(3)-(29)

Subsection 20(3) - Borrowed money

Cases

The Queen v. Shore, 92 DTC 6059 (FCTD)

The taxpayer and his wife gave a mortgage on their Thamesford home to raise approximately $42,000 for use in their new business. They then sold their Thamesford home, with the purchaser assuming the mortgage, and purchased a new home in Stratford which was encumbered by a mortgage in favour of Victoria and Grey Trust of a similar amount to the Thamesford mortgage. In finding that the interest on the Stratford mortgage was deductible, Strayer J. stated (p. 6061):

"The reality of that transaction, in taking on a house encumbered by the mortgage in favour of Victoria and Grey Trust similar to the one on their previous residence, was in essence the replacement of one borrowing of money for the purpose of their business by another borrowing of money for the same purpose, thus bringing it within subsection 20(3) ..."

Administrative Policy

24 August 1994 T.I. 942051 (C.T.O. "Interest Deductibility")

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.

5 January 1993 T.I. (Tax Window, No. 28, p. 10, ¶2395)

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.

Subsection 20(4) - Bad debts from dispositions of depreciable property

Cases

Picadilly Hotels Ltd. v. The Queen, 78 DTC 6444, [1978] CTC 658 (FCTD)

It was found that some default in payments by a purchaser of depreciable property, and some doubts by the taxpayer-vendor as to the purchaser's management abilities, did not establish, on the balance of probabilities, that the amounts payable by the purchaser were uncollectible, and thus bad debts.

Belle-Isle v. MNR, 64 DTC 5041 (Ex Ct), briefly aff'd 66 DTC 5100, [1966] R.C.S. 354

After finding that the taxpayer has sold depreciable property for proceeds of disposition in excess of the original capital cost, Dumoulin J. noted that, although a portion of the consideration represented a mortgage which would not be paid over an extended period of time:

"The deferral of these debts creates no eventual prejudice to the appellant-vendor in the event of the financial ruin of the purchaser, since section 11(3d) ... assures the former a sufficient amount of protection." (p. 5043)

Administrative Policy

4 September 1991 T.I. (Tax Window, No. 10, p. 17, ¶1473)

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.

IT-220R2 "Capital Cost Allowance - Proceeds of Disposition of Depreciable Property" under "Bad Debts"

Subsection 20(5) - Sale of agreement for sale, mortgage or hypothecary claim included in proceeds of disposition

Administrative Policy

IT-323 "Sale of Mortgage Included in Proceeds of Disposition of Depreciable Property"

Subsection 20(7) - Where para. (1)(m) does not apply

Paragraph 20(7)(a)

Cases

Sears Canada Inc. v. The Queen, 86 DTC 6304, [1986] 2 CTC 80 (FCTD), aff'd 89 DTC 5039 (FCA)

It was found that an obligation to indemnify can exist where the obligation is not to pay monetary compensation but rather is one to perform an act or provide a service. The agreement by Sears to provide necessary repairs and maintenance services for an additional year beyond the expiry of its one-year warranty in exchange for an additional payment from its customer, was such an indemnity.

Amesbury Distributors Ltd. v. The Queen, 85 DTC 5076, [1984] CTC 667 (FCTD)

It was found, obiter, that a deduction under s. 20(1)(m)(ii) in respect of the estimated future costs of providing after-sales servicing of television sets which had been sold under a three-year warranty, would have been prohibited by s. 20(7)(a).

Mister Muffler Ltd. v. The Queen, 74 DTC 6615, [1974] CTC 813 (FCTD)

In consideration of charging a customer $1.00 more for the replacement of a muffler, the taxpayer undertook to replace a defective muffler free of charge as long as the purchaser remained owner of the car in which the muffler had been installed. The deduction by the taxpayer of a reserve under what now is s. 20(1)(m), based on its experience that only about 1/5 of the mufflers it installed had to be replaced, was denied by virtue of s. 20(7). It was intended that the words "guarantees, indemnities and warranties" "should be comprehensive enough to include all types of guarantees, indemnities or warranties, which the Act intended to exclude from immediate deduction by way of reserves because of their contingent and uncertain nature."

See Also

Redhead Equipment Ltd. v. The Queen, 2001 DTC 429 (TCC)

As part of a warranty program provided by the manufacturer of graders, the taxpayer, which was a distributor, was required to inspect graters sold by it under the program twice per year for five years. Amounts paid by the manufacturer to the taxpayer only covered part of the cost of this inspection program.

