10 October 2024 APFF Roundtable
Email this ContentThis page contains our summaries of the questions posed at the 10 October 2024 APFF Federal Roundtable held in Gatineau together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Jean Lafrenière, Sophie Larochelle and Amanda Couvrette). We use our own titles.
The 10 October 2024 Financial Strategies and Instruments Roundtable is provided on a separate page.
The written answers of CRA contain a detailed disclaimer that they are provisional.
Official Response
Q.1 - Flipped property rules
Effective January 1, 2023, gains from the disposition of flipped properties have constituted business income rather than capital gains. Suppose that Aco, which had fewer than five full-time employees and whose principal activity was property rentals, and which had been renting out one of its housing units for the past five years, then amalgamated in January 2023 with its sole shareholder, which was a property-management company (Bco).
- If Amalco disposed of the housing unit in December 2023 after it had appreciated in value, would the flipped property rules apply and, if so, would any recapture and gain be treated as business income that qualify for the small business deduction?
- What if Aco was instead wound-up into Bco before a December 2024 sale by Bco?
- What if Aco in January 2023 had transferred the housing unit on a s. 85(1) rollover basis to Bco followed by a Bco sale thereof in December 2023?
- What if the above January transfer to Bco occurred on a non-rollover basis (i.e., at FMV)?
- If Aco purchased a new building in January 2023 and operated it as a seniors’ residence until its sale in October 2023, would such building be a “housing unit”?
- In March 2023, Bco acquired a building for operation as an IT consulting business whose full-time employees take their dinner in a kitchen furnished with an oven and refrigerator. In December 2023, due to personnel shortages, the building is sold to a third party. Would the building qualify as a housing unit?
- What criteria does CRA apply to determine whether there is a “housing unit”?
CRA Responses
(a)
Generally, the rules set out in subsection 12(12) on flipped property apply where a taxpayer realizes a gain on the disposition of a "flipped property." The expression "flipped property" is defined in subsection 12(13) and essentially refers to a housing unit (or the right to acquire such a housing unit) situated in Canada, which is owned or held by a taxpayer for less than 365 consecutive days prior to its disposition, other than a disposition that can reasonably be considered to occur due to, or in anticipation of, one of the exemptions provided for in paragraph 12(13)(b). For the purposes hereof, in order to determine whether or not the property meets the parameters of the definition of ‘flipped property’ as set out in the preceding paragraph, we have made the following assumptions:
- The property disposed of is a housing unit located in Canada;
- the disposition of this property does not occur because of or in anticipation of one of the exemptions provided by paragraph 12(13)(b).
Thus, considering the assumptions set out above, the principal issue to be resolved in order to determine whether, in the scenario presented, the property disposed of in December 2023 is a ‘flipped property’ within the meaning of subsection 12(13) is to ensure that the property meets the condition set out in paragraph 12(13)(b), i.e., to determine whether the property in question is held for less than 365 consecutive days prior to its disposition by the new corporation resulting from the amalgamation. If this is the case and all other requirements are satisfied, the rules set out in subsection 12(12) on flipped property could apply.
Essentially, for the purposes of paragraph 12(13)(b), a taxpayer's holding period in respect of a housing unit begins when the taxpayer becomes the owner thereof. In the context of an amalgamation, paragraph 87(2)(a) deems a corporation resulting from an amalgamation to be a new corporation and paragraph 87(1)(a) deems it to become the owner of the property owned by the predecessor corporations following the amalgamation. Consequently, in the scenario presented, if the amalgamated corporation held the property for less than 365 consecutive days before its disposition, subsections 12(12), 12(13) and 12(14) could hypothetically apply if all the other conditions were satisfied.
Where subsection 12(12) applies to a taxpayer, the taxpayer is deemed to be carrying on a business that is an adventure or concern in the nature of trade in respect of the flipped property. The income of a Canadian-controlled private corporation (“CCPC”) from an active business carried on in Canada for a taxation year generally qualifies for the small business deduction (“SBD”). The definition of "active business carried on by a corporation" in subsection 125(7) includes an adventure or concern in the nature of trade. Thus, we are of the view that income arising from the disposition of a flipped property could be considered income from an active business and be eligible for the SBD subject to the limits and requirements set out in the Income Tax Act, in particular, in section 125.
However, we would like to point out that, under the various scenarios presented, the CRA could, depending on the circumstances, consider the possibility of applying the general anti-avoidance rule (“GAAR”) provided for in subsection 245(2) if one of the main purposes of a transaction is to obtain an undue tax benefit to which the taxpayer would not otherwise be entitled.
(b)
For information purposes, the general comments concerning subsections 12(12), 12(13) and 245(2), as well as the assumptions set out in Question 1(a), remain relevant for the purposes of this question, with certain adaptations required by the context.
Thus, in the case of a winding-up, if the requirements of subsection 88(1) are satisfied, paragraph 88(1)(a) provides, among other things, that the property of the subsidiary distributed to the parent corporation on the winding-up is deemed, except in certain cases provided for in paragraphs 88(1)(a.1), 88(1)(a.2) and 88(1)(a.3), to have been disposed of by the subsidiary.
Consequently, in determining whether the property is held by the taxpayer for less than 365 consecutive days prior to its disposition, as required by paragraph (b) of the definition of ‘flipped property’ in subsection 12(13), the time at which the parent corporation is distributed a property on a winding-up generally corresponds to the time at which it begins to be held.
Thus, in the hypothetical scenario given, assume that on January 31, the building is distributed to Bco following the winding-up of Aco. If Bco subsequently disposes of the building on December 1 of the same year, it would have held the building for less than 365 days prior to disposing of it. Given the assumptions set out above, the building could be a ‘flipped property’ under subsection 12(13) and thus trigger the application of the flipped rules in subsection 12(12) if all the requirements were satisfied.
(c)
For information purposes, the general comments regarding subsections 12(12), 12(13) and 245(2), as well as the assumptions set out in question 1(a), remain relevant for the purposes of this question, with certain adaptations required by the context.
In summary, subsection 85(1) allows a taxpayer to transfer certain property to a taxable Canadian corporation, i.e., to another taxpayer, for an agreed-upon amount when certain conditions are satisfied.
Consequently, to determine whether the property is held by the taxpayer for less than 365 consecutive days prior to its disposition, as required by paragraph (b) of the definition of ‘flipped property’ in subsection 12(13), it is first necessary to determine when the property was acquired. In this case, Bco acquired the building at the time of the rollover in its favour, i.e., in January. If it had disposed of the property on December 1, it would have held the property less than 365 days prior to its disposition. Given the above assumptions, the building could be ‘flipped property’ under subsection 12(13) and thus trigger the application of the flipped rules in subsection 12(12), provided all the requirements are satisfied.
(d)
In order for a property to qualify as ‘flipped property’ under the definition of that term in subsection 12(13), it must, among other things, be a property held by a taxpayer for less than 365 days prior to its disposition. This definition does not provide for any exception or continuity rule where the property is acquired through a transfer between taxpayers made at FMV.
(e), (f) and (g)
Questions 1(e), 1(f) and 1(g) have a common denominator in that they refer to the condition set out in paragraph (a) of the definition of ‘flipped property’ in subsection 12(13), which requires that the property in question be a housing unit situated in Canada. The term ‘housing unit’ is not defined in the Income Tax Act. We must therefore rely on the common meaning of this term and take into account the overall context of the text in which it is used so that the interpretation adopted is consistent with the spirit of the Income Tax Act and Parliament's intent.
According to the Supplementary Information that accompanied the 2022 budget,[1] the Residential Property Flipping Rule is intended to ensure that profits from residential properties flipped after less than 12 months are considered to be business income and thus subject to full taxation. The information also clarified that the reference to residential property also includes rental property.
In addition, the property flipping rules are part of a package of measures contained in Bill C-32[2] . In such a context, the CRA is prepared to interpret the expression "housing unit" with some flexibility. That said, with respect to your specific questions, they are currently under review and will be the subject of consultations with representatives of the Department of Finance in order to provide you with further clarification on the scope of this term.
In closing, it is important to note that, even in the absence of the flipped property rules set out in subsections 12(12), 12(13) and 12(14), the question of whether the disposition of a property results in business income or a capital gain can only be resolved following a review of the relevant facts and circumstances of a particular situation.
