(3)-(29)

On a sale of the taxpayer's home, the mortgage loan for which the interest was deductible pursuant to s. 20(1)(c) because the loan proceeds had been used to acquire a commercial rental building, must be repaid. Will the interest paid on a new mortgage used to acquire the new residence be deductible? CCRA responded:

[T]he situation … is similar to … Grenier … . Consequently, subject to additional facts to the contrary, … the interest paid … could be deductible pursuant to paragraph 20(1)(c).

A Canadian public company (ACo ) will force the conversion of its outstanding convertible debentures, by issuing a notice to redeem them for their principal amount. However, upon receiving notice that the debentureholders are converting, it will then exercise a further right to redeem such debentures in cash for their value based on the market value of the underlying shares, thereby resulting in the payment by it of a substantial cash redemption premium. The redemption will be funded with borrowed money.

CRA applied the “fill the hole” concept to rule that the interest on the borrowed money used to pay the premium will be deductible under s. 20(1)(c)(i) given that the accumulated profits of ACo at the time of the redemption will exceed the premium. It also ruled:

Subsection 20(3) will be applicable to the portion of Loan 3 … corresponding to the aggregate principal amount of the outstanding Debentures … such that borrowed money will be deemed for purposes of the application of paragraph 20(1)(c) to be used for the purposes for which the outstanding Debentures were used or incurred.

Similar debenture redemption transactions had already been completed, and CRA provided similar rulings for these.

CRA indicated that where a corporation borrows money from an arm's length financial institution to repay a non-interest bearing loan that it had used to earn income from an active business:

[T]he money borrowed from the financial institution by the corporation would be deemed to have been used by the corporation for the purpose for which the previously borrowed money was used by virtue of subsection 20(3). Thus, to the extent that the repaid loan was used for the purpose of earning income from a business or property, the interest on the money borrowed from the financial institution would be deductible under subparagraph 20(1)(c)(i).

Where the assets of a proprietorship are transferred to a corporation for consideration including a note payable, interest on money borrowed by the corporation from a financial institution to repay such note will be deductible.

Where a loan subject to s. 20.2(2) is refinanced, s. 20(3) will apply to treat the new loan as a continuation of the old loan.

A parent corporation is not entitled to a deduction under s. 20(4) to which a subsidiary would have been entitled if it had not been wound-up into the parent.

Are expenses incurred by members of an Association respecting conventions, symposia and seminars held during a cruise deductible from their income?

CRA noted that IT-357R2, para. 9 indicates that training is aimed at learning a subject in accordance with a formal course of study, whereas a convention is a formal meeting of members of an organization for professional or business purposes. CRA then indicated that if the costs were training costs that were current expenses, they could be deductible up to the amount that it would normally have cost if the training were provided in the taxpayer's geographical area. However, if the personal element was predominant and the cruise was more like a holiday, only the course fees themselves would be deductible. CRA then stated:

Assuming that the expenses [instead] are incurred in connection with a convention held during a sea cruise, it is our view that no amount for expenses incurred to attend the convention would be deductible since the convention would be held outside the geographical boundaries of the association that is the sponsor of the convention, as discussed in paragraph 2 of IT-131R2.

The two-convention limitation in s. 20(10) applies only to capital expenditures. Are expense of attending conventions which were incurred for earning income from a business not subject to this limitation? CRA responded:

Where a taxpayer has incurred expenses related to a convention in order to earn income from a business and such expenses are not capital expenditures, such expenses may be deductible in computing its business income without reference to subsection 20(10).

Historically, the CRA's position with respect to convention expenses is that such expenditures are generally capital expenditures to which paragraph 18(1)(b) applies. In addition, paragraphs 18(1)(a) and (h) and sections 67 and 67.1 could apply, depending on the circumstances.

A taxpayer intends to offer employees and their spouses an all-expenses-paid week-long trip to a resort located outside of North America, in which they will participate in various team building sessions and sessions related to improving their understanding of the taxpayer's business. CRA indicated that such a trip is not a "convention" under s. 20(10). As per para. 11 of IT-131R2, CRA does not consider intra-company meetings, seminars, courses, etc. to be conventions from the employees' perspective.

