(2)-(35)

A non-resident vendor received a deposit under an agreement for sale of B.C. real property, which will be forfeited to it due to failure of the purchaser to close. Is the deposit subject to s. 116 withholding?

CRA first stated (based on the s. 248(1) – "disposition" definition) that "there is a disposition of a right under a contract where an agreement of sale has been cancelled and the buyer's deposit is forfeited to the vendor," and noted that under s. 248(4) "where the property is a security interest derived by an agreement for sale, it is excluded from being an interest in real property and is thereby excluded from the definition of taxable Canadian property." Before referring to Howe v. Smith (1884), 27 Ch D 89 and Tang v. Zhang, 2013 BCCA 52, CRA stated that "at common law, a deposit in respect of an agreement for the sale of real property has been viewed as an earnest or security for the performance of the purchase and sale, unless there is evidence that the contract requires otherwise," and then concluded that on forfeiture of the deposit:

there would be a disposition of a security interest derived by virtue of an agreement for sale or similar obligation. Since the property disposed of would not be an interest in real property for the purposes of the Act, it would not be taxable Canadian property and would not be subject to the application of section 116.

Respecting a question as to whether shares of an unlisted corporation would be taxable Canadian property if during the preceding 60 months "most of the value of the corporation's shares was derived directly from assets consisting of non-defaulted arm's length mortgages secured by real property situated in Canada," CRA stated:

An interest in real property derived from a non-defaulted arm's length mortgage secured by real property is generally limited to an interest as security only, and subsection 248(4) of the Act clarifies that for the purposes of the Act, an interest in real property does not include an interest as security only derived by virtue of a mortgage. Therefore, CRA is of the view that the fact that at some time during the 60-month period that ended at the determination time, most of the value of the shares of a corporation that is not listed on a designated stock exchange was derived directly from assets consisting of non-defaulted arm's length mortgages secured by real property situated in Canada, would not result in a share of that corporation being TCP. However, if the rights of a particular mortgagee were different from those described in subsection 248(4) of the Act, we would need to examine all of the facts and circumstances relating to that particular mortgage before taking a final position....

A mortgage bond secured by a leasehold interest in land would constitute a mortgage secured by real property situated in Canada in light of s. 248(4).

A three-year second mortgage loan, bearing interest at 11% per annum, made by a non-resident to a Canadian partnership provided that on maturity the lender would receive, in addition to principal and interest, 10% of the increase in the value of the building, if any, over the three-year term as determined by independent appraisal. In concluding that any disposition of the loan during the term of the loan would be a disposition of "real property situated in Canada" for purposes of s. 115(1)(b), the Department indicated that "the non-resident's interest in the building, which includes a right to participate in the appreciation of the building, is not 'an interest as security only' for purposes of s. 248(4), so that the mortgage loan was an interest in real property.

In light of s. 248(4), leasehold improvements to a leasehold interest would, if rented, be considered to give rise to income from real property for purposes of the specified investment definition.

Although s. 248(4) deem leases (in this case grazing leases on Crown lands) to be interest in real property, the definition of qualified farm property in s. 110.6(1) referred only to real property and, therefore, did not include a leasehold interest.

In the course of reviewing the facts summarized under s. 93(2.01), CRA stated (TaxInterpretations translation):

Subsection 248(5) contemplates rules of interpretation which establish the scope of the concept of substituted property for purposes of the Act. Paragraph 248(5)(a) circumscribes this concept in referring to a property acquired in a disposition or exchange of a given property, so that the latter property is the subject of a legal transaction. The second part of paragraph 248(5)(a) expands the scope of this concept in envisaging an indeterminate number of substitutions, establishing a link between the initial property under consideration and the property acquired in the final substitution. …

In this case, the XX A Shares of USCO1 were issued in the course of a legal transaction which did not involve in any way the interest in LLC1 or a property acquired in replacement for such interest.

Canco owns all the shares of Forco1, which it transfers to Forco2 for a promissory note payable in U.S. dollars, and then transfers the note to Forco3 in exchange for shares of Forco3. In finding that such shares of Forco3 were substituted for the shares of Forco1, CRA indicated that the concept of "share substituted" was not restricted "to a chain of substitutions in which only shares are substituted."

Where, in 1978, a taxpayer transferred property to his spouse who, in turn, transferred the property to a holding company for preferred shares and also subscribed for common shares, the attribution rules may apply to the sale of the common shares by the spouse.

Where a minor son received shares from his father on a rollover basis pursuant to former s. 73(5), realizes an exempt capital gain on a later disposition of those shares and invests the proceeds in GIC's, the interest on the GIC's (including the interest on the portion relating to the exempt capital gain) would fall within the definition of substituted property, with the result that s. 74.1(2) will apply to attribute the interest income back to the father.