Official Response
10 October 2024 APFF Roundtable Q. 1, 2024-1028361C6 F - Règles de revente précipitée
Q.2 - Intergenerational business transfer rules
Parent wishes to access the s. 84.1(2.31) or (2.32) rules regarding a transfer of Parent Inc. (which has been a small business corporation for 24 months) to Parent’s adult children, who (from before the time of the freeze referred to below) have been actively engaged in the business of Parent Inc. Parent had effected an estate freeze in favour of the children, as a result of which Parent now held voting preferred shares, according voting control (the “Control Shares”), as well as retractable preferred shares (the “Freeze Shares”); and the children hold voting common shares. Parent (who has not utilized the capital gains deduction) now wishes to sell the Freeze Shares to a portfolio corporation (“Buyco”) controlled by the children and in which Parent holds no shares.
(a) Assuming that the conditions in s. 84.1(2.31)(g) or s. 84.1(2.32)(h) for the transfer of business management to the children are satisfied, as well as the conditions in ss. 84.1(2.31)(d) and (e), or ss. 84.1(2.32)(d) to (f) for the transfer of the economic interest, could Parent realize a capital gain on: (i) a sale of both the Freeze Shares and Control Shares to Buyco; or (ii) of the Freeze Shares, with the Control Shares retained to secure the payment of the purchase price.
(b) Would the conditions in s. 84.1(2.31)(g) or s. 84.1(2.32)(h) for the transfer of business management to the children be satisfied if:
(i) Parent remains as the sole director of Parent Inc.;
(ii) Parent remains as the sole director only for 36 months (in the case of an “immediate” transfer pursuant to s. 84.1(2.31)(g)) or for 60 months (in the case of a “gradual” transfer pursuant to s. 84.1(2.32)(h));
(iii) Parent remains the sole director but the direction of the current activities of the business is in the hands of the children;
(iv) Parent remains the director, but along with a child or children; and
(v) Parent is not a director, nor manages Parent Inc., but remains the signatory or co-signatory responsible for disbursements of business funds?
(c) Would the conditions in ss. 84.1(2.31)(d) and (e), or ss. 84.1(2.32)(d) to (f) for the transfer of the economic interest be satisfied in these three scenarios:
(i) Parent, in either case, sold Parent’s Freeze Shares in three tranches (1/3 on the transaction date (the “Date”), 1/3 on the 1st anniversary thereof and the balance of 1/3 on the 2nd anniversary) and retained the Control Shares until the final transfer on the 2nd anniversary of the Date;
(ii) the same as (i), except that the Control Shares also were sold in three tranches with the Freeze Share tranches; and
(iii) in the case of a gradual (rather than immediate) transfer, Buyco purchased all of Parent's shares but paid only for 20% over the 10 years following the Date?
(d) Suppose that in addition to the Freeze Shares and Control Shares, Parent also held preferred shares, with a redemption value and ACB of $200,000 and PUC of $100, which had been issued to Parent in a crystallization transaction to utilize Parent’s capital gains deduction (CGD). It would appear that Parent therefore would not satisfy the requirement of s. 84.1(2.31)(a) or s. 84.1(2.32)(a) of not having sought an exception to the application of s. 84.1(1) under s. 84.1(2)(e). Does CRA agree that a prior crystallization transaction would have this tainting effect?
CRA Responses
(a)
The new rules in paragraph 84.1(2)(e) and subsections 84.1(2.3), 84.1(2.31) and 84.1(2.32) seek a balance between:
- on the one hand, facilitating genuine intergenerational transfers of businesses between an owner-manager parent and an adult "child" or "children" who are themselves owner-managers; and
- on the other hand, to prevent the stripping of surplus from a corporation where there is no genuine transfer to the next generation.
There is no specific legislative requirement that shares sold by a parent to a corporation controlled by one or more "children" must be common shares or voting shares. Subject to compliance with the specific requirements set out in subsections 84.1(2.31) (“Immediate intergenerational business transfer”) and 84.1(2.32) (“Gradual intergenerational business transfer”), including in particular the requirements set out in paragraphs 84.1(2.31)(g) and 84.1(2.32)(h), we are of the view that non-participating preferred shares would not be excluded outright from the exception in paragraph 84.1(2)(e) (the “Exception”).
Retaining the Control Shares would, however, prevent the parent from benefiting from the Exception. In fact, the parent would still control the corporation in question at a time subsequent to the disposition of the shares concerned, which would not satisfy the requirements of subparagraphs 84.1(2.31)(c)(i) and 84(2.32)(c)(i) Furthermore, the parent would hold all of the Control Shares after the disposition of the shares concerned. Those shares would not qualify as shares of a “specified class”, in particular because of paragraph 256(1.1)(b), which requires that the shares not carry voting rights. Thus, the requirements of subparagraphs 84.1(2.31)(d)(i) and 84(2.32)(d)(i) would not be satisfied.
(b)
In order to answer this question, for each of the given scenarios, we have assumed that the parent does not exercise de facto control of Parent Inc.
We have also assumed that the parent still exercised management at the time of the disposition of the shares concerned and that the parent is taking reasonable steps to transfer such management to the children within the required period in addition to the responsibilities listed in this question. Our comments relate exclusively to the duties and responsibilities that would constitute management activities for the purposes of paragraphs 84.1(2.31)(g) and 84.1(2.32)(h)
Paragraph 84.1(2.3)(i) specifies that, for the purposes of paragraphs 84.1(2.31)(g) and 84.1(2.32)(h), management refers to the direction or supervision of business activities but does not include the provision of advice.
Paragraphs 84.1(2.31)(g) and 84.1(2.32)(h) read as follows:
“[S]ubject to subsection (2.3), within 36 months after [or within sixty months of, depending on the relevant paragraph] the disposition time or such greater period as is reasonable in the circumstances, the taxpayer and a spouse or common-law partner of the taxpayer take reasonable steps to
(i) transfer management of each relevant business of the subject corporation and any relevant group entity to the child or at least one member of the group of children referred to in subparagraph (f)(ii), and
(ii) permanently cease to manage each relevant business of the subject corporation and any relevant group entity;”
Whether a task or responsibility is management within the meaning of paragraph 84.1(2.3)(i) is largely a question of fact. Since the statement of the question only briefly describes a hypothetical situation, we cannot give a definitive opinion on such a question. However, we can make the following general comments.
Directing or supervising the activities of the business, within the meaning of paragraphs 84.1(2.3)(i), 84.1(2.31)(g) and 84.1(2.32)(h), involves relatively significant decision-making power in relation to the business. As a general rule, a director manages the corporation's business and affairs or supervises such management [3] . Either of these roles would likely come within the interpretive rule in paragraph 84(2.3)(i) Thus, in the case where the parent remains a director of Parent Inc. and steps are not taken to completely and permanently cease to hold such office, within the time periods stipulated by paragraphs 84.1(2.31)(g) and 84.1(2.32)(h), including any longer period that is reasonable in the circumstances, the requirements of subparagraphs 84.1(2.31)(g)(ii) and 84.1(2.32)(h)(ii) would not be satisfied. Our conclusion would be the same, regardless of whether the parent is the sole director or one of the directors, and regardless of whether the direction of the day-to-day activities is in the hands of the children.
That said, the mere fact that the parent is not a director or officer of Parent Inc. would not lead us to conclude that the parent no longer participates in the management or supervision of the business. This is essentially a factual determination requiring analysis of all relevant facts and circumstances. Generally speaking, the more the tasks for which the parent will remain responsible involve significant decision-making power, in the context of the particular business, the more they could constitute "management" within the meaning of paragraph 84.1(2.3)(i).
Based on an analysis of the full factual context, we could consider that discretionary control over a corporation's cash expenditures is a significant function that could constitute managing or supervising activities of the business, within the meaning of paragraph 84(2.3)(i). If so, it would be up to the taxpayers to demonstrate that it was reasonable for the parent to retain such responsibilities beyond the periods provided for in paragraphs 84.1(2.31)(g) and 84.1(2.32)(h).
(c)
In order to answer these questions, we have assumed that the Freeze Shares qualify as shares of a "specified class" within the meaning of subsection 256(1.1) and that, for the purposes of the 2nd and 3rd scenarios, the parent does not exercise de facto control after the disposition of the shares concerned.
Paragraphs 84.1(2.31)(a) and 84.1(2.32)(a) provide that the taxpayer must not previously, at any time after 2023, have sought an exception in respect of a disposition of shares that, at that time, derived their value from an active business that is relevant to the determination of whether the subject shares are qualified small business corporation shares (“QSBCS”) or shares of the capital stock of a family farm or fishing corporation as those terms are defined in subsection 110.6(1). In the case of the Freeze Shares, the shares sold successively would all relate to the same business. In addition, dispositions subsequent to the first disposition for which the Exception is sought would be governed by the rules otherwise applicable to section 84.1, including the rules relating to non-arm's length relationships.