The portion of the proceeds received on sale of the graders that the taxpayer estimated was equal to the future additional cost to it of the inspection program was eligible for the reserve under s. 20(1)(m).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) reserve for future inspection costs down adjustable based on hindsight 130

Dubawn Holdings Inc. v. The Queen, 94 DTC 1252 (TCC)

A MURB project promoter who, at the time of sale of MURBs to investors by its subsidiary, received promissory notes of the investors in consideration for services to be provided by it over the following ten years, including using its best effort to find responsible tenants, arranging appropriate insurance, providing maintenance, filing documents and providing accounting services, was not precluded by s. 20(7) from deducting a reserve under s. 20(1)(m).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(e) deducted if factually deducted 75

Administrative Policy

89 C.R. - Q.21

No reserve is available to a developer under 20(1)(m) in respect of cash flow guarantee fees.

Subsection 20(10) - Convention expenses

Cases

Graves v. The Queen, 90 DTC 6300 (FCTD)

Business meetings which the taxpayers, who carried on business in partnership as Amway distributors, attended in the United States along with other Amway distributors, which were primarily devoted to group meetings, seminars and training sessions of a primarily motivational character, constituted conventions for purposes of s. 20(10). In rejecting the distinction drawn in Friesen v. MNR, 89 DTC 682 (TCC) between "up-line" meetings which involved Amway sponsors senior to the taxpayer and "down-line" meetings involving people sponsored by the taxpayer, MacKay J. stated that "whether or not the meeting or conference can be a convention within section 20(10) depends upon an assessment of the nature of the meeting and its relationship to the taxpayer's business rather than upon the particular standing of the taxpayer or his status in relation to others who may attend." In light of the fact that the taxpayers were members of two Amway networks which had their bases in North Carolina and Maine, the expenses they incurred in attending the meetings in the U.S. were found to have been incurred in connection with their business and in a location reasonably consistent with the territorial scope of the two organizations.

See Also

Shaver v. The Queen, 2003 DTC 2112, 2004 TCC 10

Expenses incurred by the taxpayer, an Amway distributor, in attending "business training seminars" in Canada and the U.S. were found to be capital expenditures whose deduction was limited by s. 20(10). Lamarre J. stated (at p. 2119):

"... The seminars in question herein can very well be defined as formal meetings of members of an organization (Amway) that are held for business purposes and that result in the acquisition of knowledge by those attending them. Accordingly, in my view, these seminars are conventions ... ."

Words and Phrases
convention

Administrative Policy

6 October 2017 APFF Roundtable, Q.12

convention expenses “historically” have been viewed as capital expenditures

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Know-How and Training convention expenses "historically" viewed as capital expenditures 63

1 March 2013 External T.I. 2013-0477911E5 - Expenses to host employees and spouses at a resort

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.

Articles

Novek, "Convention Expenses Are Subject to Territorial Limitations", Taxation of Executive Compensation and Retirement, February 1992, p. 557.

Subsection 20(11) - Foreign taxes on income from property exceeding 15%

Administrative Policy

3 February 2016 External T.I. 2014-0548111E5 - U.S. tax paid in respect of an LLC's income

only income was taxable capital gains

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(3) - Paragraph 88(3)(d) no deemed dividend 124
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax LLC tax paid by Cdn member not re business 163
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) s. 20(14) deduction for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain 418
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) FTC for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain 316
Tax Topics - Treaties - Articles of Treaties - Article 24 Treaty sourcing rule does not trench on domestic FTC 208

10 June 2013 STEP CRA Roundtable, 2013-0480301C6 - 2013 STEP CRA Roundtable – Question 4

" 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."

10 June 2013 STEP Roundtable, 2013-0480371C6 - 2013 STEP Question 13 - US LLCs and 20(11)

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.

3 March 1997 Memorandum 964132

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

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 24 16

84 C.R. - Q.34

Income received by beneficiaries of a Canadian resident trust earning income from foreign real property is income from a "property that is an interest in the trust" (s.108(5)(a)) and not income from real property. The 15% limitation in s. 20(11) does not apply because the foreign tax was not paid by the beneficiary.