Before finding that the annual meeting of the members of the Corporation of Master Pipe Mechanics of Quebec (the "CMMTQ") and the MCEE trade show (Mechanics, Climate control, Electricity and Lighting), of which the CMMTQ is the co-organizer, and which offers, among other things, conventions in which all the members of the industry, whether or not members of the CMMTQ, can participate qualified as conventions, CRA stated:

[I]t is not necessary for the taxpayer to be a member of the organization responsible for the convention, but the taxpayer’s presence at the convention must be related to the business the taxpayer carried on or the profession the taxpayer practises.

However, we reiterate that under subsection 8(2), employees cannot under any circumstances deduct expenses incurred to attend conferences in computing their income.

When asked whether expenses for attending a convention, seminar, luncheon meeting or other meeting incurred by an individual in the course of operating a business or an immovable are deductible, CRA stated:

Training costs are not deductible as current expenses and are considered to be capital expenditures under paragraph 18(1)(b) if the training course to which they relate provides a lasting benefit to the taxpayer. …

As stated in paragraph 9 of IT-357R2, a training course should be distinguished from a convention. Unlike a training course, which generally has a classroom format for teaching a subject in accordance with a formal course of study, a convention does not normally have a classroom format and those attending are normally not expected to study text-books, prepare assignments or take tests. In addition, a convention does not become a training course when some of its sessions take the form of workshops. Although convention expenses may provide a lasting benefit to the taxpayer, the taxpayer may deduct these expenses in computing income under subsection 20(10), subject to the limitations contained in that subsection.

Does a convention for s. 20(10) purposes include a symposium, conference, information session or formal meeting? CRA responded:

[A]s stated in … IT-131R2 [para. 1] a convention may be defined as a formal meeting of members of an organization for professional or business purposes.

If foreign taxes allocated from an employees profit sharing plan to an individual on a T4PS are limited to 15% for foreign tax credit purposes, is any excess deductible from the individual’s income? After affirming the 15% limitation in the case of non-realty income, CRA stated:

[U]nlike paragraph 144(8.1)(b) … there is no provision of the Act which deems any portion of the foreign NBIT paid by an EPSP to have been paid by an employee beneficiary for the purposes of subsection 20(11) or 20(12) of the Act. Consequently, an employee beneficiary would not be entitled to a deduction under either subsection 20(11) or 20(12) … .

Mr. A, Canadian resident and citizen, was a member of an LLC carrying on a U.S. active business and which was treated as a partnership for Code purposes. In each of 2013 and 2014, Mr. A paid U.S. individual income tax of $400 on his share of LLC’s income of $1,000, and did not receive any dividends from LLC or any other U.S. source. LLC (which was not a controlled foreign affiliate of Mr. A) made a pro rata distribution of all its property in 2014 on a liquidation and dissolution (“L&D”), including a distribution of $2500 to Mr. A, thereby giving rise to a $2,000 capital gain on his LLC shares.

CRA noted that no s. 20(11) deduction would be available, as no income from property was include in Mr. A’s income.

A U.S. citizen is required to pay U.S. tax on dividends and capital gains at a 20% rate (increased from the previous 15% rate). Does this mean that such citizen if also resident in Canada is only entitled to a deduction under s. 20(11) with respect to the additional 5% tax?

CRA stated that Art. XXIV, para. 5 of the Canada-U.S. Treaty is "a complete code in respect of the deductions and credits available to U.S. citizens resident in Canada for the purposes of eliminating double taxation on dividends, interest, and royalties," and that the deductions thereunder "are available in place of deductions under subsections 20(11) and 20(12), and are typically more advantageous to the taxpayer."

US tax is paid on the income of an LLC by an individual resident in Canada to which the LLC is not a controlled foreign affiliate (so that its income is not FAPI). As this tax is independent of whether there is any distribution from the LLC that has been included in computing the taxpayer's income for the year, should it be concluded that s. 20(11) can never apply in these circumstances as the U.S. tax is not paid "in respect of" the individual's income?