With respect to the first disposition, however, the fact that the parent retains all of the Control Shares would prevent it from benefiting from the Exception. We refer you to our answer to Question 2(a) in this regard.
Furthermore, if the parent also disposed of all of the Control Shares at the time of the first disposition, although the conditions set out in paragraphs 84.1(2.31)(d), 84.1(2.31)(e), 84.1(2.32)(d) and 84(2.32)(e) may be satisfied, as stated above, the Exception would only apply to the first disposition of shares by the taxpayer for which it is claimed.
Finally, with regard to the last scenario submitted, the conditions required by paragraph 84.1(2.32)(f) would not be satisfied. The conditions stated therein must be satisfied within 10 years of the time of the disposition for which the Exception is claimed and at any time after the time of the "final sale." Since the shares sold on the first disposition were QSBCS, subparagraph 84.1(2.32)(f)(ii) requires that, during such a period, the taxpayer and the taxpayer's spouse or common-law partner not own, directly or indirectly, interests in certain entities, including the purchaser corporation, having a fair market value that exceeds 30% of the fair market value of all the interests that were owned, directly or indirectly, by the taxpayer and a spouse or common-law partner of the taxpayer immediately before the disposition of the shares for which the Exception is claimed. At the end of the 10-year period, the parent will still hold a claim against the purchaser corporation having a FMV equal to 80% of the FMV of all of the parent's interests held immediately before the disposition for which the Exception was claimed.
(d)
The provisions of subsections 84.1(2.31) and 84.1(2.32) do not distinguish between a situation where typical freeze preferred shares are issued and a situation where preferred shares of the same nature would have been issued for the sole purpose of increasing the ACB of the shares held by the parent through the use of the CGD (i.e., "crystallized" shares).
If these crystallized shares were sold by the parent to a corporation controlled by one or more children and all the conditions set out in one of subsections 84.1(2.31) or 84.1(2.32) were satisfied, an election could be made in respect of the shares sold, to the extent that no other Exception had previously been claimed, after 2023, in respect of the same underlying business. Our understanding is the same, regardless of whether the shares were crystallized before 2024 or after 2023.
Official Response
Q.3 [later renumbered to Q.18] - Foix and hybrid sales
Foix (2023 FCA 38) concluded that s. 84(2) applied to a hybrid sale where certain conditions were satisfied. Will CRA apply the Foix principles only to identical facts in its interpretation and application of s. 84(2)?
CRA Response
No. The Federal Court of Appeal's comments have a much broader scope and are not limited to situations identical to the facts in Foix in the interpretation and application of subsection 84(2). According to the broad interpretation of subsection 84(2) adopted by the Court, “transactions leading to an alleged distribution or appropriation of funds or property are to be considered as a whole in a way that is temporally flexible”. [4] With respect to the expression "in any manner whatever" in subsection 84(2), the Court noted that “[t]hese far-reaching words are anchored in history as they have always been part of this provision, and they faithfully reflect its anti-avoidance purpose”. [5] Finally, the Court emphasized that when a facilitator is involved, “the distribution or appropriation of the target corporation’s funds or property can be carried out in a variety of different ways and take place through various steps that are organized so as to occur at different times”. [6] It then added that "in the presence of an orchestrated attempt to extract surpluses without tax or at a reduced rate, the intention of Parliament requires a reading of subsection 84(2) that balances the words that are used, as an overly literal reading would defeat its anti-avoidance mission". [7] .
It should also be noted that the Federal Court of Appeal also resolved the uncertainties arising from certain decisions that taxpayers frequently invoked against the application of subsection 84(2), namely McNichol v. Canada, [8] Descarries v. The Queen, [9] and Robillard (Estate) v. The Queen [10] . The Court issued an important warning against the formalistic and restrictive application of subsection 84(2) put forward in those decisions.
In addition, it should be noted that the Federal Court of Appeal in Foix did not express an opinion on the Tax Court of Canada's analysis in Geransky v. The Queen,[12] and Foix. It also clearly ruled that subsection 84(2) should be given a broad interpretation. In this regard, the Federal Court of Appeal correctly reiterated that each provision of the Income Tax Act must be interpreted according to a textual, contextual and purposive analysis, citing in this regard Canada Trustco Mortgage Co. v. Canada, [13] a decision rendered by the Supreme Court of Canada in 2005 [14] .
It is also appropriate to point out, with respect to the Geransky decision, that the CRA clearly indicated in its response to Question 2 of the Federal Roundtable at the 2002 APFF Conference [15] that it would continue to apply the GAAR in surplus stripping situations such as McNichol and RMM Canadian Enterprises Inc. v. Her Majesty the Queen [16] . Finally, the CRA stated that GAAR would not be applied in situations identical to the Geransky case. Taxpayers should therefore not rely on this document if the facts of their situation are not identical to the facts in the Geransky decision.
Finally, the ITRD has refused since 2007 [17] to issue favourable advance income tax rulings regarding the non-application of subsection 84(2) in respect of series of transactions that constitute a mechanism for stripping a corporation's surpluses tax-free or at a reduced rate and where all the conditions for the application of subsection 84(2) are satisfied. In this context, any hybrid sale plan could therefore be analyzed by the CRA to determine whether, in a given situation, all of the conditions for the application of subsection 84(2) are satisfied.
Official Response
10 October 2024 APFF Roundtable Q. 18, 2024-1027351C6 F - Arrêt Foix et ventes hybrides
Q.4 - Effect of transfer and wind-up of US holdco on T1134
On April 30, 2023, Canco (resident in Canada) transferred all the shares of USco (resident in the US and which, in turn, wholly-owned a US LLC) to a wholly-owned newly-incorporated Canadian holding company (“Holdco”) on a s. 85 rollover basis; and then USco was wound up into Holdco on May 1, 2023. The taxation year ends of Canco and Holdco were June 30, and that of the LLC was December 31.
(a) Who must file the T1134 for 2023: Canco, Holdco, or both?
(b) What are the equity percentages and the direct equity percentages of USco in the LLC to be reported in (ii) of Subsection C of Section 3 of Part I of the T1134 if USco held 50% of the shares of the LLC on June 30, 2022, 100% of those shares on December 31, 2022 and none on May 1, 2023?
CRA Responses
(a)
For purposes of this response, it is assumed that USco and LLC were not corporations considered “inactive” for purposes of filing the T1134 information return.
Section 233.4 requires a reporting entity (a taxpayer or partnership) to file a T1134 information return in respect of each of its corporations that were foreign affiliates in its taxation year. Under paragraph 233.4(1)(a), a taxpayer who is resident in Canada and for whom a non-resident corporation is a foreign affiliate at any time in the year is a reporting entity. The characterization of a non-resident corporation as a foreign affiliate is made, for the purposes of section 233.4, in light of the definition of “equity percentage” found in subsection 95(4), paragraph (b), which was amended by paragraph 233.4(2)(a) to disregard equity percentages held in corporations resident in Canada.
As stated in the instructions for the T1134 information return, only a direct holding corporation, often the lowest-tier subsidiary of a group of Canadian corporations under common control, is required to file a T1134 information return in respect of a foreign affiliate held during the fiscal year. However, if another Canadian corporation has a direct equity percentage in the same foreign affiliate during that fiscal period, that corporation is also required to file a return in respect of that foreign affiliate.
In this case, Canco directly held all of the shares of USco for the period from July 1, 2022 to April 30, 2023, and Holdco for the period from May 1 to June 30, 2023. They therefore both had a sufficient direct equity percentage in USco and LLC, within the meaning of paragraph 95(4)(a) as amended by paragraph 233.4(2)(a), so that USco and LLC were their foreign affiliates during their taxation year ending June 30, 2023. Canco and Holdco are therefore reporting entities for purposes of filing the T1134 information return for their taxation year ending June 30, 2023. The "Questions and Answers about Form T1134" page, available on the Canada Revenue Agency's website, [18] also states in the “Do you have to file a return” section that a T1134 information return must be filed for a foreign affiliate which stops being a controlled foreign affiliate before the end of the reporting taxpayer's tax year. If Canco and Holdco meet the conditions set out in the instructions for the T1134 information return, they may designate one of them as their representative and the designated corporation may file a single T1134 information return with the required information for both. This administrative relief, described in the instructions under the “A group of reporting entities that are related to each other” section of the T1134 information return, is available to reporting entities that are part of a related group of filers, that file their tax returns in Canadian currency or in the same functional currency, and that have the same fiscal period end. The concept of a “related group” according access to the administrative measures refers to the definition in subsection 251(4) and refers to a group each member of which is related to each other member.
