News of Note
We have published 10 more translations of CRA interpretations
Email this ContentWe have published a further 10 translations of CRA interpretation released in September, August and July, 2006. Their descriptors and links appear below.
These are additions to our set of 1,776 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 15 ¼ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for November.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2006-09-08 | 1 November 1994 Internal T.I. 94234170 F - CBR Assurance-vie | Income Tax Act - Section 148 - Subsection 148(9) - Disposition | amendment to policy to reduce premiums and insured amounts was not intended to create a new policy, and was not a disposition |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition | amending policy to reduce premiums and insured amount was not a disposition | ||
| 2006-08-18 | 20 June 2006 External T.I. 2005-0149651E5 F - CEE / FEC | Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) | expenditures to ensure safety of exploration personnel generally qualify if not specifically excluded |
| 2006-08-11 | 18 July 2006 External T.I. 2005-0159781E5 F - Paragraph 55(3)(a) | Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(i) | ss. 55(3)(a)(i) to 55(3)(a)(v) not engaged where Holdco spins off Subco to Sisterco and then redeems the minority shareholding in Holdco of 3rd party |
| 18 July 2006 External T.I. 2005-0162181E5 F - Subsection 74.4(2) | Income Tax Act - Section 74.4 - Subsection 74.4(2) - Paragraph 74.4(4)(a) | a 9% spousal shareholder is a specified shareholder if she also controls a related corporation | |
| Income Tax Act - Section 248 - Subsection 248(1) - Specified Shareholder | 9% shareholder of corporation otherwise held by her spouse becomes a specified shareholder if she wholly-owns a second corporation | ||
| 29 June 2006 External T.I. 2006-0170641E5 F - Distribution of Corporate Property | Income Tax Act - Section 84 - Subsection 84(2) | 12 month maintenance of business of pipeline corporation contributes to favourable s. 84(2) ruling | |
| 18 July 2006 Internal T.I. 2006-0184431I7 F - Prêt d'un gouvernement | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subparagraph 12(1)(x)(iii) | ultimate obligation to repay all the amount advanced rendered a loan an unconditional loan rather than a forgivable loan | |
| 1 June 1993 External T.I. 93061850 - Prestations d'assurance-salaire | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | benefits under wage loss insurance plan were taxable to employees because they had not fully borne the premiums (but s. 6(1)(f)(v) deductions available) | |
| 2006-07-28 | 11 July 2006 External T.I. 2006-0182451E5 F - Indemnité versée par un syndicat | Income Tax Act - Section 8 - Subsection 8(5) | payments by union to members to attend union conventions on their days off reduce the union dues deduction |
| Income Tax Act - Section 3 - Paragraph 3(a) | payments by union to members to attend union conventions on their days off not taxable | ||
| 20 July 2006 External T.I. 2005-0124101E5 F - Avantages imposables à des employés | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | a working meal potentially could be excluded | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(v) | exemption inapplicable where union employee negotiating contract is employed by different union | ||
| Income Tax Act - Section 248 - Subsection 248(1) - Office | temporary position of unionized employee with union is an "office" | ||
| 11 July 2006 External T.I. 2005-0152031E5 F - Actions admissibles de petite entreprise | Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation | building used 75% in the corporation’s active business operations and 25% for rental use would qualify | |
| Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(7) - Paragraph 110.6(7)(b) | transfer of property to corporation for a s. 85 agreed amount less than FMV of the property and the shares issued therefor does not engage s. 110.6(7)(b) |
CRA indicates that “consideration … received” in s. 118.1(13)(c) includes a s. 84(3) deemed dividend
Under s. 118.1(13)(c), where a qualified donee that disposes of non-qualifying securities (“NQS”) that were gifted to it, the amount of the original gift will be deemed in some circumstances to equal the fair market value of the “consideration” received by the donee for that subsequent disposition.
CRA indicated that, unless the context indicates otherwise, “the notion of ‘consideration’ is broad enough to encompass any amount, good or service received upon the disposition of property,” so that the “consideration” received by the donee would not be limited to s. 54 proceeds of disposition, and would include a deemed dividend received by the qualified donee under s. 84(3) on a redemption of shares.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.14 under s. 118.1(13)(c).