IT-506 "Foreign Income Taxes as a Deduction from Income"

Articles

Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", 2014 Conference Report, (Canadian Tax Foundation), 22:1-37

Non-deductibility on general principles (p.6)

Subsections 20(11) and 20(12) specifically override the limitation in paragraph 18(l)(a) which would normally preclude the deduction of taxes paid, on the basis that taxes paid are typically viewed as an expense incurred as a result of earning income, rather than for the purpose of earning income. [fn 36: See…[IRC] v. Dowdall, O'Mahoney & Co., [1952] AC 401…cited in 4145356 Canada Ltd v. R., 2011 TCC 220 at para 62… .]

Picayune deduction where active LLC only distributes amount equalling Cdn member's US tax liability (p.25)

An individual investing directly in an LLC will not recognize any foreign source income from the LLC for Canadian tax purposes until the LLC pays dividends unless the LLC earns FAPI and is a controlled foreign affiliate of the individual….

The CRA takes the position that the full amount of U.S. taxes paid in the year should be used in the 20(11) formula in this instance, regardless of whether the LLC has distributed all or only a portion of its income for the year. [fn 111: … 9641375…1999-0010305.] The result of this position is that the 20(11) deduction may be based on an effective tax rate that exceeds the actual U.S. tax rate imposed on the LLC's income. For example, where the LLC earns income from an active business or is not a controlled foreign affiliate of the taxpayer, and if a taxpayer's share of the LLC's income for a taxation year is $10,000 and the taxpayer pays $4,000 of U.S. taxes for that year (based on an assumed U.S. tax rate of 40%), and if the LLC only distributes an amount for the year sufficient to cover that tax, the taxpayer's income for the year would be limited to $4,000 and the 20(11) deduction would be calculated as follows:

U.S. tax paid - (15% x Canadian income inclusion from the LLC shares)

= $4,000 - (15% x $4,000)

=$3,400

This would leave only $600 of U.S. taxes eligible for a foreign tax credit. [fn 112: By virtue of paragraph (b) of the definition of non-business income tax in subsection 126(7). See similar sample calculation in 1999-0010305... . Note that the ability to claim the amount eligible for a foreign tax credit would also be impacted by the taxpayer's Canadian tax otherwise payable, taking into account the impact of the 20(11) deduction... .] Under this formula, the less of its income an LLC distributes each year, the more its Canadian members will be limited to a foreign tax deduction in respect of the U.S. taxes paid – (oddly) unless the LLC distributes none of its income in which case the full amount of U.S. taxes would potentially be ( creditable (provided the taxpayer has other U.S. source income to support the credit)….

Subsection 20(12) - Foreign non-business income tax

Cases

FLSmidth v. The Queen, 2013 DTC 5118 [at 6147], 2013 FCA 160, aff'g infra

U.S. withholding not paid on direct dividend income, but paid respecting indirect dividend income from CFA

In order to finance the acquisition of U.S. companies, the taxpayer utilized a tower structure:

  • The taxpayer held a 98.9% interest in a U.S. limited partnership ("GL&V LP").
  • GL&V used mostly borrowed money to subscribe for shares of a Nova Scotia unlimited liability company ("NSULC").
  • NSULC subscribed for shares of a U.S. limited liability company ("LLC").
  • LLC made loans to a U.S.-resident holding company ("Holdings") which was a subsidiary of GL&V LP.
  • Holdings carried on a business of investing in U.S. companies.

For U.S. tax purposes, GL&V LP was a corporation while NSULC and LLC were fiscally transparent. Therefore, for U.S. tax purposes, GL&V LP was considered to have made loans directly to, and received interest directly from, Holdings. For Canadian tax purposes, GL&V LP was fiscally transparent and NSULC and LLC were corporations, so that the income of the taxpayer (as to its 98.9% share of GL&V income) was dividends on the NSULC share. The taxpayer sought to deduct under s. 20(12) its 98.9% share of the US taxes paid by GL&V LP on such interest income on the basis that those taxes: (i) were paid by it in respect of its income, and (ii) could not be reasonably regarded as having been paid by it in respect of income on foreign affiliate shares (i.e., the LLC membership interests). (In contrast to para. 16 of the TCC judgment, the s. 20(12) deduction is described, at para. 15, as having been taken in computing income at the taxpayer rather than GL&V. level.)