The transfer of USco shares to Holdco will have to be reported appropriately on the T1134 information return, in particular under Subsection B of section 3 of the summary.
(b)
Subsection C of Section 3 of Part I of the T1134 information return must be completed in order to provide the Canada Revenue Agency with the organizational structure of the group of corporations and partnerships that own the foreign affiliates. Alternatively, the reporting entity may provide an organizational chart of the group structure that includes the information requested therein.
As stated on the “Questions and Answers about Form T1134” page of the Canada Revenue Agency website, the organizational structure must be reported as it exists at the reporting taxpayer's year-end. It is also stated on this page that additional information can also be reported on a separate page attached to the form, including information on entities that are no longer part of the corporate structure at the end of the fiscal year but must still be reported.
For its fiscal period ended June 30, 2022, if Canco completes Subsection C of Part I of the T1134 information return, it will be required to indicate in item ii) that USco had a 50% equity interest in LLC, and a 50% direct equity interest in LLC.
For their fiscal period ended June 30, 2023, Canco and Holdco will have to indicate that USco had a 0% equity interest in LLC, and a 0% direct equity interest in LLC. This is the case regardless of whether Canco and Holdco each file a T1134 information return or whether a single return is filed pursuant to administrative relief for groups of related filers.
Transactions relating to the winding-up of USco must be reported in Subsection B of section 3 of Part II of the supplement filed in respect of USco.
Official Response
Q.5 - Treatment of partnerships and trade payables on T1134
Situation 1
The T1134 instructions indicate that to access the relief for related reporting entities, they should be related as per s. 251(4). A partnership may be a reporting entity pursuant to s. 233.4(1)(c), but is not necessarily a person for ITA purposes.
How is it determined whether a partnership is part of a related group for purposes of the administrative relief?
CRA Response
For taxation years commencing after 2020, the CRA allows filers that are members of the same related filing group to file a single T1134 information return for all foreign affiliates for which the members of the related group would otherwise have been required to file T1134 information returns.
As stated in the instructions for the T1134 information return, to be part of a group of related filers, the filers must be part of the same related group, as that term is defined in subsection 251(4), have the same fiscal period end and use the same Canadian currency or functional currency.
A partnership described in paragraph 233.4(1)(c) is a reporting entity for the purposes of section 233.4 as soon as a partner who is resident in Canada and who is not exempt from Part I tax has an interest of at least 10% in the income or losses of the partnership for the fiscal period. Indeed, a partnership is a reporting entity if the total of all amounts each representing the share of the income or loss for the fiscal period of a partner who is not resident in Canada or who is a fully exempt taxpayer is less than 90% of the income or loss of the partnership for the fiscal period.
If a partnership is a reporting entity in respect of a foreign affiliate, the administrative relief for related reporting groups extends to the partnership if at least one of its members (or if another partnership is a member, one of its members) is related to each of the other reporting entities forming a related group in respect of that same foreign affiliate. If there is any doubt about a partnership, the reporting entity would be well advised to include it in the T1134 information return for the group of related reporting entities to ensure that the partnership's reporting obligations are met and the CRA will recognize them as such.
Situation 2
The instructions for Subsection C of Section 1 of Part II indicate: “For the purposes of completing this return, gross indebtedness does not include set-offs or trade accounts payable.” Does this instruction also apply to Table 4 of Subsection A of Section 3 of Part II, i.e., are trade accounts payable to be disclosed as an upstream loan?
CRA Response
A reporting entity must complete, for each of its foreign affiliates, Table 4 “Upstream Loan Rules” in Subsection A of Section 3 of Part II of the supplement filed for the particular foreign affiliate.
In this table, the reporting entity must indicate in Question 4.1 whether a specified debtor in respect of the reporting entity or any member of the related Canadian group owes an amount to the foreign affiliate or a partnership of which the foreign affiliate was a member. Note that this table does not refer to “gross indebtedness”.
The instructions in Section 1 to Section 3 of Part II of the T1134 information return are not applicable to Table 4 of Subdivision A of Section 3 of Part II. Subsection 90(6) refers to a loan or indebtedness. Since an accounts payable is a debt, the answer to question 4.1 of Table 4 of Subsection A of Section 3 of Part II would be “yes” since it is an amount that the reporting taxpayer owes to the foreign affiliate. If all the conditions of the exception to paragraph 90(8)(b) are satisfied, the answer to the second question would be “no” because subsection 90(6) would not apply to that debt. Similarly, the answer to the third question would be “yes” insofar as the conditions in paragraph 90(8)(b) are satisfied.
Official Response
Q.6 - Safe income and s. 55(3)(a) exception
Example 12 of “CRA Update on Subsection 55(2) and Safe Income: Where are we Now?” states that: “A redemption of the preferred shares for its fixed redemption amount should not affect the entitlement to safe income of the common shares”, which seems to conform with a longstanding CRA position. However, Example 12 does not specify that such redemption benefits from the exception in s. 55(3)(a). Could CRA comment regarding the application of s. 55(3)(a) in the context of Example 12?
CRA Response
The application of paragraph 55(3)(a) will depend on the facts and circumstances of a particular situation and whether all of the conditions for the application of paragraph 55(3)(a) are satisfied.
However, in the context of a share redemption that results in a deemed dividend that is supported by little safe income, but where the dividend is technically exempted by paragraph 55(3)(a), the redemption in question should be analyzed with respect to the purpose of the dividend resulting from the redemption and the GAAR could potentially apply in such a situation. In this regard, see Example 5 in the Update regarding a share buyback. The ITRD has refused to grant favourable advance rulings regarding the application of paragraph 55(3)(a) in those circumstances.
On the other hand, in the context of a share redemption the purpose of which is ultimately to finance the personal needs of a shareholder-individual, for example in a situation involving a redemption of freeze preferred shares of the capital stock of an operating corporation held by a holding company of the shareholder-individual followed by the payment of that amount by the holding company to the shareholder-individual, the CRA would accept that paragraph 55(3)(a) could apply.
Ultimately, whether or not the exemption in paragraph 55(3)(a) applies will have no impact on the safe income of the common shares in Example 12. In addition, as stated in the Update, the gain realized on the sale of goodwill for $500 or less could not constitute safe income on the common shares because such gain does not contribute to the gain on the common shares, even when the goodwill was sold after the redemption of the preferred shares. If, on the other hand, the goodwill were sold for more than $500, the gain on the excess over $500 would constitute safe income on the common shares.
Official Response
10 October 2024 APFF Roundtable Q. 6, 2024-1028881C6 F - Revenu protégé
Q.7 - Conversion of ERDTOH to NERDTOH
The implementation of two distinct RDTOH accounts can generate issues where a corporation pays an eligible dividend and non-eligible dividend to two shareholders in the same taxation year and it receives a dividend refund (DR) from both its ERDTHOH and NERDTOH accounts, as illustrated below.
Aco has two connected shareholders: Bco holding all its common shares; and Cco holding all its preferred shares.
At the end of the December 31, 20X0 taxation year of Aco, it has the following balances: GRIP - $100,000; ERDTOH - $38,333; and NERDTOH - $100,000.
In the course of that taxation year, the following transactions take place:
- Aco pays an eligible dividend to Bco of $100,000, generating a DR of $38,333 from its ERDTOH account; and
- Aco redeems the preferred shares held by Cco, generating a deemed dividend of $500,000 for which Aco receives a DR of $100,000 from its NERDTOH account.
As Bco and Cco are connected to Aco, they are subject to Pt. IV tax on the dividends received as a function of the total DR received by Aco, in accordance with s. 186(1)(b):
- Bco: $100,000/$600,000 X $138,333 = $23,055;
- Cco: $500,000/$600,000 X $138,333 - $115,278.
For Bco, as the dividend received permitted Aco to receive a DR from its ERDTOH, the $23,055 is added to its ERDTOH account. As for Cco, as the dividend received did not generate a right to a refund from its ERDTOH, the $115,278 is added to its NERDTOH account.
Thus, there is a conversion of a $15,278 amount from ERDTOH to NERDTOH for the corporate group, as the initial allocation between the RDTOH accounts ($38,333 of ERDTOH and $115,278 of NERDTOH) has been changed ($23,055 of ERDTOH and $115,278 of NERDTOH) for the same corporate group. The tax obligation of the ultimate shareholder (the "Shareholder") thus is increased, so that to access a DR of $15,278, a non-eligible dividend must be paid.
Are legislative amendments expected to address this issue?
If not, does CRA agree that this is an inappropriate result?
