News of Note
CRA finds that the sale of the two interests in a commercial trust to a 3rd party gave rise to a new trust
Email this ContentA non-resident common-law commercial trust had been settled with cash and Canadian real estate by two (apparently non-resident) corporations. A subsequent sale of their interests in the trust (along with the shares of the corporate trustee) to a third-party resident purchaser was found to have given rise to a resettlement of the trust, so that losses of the trust disappeared and, thus, were not available to shelter gain on the immediately ensuing sale of the real estate by the trust (which on the sale had become resident in Canada).
In this regard, the Directorate stated:
[T]he two original beneficiaries were not specifically prohibited from disposing of their capital and income interests in the Trust by selling it to someone else. However, in doing so the intention of the two original settlors is completely set aside. The intention of the settlors, as clearly spelled out in the Trust Deed, was to have the trustee hold and invest the capital of the trust for the benefit of two specific beneficiaries, the two original settlors themselves, and this is no longer the case. … [T]he transaction changed the whole substratum or “raison d’etre” of the Trust.
The Directorate went on to find (apparently in the alternative) “that the effective transfer of losses of the Trust to benefit the unrelated new majority/sole beneficiary of the Trust should be subject to GAAR,” after having quoted from Mackay.
Neal Armstrong. Summaries of 9 August 2016 Internal T.I. 2014-0526171I7 under s. 248(1) – disposition and s. 245(4).
CRA indicates that restricting s. 88(1.1) to Canadian corporations is not contrary to Art. XXV(1) or (5) of the Canada–U.S. Treaty
U.S. LLCs that had incurred non-capital losses as a result of carrying on business in Canada through Canadian permanent establishments, are wound up into their parent, which also is a U.S. LLC. S. 88(1.1) is restricted to Canadian corporations, so that those non-capital losses are extinguished, rather than being transferred to the LLC parent.
CRA confirmed in light of Saipem UK and some OECD commentary that it does not consider this result to constitute discrimination based on nationality or on permanent establishment status contrary to Art. XXV(1) or (5) of the Canada–U.S. Treaty.
Neal Armstrong. Summary of 25 May 2017 External T.I. 2017-0685651E5 under Treaties - Article 25.
Income Tax Severed Letters 28 June 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bygrave – Federal Court of Appeal finds that reliance by the taxpayer on ignorant advice justified his delay in bringing a s. 167(5) extension application
The taxpayer was misinformed by his accountant that it was necessary to gather the necessary documentary proof before appealing an assessment which treated his condo gain as on income account, as well as imposing a s. 163(2) penalty. Pelletier JA found that, in this light, the failure of the taxpayer (acting through the same accountant) to bring a Court application for extension of the appeal deadline until 52 days past the appeal deadline nonetheless satisfied the test in s. 167(5)(b)(iii), that the extension application “was made…as soon as the circumstances permitted.”
Neal Armstrong. Summary of Bygrave v. The Queen, 2017 FCA 124 under s. 167(5)(b).
Seven further full-text translations of CRA technical interpretations/Roundtable items are available
Full-text translations of the five French technical interpretations released last week and of two (APFF) Roundtable item that were released on January 14, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 29 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.
CRA comments on the Uber GST/HST amendment
Every small supplier who carries on a taxi business is required to be register in respect of that business. Effective July 1, 2017, the taxi business definition is being expanded to include commercial ride-sharing services, i.e. (subject to some exclusions), a business of arranging or coordinating, through an electronic platform or system, such as a mobile application or website, the transporting of passengers for fares by motor vehicle within a municipality.
CRA appears to acknowledge that this expanded definition is still subject to the limitations under general principles as to what constitutes a “business” – although it also seems to consider that any Uber driving is carried on in the course of a business. If there are any other business revenues of the registrant, those do not have to be reported provided that they do not cause the aggregate revenues to exceed the $30,000 small-supplier threshold.
Neal Armstrong. Summaries of GST/HST Info Sheet GI-196 “GST/HST and Commercial Ride-sharing Services” June 2016 under ETA s. 123(1) – taxi business and s. 148(1).
CRA automatically pays available dividend refunds even when not claimed (or wanted)
Although a private corporation with an available claim for a dividend refund (“DR”) is not required to make the claim, CRA considers that it has the discretion to make the DR even when not claimed – and in fact:
Currently, the CRA policy… is to automatically make a DR where the information required for the calculation of the DR has been filed on the T2 return (including the Schedule 3/T2SCH3), even where a private corporation does not request it (for example, by entering zero on line 784 of its T2 return).
Neal Armstrong. Summary of 12 May 2017 External T.I. 2016-0649841E5 Tr under s. 129(1)(a).