Noël JA noted (at para. 43-44) that if a narrow construction were given to the phrase "in respect of," the US taxes were paid by GL&V LP (based merely on the payment of interest by Holdings to LLC) irrespective of whether LLC and NSULC paid dividends and, therefore, were not paid in respect of income allocated to the taxpayer (so that (i) above was not satisfied). On the other hand, if (on a broader construction) the U.S. taxes were considered to be paid in respect of such dividends because those dividends were indirectly derived from the interest paid by Holdings, the US taxes should be considered to be paid by the taxpayer in respect of the dividend income sourced from the LLC (a foreign affiliate), so that the foreign affiliate exclusion in (ii) above applied.

In response to a submission that the US taxes were not paid by a corporation as required under such exclusion in (ii), Noël JA agreed with 4145356 Canada Ltd., and found (at para. 46-49) that GL&V LP's legal personhood for US tax purposes did not affect the principle that, for Canadian tax purposes, the taxpayer's share of GL&V LP's US tax was paid by the taxpayer.

See Also

FLSmidth Ltd. v. The Queen, 2012 DTC 1052 [at 2745], 2012 TCC 3, aff'd 2013 DTC 5118 [at 6147], 2013 FCA 160

In order to finance the acquisition of U.S. companies, the taxpayer set up a tower structure. See above for details.

For U.S. tax purposes, GL&V was a corporation while NSULC and LLC were fiscally transparent. Therefore, for U.S. tax purposes, GL&V was considered to have made loans directly to, and received interest directly from, Holdings. For Canadian tax purposes, GL&V was fiscally transparent and NSULC and LLC were corporations.

Paris J. found that (for purposes of computing the taxpayer's income qua partner) GL&V U.S. income tax liabilities were paid "in respect of" its dividend income from the NSULC shares, even though the tax arose from Holdings' payments to LLC rather than NSULC's dividend payments to GL&V. The words "in respect of" do not require that the taxes be paid on the source of income - only that they be connected with or related to that income (para. 45). In this case they were connected because, if the taxpayer had not owned NSULC shares, it would not have had to pay U.S. tax.

However, by similar reasoning, GL&V's share of the U.S. income taxes was not deductible because those taxes were paid "in respect of income from a share of the capital stock of a foreign affiliate" (LLC). Paris J. stated (at para. 63):

I disagree with the appellant's position that the words "can reasonably be regarded" in subsection 20(12) do not enable the Minister to look through NSULC. It seems to me that this phrase, on its own, is a specific provision enabling the Minister to evaluate the economic substance of a transaction regardless of its legal form.

Kaiser v. MNR, 91 DTC 1057 (TCC)

exclusion for employment income

Subsection 20(12) was found to be limited to the computation of income from a business or property, and did not permit a deduction from employment income earned in the U.S. of U.S. income taxes which were not deductible under s. 126(1).

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Headings 48

Administrative Policy

3 February 2016 External T.I. 2014-0548111E5 - U.S. tax paid in respect of an LLC's income

s. 20(14) deduction for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain

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 … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(3) - Paragraph 88(3)(d) no deemed dividend 124
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax LLC tax paid by Cdn member not re business 163
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) only income was taxable capital gains 131
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) FTC for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain 316
Tax Topics - Treaties - Articles of Treaties - Article 24 Treaty sourcing rule does not trench on domestic FTC 208

15 December 2015 Internal T.I. 2014-0560371I7 - Subsection 20(12) deduction

U.S. taxes paid by a Canadian resident individual on business income of LLCs held through a ULC are deductible under s. 20(12)

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 its 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].

7 March 2016 Internal T.I. 2015-0572461I7 - Foreign tax deduction

deduction available re U.S. corporate tax paid by US LP on active business earnings of dividend-paying transparent LLCs

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.

S5-F2-C1 - Foreign Tax Credit

s. 20(12) provides a deduction where non-business income tax is non-creditable

1.24 ...If an amount of what would otherwise qualify as NBIT for purposes of a foreign tax credit cannot be claimed as such, and dollar-for-dollar tax relief through a reduction to Canadian tax otherwise payable is not obtained, subsection 20(12) provides relief through a deduction in computing income.

"Paid...for the year"

1.32 …The words, for the year relate to the year for which the taxpayer is liable to pay tax (that is, when it is exigible) to the foreign jurisdiction for the income which is considered to have been earned under the foreign jurisdiction’s tax law, even though the income may not be realized in Canada during the same tax year. Where a foreign country uses a tax year different than the tax year used in Canada, the foreign taxes actually paid must be prorated to match the Canadian tax year.