In responding, CRA first noted that if no distribution were made in the year by the LLC, there would be no amount included in the individual's income so that: the US tax paid by the taxpayer would be deductible under s. 20(12) and not under s. 20(11); and that to the extent the tax was not deducted under s. 20(12), it would be creditable for purposes of s. 126(1). CRA then stated:

On the other hand, in a year that the taxpayer receives a distribution from the LLC there would be an amount of dividend income included in computing the taxpayer's income for the year from the LLC. In our view the words "tax paid …as may reasonably be regarded as having been paid in respect of" in paragraph 20(11)(a) are broad enough to connect a US tax computed on the profits of the LLC to the dividend from the LLC. Therefore, in computing the taxpayer's income from the shares of the LLC, there may be deducted under subsection 20(11) the amount, if any, by which the amount of the US tax paid by the taxpayer exceeds 15% of the amount of such dividend income.

Discussion of the interaction of s. 20(11) and paragraph 5 of Article XXIV of the U.S. Convention.

CRA noted that the attribution of foreign source income (e.g., U.S. dividend income) to a settlor under s. 75(2) does not entail the attribution of the non-business taxes (i.e., withholding taxes) thereon so that the settlor cannot claim a foreign tax credit. The settlor would not be able to claim a s. 20(11) or (12) deduction for the same reason, i.e., the settlor did not make the payment. However, the trust itself may be able to claim a s. 20(11) or (12) deduction in calculating the income that is attributed to the settlor.

If foreign taxes allocated from an employees profit sharing plan to an individual on a T4PS are limited to 15% for foreign tax credit purposes, is any excess deductible from the individual’s income? After affirming the 15% limitation in the case of foreign non-realty income, CRA stated:

[U]nlike paragraph 144(8.1)(b) … there is no provision of the Act which deems any portion of the foreign NBIT paid by an EPSP to have been paid by an employee beneficiary for the purposes of subsection 20(11) or 20(12) of the Act. Consequently, an employee beneficiary would not be entitled to a deduction under either subsection 20(11) or 20(12) … .

Mr. A, Canadian resident and citizen subject to a Canadian marginal rate of tax of 50%, was a member of an LLC carrying on a U.S. active business and which was treated as a partnership for Code purposes. In each of 2013 and 2014, Mr. A paid U.S. individual income tax of $400 on his share of LLC’s income of $1,000, and did not receive any dividends from LLC or any other U.S. source. LLC (which was not a controlled foreign affiliate of Mr. A) made a pro rata distribution of all its property in 2014 on a liquidation and dissolution (“L&D”), including a distribution of $2500 to Mr. A, thereby giving rise to a $2,000 capital gain on his LLC shares. Would s. 20(12) apply?

CRA first noted:

[W]hen a taxpayer resident in Canada is a member of an LLC, CRA views the US tax paid by the taxpayer, for a particular year of the taxpayer, on its portion of the taxable income of the LLC for a taxation year of the LLC that ends in the particular year, as being a foreign tax paid by the taxpayer in respect of an amount (e.g. a dividend on a share) that is or will be included in computing the taxpayer’s income from the shares of the LLC.

Respecting 2013, CRA stated:

[S]ubsection 20(12) permits a taxpayer to deduct in computing its income from a property (being the shares of LLC in the Described Case) for a particular taxation year an amount up to the non-business income tax paid by the taxpayer “in respect of that income”, even if the deduction results in the taxpayer having a loss from the particular property for that year. …[T]he US income tax paid by Mr. A…[would] be, for purposes of subsection 20(12), a tax “in respect of that income”… even if no distributions are received from the LLC… . [S]ince Mr. A has no foreign source income in 2013 and thus would not be entitled to a foreign tax credit in 2013 under subsection 126(1), it would generally be expected that in 2013 Mr. A would claim under subsection 20(12) the $400 of US tax that he paid in respect of his share of LLC’s income for that year, resulting in Mr. A having in 2013 a loss from property (being the shares of LLC) of $400.

Respecting 2014, CRA stated:

Mr. A could under subsection 20(12) opt to claim, in his 2014 Canadian income tax return, an amount of up to $400…[which] would reduce the amount of his “non-business income tax” for 2014 … .