CRA indicates that a post-wind up drop down transaction would preclude the application of s. 98(5)
Mr. A and Mr. B carried on business in a general partnership, whose most important asset (as to 85% of the total value) was goodwill. The partnership is wound up in reliance on s. 98(3) so that each receives a pro rata portion of the assets. Mr. A transfers his pro rata portion on a s. 85(1) rollover basis to a newly-incorporated wholly-owned corporation (A Inc.) and A Inc. then purchases the pro rata portion of the assets held by Mr. B.
CRA indicated that s. 98(5) would not apply assuming that the partnership ceased to exist before A Inc. acquired the former partnership property. Although the questioner adverted to the issue as to whether indeed undivided interests in goodwill can be transferred to the former partners of a partnership for a few moments in time, CRA nonetheless did not question the proposition that s. 98(3) could apply to such a winding up.
Neal Armstrong. Summaries of 8 October 2021 APFF Roundtable, Q.11 under s. 98(3) and s. 98(5).
CRA generally will accept advance concurrences by share vendors to elect to convert excessive capital dividend or eligible dividends to ordinary dividends
Vendors may proceed with a preliminary reorganization before a share sale and agree in advance that elections will be made in the event that CRA later identifies that there have been excessive eligible dividend or capital dividend designations. CRA stated:
… In [this] context … the CRA generally accepts that shareholders may give their concurrence in advance, through undertakings under the various sale agreements, to the making of elections under subsections 184(3) and 185.1(3).
It went on to indicate that “since in such circumstances the number of shareholders is generally small and their respective returns have generally been assessed at the time the 184(3) election is filed, the CRA will not request the preparation of T5 slips in respect of that election unless the circumstances make that procedure practical."
Neal Armstrong. Summaries of 8 October 2021 APFF Roundtable, Q.10 under s. 184(3) and s. 185.1(3).
2021 APFF Financial Strategies and Instruments Roundtable is available
The 8 October 2021 APFF Financial Strategies and Instruments Roundtable is now available in the form of our summaries of the questions posed and our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers. (We made the (regular) 2021 APFF Roundtable available on a similar basis last week.)
CRA confirms that payment of a non-eligible dividend by an Opco with both NERDTOH and ERDTOH to Holdco avoids s. 55(2) if the resulting s. 186(1)(b) tax is not refunded as part of the same series
Suppose that Holdco has eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) both of nil, and a general rate income pool (“GRIP”) of $1,000,000, and that its wholly-owned subsidiary, Opco, has ERDTOH, NERDTOH and GRIP of nil, $383,333 and $2,000,000, respectively. There is no safe income attributable to the Opco shares held by Holdco. Opco pays a non-eligible dividend of $1,000,000 to Holdco, and Holdco then pays a $1,000,000 dividend.
On the payment of the Opco dividend, it generates a dividend refund of $383,333, which results in Pt. IV tax payable by Holdco of the same amount, which is added to Holdco’s NERDTOH account. When Holdco in turn pays an eligible dividend of $1,000,000, no dividend refund is generated.
CRA confirmed that s. 55(2) does not apply to the dividend given that the entire amount of the dividend generates a dividend refund of Opco’s NERDTOH balance, such that the dividend is subject to corresponding Pt. IV tax under s. 186(1)(b) in the hands of Holdco – so that the exclusion in the preamble to s. 55(2) applies to the extent that such Pt. IV tax is not refunded as part of the series.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.9 under s. 55(2).
CRA indicates that a limited partnership cannot use a cost recovery earnout
Where a limited partnership with resident and non-resident partners sells shares subject to an earnout, it is difficult to comply with the conditions in paras. 2(e) and (f) of IT-426R respecting use of the cost-recovery method given that the limited partners generally will not have access to the sale contract and they do not declare the capital gain on their own returns in the capacity of vendor. CRA stated:
The conditions of application provided in paragraph 2 of IT-426R were not designed for limited partners of a limited partnership in a situation as described above.
Consequently, the cost recovery method could not be used by a limited partnership in such a situation.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.8 under s. 12(1)(g).