CRA Response
For the purposes of this question, we have assumed that Aco, Bco and Cco are private corporations, as that term is defined in subsection 89(1). We have also assumed that the Shareholder is an individual resident in Canada who holds all of the shares of the capital stock of Bco and Cco.
First, we agree with the calculation of the addition to Bco's and Cco’s ERDTOH and NERDTOH accounts as shown above. That result is consistent with the application of the provisions of the Income Tax Act in this regard.
We understand that it can be argued that this shift of an amount from the ERDTOH account to the NERDTOH account results from the fact that paragraph 186(1)(b) makes no connection between the type of RDTOH account entitling Aco to the DR and the type of dividend received by Bco and Cco. In a hypothetical situation where such a link could be made, Bco would pay Part IV tax of $38,333 on the $100,000 eligible dividend received from Aco and, once that $100,000 eligible dividend was paid to Shareholder, Bco would be entitled to a DR of $38,333 from its ERDTOH. For its part, Cco would pay Part IV tax in the amount of $100,000 and, once an ineligible dividend of $260,870 had been paid to Shareholder, Cco would be entitled to a DR of $100,000 from its NERDTOH. The sum of dividends received by Shareholder would be $360,870 and the DR, for the corporate group, would total $138,333. We note, however, that in such a case, the Part IV tax would be borne by Bco and Cco differently than in the Particular Situation.
Furthermore, in the Particular Situation, to be entitled to the DR totalling $138,333, Bco would have to pay an eligible dividend in the amount of $60,144 and Cco would have to pay an ineligible dividend in the amount of $300,726. Bco would still have a GRIP balance of $39,856. In the Particular Situation, we understand that additional tax could result at this stage to Shareholder compared to a hypothetical situation where the payment of an eligible dividend in the amount of $100,000 and an ineligible dividend in the amount of $260,870 would entitle Shareholder to the DR of the ERDTOH and the NERDTOH totalling $138,333.
We therefore agree with your comment that the conversion of an amount of ERDTOH into an amount of NERDTOH results in an increase in the tax payable by the Shareholder in the Particular Situation, but only at that stage, i.e., at the stage where the amount of dividends paid is limited to the amount necessary to give entitlement to the DR of the ERDTOH and the NERDTOH of Bco and Cco totalling $138,333.
This result was also obtained before the new RDTOH regime came into effect on January 1, 2019. In fact, since 2006, in the Particular Situation, Bco would have had to pay an eligible dividend in the amount of $60,144 to be entitled to the DR of its ERDTOH of $23,055 and Cco would have had to pay an ineligible dividend in the amount of $300,726 to be entitled to the DR of its ERDTOH of $115,278.
However, the conversion of an ERDTOH amount into a NERDTOH amount, as shown in the Particular Situation, does not ultimately result in additional tax to the Shareholder once all of the dividends received from Aco are paid to the Shareholder by Bco and Cco. Bco will have paid an eligible dividend of $100,000 and will have been entitled to the DR of its ERDTOH of $23,055, while Cco will have paid an ineligible dividend of $500,000 and will have been entitled to the DR of its NERDTOH of $115,278. The same result would be obtained if Shareholder directly held all of the shares of the capital stock of Aco. Aco would pay Shareholder an eligible dividend of $100,000 and an ineligible dividend of $500,000. Aco would be entitled to the DR of its ERDTOH of $38,333 and the DR of its NERDTOH of $100,000.
In light of the above, any changes to the Income Tax Act in this regard would be based on tax policy considerations. The CRA's mandate is to administer and enforce the Income Tax Act. Responsibility for the development of tax policy and amendments to the Income Tax Act rests with the Department of Finance Canada. We have therefore brought your question to the attention of the Department of Finance.
Official Response
Q.8 - Time for satisfaction of automobile definition
The conditions in (e)(i) to (iii) for exclusion from the “automobile” definition specify that such conditions must be satisfied “in the taxation year in which it is acquired or leased.” In the case of a leased vehicle, is the referenced taxation year the year of the signing of the leasing contract, or does it apply to each of the years within the lease term?
CRA Response
Subsection 248(1) defines an ‘automobile’ as a motor vehicle designed or adapted primarily to carry individuals on highways and streets and having a seating capacity for not more than nine persons, including the driver, other than a vehicle referred to in paragraphs (a) to (e) of that definition.
For a motor vehicle (whether a van or pick-up truck, or a similar vehicle, as the case may be) to come within the exclusion provided for in paragraph (e), it must, among other things, meet one or other of the use criteria provided for in subparagraphs (e)(i), (d)(ii) or d)(iii) of that definition. Those subparagraphs provide that those tests must be carried out “in the taxation year in which it is acquired or leased”. With respect to leased vehicles, the CRA is of the view that the use tests apply in the taxation year in which the lease agreement comes into effect, i.e., generally in the taxation year in which the lease agreement is signed.
Official Response
10 October 2024 APFF Roundtable Q. 8, 2024-1028891C6 F - Définition du terme « automobile »
Q.9 – S. 13(5.2) application to optioned automobile
An individual, after having paid $12,500 in lease expenses during the first 48 months of an automobile lease, exercises the option under the lease to acquire the automobile for $15,000, at a time that its FMV is $20,000, then immediately sells it for $20,000. If the individual had been using the vehicle in the course of carrying on a business then, by virtue of s. 13(5.2), the capital cost would be deemed to be $20,000 (i.e., the lesser of the vehicle’s FMV, and the sum of the actual cost of $15,000 and the lease expenses), and the individual would be deemed to realize recapture of depreciation of $5,000 on the sale, rather than a capital gain.
On the other hand, if there was no business use of the automobile, s. 13(5.2) would not apply, and the individual would realize a capital gain of $5,000.
Does CRA agree with this analysis?
CRA Response
The CRA agrees with your analysis.
As indicated in the statement of the question, the rules in section 49 apply to an option to purchase a property so that the portion of each lease payment in respect of the option to purchase the property forms part of the ACB of that option. Pursuant to subsection 49(3), the ACB of the option to purchase the property is added to the cost of the property acquired following the exercise of the option to purchase.
In the example given, assuming, as indicated in the statement of the question, that the relationship between the parties was legally a leasing agreement for a vehicle and that no part of the leasing costs was reasonably attributable to the acquisition of the purchase option, the ACB of the purchase option for the vehicle under the section 49 rules was nil.
Consequently, the ACB of the vehicle in the example given, which was not used in the course of carrying on a business, was $15,000, which corresponds to the exercise price of the $15,000 purchase option plus the ACB of the option of $0. Thus, on the sale of the vehicle for proceeds of disposition of $20,000, the individual does not have to include any amount as recapture of depreciation in computing the individual’s income in the year of sale since subsection 13(5.2) does not apply, but the individual must include an amount of $5,000 as a capital gain in computing the individual’s income.
Official Response
Q.10 – S. 67.3 and car lease early termination fee
In 2023, a self-employed individual leased an automobile, which he used in the course of his business, but several months later, terminated the lease and paid a lease termination fee of $10,000, in order to lease a different make of car.
In 2008-0285361C6, CRA dealt with a car lease early termination payment by an employee (claiming employment expenses therefor) and stated that if the termination fee represented actual lease charges under the automobile lease, it could be deducted pursuant to s. 8(1)(h.1) subject to the limitations in s. 67.3, i.e., the termination fee was to be added to the other lease costs that were subject to s. 67.3.
(a) Does CRA agree with the above analysis in relation to a self-employed worker or a corporation using an automobile in the course of a business?
(b) If the other leasing expenses were already limited by s. 67.3 (for example, for a luxury vehicle), would the $10,000 termination fee be non-deductible by virtue of s. 67.3?
CRA Responses
(a)
Essentially, section 67.3 limits all or part of the “actual lease charges” paid or payable for a passenger vehicle that a taxpayer may deduct in computing income for the year.
If the taxpayer is an employee and may, where certain conditions are satisfied, deduct “actual lease charges” in computing employment income as motor vehicle expenses under paragraph 8(1)(h.1), such costs will be subject to the limit set out in section 67.3.
If the taxpayer is self-employed or a corporation, the limit set out in section 67.3 also applies to determine the maximum amount that may be deducted as “actual lease charges” paid or payable for a passenger vehicle in computing the taxpayer's business income for the purposes of subsection 9(1). That means, among other things, that such costs must be current in nature and must have been incurred for the purpose of earning income from a business or property. Those expenses are also subject to various provisions of the Income Tax Act that could impose restrictions depending on the circumstances, such as paragraph 18(1)(h).
