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2 May 2022- 11:16pm CRA rules on gross asset butterfly with preliminary safe income dividend to increase ACB to exceed pre-1972 CSOH Email this Content CRA ruled on a butterfly split-up of a rental property company ("DC"- which was considered to carry on an active business because it had more than five full-time employees) between two transferee companies (TCs) formed by its two shareholders, being holding companies for the families of two brothers (one of them, deceased). ...

After he had requested the certified record contemplated by Federal Court Rules 317 and 318 (containing materials that CRA had considered), he was contacted by a journalist inquiring about the application. ...

Absent objectionable tax planning or abusive tax avoidance, this may be acceptable, but each particular situation would need to be considered on a case-by-case basis. ...

CRA indicated that this would result in a new lease agreement, even if it was only the lease term that was amended rather than any other terms such as the monthly rent, stating: [T]he modification of the lease in respect of any of its essential elements, such as the rent or the term of the lease, would be considered a significant change that goes to the root of the agreement. ...

CRA essentially confirmed this interpretation, stating: While a change in use of 10% or more is normally considered to be a significant change in use (i.e. because section 197 considers any change of less than 10% to be insignificant), section 141 nevertheless considers that the entire use of the capital property is not commercial activities. ...

The operation of the source deduction rules turns on whether an employee is considered to “report for work” at an actual establishment of the employer as per Reg. 102(1), or is deemed by Reg. 100(4) to report for work at the establishment of the employer from which the remuneration is paid. ...

CRA responded: CRA indicated, consistently with 2010-0359421C6, that it generally considered that s. 246(1) could apply where a parent corporation owns and pays the premiums on a life insurance policy and its subsidiary is designated as the beneficiary so that, here, s. 246(1) could apply in respect of Opco, although the exception in s. 246(2) might apply if the two brothers dealt with each other at arm’s length. ...

Ss. 93.1(5) and (6) could only apply to such interest if, pursuant to the coming-into-force (CIF) provision for ss. 93.1(5) and (6) (which otherwise applied only to the 2013 and subsequent taxation years), it could be considered that the taxpayer (USP) had “elected[ed] in writing” and timely “file[d] the election with the Minister” to have ss. 93.1(5) and (6) apply to those earlier years. ...

Even though the units were places of lodging rather than places of residence, CRA nonetheless considered the bunkhouse to qualify as a residential complex and as a multiple unit residential complex. ...

If the taxpayer was a “fixed interest commercial trust” and was considered resident, it could potentially transfer and receive excess capacity from other eligible group entities. ...