1.33 ...Any portion of a taxpayer’s foreign tax which is paid but which will be, or is, refunded to the taxpayer is not considered to be tax paid for the year.

11 June 2013 STEP Roundtable, 2013-0480321C6 - 2013 STEP Question 6 US LLCs - FAPI, FAT and FTCs

deduction for US tax on LLC income which also is FAPI

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)."

28 May 2013 Internal T.I. 2013-0476381I7 - Deemed Resident Trusts & Foreign Tax Credit

no s. 20(12) deduction available where only a capital gain

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) no pro-ration of FTC by s. 94 trust where Canadian gain was smaller than US gain 283
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(b) 283

18 July 2011 Internal T.I. 2011-0394631I7 - Foreign non-business income tax

applied on source-by-source basis so that taxes paid on business income not eligible where Canco only earns property (dividend) income

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).

1 October 2008 T.I. 2006-0174701E5

s. 20(11) or (12) deduction available to U.S. citizen/Cdn resident from s. 75(2) inclusion

A U.S. citizen immigrates to Canada having previously established a U.S. grantor trust, whose investments are not taxable Canadian property and the income from which is included in the individual's U.S. income tax return. Following four years, the grantor trust is deemed resident in Canada, and the income is included in the individual’s income under s. 75(2). Would a foreign tax credit, or s. 20(11) or (12) deduction, be available for the U.S. taxes paid? CRA responded:

While the individual would be entitled to claim a deduction under subsection 20(12) for the 15% of foreign taxes not deductible under subsection 20(11), any amount claimed under subsection 20(12) would reduce the amount of the foreign tax credit available under subsection 126(1).

22 July 2008 Internal T.I. 2008-0284351I7 - Subsection 20(12)

deduction available where no current distributions from the source of income

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]”

Words and Phrases
paid for the year

10 January 2005 External T.I. 2004-007593

no partnership ACB reduction for partner s. 20(12) deduction

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.

19 March 2004 External T.I. 2003-003730 -

income from IRA not property income

"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."

10 April 2003 External T.I. 2003-0003095 -

no deduction for taxes on taxable capital gains

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).

21 February 2000 T.I. 1999-0010295

U.S. income taxes paid by Cdn individual in respect of shares of ULC held by him

A Canadian-resident individual holds all the shares of a Nova Scotia ULC which, in turn, owns all the shares of a U.S. LLC. The ULC and LLC are fiscally transparent for Code purposes. The individual pays U.S. income taxes on the business income of the LLC.

The Directorate stated:

[A]lthough LLC generates business income, the U.S. taxes paid by the taxpayer are not considered to be business income taxes as defined under subsection 126(7)… because they are not in respect of any business carried on by the taxpayer in the U.S. … To the extent that the U.S. taxes are not used for claiming a foreign tax credit, they may be deducted under subsection 20(12)…. Although what the taxpayer owns is the shares of ULC which is a Canadian corporation, the U.S. taxes paid can be considered to be in respect of such shares such that the deduction under subsection 20(12)… would not be denied because that subsection, unlike subsection 20(11), does not use the clause "that is income from a source outside Canada". In this situation the property is the shares of ULC. If the taxpayer did not own such shares he would not have to pay the U.S. taxes… .

Note: this Technical Interpretation was discussed in the FL Smidth case, supra, 2012 TCC 3, aff'd on narrower grounds 2013 FCA 160, where Paris J stated (at para. 42) that “the CRA stated that the individual was entitled to a deduction under subsection 20(12) for the U.S. tax paid even if he or she did not receive any dividend from ULC,” before adopting and applying this CRA statement at para. 46 of his reasons.

10 February 1993 Memo 9300776

source of income requirement

After noting that under the "current" (pre-1992) version of s. 20(12) "a subsection 20(12) deduction does not have to be sourced against a particular type of income (i.e. employment, business or property income)," CRA stated:

Consequently, in situations where a non-business-income tax is paid on amounts which are not, or may never be, subject to Canadian tax, income which should properly be taxed in Canada is inappropriately sheltered. The proposed amendment to subsection 20(12) is an attempt by the Department of Finance to correct this problem.