Taxpayer, a U.S. citizen and Canadian resident, owns a portion of the shares of a Canadian unlimited liability company (“ULC”), which is treated as a partnership for Code purposes. ULC holds interests in U.S. limited liability companies earning U.S. active business income (“LLCs”) through a U.S. limited liability company holding company (“Holding LLC”). Holding LLC and the LLCs are each disregarded entities for Code purposes and made no distributions of income. From a Code perspective, partnership income reported by ULC was allocated to each of its members, so that Taxpayer paid U.S. income taxes based on the individual's percentage share ownership of ULC.

Is Taxpayer entitled to a s. 20(12) deduction for the U.S. taxes paid? CRA responded affirmatively:

The CRA has previously stated that the U.S. taxes paid by the Canadian resident individual on the allocation of income from a LLC where the individual indirectly holds an interest in the LLC through a corporate entity that is fiscally transparent for U.S. tax purposes (i.e., the ULC) would be considered foreign non-business income tax for purposes of the deduction under subsection 20(12) [see 1999-0010295]. This position is based on the fact that the U.S. taxes are considered to have been paid by the taxpayer in relation to, or in respect of, the shareholdings of ULC and not in relation to any business carried on by the taxpayer himself.

… There is a logical connection between the income from ULC and the U.S. taxes paid by Taxpayer because if Taxpayer did not own such shares, no U.S. taxes would have been paid [citing Smidth].

A Canadian-resident individual owns an interest in a Canadian LP (“LP”), that owns an interest in a U.S. LP (“Holding LP”), which has elected to be a corporation for Code purposes. Holding LP’s source of income (allocated pro rata to LP, and then to the individual) was distributions from LLCs earning active business income in the U.S. that was distributed to Holding LP. Would the individual be entitled to deduct a pro rata share of the U.S. income taxes paid by Holding LP on the income of the LLCs (which are disregarded under the Code)?

After referring to “the CRA’s long standing treatment of foreign taxes paid by a partnership for purposes of the foreign tax credit rules in section 126 and the findings… in Smidth… (2012 TCC 3, aff’d 2013 FCA 160)," CRA stated:

a partner’s non-business income tax, within the meaning of subsection 126(7), paid to a particular foreign country includes the partner’s share of any non-business income tax paid to that country through the accounts of the partnership. Consequently, any foreign tax credit under subsection 126(1) or deduction under subsection 20(11) or 20(12) may be claimed by the particular partner, provided all requirements of these provisions are otherwise met.

Is the US tax paid by a Canadian-resident taxpayer on the income (which also is foreign accrual property income) of an LLC which is owned by it (and is a controlled foreign affiliate) considered to be foreign accrual tax in respect of the LLC?

After responding that the US tax paid by the taxpayer would not qualify as FAT, CRA went on to note that any amount included under s. 91(1) in respect of the FAPI would be considered income from sources in the US for purposes of ss. 20(11) and 126(1), so that an individual taxpayer could deduct under s. 20(11) any portion of the US tax paid for the year in excess of 15% of the s. 91(1) income inclusion. "Any excess [i.e., the 1st 15%] will be eligible for a foreign tax credit under subsection 126(1) and any of the excess US tax paid that cannot be utilized by the foreign tax credit may be deducted from income pursuant to subsection 20(12)."

A deemed-resident s. 94 trust realized a capital gain and incurred gains tax of $10,000 for U.S. purposes on disposing in the U.S. of marketable securities but, for purposes of the Act, realized capital gains of only $20,000 (with Canadian tax thereon of $2,900) due to the securities' ACB previously having been stepped up under s. 128.1(1)(c). Before finding that a full foreign tax credit was available, CRA stated:

[T]he deduction of foreign non-business income tax provided under subsection 20(12)...is not available in the context of a capital gain, since the subsection 20(12) deduction is only available in computing income from business or property, and the foreign taxes have to be paid in respect of such income. In this case, the foreign taxes paid by the trust are in respect of a capital gain, and not any income from business or property as determined under Canadian law or foreign law.