CRA considers that a “survivor payment” can be made out of the deceased’s TFSA even where this occurs in the executor’s discretion
In general, a surviving spouse of the deceased, if designated as a beneficiary, can contribute and designate all or a portion of a “survivor payment” from the deceased’s TFSA as an exempt contribution to his or her own TFSA. The definition of “survivor payment” references a payment to the survivor “directly or indirectly” out of the former TFSA because of the deceased’s death.
CRA considered that these requirements could be satisfied (in light inter alia of s. 248(8)(a)) where an executor in his discretion chooses to satisfy a specific legacy out of TFSA property, rather than this being spelled out in the will.
Neal Armstrong. Summary of 11 May 2017 External T.I. 2016-0679751E5 Tr under s. 207.01(1) - exempt contribution – para. (b).
Mady – Tax Court of Canada finds that the series of transactions can inform whether an included property transfer has a bad s. 74.5(11) purpose, and that the taxpayer is not responsible under s. 163(2) for the unbeknownst sharp practice of his tax advisor
As a result of Dental College requirements, the common shares of the professional corporation through which the taxpayer carried on his dental practice (“MDPC“) had to be transferred from a family trust to him. This was accomplished by those shares being distributed out of the trust to his wife qua capital beneficiary, followed by their immediate gifting to him. Dividends paid by MDPC to the taxpayer were reported as his wife’s income under s. 74.1(1).
In confirming CRA’s application of s. 74.5(11) (applicable where one of the main reasons for a transfer was to reduce Part I tax on income on the transferred property), Hogan rejected a submission that since s. 74.5(11) only referred to the purpose of the transfer, not of the series, and the wife was not accomplishing any reduction in her Part I tax by transferring her shares to her higher income husband:
[Lehigh Cement] accepts that, even in the absence of a “series of transactions” concept, the entire series of transactions may form part of the relevant circumstances in determining the purpose of the transfer of property.
Years later, the same dentist executed an agreement to sell all his MDPC shares for $4.5 million and then implemented tax planning. He did a s. 86 “estate freeze” transaction on the morning of the closing in which he exchanged all his common shares of MDPC for preference shares with a redemption value of $2 million and for new common shares. He then sold 85% of his new common shares to his wife and two children at a sale price of $0.01 per share, and they sold the same shares later in the day to the purchaser for $8,645 per share.
Hogan J found that the fair market value of the shares sold by the taxpayer to his wife and children was $8,645, not $0.01, per share, so that the taxpayer realized a corresponding capital gain under s. 69(1)(b)(i). However, he vacated the imposition of a gross negligence penalty on the taxpayer. The preferred shares’ redemption value equalled the $2 million equity value of MDPC as estimated by a colleague at the same accounting firm as the taxpayer’s tax advisor, who had not been informed by him that the purchaser had agreed to purchase that equity for $4.5 million. Hogan J stated:
While [the tax advisor] acted imprudently in failing to disclose the pending sale of MDPC to his colleague, I do not believe that the Appellant can be held accountable for his actions. … It is well established that a taxpayer is responsible for the actions of his agent only where the taxpayer is privy to the gross negligence of that agent or wilfully blind… .
Also of assistance to the taxpayer’s penalty defence:
- “the so-called freeze transaction had been discussed with his advisor well before the date of those [most recent financial] statements”
- CRA had assessed the taxpayer under the s. 86(2) conferral-of-benefit rule, which Hogan J had found to be inapplicable, and the alternative (successful) s. 69(1)(b)(i) ground was raised for the first time in the appeal – and “it is difficult to say that the Appellant, knew about, or was wilfully blind to, the application of a provision, i.e. subparagraph 69(1)(b)(i), that the CRA auditor overlooked during the assessment process.”
- “the transfer agreements between the Appellant and his wife and daughters all contained purchase price adjustments… [and] he believed that this type of clause allowed for greater leeway in setting the price paid by the related parties.”
Respecting the price adjustment clause, he indicated that he had no jurisdiction to comment on its application where the affected taxpayers (the wife and children) were not appellants.
Neal Armstrong. Summaries of Mady v. The Queen, 2017 TCC 112 under s. 74.5(11), General Concepts – FMV – Shares, General Concepts – Ownership, s. 86(2), s. 163(2) and General Concepts – Price Adjustment Clause.
CRA rules that a medical clinic receiving a share of the clinic doctors’ billings to the provincial health care plan was supplying GST/HST taxable administrative services to them
CRA ruled that a medical clinic providing its facilities to doctors in exchange for a percentage of their provincial health-care plan billings was making a single taxable supply of administrative services to them. CRA has pronounced that fee-sharing arrangements can be structured so as to minimize the GST/HST drag relating to the use of the shared health-care facilities (see P-238), but the above arrangement did not so qualify.
Neal Armstrong. Summary of 10 January 2017 Ruling 165757 under Sched. V, Pt. II, s. 9.