News of Note
Miller – Tax Court of Canada accepts that software was to be valued at its purchase price
Email this ContentA PhD purchased software from a promoter entity in 2003 for $7,000 and immediately donated it to a registered charity, and was issued a tax receipt for $42,000. In confirming CRA’s reduction in the gift amount to $7,000, Owen J applied the dictum in Nash that “where the dates of acquisition and disposition are very close in time, barring evidence to the contrary, the cost of acquiring the asset will likely be a good indicator of its fair market value.”
Neal Armstrong. Summary of Miller v. The Queen, 2019 TCC 204 under s. 118.1(1) – total charitable gift.
Joint Committee comments on the draft stock option rules
Comments of the Joint Committee on the June 17, 2019 draft stock option legislation include:
- Both (i) the denial of the s. 110(1)(d) deduction for benefits respecting “non-qualified securities” and (ii) the granting of a corresponding employer deduction under s. 110(1)(e) should apply respecting agreements to sell or issue securities entered into after 2019, rather than the first change coming into force on January 1, 2020 – and the continuity rule in s. 7(1.4) should apply for such purposes.
- The conditions for the s. 110(1)(e) deduction should be relaxed to permit the stock option issuer (e.g., a resident or non-resident parent) to differ from the deducting employer, to permit the employer not to be a specified person, and to require that the specified person status of the issuer be tested only at the time of grant – but s. 110(1)(e) should not permit multiple employers to each take the deduction.
- A successor rule should be added to permit s. 110(1)(e) to apply following a reorganization.
- The vesting year definition in s. 110(0.1) is part of the system for placing a numerical limit on the number of options that can become exercisable in a particular vesting year. Para. (b) of that definition, which utilizes the intractable concept of when vesting may reasonably be expected to occur, should instead provide for deemed ratable vesting over the term of the option.
- It is inappropriate for D(ii) of the numerical limit formula in s. 110(1.31) to include the FMV of securities to be issued under earlier options where they were non-qualified securities.
- Also, under that formula, the $200,000 limit is applied to the first options granted having a particular vesting year, therefore producing a blocking effect even when they become uneconomic (i.e., under water). Where a subsequent option is granted having a lower exercise price, the specified person should be able to designate the securities issuable under the earlier option to be non-qualified securities in order to cleanse the securities issuable under the subsequent option.
- Furthermore, where an option is cancelled or replaced (including under s. 7(1.4) or 110(1.7)), the securities which were to be issued under such option should be considered to be options not described in D(ii).
- Requiring same-day written notification (in s. 110(1.9)(a)) can be impracticable – at least 30 days should be allowed.
Summaries of 13 September 2019 Joint Committee Letter entitled “Employee Stock Option Amendments” under s. 110(1)(e), s. 110(0.1) – vesting year, s. 110(1.31) and s. 110(1.9).
Income Tax Severed Letters 2 October 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
A CRA policy goal has driven it to warp the proper interpretation of s. 40(3.5)(c)(i)
It is suggested that CRA’s interpretation of s. 40(3.5(c)(i) (which can prevent the release of a suspended loss):
appears to be driven by a policy goal that suspended losses should not be released as a result of a winding up that is not subject to Canadian tax (either because the winding up qualifies for Canadian tax deferral or because the parties to the winding up are outside the reach of the Canadian tax system).
CRA's expansive interpretation of s. 40(3.5)(c)(i) (in, e.g., 2017-073715117) interprets "merger or combination" as including a winding-up, and the reference to "the corporation formed" on a merger combination as including a shareholder of a wound-up corporation. It is suggested that this interpretation renders ss 40(3.5)(c)(ii) and (iii) redundant. Based on this and other considerations, including the French version - which effectively refers to an “amalgamation” rather than the somewhat broader term “merger” (which nonetheless is not cognate with a winding-up) – it is suggested that s. 40(3.5)(c)(i) applies to Canadian amalgamations and similar foreign reorganizations, in which two or more companies merge to form a single corporate entity (such as foreign mergers described in subsection 87(8.1).).
Even if a winding up could be considered a "merger" or "combination," it would not result in the “formation” of a corporation.
Furthermore, CRA considers that a s. 40(3.5)(c)(i) merger or combination can include the winding-up of a corporation into multiple shareholders. In addition to being linguistically untenable, this interpretation effectively forces CRA to apply the stop-loss rule in ways not contemplated by its language.