Contains a general discussion of the series of transactions doctrine in the context of a proposes asessment under s. 110.6(7)(b). CRA notes that under Copthorne, a series of transactions can include the prospective or retrospective attachment of a related transaction to the series.

"A particular transaction will be part of a series of transactions if that transaction is logically and reasonably connected to another transaction or series of transactions or is a related transaction undertaken in contemplation of another transaction or series of transactions."

A preliminary transaction will form part of a series of transactions that includes subsequent transactions if at the time of the preliminary transaction the taxpayer has the intention to implement the subsequent transactions when the subsequent transactions are eventually carried out, even though at the time of completion of the preliminary transactions the taxpayer either had not determined all the important elements of the subsequent transactions or lacked the ability to implement the subsequent transactions.

"A preliminary transaction will form part of the series of transactions or events determined with reference to subsection 248(10) if, at the time that the preliminary transaction is carried out, the taxpayer is intending to implement the subsequent transactions constituting the series, and the subsequent transactions are eventually carried out. Thus, the preliminary and subsequent transactions will be part of the series even though at the time of completing the preliminary transactions the taxpayer either had not determined all the important elements of the subsequent transactions - such as, for instance, the identity of the other taxpayers involved - or lacked the ability to implement the subsequent transactions."

Where a building drop-down under s. 85(1) generates an ITC to the transferor under ETA s. 193, such ITC does not reduce the UCC of the property for s. 85 elected amount purposes. CRA appears to be effectively ignoring s. 248(16)(a)(i), which deems the ITC to have been received as government assistance when the GST originally was payable by the transferor, because that does not make any sense under facts such as these. See summary under s. 85(1)(e).

A cash-basis taxpayer will be considered to have received a GST input tax credit in the period for which the refund is claimed on the GST return.

A GST rebate which is claimed by a partner of a partnership at the end of the 1991 calendar year in respect of expenses incurred by him personally before the end of the partnership's fiscal year ending in 1991 will not be included in his income until the year in which it is received or credited, which will be 1992 at the earliest.

Where the taxpayer was assessed in July 1993 to deny an input tax credit, appealed successfully to the Tax Court but with the Minister then successfully appealing the Tax Court decision, the "particular time" referred to in s. 248(18) would be July 1993. If the taxpayer had ultimately prevailed in its GST appeal at a time when the July 1993 had become statute-barred, there would be a loss to the fisc.

Mr A held land used by him in farming in co-ownership with his brother. Following a partition and cessation of farming, Mr A became the sole owner of the land and sold it to a third party. What was the date of Mr A's acquisition for purposes of s. 110.6(1.3)(a) and (c)? CRA stated (TaxInterpretations translation):

The fractional interest in land which Mr A held from the death of his father is deemed under paragraphs 248(20)(a) and (b) to have not been acquired or disposed of by him. As he acquired that interest before 18 June 1987, paragraph 110.6(1.3)(c) applies to that interest.

In accordance with 248(20)(d), Mr A is deemed to have acquired the fractional interest that his brother held in the land. As that was not acquired before 18 June 1087, paragraph 110.6(1.3)(a) applies to that interest.

"In a situation where more than one property is acquired under one deed, such properties would be considered to be one property for purposes of the partitioning rules even if the properties were not adjacent. Subsection 248(20) of the Act applies where the fair market value of the separate piece of property received by a co-owner upon partition is less or greater than the fair market value of the co-owner's previous interest. Where the value is less, the co-owner is deemed to have disposed of the part of the interest in the property attributable to the shortfall. An amount received by such a co-owner because of an unequal partition could result in a gain or loss from the disposition. Where the value is greater, the co-owner is deemed to have acquired an interest in the property attributable to such excess. Furthermore, where a partition occurs but the property is not divided proportionately with respect to fair market values, the exception provided by subsection 248(21) of the Act will not apply, and thus subsection 248(20) will apply, in those situations where the joint owners make up for the disproportionate interest by cash contributions or otherwise, such as a disproportionate allocation of debt."

A partnership holding publicly-traded shares and limited partnership units was to be wound-up under s. 98(3), with the shares and units (while being held by a nominee) were partitioned into new share and unit certificates. RC ruled that the partition would not constitute a disposition provided that there was a partition under the provincial law.

The partition of a jointly owned non-real estate asset, such as a milk quota, could be accomplished under either s. 248(20) or (21) of the Act without causing a disposition, provided the fair market value tests were satisfied.

If non-adjacent parcels of land are acquired at one time and under one deed, they will be considered as property that can be partitioned under s. 248(20).

Where a co-owner exchanges an undivided interest in a property for an undivided interest in each subdivided parcel, followed by an exchange of the undivided interest for a divided interest in the subdivided parcel, no partition would have occurred.