(b)
Section 67.3 uses the expression “actual lease charges”. That term is not defined in the Income Tax Act.
Generally speaking, “actual lease charges” include the monthly payments for the use of a passenger vehicle. They also include other expenses provided for in the leasing contract, such as mileage or other final charges paid or payable and relating to the use of the vehicle by the lessee.
The determination of whether the costs of early termination of an automobile lease constitute “actual lease charges” is a question of fact. That determination can only be resolved after an analysis of the lease contract.
Where the $10,000 early termination fee for an automobile lease constitutes “actual lease charges”, it must be added to the usual lease charges (as per the base lease). If the taxpayer's total annual lease charges exceed the limit allowed under section 67.3, the taxpayer will not be able to deduct the excess charges.
Official Response
Q.11 - Computing recapture if increased business use of Class 10.1 vehicle
CRA has considered that when calculating the CCA deduction where a self-employed worker uses a Class 10.1 passenger vehicle for both personal and business use, the worker can first calculate the CCA deduction as if the vehicle were used entirely for business use, but only deduct the portion of that computed amount based on the proportion of business use.
In 2022, a self-employed worker acquired a passenger vehicle at a cost of $50,000, so that $34,000 was included in Class 10.1. The business-use percentage in 2022 was 40%, and the individual designated the property as designated immediate expensing property, giving rise to a CCA claim of $13,600 for 2022.
In 2023, he sold the passenger vehicle for $38,000. From the beginning of 2023, he had been using the vehicle 60% for business use. Since the cost to him of the passenger vehicle, which was property that had been designated as designated immediate expensing property within the meaning of Reg. 1104(3.1), was higher than the amount set under Reg. 7307(1), s. 13(7)(i) provided that the proceeds of disposition were computed as: $38,000 X $34,000/ $50,000 = $25,840, resulting in recapture of depreciation. However, taking into account the business-use percentage for 2023, the recapture was required to be multiplied by 60%. Accordingly, the individual was required to include recapture of depreciation of $15,504, notwithstanding that this exceeded the amount claimed in 2022.
(a) What use percentage should be used in calculating the recapture: that for the year of acquisition, or for that of the disposition?
(b) If the percentage for the year of disposition is to be used, does CRA agree that this gives rise to an inappropriate result?
CRA Responses
(a)
Under the rules set out in section 13, a taxpayer who disposes of depreciable property, as that term is defined in subsection 13(21), may be required to include in computing income an amount as recapture of depreciation claimed in respect of such property.
Where a self-employed worker uses the method described above to calculate CCA in respect of a motor vehicle used for both business and personal purposes, the individual must determine the amount of CCA in respect of the motor vehicle as if it were used entirely for business purposes, while deducting annually only the proportion of CCA corresponding to the business use in the particular year.
Consequently, when recapture of depreciation must be included in computing the individual’s income for the year pursuant to subsection 13(1), such recapture of depreciation must be included in the proportion corresponding to the business use in the year of disposition. In the hypothetical scenario submitted, that proportion corresponds to 60%.
(b)
Although the CRA accepts the method previously described for calculating CCA in respect of a motor vehicle used by a self-employed individual for both business and personal purposes, it is important to note that, pursuant to paragraphs 13(7)(c) and 13(7)(d), the capital cost of the property must generally be apportioned on an annual basis between its use for the purpose of earning income and its use for other purposes. Thus, where the property is used for both business and personal purposes, CCA can only be claimed on the proportion of the capital cost related to the business use.
In certain situations, the calculation of CCA and recapture of depreciation may produce a different result depending on the calculation method used. Since the CRA accepts both methods, a self-employed worker can use the one that is most appropriate for the situation. However, the same method must be used for all taxation years.
Official Response
Q.12 - Timing of NAL test under s. 84.1
Situation 1
There is an ACB reduction under s. 84.1(2)(a) for the capital gains deduction (CGD) utilized by a non-arm’s length person.
In 2020, Mr. X married the daughter of Mr. Y and also acquired the shares of PME Inc. from Mr. Y (who claimed the CGD). In 2022, Mr. X ceased to be related to Mr. Y by virtue of the death of his spouse or the rupture of their marriage.
(a) If in 2024, Mr. X transferred his shares of PME Inc. on a s. 85 rollover basis to his holding company, would s. 84.1 reduce the ACB of his shares of PME Inc.?
(b) Is the determination of the non-arm’s length relationship under s. 84.1 to be made at the time of the purchase (in 2020) or at the time that s. 84.1 is engaged (in the rollover transaction)?
CRA Response
Paragraph 84.1(2)(a.1) may apply if a share was acquired by a taxpayer from a person with whom the taxpayer was not dealing at arm's length. The time for determining a non-arm's length relationship referred to in that paragraph is the time at which the shares were acquired by the taxpayer.
If the taxpayer was not dealing at arm's length at that time, subparagraph 84.1(2)(a.1)(ii) could have the effect of reducing the ACB of the shares to the taxpayer, for the purposes of applying section 84.1 to any subsequent disposition. That reduction will occur to the extent that the CGD was claimed in respect of a previous disposition of the share or of a share for which the share was substituted, where such CGD was claimed by the taxpayer or an individual with whom the taxpayer did not deal at arm's length. According to the CRA's longstanding position, the relationship between the parties must be assessed at the time section 110.6 is to be applied.
At the time Mr. X acquired the shares of the capital stock of PME Inc., there was a non-arm's length relationship between Mr. X and Mr. Y, and the CGD was claimed by Mr. Y in respect of that disposition. There was therefore a non-arm's length relationship both at the time referred to in paragraph 84.1(2)(a.1) and at the time referred to in subparagraph 84.1(2)(a.1)(ii). Consequently, for the purposes of applying section 84.1 to the sale to his holding company, the ACB of the shares of the capital stock of PME Inc. held by Mr. X must be reduced by the CGD claimed by Mr. Y.
Situation 2
Mr. X sold his shares of PME Inc. to a third party (Mr. C) and claimed the CGD. Later, the daughter of Mr. X purchased the same shares from Mr. C.
Would s. 84.1(2)(a) apply to reduce, for s. 84.1 purposes, the ACB to the daughter of Mr. X of the shares of PME Inc. by reason of the CGD claimed by her father on the sale to Mr. C?
CRA Response
We have assumed that Scenario 2 is completely independent of Scenario 1 above and that Mr. X's daughter deals at arm's length with Mr. C. Finally, we have assumed that these transactions were not contemplated in advance and that Mr. C acquired the shares as a bona fide investment.
Insofar as Mr. X's daughter purchased the shares from a person with whom she was dealing at arm's length and under the above assumptions, we are of the view that the ACB of those shares should not be reduced by paragraph 84.1(2)(a.1), for the purposes of section 84.1.
Official Response
10 October 2024 APFF Roundtable Q. 12, 2024-1028931C6 - Article 84.1 L.I.R.
Q.13 - Post-mortem use by spousal testamentary trust of s. 69(5) wind-up
In 2012-0456221R3, CRA ruled that s. 69(5) applied to the winding-up of a Newco so that s. 40(3.6) did not deny the capital loss from the resulting disposition to a spousal testamentary trust of its Newco shares, which it had acquired, after the death of its beneficiary, in exchange for shares of a corporation held by that trust before such death. CRA also confirmed the non-application of s. 245(2), since the purpose of the transactions was to avoid double taxation. Furthermore, in 2013-0480361C6, CRA confirmed that s. 129(1.2) could not be applied.
Would these positions apply where legal and commercial constraints precluded the winding-up of the corporation held by trust for three years following such death?
CRA Response
Yes, the positions taken by the CRA are still valid in the context of such post-mortem planning, even if legal and commercial constraints prevent the winding-up of the corporation within three years of the death of the beneficiary spouse.
Paragraph 69(5)(d) provides that where in a taxation year of a corporation property of the corporation has been appropriated in any manner whatever to, or for the benefit of, a shareholder, on the winding-up of the corporation, subsection 40(3.6) does not apply in respect of any property disposed of on the winding-up. Where the conditions and technical parameters of subsection 40(3.6) apply, the Trust finds itself in a situation of immediate double taxation (capital gain on the death of the beneficiary spouse and deemed dividend on the redemption of the corporation's shares). We understand that in a situation where legal and commercial constraints prevent the winding-up of the corporation within three years of the death, such double taxation could be permanent. The CRA does not consider that the use of post mortem transactions to eliminate the capital gain arising on the death of the beneficiary spouse in order to limit double taxation at the trust level results in a situation of abuse within the meaning of paragraphs 245(4)(a) and 245(4)(b). The position set out in document 2012-0456221R3 is therefore still valid and represents the CRA's current position.