...[T]he wording of paragraph 3(d) is broad enough to allow for a loss from a property or business to be created by a subsection 20(12) deduction, provided the taxpayer had a property or business that could conceivably generate income for the year (notwithstanding that there may not have been any revenue for that particular year or that the non-business-income tax was not directly related to that property or business source). Therefore, in these circumstances, it would be possible to have a non-capital loss pursuant to paragraph 111(8)(b) effectively created by a subsection 20(12) deduction.

20 November 1992 T.I. 123456 (September 1993 Access Letter, p. 410, ¶C20-1160)

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.

October 1992 Central Region Rulings Directorate Tax Seminar, Q. J (May 1993 Access Letter, p. 231)

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).

25 March 1991 Memo 7-4727

US withholding on share redemption was income tax

US withholding taxes paid on the redemption of preference shares of a US subsidiary qualified as income or profits taxes within the meaning of s. 126(7)(c) given that

under U.S. income tax law all distributions of property from a U.S. corporation are considered to be dividends unless there exists certain prescribed conditions. One of the required conditions is that the corporation has no "earnings and profits" at the time of the distribution of property [as was the case here.]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax US withholding on share redemption was income tax 81

88 C.R. - Q.57

Treaty inapplicability

As s. 20(12) provides for a deduction from income and not from tax, Conventions which provide for "a deduction from the tax on the income of that person" for taxes that have been spared will not render s. 20(12) applicable.

16 July 1985 Memo 7-4095

consent dividend tax paid by US corporation not re income on its shares

After noting that "U.S. consent dividends are not dividends received for purposes of section 90, that "where a U.S. corporation withholds and remits the U.S. consent dividend tax on behalf of a Canadian shareholder, the amount of such U.S. tax so withheld would constitute a benefit conferred on the Canadian shareholder for purposes of paragraph 15(1)(c)," and that such s. 15(1)(c) income inclusion constitutes "income from a share of the capital stock of a foreign affiliate of the corporation" for purposes of ss. 20(12) and 126(1)(b)(i)(D), so that "the U.S. consent dividend tax would not be creditable under subsection 126(1) against any Canadian tax arising on the paragraph 15(1)(c) income inclusion to the Canadian shareholder," the Directorate stated:

…For purposes of paragraph 126(1)(a) and subsection 20(12)…if the U.S. corporation is a foreign affiliate the U.S. consent dividend tax itself, which…qualifies as a non-business-income tax paid as defined by paragraph 126(7)(c) of the Act, may not be reasonably regarded as having been paid by the taxpayer (the Canadian shareholder-corporation) in respect of income from a share of the capital stock of a foreign affiliate of the taxpayer (corporation).

Subsection 20(14) - Accrued bond interest

Cases

Canada v. Antosko, 94 DTC 6314, [1994] 2 S.C.R. 312

On March 1, 1975 the taxpayers acquired all of the common shares of the New Brunswick Industrial Finance Board in a company that manufactured charcoal briquettes for $1 and agreed to operate the company for the following two years in consideration for the agreement of the Board to postpone the obligation to pay principal and interest in excess of $5 million of indebtedness owing by the Company to the Board, and the Board's agreement that upon expiration of the two-year period it would sell such indebtedness and accrued interest to the taxpayers for $10.

The taxpayers were entitled to deductions under s. 20(14)(b) to the extent of the interest received by them on the indebtedness following the two-year period. There was no requirement that the accrued interest be included in the income of the transferor (the Board) in order for the transferee (the taxpayers) to be entitled to a deduction. Iacobucci J. noted at p. 6322 that "where specific provisions of the Income Tax Act intend to make the tax consequences for one party conditional on the acts or position of another party, the sections are drafted so that this interdependence is clear. Furthermore, the motives of the parties and the setting in which the transfer took place, are simply not determinative of the application of the subsection" (p. 6320).

In response to a submission that a deduction was not available under s. 20(14)(b) with respect to the interest that accrued during the two-year period because it became payable at the same time as the transfer of the debt occurred at the expiration of the two-year period, Iacobucci J. stated (p. 6323) that he found "it difficult to understand how the appellants could have made a valid demand for payment of the interest until after the debt had been fully transferred to them". Accordingly, such accrued interest did not become payable on demand until immediately after the time of the transfer.

See Also

Mitchell v. The Queen, 96 DTC o (TCC)

Accrued but unpaid interest on bonds of the taxpayer that it purchased in the open market was not deductible by it under s. 20(14) because "a company that acquires its own debt cannot pay interest to itself" and "therefore, it, as a transferee, is not entitled to interest".