CRA states that financial dependence is indicative but not dispositive of a non-arm’s length relationship
Is financial dependence of one party on another sufficient in itself to create a non-arm’s length relationship? CRA stated:
If the facts and circumstances of a specific case demonstrate that the financial dependence of one party on another is such that it is possible for the CRA to conclude that a transaction or series of transactions was entered into between persons not dealing with each other at arm's length under any of the criteria listed in … S1-F5-C1, [para. 1.38, respecting a common mind directing the bargaining, acting in concert or de facto control], then such dependence may be sufficient to conclude that the parties are not dealing at arm's length.
CRA further indicated that, in determining whether there was financial dependence, it would be guided by the jurisprudence, as to which it stated:
[T]he following factual elements have been considered by the courts in determining whether a party is financially dependent on another party: all or substantially all of the income earned by one party came from the other party; one party was the sole customer or supplier of the other party; the sole customer or supplier would be very difficult to replace; the integration of the activities of one party with those of the other party; the involvement or control of one party in the financing of the other party; and the contractual and commercial arrangements between the parties did not reflect terms and conditions normally agreed upon by independent parties according to commercial practices of the industry.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.7 under s. 251(1)(c).
CRA will honour incorrect AMT carryforward balances that arose due to an error in the CRA form
S. 120.2(3) computes the “additional tax” alternative minimum tax liability for the year (i.e., the excess of the minimum tax over the Part I tax otherwise payable for the year, as adjusted) that may be carried forward for up to seven years for deduction under s. 120.2(1) if the minimum tax levels fall below the adjusted Part I taxes otherwise payable in those carryforward years.
Form T691 currently provides that the tax on split income (TOSI) for the year is to be deducted in computing the adjusted Part I tax that is compared to the minimum tax in computing the additional tax. This has the effect of making TOSI for that year a tax that increases the “additional tax” for the year that thereby can be carried forward to be deducted from future years’ excesses of ordinary Part I tax over the minimum tax for those future years.
This is an error – and has been such since 2013, when s. 120.2(3)(b) was amended to exclude TOSI from the downward adjustments to the adjusted Part I ordinary tax liability for the year that is used in computing the additional tax (although, of course, it was only recently that the scope of TOSI was increased).
After acknowledging this error, CRA stated:
The CRA does not have a general administrative policy on the implications of a correction to a CRA form that may result in a reassessment for prior taxation years. … With respect to the amendment to Form T691, the CRA will correct the application of subsections 120.2(1) and 120.2(3), but will not issue reassessments for taxation years prior to 2021 changing the amount of tax payable that relates to that correction. System changes are being implemented so that additional tax amounts are computed using line 113 of Form T691 for taxation years prior to 2021 only and the unused additional tax balance resulting from line 113 for those years is available for the 2021 and subsequent taxation years.
In other words, CRA is grandparenting not only prior taxation years where an erroneously high carryforward amount was applied, but also unutilized carryforward balances that were erroneously calculated in 2020 and prior years’ returns and can still be erroneously claimed in future taxation years within the seven-year carryforward period.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.6 under s. 120.2(3)(b).
Glencore – Tax Court of Canada finds that a break fee was income from a business
An integrated nickel-mining public company (“Falconbridge”), entered into merger agreements with a more junior public company (“DFR”) which, through a 75%-owned subsidiary, held a valuable deposit at Voisey’s Bay in Newfoundland. The merger agreements provided for the immediate payment by DFR of a “Commitment Fee” of $28.2 million, and for the payment of a break fee of $73.3 million (calculated to bring the total of the two fees to 2.5% of the transaction value) on a failure of DFR to complete the merger. In fact, another public company (“Inco” – the 25% minority shareholder) made a subsequent offer that was accepted by DFR, thereby triggering the payment by it of the break fee.
In finding that the fees were income from a source, namely, a business, Favreau J drew an analogy with the findings in Ikea that payments received in the day-to-day conduct of a business, namely, tenant inducement payments received as “necessary incidents” of the conduct of that business in rented premises, were income receipts. He stated:
The potential acquisition of the Voisey’s Bay deposit was part of Falconbridge’s strategy for earning income from its business.
Falconbridge was carrying on its business when it negotiated the Merger … Agreement[s], … which provided for the fees in dispute. … The … Fees were ancillary business income received by Falconbridge in the course of earning income from business.
Neal Armstrong. Summary of Glencore Canada Corporation v. The Queen, 2021 TCC 63 under s. 9 – compensation payments.