News of Note
CRA rules on a split-up butterfly entailing an immediate sale of distributed shares by one TC to the other
Email this ContentFeatures of a ruling letter for the butterfly split-up of DC (a CCPC with three types of property including tenant receivables) equally between the family holding companies (Shareholder1 and Shareholder2) for two unrelated families include the following features:
- The redemption by DC of the common shares held in it by the two respective transferee corporations (TC1 and TC2) is handled so as to result in TC2 but not TC1 receiving a capital dividend, i.e., the CDA is not split pro rata.
- Deferred revenue (presumably prepaid rent) for which a s. 20(24) election is made on the distribution by DC is treated as boot.
- The shares of Subco2, which might be a significant subsidiary of DC, are split 50-50 between TC1 and TC2 on the butterfly, then TC1 sells its shares of Subco2 to TC2 for FMV consideration.
- On the winding-up of DC, it distributes the remaining notes owing to it by TC1 and TC2 (resulting from the redemption of the preferred shares issued by them on the butterfly distribution) to TC1 and TC2, respectively, with CRA ruling that this does not give rise to a forgiven amount (i.e., implicitly the notes are treated as if they were repaid in full by way of set-off against the winding-up distribution).
Neal Armstrong. Summary of 2015 Ruling 2014-0552871R3 under s. 55(1) – distribution.
CRA indicates that a kilometer-based minimum car allowance must be intended to compensate for actual expenses
S. 6(1)(b)(x) deems an employee’s car allowance to be unreasonable if it “is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment.” Did 2012-0460481E5 (which found that a fixed allowance of $4.60 for each trip made of less than 10 kilometres in the same day in running errands for the employer was deemed to be unreasonable by s. 6(1)(b)(x)) reverse 2007-0228521I7 (which accepted the employer’s compensation policy of providing for a daily minimum payment where the number of kilometres traveled per employee was less than a specified number). In indicating no change, CRA stated:
[A] minimum daily allowance based on the number of kilometres traveled should not have adverse tax consequences if it is representative of the actual use of a vehicle and is established to compensate an employee for expenses actually incurred for the use of the employee’s vehicle in the performance of duties of employment. This position is still in effect.
Neal Armstrong. Summary of 24 June 2016 Internal T.I. 2014-0555611I7 Tr under s. 6(1)(b)(x).
S. 100 rules extend to negative ACB amounts
Where a general partner interest is sold to a non-resident or tax exempt, any negative ACB amount is included in the amount which is 100% rather than 50% taxable (except to the extent that the it is attributable to non-depreciable property capital property). It is unclear whether this is an intended result.
Neal Armstrong. Summary of Paul Cormack and Janette Pantry, "Negative Partnership Interest ACB," Canadian Tax Highlights, Vol. 24, No. 8, August 2016, p. 2 under s. 100.
CRA’s audit practice is to interpret the central-paymaster provision (Reg. 402.1) restrictively
The central-paymaster provision in Reg. 402.1 likely is intended to ensure that the general inter-provincial income allocation formula in Reg. 402(3) (which gives ½ weight to the relative payroll borne by the respective provincial permanent establishments) is uanaffectd where the business has one corporation (Payco) bearing payroll for the whole group. Be that as it may:
CRA's provincial income audit practices take the restrictive view that the provision only applies if Payco's employees spend at least 90 percent of their time on the related corporation's economic activity. Thus, two sister corporations that share vital operational functions equally do not include their share of relevant salaries and wages from those functions when determining income attributable to a province if a third corporation in the group acts as central paymaster.
Neal Armstrong. Summary of Brian Robson, "Provincial Income Allocation," Canadian Tax Highlights, Vol. 24, No. 8, August 2016, p. 3 under Regulation 402.1.
Chappell – Court of Appeal of England and Wales finds that a provision intended to provide relief for “real world…commercial transactions” was not available in a purely tax-driven structure
Patten LJ applied the Ramsay doctrine and, in particular, how it was expressed in UBS, to find that a tax scheme, which depended on accessing relief for manufactured overseas dividends, failed given that such relief was only “intended to benefit the parties to real-world, commercial transactions involving the lending of marketable securities and not to transactions which lack those characteristics and whose only purpose is to obtain tax relief.” From a Canadian perspective, this might be articulated as giving greater weight to the “purposive” part of “textual, contextual and purposive” than would normally animate a Canadian decison (in the absence of GAAR).
Neal Armstrong. Summary of Chappell v Revenue and Customs Commissioners [2016] BTC 36, [2016] EWCA Civ 809 under General Concepts – Tax Avoidance.
CRA finds that qualification of partnership units as interests in a family farm or fishing partnership can be based on a previous period of farming use of its assets
In the situation where a farming couple held a partnership holding the farm property, which leased the farm to a farm corporation, also owned by them, which used the land in its farming business for the first 11 of the 20 years that the land was held by the partnership – but, then, apparently ceased operations, CRA accepted that their interests in the partnership qualified under the s. 110.6 definition of "interests in a family farm or fishing partnership," because the land was used in the farming business for over half of the 20-year holding period by the partnership. Thus the units qualified at the end of the 20 year period even though the active use test by the family corporation was no longer satisfied at that time.