Canco, and its wholly-owned subsidiary, Cansubco, are the 99.9% and 0.1% partners of USLP, which is a partnership for Canadian purposes and has elected to be a corporation for U.S. tax purposes. USLP holds all the shares of USLLC, which has elected to be disregarded entity for US tax purposes. USLLC earns active business income. USLLC has not distributed any dividends to USLP. For US tax purposes, USLP declares the active business income earned by USLLC. Would Canco be entitled to a s. 20(12) deduction where the US tax paid by USLP on business income is not in respect of the income that Canco would potentially receive as dividend income from USLLC shares held by USLP? After noting that since the taxes paid by USLP "are in respect of business income, they would not meet the definition of 'non-business income taxes'," CRA stated:

The phrase "in respect of that source" found in subsection 20(12) requires that the foreign taxes paid must be paid in respect of the particular business or property to which the tax relates. In other words, for the purposes of claiming the deduction in subsection 20(12), the computation of income from a business or property should be on a business-by-business and/or property-by-property basis. Therefore…in computing the income of Canco and Cansubco from the shares of USLLC (as partners of USLP), USLP cannot deduct, under subsection 20(12), the foreign taxes paid by it on income from business, computed under US tax law, because USLP would generally only receive income from property under Canadian tax law.

CRA went on to note that the prohibition against recognizing tax paid by a corporation respecting income from foreign affiliate shares also applied in light of s. 93.1(1).

A Canadian resident individual taxpayer reported the income (which was not distributed) of a wholly-owned S Corporation in his U.S. tax return in 2006. He claimed a deduction under s. 20(12) respecting the U.S. tax that he paid on such income. CRA stated:

[A] deduction in a taxation year under subsection 20(12)…for U.S. tax paid by the taxpayer for the year in respect of his share of income of an S Corporation is not to be denied even though the taxpayer does not receive a distribution from the S Corporation in the year. …

[I]n...Kaiser...91 DTC 1057...the taxpayer tried [unsuccessfully] to convince the Tax Court that foreign taxes paid on employment income were deductible under subsection 20(12)... . However, the Department of Finance did not want to leave any chance that foreign tax paid on income other than income from a business or property could be construed as being deductible under section 20(12)... .

[T]he intended use of the expression "in respect of that income" in subsection 20(12) of the Act was to clarify that non-business-income taxes paid on income from sources other than business or property (e.g., employment income) are not deductible... . All that is required is that there is a potential source of income from a business or property and that the non-business-income taxes relate to that source of income. ...

[T]he term "paid ... for the year"...relates to the year for which the taxpayer is liable to pay tax to the foreign jurisdiction for the income which is considered to have been earned under the tax law of the foreign jurisdiction even though the income may not be realized in Canada in the year for which the foreign tax is paid.

Note: this Technical Interpretation was discussed with approval in the FL Smidth case, supra, 2012 TCC 3, aff'd on narrower grounds 2013 FCA 160, where Paris J stated (at para. 43) that “the CRA accepted that the 20(12) deduction was available where the U.S. tax was paid on income from a source that is different from the taxpayer’s source of income under the Act. Presumably, the CRA accepted that the U.S. tax was paid in respect of the shareholder’s income from property under the Act because the corporation’s income is paid out to the shareholder eventually and taxed as income from property. [emphasis in original]”

A member of a partnership has been allocated a proportionate share of the non-business income tax paid to a foreign government with respect to foreign source income earned by the partnership and allocated to the partners thereof. One of the partners has claimed a deduction under subsection 20(12) in lieu of claiming a foreign tax credit under s. 126(1) in respect its share of the non-business income tax paid. CRA stated:

[P]aragraph 53(2)(c) does not provide for a deduction in computing the adjusted cost base of a taxpayer's interest in a partnership for the amount of any non-business income tax paid to a foreign country through the accounts of the partnership that was allocated to the particular partner, or for any amount deducted under either subsection 20(12) in computing the taxpayer's income or subsection 126(1) in computing the taxpayer's taxes otherwise payable in respect of such amount. Consequently...no reduction to the adjusted cost base of the taxpayer's partnership interest would be required...regardless of whether such amount is deducted under subsection 20(12) in computing the taxpayer's income or under subsection 126(1) in computing the taxpayer's taxes otherwise payable.