Subsection 129(1.2) is a specific anti-avoidance rule under which, for the purposes of subsection 129(1), a dividend paid on a share of the capital stock of a corporation is deemed not to be a taxable dividend if the shareholder acquired the share (or another share for which the share was substituted) in a transaction or as part of a series of transactions one of the main purposes of which was to enable the corporation to obtain a dividend refund. Thus, the corporation is not entitled to its DR when subsection 129(1.2) applies. Whether the purpose test in subsection 129(1.2) is satisfied is a question of fact that can only be resolved in light of the facts and circumstances of a particular situation.
Generally, where, in light of the facts and circumstances of a particular situation, post mortem planning is undertaken primarily to prevent the application of the loss limitation rule in subsection 40(3.6) to limit double taxation and, to the extent that the integration principle is respected, i.e., a corresponding tax is ultimately paid by the Trust on the deemed dividend received, the CRA would be of the view that the specific anti-avoidance rule in subsection 129(1.2) should not apply in those circumstances. Consequently, the CRA's response to Question No. 12 of the Society of Trust and Estate Practitioners Roundtable of June 10, 2013 is still valid.
Official Response
Q.14 – NCLs carryforward where acquisition and amalgamation
Holdco, a CCPC, provided the services of its employee (e.g., payroll and administrative services) to Opco, which was wholly-owned by it and engaged in a manufacturing business. Holdco, which had accumulated non-capital losses (NCLs) arising from the management services it had rendered over the years to Opco, was subject along with Opco to a loss restriction event on January 1, 2024 due to an acquisition of control by Buyco. Immediately thereafter, Holdco and Opco amalgamated, so that the same services of the employee now occurred within Amalco.
(a) Could the NCLs accumulated by Holdco be deducted in computing Amalco's taxable income? More specifically, do the ss. 87(2.1) and 111(5) restrictions preclude the use of Holdco's NCLs?
(b) Would the answer be the same if Amalco had 2 divisions within the same legal entity: a first division that carried on the manufacturing business; and a second division for management services, which would include the same services that were rendered by Holdco to Opco prior to the amalgamation? Each division would have a separate financial statement.
CRA Responses
(a)
First of all, it should be noted that the comments below relate to the CRA's opinion as to the application of subsections 87(2.1) and 111(5) in the context of the given situation and that they are not intended to deal exhaustively with all the tax consequences that could arise from the present situation. In addition, as stated in the question, we understand that the NCLs in question are business losses of Holdco resulting from the management services it rendered and are not property losses that it would otherwise have incurred.
Generally speaking, subsection 111(5) limits the use of a corporation's NCLs in the event of an acquisition of control of the corporation at a given time. One of the conditions set out in paragraph 111(5)(a) in order for NCLs realized in a taxation year ending before that time to be used in a taxation year ending after that time requires that the business that generated the losses be carried on for profit or with a reasonable expectation of profit throughout the year in which the corporation wishes to deduct the losses.
As for subsection 87(2.1), the question of whether a business continues to be carried on after an acquisition of control is a question of fact that can only be resolved after an analysis of all the facts relating to a particular situation. Since the statement in this question only briefly describes a hypothetical situation, the CRA cannot take a definitive position on this issue. That said, on the limited basis of the facts submitted, we are of the view that it would be reasonable to consider that the business that generated the losses, namely the management services business that was carried on by Holdco prior to the acquisition of control and prior to the amalgamation of Holdco and Opco, ceased to be operated after the amalgamation. This conclusion is based in particular on our understanding that the management activities performed by the Amalco employee were intended solely to support the corporation in the manufacturing field, and did not in themselves represent the carrying on of a business. However, we note that it may be possible, depending on the specific facts of a given situation, to implement tax planning that would allow all or part of Holdco's NCLs to be used prior to the acquisition of control.
(b)
Our response would be the same as for Question 14(a). More specifically, based on the facts submitted, we are of the view that creating two divisions with a separate financial statement for the management services and manufacturing businesses would not change our conclusion stated above that it would be reasonable to consider that the management services business that was carried on by Holdco ceased to be carried on after the amalgamation of Holdco and Opco.
Official Response
Q.15 – S. 75(2) and fee payments by trustee or beneficiary
In 2009-0306591E5, where CRA was asked whether the payment of professional fees by the trustee of a trust was a contribution to the trust and, if so, whether this triggered the application of the attribution rules, CRA indicated it was unable to answer because it lacked information, including a copy of the trust deed.
In July 2012, however, 2010-0388551I7 indicated that such a payment does not engage s. 75(2). In February 2013, 2011-0424341I7 concluded that s. 75(2) does not apply in such a situation. Furthermore, at the 2013 APFF Conference Roundtable on Provincial Taxation, Question 5, Revenu Québec stated: [TaxInterpretations translation]
"Attribution rules
Where the professional fees and bank charges of a trust are paid by one of its beneficiaries, the attribution rules may, depending on the circumstances, apply to the beneficiary. If the relevant facts lead to the conclusion that the beneficiary who paid those fees made an indirect transfer either to the other beneficiaries or to the trust, and the other conditions for the application of the attribution rules are met, income from an amount equivalent to the amount of the professional fees and bank charges paid by the beneficiary could be attributed to the beneficiary.
On the other hand, where the income of the discretionary family trust is not paid or payable to the income beneficiaries, it would be necessary to examine all the facts to determine whether the attribution rules apply and how they may apply."
a) Can the payment of professional fees by a trustee or beneficiary of a trust trigger the application of s. 75(2)?
b) If so:
i) Are there specific factors to be considered in order to make this determination (for example, in the trust deed)?
ii) What are the relevant circumstances for concluding whether or not the trustee or beneficiary who paid these fees made an indirect transfer to the other beneficiaries or to the trust?
iii) What is the "property" held by the trust that could allow income to flow to the beneficiary or trustee from an amount equal to the amount of the professional fees and bank charges paid by the beneficiary or trustee?
CRA Response
Generally, subsection 75(2) deals with situations where a person transfers, directly or indirectly, property to a trust and, under that trust, that property or property substituted for it may revert to the person, may pass to persons to be designated by the person after the trust is created, or may, during the person's lifetime, be disposed of only with the person's consent or in accordance with the person's direction.
Whether the payment of professional fees by a trustee, beneficiary, or other person is considered to be a contribution of property indirectly made by that person to the trust for the purposes of subsection 75(2) is a question of fact requiring an analysis of all the facts and circumstances relating to a particular situation. Since each situation must be analyzed in light of its own circumstances, the CRA is not in a position to set out a list of specific factors to be considered in this analysis. However, the CRA is generally of the view that the fact that a person pays fees for the creation of a trust should not, in and of itself, trigger the application of subsection 75(2), since those fees were incurred before the trust was created and do not result in an indirect contribution to the trust's patrimony.
This would obviously not be the case if the fees were reimbursement of the costs of acquiring the property initially contributed by the settlor to the trust. Similarly, the fees incurred for the creation of a trust are distinct from the professional fees of a trust that would be incurred after its creation. Where applicable, the payment of such fees by another person, such as a trustee or beneficiary, could be considered a contribution or transfer made indirectly to the trust by that other person and could, depending on the circumstances, result in the application of subsection 75(2).
In this sense, the comments made by the CRA in response to Question 7 in the 2012 Trusts Seminar, which are also consistent with the position taken by the CRA in Technical Interpretations 2010-0388551I7 and 2011-0424341I7, mentioned above, still represent the CRA's position.
Official Response
Q.16 – GAAR amendments
Certain amendments were made to the GAAR following the adoption of Bill C-59, including the introduction of s. 245(4.1), dealing with a transaction or series of transactions that lack substantial economic substance. Clarifications published by the CRA, such as those in 2023-0987941I7 (pipeline-type post-mortem transactions), are very useful for the tax community.
(a) Can the CRA give some examples of planning that were not covered by the previous version of the GAAR and will now be covered?
(b) Does the CRA intend to publish a new version of Information Circular IC88-2?
(c) Does the CRA intend to publish other documents like the one on pipeline transactions in the near future?
CRA Response
At this time, the CRA is not in a position to provide examples of planning that were not covered by the previous version of the GAAR and would now be covered.
It must be understood that the potential application of the GAAR by the CRA requires a complete review of all the facts and circumstances relating to a particular situation. Consequently, the development of guidelines on the application of the current version of the GAAR will take place as files are analyzed by the CRA, and will continue to be subject to the proven and rigorous administrative process already in place in this regard. For a detailed analysis of this process, we refer you to the presentation given by Suzanne Saydeh of the Compliance Programs Branch, Tax Avoidance Division, as part of the conference entitled Interactive Workshop on Mandatory and Preventive Disclosures and the New Version of the GAAR.