A rental property comprised of land and three buildings, is beneficially owned by three co-owners, holding their interests as capital property. S. 248(21) ruling given (based inter alia on the FMV test being satisfied) respecting the subdivision and partition of the property so that Property 1 and Property 2 (representing XX% of the FMV of the Project at that time) are held under one new title and co-owned by two of the former co-owners; and Property 3 (representing XX% of the FMV of the Project at that time) is held under a separate new title by the third former co-owner.

In a general response, CRA stated:

Subsection 248(21) applies where a co-owner receives, upon the partition of "a property", title to a separate piece of property whose fair market value equals the fair market value of the co-owner's previous interest. In such a situation, paragraph 248(21)(b) of the Act deems the co-owner's new interest to be a continuation of the co-owner's undivided interest in the property immediately before the partition. In other words, the co-owner will have neither disposed of nor acquired any property and, as a result, there is no capital gain or loss upon the partition of the property. Since the term "a property" is used, this means a singular property or one property. However, paragraph 248(21)(c) provides an exception to the single property rule for purposes of subsection 248(21) and modifies the meaning of the term "a property" so that subdivisions of land established in the course of, or in contemplation of, a partition shall be regarded as one property.

…Where more than one property is acquired under one deed, it is our general view that such properties would be considered to be one property.

The summary states:

Can a property with two buildings on it be partitioned so that each former co-owner receives one building?...No. The buildings are separate properties and are not being partitioned.

The body is inconsistent internally and with this summary.

A professional partnership in the health field winds up its operations with a view to electing under s. 98(3), on the winding-up each partner receives an undivided interest in the Partnership's property including goodwill and, immediately thereafter, each of the former partners enters into a contract to acquire a divided interest in the former Partnership's goodwill and, in order that the division will be legally enforceable between the parties, each former partner signs a non-solicitation agreement with respect to the patients that may follow a particular former partner after the wind-up of the Partnership. The former partners or companies related to them enter into contractual arrangement with a newly-incorporated operating company whereby it will be able to utilize goodwill and related assets of the corporation in consideration for paying a licensing fee and also retaining the former partners for agreed-upon per diem fees.

A ruling is given that provided the contracts between the former partners to acquire a divided interest in the goodwill constitutes a "partition" under the governing laws, s. 248(21) of the Act will apply, s. 248(20) will not apply, and each Partner's divided interest in goodwill will be deemed to be a continuation of each such Partner's undivided interest in such partnership goodwill immediately before its partition.

A master partnership invests in a lower-tier operating partnership which, in turn, transfers a business acquired by it to a newly-formed taxable Canadian corporation ("Canco") in exchange for preferred shares pursuant to s. 85(2) and the lower-tier partnership is wound up under s. 85(3), so that the master partnership receives the preferred shares. On a wind up of the master partnership under s. 98(3) each partner receives an undivided proportionate interest in each preferred share. Following a dissolution of the master partnership, the former partners partition each of the preferred shares so that each partner's respective undivided interest in the particular preferred share becomes a divided interest. [With an equivalent fair market value] Canco issues certificates for any fractional shares created as a result of the partition and the shareholders' register indicates fractional shares held by each shareholder to the extent necessary to reflect the partition. The holders of the preferred shares then exchange the preferred shares for common shares of the corporation with an equivalent fair market value

Ruling that s. 248(21) applies to the partition.

Respecting the situation where corporations own undivided interests in shares of public corporations and in an interest in a mutual fund trust following the dissolution of a partnership, and wish to partition such properties, the Director stated:

"If a corporation can legally issue fractional shares and if the partition of a share gives rise to the issuance of fractional shares, all of such fractional shares would be considered to represent the same property as the share being partitioned and each person would be considered to have a new interest in such a share. Consequently, subsection 248(21) may apply to the partition of a share in such circumstances. If subsection 248(21) does not apply, the partition of the share may not necessarily attract adverse tax consequences pursuant to subsection 248(20) ... . [A]n interest in a trust constitutes one property, even if described by reference to units. Consequently, if it is legally possible to effect a partition of an interest in a trust owned by two or more persons and if each person's respective undivided interest in such an interest becomes a divided interest in the said interest, the Rulings Directorate would generally consider that subsection 248(21) may apply to such partition if the fair market value test in subsection 248(21) is met ... ."

Where three parties jointly own equal undivided interests in a property, and the property is subdivided into three lots with each party having 100% ownership of one lot, s. 248(21)(b) provides that the cost of each co-owner's new interest will be the same as the cost of its undivided interest in the property before the partition.

After a detailed description by the correspondent of the manner in which the partition of real property in B.C. typically is undertaken, RC indicated that s. 248(21)(b) would apply provided the prerequisites contained in s. 248(21) are met. RC also stated that the term "a property" means "a singular property or one property", and that s. 248(21)(c) "modifies the meaning of this term so that subdivisions of land established in the course of or in contemplation of a partition shall be regarded as one property."