Husain v. MNR, 91 DTC 278 (TCC)

In finding that the taxpayer was not entitled to a deduction under paragraph 20(14)(b) in respect of interest that had accrued on a bond while it had been held by her deceased non-resident husband, Sarchuk TCJ. stated (p. 284):

"Unless the transferor and transferee are both subject to income tax under Part I of the Act the exception created by subsection 20(14) is not available."

Administrative Policy

92 C.R. - Q.1

Where a taxable transferee acquires a debt obligation from a non-taxable transferor, a deduction may be available to the transferee if the accrued interest has been included in the transferor's income. It is a question of fact whether the requirements of s. 20(14) had been met where a taxable transferee acquires a debt obligation with accrued interest where the obligation trades on the public market.

90 C.R. - Q.13

The transferee will be entitled to deduction of interest pursuant to s. 20(14)(b) only to the extent that the interest is included in the income of the transferor of the interest-bearing obligation. This position was supported in Antosko.

Articles

Ewens, "Debt-for-Debt Exchanges", 1991 Canadian Tax Journal, p. 615

Ulmer, "Taxation of Interest Income", 1990 Conference Report, pp. 8:19-20

Subsection 20(16) - Terminal loss

Cases

May Bros. Farm Ltd. v. The Queen, 92 DTC 6342 (FCA)

On December 13, 1977 a corporation ("Bell") leased 200 acres of cranberry lots from another corporation ("Wingly") under a lease which expired on December 31, 1983. On June 27, 1980 Bell granted the taxpayer a profit à prendre for most of the acreage for the period to December 31, 1983, and on October 14, 1980 the taxpayer purchased the fee simple in the acreage from Wingly.

Because the intention of the parties (as determined from reading the relevant documents) was that both the lease and the right of the taxpayer to work the land should survive the transfer of the fee simple, there was no merger at equity. There also was no merger at common law given the statutory repeal of that operation. Finally, the intermediate estate in the lands (i.e., the leasehold interest of Bell) also precluded a merger. Therefore, the profit à prendre was not extinguished and no terminal loss was generated.

See Also

Benedict v. The Queen, 2012 DTC 1170 [at 3419], 2012 TCC 174 (Informal Procedure)

When the taxpayer filed his 2007 return, the capital cost allowance schedule attached to his return showed a terminal loss arising in the year (from his sale of a fish farm) of $74,250. However, he deducted only $16,670 of this amount in that return, and did not claim the balance (as non-capital losses) until his 2008 and 2009 returns. (It is not entirely clear from the reasons that $16,670 is the deduction which reduced his income for 2007 to nil.)

The Minister argued that the taxpayer could not claim these non-capital losses as he had failed to report the related deductions in his 2007 return. Woods J. found that this failure to claim the full amount of the terminal loss was not fatal because the terminal loss deduction under s. 20(16) was not elective ("there shall be deducted"). She stated (at para. 9):

The carryover is based on the terminal loss deduction required by the legislation and not what has been claimed by the taxpayer.

Greater Toronto Airports Authority v. International Lease Finance Corp. (2004), 69 OR (3d) 1 (CA)

S.55(2) of the Civil Air Navigation Services Commercialization Act (Canada), which provided that "'owner', in respect of an aircraft, includes ... (a) the person in whose name the aircraft is registered; ... and (d) a person in possession of the aircraft under a bona fide lease or agreement of hire" had the effect of restricting the meaning of owner to persons who are operating the aircraft and/or are the registered owners of the aircraft and have custody and control of the aircraft. Accordingly, the lessors of aircraft to an airline were not "owners" of the aircraft for purposes of such Act.

Administrative Policy

93 C.P.T.J. - Q.25

The words "where at the end of a taxation year" keep the UCC of a particular class open during the year in the event of additional purchases of that class of assets, so that a "terminal loss" which might otherwise have been available at a time during a taxation year may not exist at the end of the taxation year where other assets of that class have been purchased before the end of the taxation year.

13 May 1991 T.I. (Tax Window, No. 3, p. 15, ¶1231)

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.