Furthermore, the CRA recently stated in Technical Interpretation 2024-1008251I7 that it is generally of the view that the positions taken in Information Circulars IC88-2 and IC88-2S1 should remain unchanged under the current version of the GAAR. There are currently no plans to issue a new version of IC88-2.
The CRA also stated in Technical Interpretation 2023-0987941I7 that favourable advance income tax rulings would continue to be issued in respect of pipeline-type post-mortem transactions that meet the conditions accepted by the CRA in these circumstances. This technical interpretation also indicates that favourable advance income tax rulings will not be issued in respect of plans similar to the example provided in the Department of Finance's technical notes describing corporate surplus stripping transactions carried out by an individual (Example Jane) or similar plans where an individual shareholder of a corporation proposes to undertake non-arm's length transactions, one of the principal purposes of which is to establish an ACB in order to extract retained earnings.
In addition, the CRA recently confirmed in Technical Interpretation 2024-1016011E5 that it would generally not apply the current version of the GAAR to transactions solely on the basis that such transactions are intended to crystallize capital gains in order to benefit from the capital gains inclusion rate applicable before June 25, 2024. However, an express reservation is indicated with respect to corporate surplus stripping transactions that would be undertaken in such a context.
In closing, the CRA will continue to communicate to the tax community any new position of general interest involving the current version of the GAAR, in particular through the various tax roundtables or the publication of technical interpretations.
Official Response
Q.17 - Acquisition of control of closely-held corporation
Situation 1
Mr. A and Ms. B, who were the sole shareholders of Opco, each holding 50% of the common shares, each sold one third of their common shares to Mr. C, for FMV consideration. The three individuals were not related persons.
2010-0373131C6 confirmed the CRA view now contained in Folio S1-F5-C1 that there is a presumption that the shareholders of a private corporation having two or three unrelated shareholders will act together to exercise control of the corporation.
Furthermore, the 1984 Roundtable on Federal Taxation, Question 42, indicated that in this situation, Mr. A and Ms. B always form the group of persons that controls the corporation.
Is the CRA of the view that the group formed by Mr. A, Ms. B and Mr. C forms a new control group immediately after the transaction, resulting in the acquisition of control of Opco at the earliest time on the transaction date? Conversely, is the CRA of the view that the group formed by Mr. A and Ms. B still controls the corporation, thereby not resulting in any acquisition of control?
CRA Response
Whether a group of unrelated persons forms a group of persons that controls a corporation is a question of fact that can only be resolved after analyzing all the relevant facts pertaining to a particular situation.
The courts have generally recognized that, in order to conclude that several persons collectively exercise control of a corporation, there must be a sufficient connection between those persons, such as a voting rights agreement, an agreement to act in concert or business or family ties.
In the context of a private corporation with only two or three shareholders, none of whom individually controls the corporation, the CRA's position remains as set out in Folio S1-F5-C1, namely that the shareholders of such a corporation are presumed to act in concert to control the corporation (the “control group presumption”). The CRA also remains of the view that in almost all cases where the voting rights in a corporation are exercised equally by two shareholders, the corporation will be controlled by the group formed by those two shareholders.
Consequently, in the present situation (Situation 1), unless it can be shown that neither Mr. A nor Ms. B controlled Opco prior to the disposition of the shares to Mr. C and that the decision-making process in the corporation was effectively at a standstill, Mr. A and Ms. B would be presumed to form a group of persons that controlled Opco.
Second, whether the acquisition of a minority interest in a corporation, in this case the acquisition by Mr. C of one-third of the Opco shares held by Mr. A and Ms. B, results in an acquisition of control of the corporation by a new group of persons is a question that the CRA generally determines after reviewing all the facts, legal documents and circumstances relating to a particular situation. Paragraph 7 of Interpretation Bulletin IT-302R3 sets out certain aspects that the CRA will consider in making that determination, including the type of corporation, who previously controlled the corporation, the number or percentage of shares purchased, the method of acquisition, common interests and concerted actions.
As stated in the question, the CRA commented on a situation similar to Situation 1 as part of the 1984 Roundtable on Federal Taxation. Essentially, the CRA was asked whether there was an acquisition of control of a loss corporation where, as in Situation 1, the two equal shareholders of the corporation each disposed of one-third of their shares in the corporation to an unrelated person. In its response, CRA noted that the two original shareholders would still be in a position to control the corporation after the disposition of the shares. However, the CRA also stated that to the extent that the two original shareholders would cease to act in concert to control the corporation, the disposition of the shares could result in the acquisition of control of the corporation.
For example, in the context of Situation 1, we are of the view that such a situation could arise if Mr. A or Ms. B withdrew from control of Opco and, after the disposition of the shares, it would be reasonable to consider that control of Opco is instead exercised by a new group of persons of which Mr. C is a member. This could also be the case if, after the disposition of the shares, it was determined that Mr. A, Ms. B and Mr. C formed a group of persons that controls Opco.
Situation 2
Mr. A, Ms. B, Mr. C and Ms. D were the sole shareholders of a corporation (“Opco”), each holding 25 common shares, and are not related persons. Opco repurchased the 25 common shares held by Ms. D for FMV consideration.
2010-0373131C6 confirmed the CRA general position now contained in Folio S1-F5-C1 that in a situation where a private corporation has three unrelated shareholders, none of whom individually has control, the CRA presumes that the three shareholders act in concert, thereby forming a group that controls the corporation.
In the CRA's view, the question of whether a group of unrelated persons controls a corporation (where a private corporation has more than three unrelated shareholders, none of whom individually controls the corporation) is a question of fact.
Do Mr. A, Ms. B and Mr. C form a new control group immediately after the repurchase of Ms. D's shares, resulting in the acquisition of control of Opco at the earliest time on the transaction date?
CRA Response
Generally speaking, the comments set out above with respect to Situation 1 also apply to this situation (‘Situation 2’).
In Situation 2, immediately following the redemption of Ms. D's shares, the shares of Opco's capital stock are held equally by three unrelated shareholders. Based on the control group presumption discussed above, the three remaining shareholders, Mr. A, Ms. B and Mr. C, will be presumed to be acting in concert to control Opco.
Consequently, we are of the view that the repurchase of Ms. D's shares would result in the acquisition of control of Opco by the group of persons formed by Mr. A, Ms. B and Mr. C, unless the presumption of a control group can be rebutted in light of all the facts and circumstances surrounding Situation 2, or if it can be demonstrated that control of Opco was exercised by the same group of persons before and after the repurchase. For example, this would be the case if it could be demonstrated that the group composed of Mr. A, Ms. B and Mr. C controlled Opco prior to the repurchase.
The question of whether a group of unrelated persons controls a corporation and, if so, the composition of that group, in situations where a private corporation has more than three unrelated shareholders, none of whom individually controls the corporation, remains a question of fact. Since the statement in this question only briefly describes a hypothetical situation, it is impossible for us to pronounce definitively on this question without first examining all the facts, legal documents and circumstances surrounding a particular situation.
Official Response
10 October 2024 APFF Roundtable Q. 17, 2024-1028981C6 - Acquisition de contrôle
Q.18 [see Q.3]
1 CANADA, Department of Finance, Budget 2022 - A Plan to Grow our Economy and Make Life More Affordable, Tax Measures: Supplementary Information, April 7, 2022
2 Bill C-32, An Act to implement the fall 2022 economic statement, 1st session, 44th Parliament, 2022 (Can) (tabled November 3, 2022 and assented to December 15, 2022). FN: CANADA, Department of Finance, News Release, “Government of Canada introduces legislation to make life more affordable and build an economy that works for everyone”, November 4, 2022
3 Section 112 of the Business Corporations Act, R.S.Q., c. S-31.1 and section 102(1) of the Canada Business Corporations Act, R.S.C., 1985, c. C-44
4 Id., par. 67.
5 Id. at par. 68.
6 Id. at para. 69.
7 Id.
8 97 D.T.C. 111 (T.C.C.) (“McNichol”)
14 Foix, supra, note 6, par. 77
15 CANADA REVENUE AGENCY, Technical Interpretation 2002-0156695, October 11, 2002.
16 97 D.T.C. 302 (T.C.C.)
17 CANADA REVENUE AGENCY, Technical Interpretation 2007-0224151E5, August 13, 2007.
18 CANADA REVENUE AGENCY, (online: https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/questions-answers-about-form-t1134.html).