For example, Canco, which owns FA3 directly and (as to the other 50% shareholding) through FA1, has a suspended loss when it drops its directly-held 50% shareholding of FA3 into FA2. CRA considers that s. 40(3.5)(c)(i) prevents the release of this suspended loss when FA3 is wound-up into (i.e., “merged” with) FA2 and FA1.
But what if Canco then sells FA1 to a third party? CRA apparently would consider FA1 to continue to own 50% of the FA3 shares, suggesting that the sale of FA1 could release 50% of the suspended loss. However, there is no support for such an approach in the words of the provision.
Neal Armstrong. Summaries of Ian Bradley and Jonathan Bright, “The Stop-Loss Rules and Corporate Reorganizations – Interpretive Challenges,” Canadian Tax Journal, (2019) 67:2, 383-410 under s. 40(3.5)(c)(i) and Statutory Interpretation - Interpretation Act, s. 33(2).
Official version of the 2019 STEP Roundtable is now available
Although we discussed most of the items in the 2019 STEP Roundtable in June, we are providing the Table below, including our descriptors and links to our summaries, for convenience of reference.
The IRS has not followed up re any FATCA information sent to it
On a per capita basis, the IRS has about 1/5 the number of CRA employees.
When asked about how much FATCA information had been transmitted to the IRS and what its response was, CRA stated:
As of April 1, 2019, the CRA had sent over 700,000 records to the … IRS … under the [FATCA program] for the 2017 tax year. Apart from standard automated notifications to identify file and record level errors, no further information has been requested by the U.S. with respect to this data.
Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 17, 2019-0798711C6 under s. 266(1).
A CPP/EI status ruling can trigger a payroll audit
CRA indicated that when the CPP/EI Rulings Division provides a ruling on whether a worker is an employee or an independent contractor in relation to an employer/services recipient, “it does not automatically send a referral to the Trust Accounts Examination Division.” It only does so “in specific situations and solely to ensure compliance from the employer,” for example “If the ruling changed the employment status of the worker from self-employed to employee.”
Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 15, 2019-0798351C6 under s. 5(1).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in September, August and July, 2011. Their descriptors and links appear below.
These are additions to our set of 975 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for October.
CRA finds that recurring ordinary dividends can constitute a transfer of property sufficient to engage s. 125(5.2)
The business limit reduction under s. 125(5.1)(b) takes into account the passive income (a.k.a. “adjusted aggregate investment income”) of associated corporations. S. 125(5.2) deems two related corporations to also be associated where one of them directly or indirectly transfers assets to the other and one of the reasons for the transfer can reasonably be considered to be to reduce the passive income of the associated group for s.125(5.1)(b) purposes.
Opco, which is owned by five Holdcos, each of which are related to one another but are not associated, will continue its established pattern of annually distributing substantially all of its income as dividends, with the result that the Holdcos’ now-substantial accumulated investment funds will continue growing. Would s. 125(5.2) apply? CRA stated:
Whether subsection 125(5.2) would apply… remains a question of fact … . However, if it may reasonably be considered that one of the reasons that the payment of dividends was made was to reduce the adjusted aggregate investment income … in respect of Opco … then … the anti-avoidance rule in subsection 125(5.2) could apply.
Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 16, 2019-0798461C6 under s. 125(5.2).
Wardlaw – Tax Court of Canada notes that the effective s. 163(2) penalty rate can exceed 50% where there has been a loss carryback
The taxpayer claimed a fictitious business loss of over $357,000, and requested that the excess of the claimed loss over what he could use in the current year be carried back to the prior three years. The s. 163(2) penalty was computed by multiplying the 50% penalty rate by the amount of additional tax that would have been payable by him in the current year if the false $357,000 claim were added to his reported taxable income for the year. Given that this produced a higher effective tax rate than the tax applicable to the taxable income of the prior years to which the carryback had been applied, the penalty worked out to over 70% of the tax he sought to eliminate.
Jorré DJ stated:
[I]t does seem odd that what is apparently meant to be a 50% penalty can, where a loss carry back is involved, become a significantly higher percentage.
The Appellant may wish to consider making an application for a reduction of the penalty and interest under … subsection 220(3.1) … .
Neal Armstrong. Summary of Wardlaw v. The Queen, 2019 TCC 199 under s. 163(2).