at para. 56) that the facts were “very similar” to those in Gervais, where Noël CJ had stated that the result of the spouse retaining half of the capital gain realized by her due to ACB averaging was “contrary to the object, spirit and purpose of subsections 73(1) and 74.2(1), the purpose of which is to ensure that a gain (or loss) deferred by reason of a rollover between spouses or common-law partners be attributed back to the transferor.”
Accordingly, the s. 245(2) assessment of the taxpayer to include all (rather than ½) of the taxable capital gains in his hands was confirmed.
Neal Armstrong. Summary of Mony v. The King, 2022 CCI 120 under s. 245(3) and s. 245(4).
You may have a TOSI issue if your investment company receives interest from a company for which your brother is an active employee
Each of three resident siblings were the respective beneficiaries, along with their spouses and children, of three trusts each holding an equal number of voting common shares of Investco with FMVs equaling at least 10% of that of the Investco common shares. (The siblings also held preferred shares of Investco directly.) Only one of the siblings was actively involved in the Opco business (as its full-time manager).
In 2019, Opco (which did not carry on a services business) redeemed its shares held by Investco in consideration for an interest-bearing term note. In 2019 and 2020, the bulk of Investco's revenues were Note interest, and the balance was investment income from a portfolio acquired out of dividends that had been received over the years from Opco. The dividends received in 2020 and 2021 by the three trusts on their Investco common shares were distributed and designated to the respective siblings under s. 104(19).
Regarding the application of the tax on split income (TOSI) rules on the assumption that Investco was carrying on an investment business, and focusing on the common share dividends that were funded with the note interest, CRA indicated that the Opco business in the 2019 to 2021 years was a related business in respect of the inactive siblings based on the active involvement in that business of their sibling and that the s. 104(19) dividend amounts allocated to the inactive siblings (which, by assumption, were derived from the note interest) thus were derived indirectly from a related business. (Such dividend income would be from an excluded business in the case of the actively-involved sibling.)
The essential problem for the two inactive siblings might seem to be that the Investco common shares held by them “through” their family trusts did not qualify as excluded shares because they did not “own” those shares, as required by the excluded share definition. Could they solve their TOSI issue if such common shares instead were distributed to them by their respective family trusts before the dividends were declared?
CRA answered, “no.” Para. (c) of the “excluded share” definition was not satisfied given that: for the 2020 year, substantially all of Investco's income for the preceding year (2019) was derived, directly or indirectly, from Opco's business, a related business in respect of those two siblings (given their sibling’s involvement therein); and for the 2021 year, most of Investco's income for the preceding year (2020) was derived (in the form of the note interest), directly or indirectly from such business.
CRA closed by noting that the siblings could “depending on the circumstances, benefit from the general reasonable return exclusion” in s. g(ii) of "excluded amount."
Neal Armstrong. Summary of 5 August 2022 External T.I. 2021-0877051E5 F under s. 120.4(1) – related business.