"Amounts received out of an IRA are treated as pension income under paragraph 56(1)(a) of the Act and under the Treaty and not as income from a business or property. Accordingly, neither subsection 20(11) or 20(12) of the Act can apply to allow a deduction."

A corporation with taxable income in Year 01 of $2,000,000 claimed a non-business foreign tax credit of $25,000. In Year 03, the corporation realized a loss and carried it back to Year 01, which completely offset the corporation's income for Year 01. Can the corporation now request an amendment to its income tax return for Year 01 in order to claim the deduction under s. 20(12) and no longer claim the foreign tax credit?

CCRA responded:

In your situation, it is reasonable to assume that the corporation will have been assessed for Year 01 at the time of the Year 03 loss carryback. However, the Minister will be obliged to reassess Year 01 to take into account the loss carryback as provided for in subsection 152(6). Nevertheless, the application to amend the Year 01 return in respect of the deduction under subsection 20(12) may be allowed if the application is made within the period for serving a notice of objection. In circumstances where the application for amendment is made after the period for serving a notice of objection has elapsed, it is still open to you to make such an application to the Tax Services Office where the corporation files its tax returns.

May foreign tax attributable to a taxable capital gain be deducted under s. 20(12), notwithstanding that capital gains are not income from business or property? CRA responded:

Until 1991, subsection 20(12) began with the words "In computing the income of ...". This would indicate that foreign taxes paid in respect of capital gains would have been deductible under that prior language. ... Subsection 20(12) was amended by Bill C-15 effective for 1992 and subsequent taxation years. The Technical Notes of the Department of Finance indicate that the amendment was made to ensure that the deduction was available only with respect to foreign taxes paid in respect of income from business or property. Thus under the current wording any foreign taxes paid in respect of a capital gain would not be deductible under subsection 20(12).

A Canadian exporter that exports to a particular country without carrying on business there and is subject to an income tax of that country, will not be allowed a tax credit, but the foreign tax can be deducted under s. 20(12) in computing the exporter's Canadian income.

Because the deduction is only available in the computation of income from a business or property, foreign tax paid on the disposition of a foreign principal residence will not give rise to a deduction under s. 20(12).

CRA indicated that where an FX-denominated debt is assigned between interest coupon dates, the amount of the accrued interest translated at the spot rate on the transfer date is what is used both in determining the transferor’s income inclusion under s. 20(14)(a), and the transferee’s deduction under s. 20(14)(b).

On November 1 of a year, 1991, an individual acquires, at par, a $1,000 bond issued on that date and that was indexed to the Consumer Price Index so that, at maturity, it will be repaid for $1,000 plus the intervening CPI increase. The bond bears interest at 4% on the indexed principal amount, payable on November 1 of each year. Regarding the consequences of disposing of the bond between the November 1 due dates, CCRA stated:

IT-410R [para. 3] … states that interest accrued between two due dates for the payment of interest on the obligation will be calculated at the rate stipulated in the terms of the obligation. In our example, if the taxpayer disposes of the debt obligation on April 30, 1992, the amount of interest to be included in income for 1992 pursuant to paragraph 20(14)(a) would be $20, or 2% of $1,000.

In the course of confirming that the accrued interest component of a debt obligation is included in its cost amount and ACB to registered plans or individuals before reduction under s. 53(2)(l), CRA provided an overview of the operation of s. 20(14).

An individual (Mr. C) acquired a mortgage (at a significant discount to its principal) from another individual (Mr. B) between due dates for the monthly blended payments of principal and interest. Regarding s. 20(14), CCRA stated:

If Mr. C has acquired the debt between two payment dates of interest and principal, the provisions of subsection 20(14) will apply. That provision has the effect of adding to Mr. B's income the interest accrued between the date on which Mr. C acquired the debt and the date on which he received the first payment from Mr. B. That same amount is deductible in computing Mr. C's income to the extent that it was included as interest in computing his income. The amount deductible under subsection 20(14) reduces the adjusted cost base of the debt obligation pursuant to paragraph 53(2)(l) if the debt obligation is capital property.