Neal Armstrong. Summary of 2013-0478961E5 Tr under s. 110.6(1) - interest in a family farm or fishing partnership.
Income Tax Severed Letters 7 September 2016
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA states that an exchange listing does not count until it becomes unconditional
In its new Folio on qualified investments for registered plans such as RRSPs, CRA states:
In a new public issue of securities, the listing of the securities may be delayed for a short period of time pending fulfillment of certain conditions. A security that is approved for listing or that has a conditional approval for listing is not at that time considered to be listed on a designated stock exchange. In order for a security to qualify, the listing must be full and unconditional.
Since it is common for the listing to still be conditional at the time the shares or units in question are first issued, it would be safer to try to rely, if possible, on their qualification as shares or units of a public corporation or mutual fund trust, as applicable (including potentially under the relevant look-back rules).
Other departures or additions from IT-320R3 include:
- Bitcoins are not money.
- “[C]ash on deposit with a broker…is generally not a qualified investment, [but] the CRA will not apply… adverse income tax consequences…if the deposit is left with the broker for no more than a few days.”
- The AIM and Alternext systems are not designated stock exchanges.
- A subsidiary or affiliate of one of the listed rating agencies will be accepted if the “corporate structure and legal relationship make it clear that a listed rating agency recognizes and would stand by the rating given by its subsidiary or affiliate.”
- An undivided interest in a strip coupon qualifies assuming the underlying bond qualifies.
- Gold or silver certificates issued by the Royal Canadian Mint could qualify.
- CRA will accommodate inadvertent and short-term RRSP etc. overdrafts.
- Day trading by an RRSP of qualified investments is acceptable. As for TFSAs, Prochuk "does not stand for the proposition that the trading of securities in a registered plan will not in any circumstance be considered to be carrying on a business by the plan.”
Neal Armstrong. Summaries of S3-F10-C1 under s. 204 - qualified investment - para. (a), s.262 , s.204 - qualified investment (d) , Reg. s. 4900(1)(b), s. 204.4(1), Reg. s. 4900(2), Reg. s. 4900(1)(j), Reg. s. 4900(1)(j.1), s. 204 - qualified investment - (b), Reg. s. 4900(1)(e), s. 207.01(1) -advantage- (b), Reg. s. 4900(1)(u), Reg. s. 4900(1)(v), Reg. 4901(1) specified small business corporation, Reg. s. 5100-eligible corporation, s. 207.04(4), s. 146(10.1), s. 207.01(6), s. 146(4)(a), s. 146(4)(b), s. 146.2(6)
CRA gives an example of where it would waive the 100% advantage tax
One of the conditions for equity of a corporation, partnership or trust to qualify as "excluded property” and, therefore, excluded for the application of the prohibited investment rules, sets limits regarding the “governance of the investment entity.” In its new Folio on the prohibited investment rules, CRA states that this test is not restricted to consideration of the voting rights of the shares:
[T]he phrase governance of the investment entity should be given a wide meaning. For example, where the investment entity is a corporation, the condition might not be satisfied because of the votes that could be cast at either a general meeting of shareholders or at a meeting of the board of directors.
CRA provides an example of a situation where it would give “favourable consideration” to waiving under s. 207.6(2) the 100% advantage tax. The example entails an individual’s TFSA exceeding the 10% threshold in a company as a result of the company redeeming shares of the principal shareholder without the individual finding out about it until a year later, and then the TFSA paying the “advantage” (being the appreciation in the shares while they were a prohibited investment) out to the individual on a taxable basis under s. 207.061 pursuant to a waiver.
Neal Armstrong. Summaries of S3-F10-C2 under s. 207.06(2), s. 207.05(4), s. 207.05(2) and s. 207.01(1) - excluded property – para. (c).
CRA does not permit a s. 261 functional currency different from the GAAP currency, and will consider applying the s. 261(18) avoidance rule to de facto 2nd elections
Comments of CRA in its new Folio on the s. 261 functional currency rules include:
- “Where applicable financial accounting standards require a taxpayer to report its accounts in Canadian dollars, the taxpayer will not have a functional currency simply because it maintains its records and books of account in a qualifying foreign currency.”
- “[Where] a corporation…carr[ies] on two distinct lines of business which have different currencies for financial reporting purposes…the corporation may still make a valid election to determine its Canadian tax results (from all activities) in a particular foreign currency if that currency is the functional currency of its most significant business.”
- Where a Canco which has revoked its functional currency election, avoids the prohibition (under s. 261(3)) against making a second functional currency election by, for example, rolling down all its property to a new Canadian sub which reports its Canadian tax results in U.S. dollars, or if it amalgamates with a sub and Amaclo makes a fresh election, “the CRA would consider issuing a direction under subsection 261(18) that would require either Cansub or [Amalco], as applicable, to report its Canadian tax results in Canadian dollars.”
- The loss denial rule in s. 261(21) applies automatically, i.e., no tax avoidance purpose is necessary.
Neal Armstrong. Summaries of S5-F4-C1 under s. 261(1) – elected functional currency, s. 261(1) – functional currency, s. 261(5)(a), s. 261(7)(h), s. 261(10), s. 261(6), s. 261(6.1), s. 261(12), s. 261(11), s. 261(16), s. 261(18), and s. 261(21).