Subsection 20(16.1)

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

overview

1.106 Subsection 20(16.1) of the Act provides that an excess of the UCC increases over the decreases as of the end of a tax year is not deductible as a terminal loss if it is in respect of a Class 10.1 passenger vehicle. However, subsection 1100(2.5) of the Regulations provides that if a taxpayer owns a Class 10.1 passenger vehicle at the beginning of a particular year and disposes of it before the end of that year, they may take a deduction equal to 50% of the CCA deduction that would have otherwise been available in respect of the vehicle for that particular year had they not disposed of it. The terminal loss so denied is nevertheless included in the total depreciation allowed (as defined in subsection 13(21) of the Act and included in element E of the definition of UCC) and becomes part of the UCC decreases… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

Subsection 20(21) - Debt obligation

Administrative Policy

19 March 1992 Memorandum (Tax Window, No. 18, p. 6, ¶1820)

S.20(21) does not apply in cases of bankruptcy as it is only meant to apply to over-accruals.

Articles

Ewens, "Debt-for-Debt Exchanges", 1991 Canadian Tax Journal, p. 615: Discussion of potential deduction to holders of debentures in a target corporation for arrears of interest realized under s. 76(1).

Subsection 20(24) - Amounts paid for undertaking future obligations

Administrative Policy

2015 Ruling 2015-0601441R3 - XXXXXXXXXX Partnership - winding up

s. 20(24) election on s. 98(5) wind-up
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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 98(5) wind-up through s. 85 transfer of partnership interest of one partner to the other and preceded by debt assumptions 272
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) interest deductible following assumption of interest-bearing internal debt on s. 98(5) wind-up 279
Tax Topics - Income Tax Act - Section 34.2 - Subsection 34.2(11) continuation of s. 34.2(11) reserve following partnership wind-up 324
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) continued availability of s. 20(1)(m) reserve following s. 98(5) wind-up 266
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) flow-through of s. 20(1)(n) reserve on s. 98(5) wind-up 262
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) s. 18(9) deduction claimable by transferee former partner following s. 98(5) wind-up 216
Tax Topics - Income Tax Act - Section 147.2 - Subsection 147.2(8) s. 147.2 continuity following s. 98(5) wind-up 336
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(i) no income inclusion on assumption on s. 98(5) wind-up of DSUs and RSUs 329
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangements - Paragraph (k) no income on RSU/DSU assumption 20

2015 Ruling 2014-0552871R3 - Split-Up Butterfly

deferred revenue treated as boot

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution post-butterfly sale of distributed shares by TC1 to TC2/disproportionate split of CDA/assumption of prepaid rent (for which a 20(24) election) treated as boot 709
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) post-butterfly sale of distributed shares by one TC to the other 59

8 December 2010 External T.I. 2010-0375921E5 - Subsection 20(24)

payment by set-off/no prescribed form/vendor income if no election

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).

2009 Ruling 2008-0304371R3 - Single-Wing Butterfly

portion of assets transferred to transferee corporation on butterfly treated as s. 20(24) payment

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution net receivables and prepaids of rental company reclassified as business property 145

2008 Ruling 2008-0279671R3 - Partnership Wind-up

s. 20(24) payment-in-kind could be made as part of a s. 98(3) wind-up/immediate amalgamation of former partners
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.

7 March 2005 External T.I. 2005-011498 -

s. 12(1)(e) inclusion

"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)."

20 November 2003 External T.I. 2003-003354 -

partnership is taxpayer/application to s. 98(5) wind-up

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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) continuity under s. 98(5) 78

15 November 1999 External T.I. 5-992458 -

prepaid rent on related-party building transfer

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) lowering of sale price 84

June 1991 Memorandum (Tax Window, No. 4, p. 18, ¶1274)

Discussion of different ways to handle the assumption of take-or-pay obligations on the sale of a resource property.

22 April 1991 Memorandum (Tax Window, No. 2, p. 24, ¶1192)

A vendor is not permitted to deduct an amount paid by it to compensate the purchaser for the assumption of contingent liabilities of the vendor for product warranties.

5 June 1990 TI File 7-4678

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.

Articles

Ron Choudhury, "Non-Resident Issues in Acqusition Transactions", 2005 Conference Report (Canadian Tax Foundation), 42:9-16.

Bergen, "Purchase and Sale of Assets: An Update", 1996 Corporate Management Tax Conference Report, pp. 3:6-8.

Subsection 20(29) - Idem [Deduction before available for use]

Administrative Policy

13 April 1992 T.I. (Tax Window, No. 18, p. 13, ¶1843)

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.