Where a Canadian film and video production ("CFVP") that was included in Class 10 no longer generates income, how is the balance of the undepreciated capital cost ("UCC") of the class to be treated? After referring to s. 45, CRA stated:

[I]f the CFVP ceases to be used to earn income, the corporation is deemed to have disposed of it for an amount equal to the lesser of the proceeds of disposition of the property and its capital cost. …

…[T]o the extent that the CFVP was the only depreciable property included in Class 10, the change in use of the CFVP results in no property being included in Class 10. If there is a positive UCC balance in the class after deducting the lesser of the proceeds of disposition of the CFVP and its capital cost, we are of the view that the corporation can claim a terminal loss on that balance.

The RCMP conducted a search of the business premises of the taxpayer, whose activity was illegal, and seized all equipment related to that activity. The taxpayer was charged, convicted and imprisoned. Regarding the resulting disposition, the Directorate stated:

[Here] there was a disposition of the seized equipment … at the time the court confiscated the property pursuant to section 16 of the Controlled Drugs and Substances Act. … [T]ax treatment of such equipment dispositions should be in accordance with the Act regardless of whether they are derived from illegal activity. These dispositions may therefore give rise to a terminal loss if all the conditions set out in the Act and the Income Tax Regulations are satisfied.

Where a taxpayer, whose only leasehold improvements (Class 13) were with respect to office space in a building, moves to a new building in which it does not acquire leasehold improvements, it is entitled to a terminal loss.

In the course of a general discussion, CRA stated:

[W]here accrued interest has been included in the transferor's income and the debt obligation is disposed of for consideration equal to its fair market value, that taxpayer may deduct pursuant to subsection 20(21) the amounts of interest on that debt obligation that were included in computing the taxpayer's income for the year of disposition and all preceding years in excess of the total interest actually received or receivable that the taxpayer has not repaid to the issuer of the debt obligation on that debt obligation. However, where that taxpayer has deducted an amount by virtue of paragraph 20(14)(b) in respect of the debt obligation, the deduction pursuant to subsection 20(21) is reduced by that amount.

Current structure

Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent) are currently the sole partners of a general partnership (“Partnership”). Partnership’s business generates income under s. 12(1)(a) and Partnership claims a reserve under s. 20(1)(m).

Proposed transactions

1. Partnership will pay to Sub1 a reasonable amount for undertaking to assume Partnership’s prepaid revenue obligations (by assigning an equivalent amount of the Parent-Partnership Note as payment), and a joint election will be made under s. 20(24).
2. Sub2 will transfer its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and a non-interest bearing promissory note (the “Sub1 Note”), jointly electing under s. 85(1). As a consequence Partnership will cease to exist, Sub1 will become the sole owner of all the Partnership property and Sub1 will become subject to all the remaining obligations of Partnership, and immediately after the time that Partnership ceased to exist, Sub1 will carry on alone the business that was the business of Partnership.
3. The total income for Partnership’s taxation year ending in the year of wind-up will include (pursuant to s. 12(1)(d) or 12(1)(e)) all amounts in respect of which Partnership will have claimed a reserve pursuant to any of ss. 20(1)(l), 20(1)(m) or 20(1)(n). Partnership’s income for its final fiscal period will be allocated to Sub1 and Sub2 in proportion to their respective interests.

Ruling

The payment made in 1 above may be deducted in computing the income of Partnership pursuant to s. 20(24)(a) and will be deemed to be an amount described in s. 12(1)(a) of Sub1 for its fiscal period in which the payment is received, pursuant to s. 20(24)(b), provided the amount of such payment is reasonable.

In connection with the butterfly split-up of DC equally between the family holding companies for two unrelated families, the assumption of deferred revenue (presumably prepaid rent), on the distribution by DC of its property to the two transferee corporations, is treated as boot. A s. 20(24) election is made on such distribution.

A Canadian-resident Vendor agreed to sell all the assets of its business, having a fair market value of $1,000, to the Canadian-resident Purchaser. Deferred revenue which the Vendor had previously included in its income under s. 12(1)(a) was $400. The parties agree to a $400 offset against the asset purchase price of $1,000 in consideration for the Purchaser's assumption of the Vendor's commitments.

After noting that if a s. 20(24) election were made, the Vendor would be entitled to deduct $400 and that amount would be included in the Purchaser's income under s. 12(1)(a), CRA noted that there is no prescribed form for the election. If no election was made, the Vendor would not be entitled to the deduction, and the payment would be included in the Purchaser's income under s. 9 or 12(1)(x).

In a single-wing butterfly of a company whose assets consisted of cash and cash equivalents, tenant receivables and a revenue producing rental property, the transferee corporation (B Sub Holdco) will assume various undertakings of the distributing corporation (Opco), and a joint s. 20(24) election will be made respecting the consideration paid by Opco for such assumption. Ruling: that Opco will be entitled to a s. 20(24) deduction for such payment.

Background

The limited partner and general partner units in the Partnership are held by Holdco II and by a wholly-owned subsidiary of Holdco II (GP), respectively. "Deferred Revenue" refers to the Partnership's liabilities that arose as a result of payments, received by it in a taxation year and included in income under s. 12(1)(a), for services to be rendered by it after the end of its current taxation year.

Proposed transactions

After the transfer of certain assets by it to a newly-incorporated corporation (Newco) under s. 85(2) in consideration for the assumption of liabilities and the issuance of Newco shares, and in connection with a wind-up of the partnership as described in s. 98(3), GP and Holdco II will assume, pro-rata to their respective interest in the Partnership, the Partnership's obligations, including the Deferred Revenue obligations. As consideration for the assumption of the Partnership's Deferred Revenue obligations, the Partnership will transfer to each of GP and Holdco II an undivided interest in Newco shares owned by the Partnership having a fair market value equal to the amount of the Deferred Revenue, with a joint s. 20(24) election being made.

Shortly after the cessation of the Partnership, GP will be amalgamated with Holdco II (resulting in "Amalco").

Shortly thereafter, Newco will be wound up into Amalco pursuant to s. 88(1).

Rulings

Including that the Partnership will be entitled to a s. 20(24)(a) deduction and that GP and Holdco II may claim a s. 20(1)(m) reserve for services that will have to be rendered after the taxation year in which they received the s. 20(24) payment.

"We are of the view that subsection 20(24) of the Act may also apply to a transferred obligation for which an amount has been included in the taxpayer's income in a taxation year under paragraph 12(1)(e)."

The taxpayer referenced the statement in IT-474R, para. 10 that “[w]here the provisions of paragraph 87(2)(a) produce unintended consequences … the Corporate Rulings Directorate … is prepared on a case by case basis to consider whether relief is appropriate.” After indicating that this statement was not a basis for requested relief from the short taxation year (which had not been anticipated) resulting from an amalgamation producing an additional administrative burden, CRA stated:

[W]e have previously allowed an amalgamated corporation to make the subsection 20(24) election, even though technically it could only be made by the predecessor corporation, since it was the predecessor corporation, and not the amalgamated corporation, that had included in its income for a taxation year an amount in respect of undelivered goods or services pursuant to paragraph 12(1)(a).

As a partnership may be regarded as a taxpayer for purposes of s. 20(24), where a partnership that is being dissolved pays to the surviving partner who will continue the business as a sole proprietor as described in s. 98(5) a reasonable amount for undertaking to assume the partnership's obligations described in paragraph 12(1)(a), an election may be available to the partnership and the sole proprietor under s. 20(24).

Discussion of the application of s. 20(24) where one corporation that has received prepaid rent on a leased building transfers the building to a related corporation and they make the s. 20(24) election.

In the normal case where the sale of a business occurs on capital account, the vendor would not be able to deduct a payment described in s. 20(24) in the absence of the election.

Where a taxpayer incurs soft costs in respect of an addition to an existing building, the deduction under s. 20(29) is restricted to the taxpayer's income from renting the addition.