S.248(21) generally will apply where a piece of land has been subdivided into several parcels and the subdivided parcels are then partitioned between the joint owners. However, if subsequent to the partition, several other subdivided parcels continue to be held in joint ownership by all the joint owners and they subsequently exchange with each other their undivided interests so that each owner receives a divided interest, a disposition will occur at that time.

The rules in s. 248(21) could apply where there is a stratification of a condominium building and a subsequent proportionate distribution of the units to the owners.

The enactment of s. 248(24) does not affect the computation of safe income under s. 55(2)

Can a legatee by particular title referred to in s. 808 of the Quebec Civil Code be considered a person beneficially interested pursuant to subsection 248(25)? CRA stated (TaxInterpretations translation):

[N]otwithstanding that the legatee by particular title has a payment priority over the heirs by virtue of certain provisions of the Quebec Civil Code, the legatee nonetheless has a beneficial interest in the succession as contemplated by subsection 248(25).

In Fiducie Famille Salammbô c. Ville de Montréal (2011 QCCQ 11322), a mutations tax case, the Court found that potential non-designated beneficiaries should not be taken into account as beneficiaries at the moment of registration of the land transfer. In considering whether a person is related to each beneficiary under a trust, does CRA accept that it should consider only the persons who have been designated as beneficiaries at the particular time?

After referring to Propep, where the definition of "beneficially interested" in s. 248(25) was stated to apply for determining that an individual was a beneficiary, CRA stated (TaxInterpretations translation):

The CRA believes that the courts would adopt this expanded sense of the concept of beneficiary for purposes of ITA subparagraph 55(5)(e)(ii). The CRA further could consider arguing that this expanded concept of beneficiary is also engaged by the text of ITA subparagraph 55(5)(e)(ii) which refers to "each beneficiary under a trust who is or may (otherwise than by reason of the death of another beneficiary under the trust) be entitled to share in the income or capital of the trust." Consequently, the position stated in [2004-0086961C6]…is not valid.

…It is beyond the scope of this Roundtable to comment on the meaning to be accorded to the term "beneficiary" and under the definition of "beneficially interested" in ITA subsection 248(25) in accordance with the applicable private law… .

Where the trustees of a Quebec inter vivos trust have the power to appoint beneficiaries including a testamentary trust. However, a particular testamentary trust is not so designated. CRA referred to Art. 1282 of the Civil Code, which provided:

In the case of a personal or private trust, the power to appoint may be exercised by the trustee or the third person only if the class of persons from which he may appoint the beneficiary is clearly determined in the constituting act.

CRA stated (TaxInterpretations translation):

[A] trust created by will that is part of the category of persons from which the trustee can designate beneficiaries of an inter vivos trust has a beneficial interest by virtue of subsection 248(5).

Articles

An election made by the former trustees, including an election under s. 259(3), will continue to be valid following a trust-to-trust transfer described in s. 248(25.1).

In finding that s. 80 would not apply to the settlement under Part III of the Bankruptcy and Insolvency Act of a debt for unremitted GST and QST, CRA stated (TaxInterpretations translation) that:

[T]he portion of the amount of the gain arising from the settlement of the unremitted GST and QST (including interest and penalties) would not be subject to …section 80 given that such [amounts]…would not be considered as a "debt issued" by the debtor under the terms of subsection 248(26)… .

CRA indicated respecting any potential double taxation arising from the applicability of both s. 84(2) and (3) to a surplus stripping transaction that, in practice, CRA would avoid double taxation through applying s. 248(28)(a). See summary under s. 84(2).

///?page_id=873#2013-0499121E5">2013-0499121E5]. As a result of a wind-up of a 2^nd tier FA following a s. 90(6) loan to Canco, there technically would be a double income inclusion to Canco under ss. 90(6) and (12). By virtue of s. 248(28)(a), only one of the two amounts would be included in Canco's income. See detailed summary of Scenario 6 under s. 90(9).

CRA will construe paragraph 55(2)(c) so that the amount deemed not to be a dividend is not taxed as a capital gain twice. Paragraph 55(2)(c) will be applied in the year of the increase of the stated capital of the shares; when the shares are sold, the capital gain will be reduced by the amount already included in income pursuant to paragraph 55(2)(c).

A lease is amended to add an option to purchase and to increase the annual lease payment by an amount that would be in excess of the fair market value rent in the absence of the option. The additional lease payment are treated for purposes of s. 49(5) as payments in respect of the extension of the original option, with the result that, for purposes of s. 49(1), such amount are deemed to be proceeds of disposition in respect of the grant of the option at the time of receipt of each such payment.

Upon the exercise of the option, the vendor by virtue of s. 248(28) will not be required to include in its proceeds of disposition the amounts included as capital gains under s. 49(5) and 49(1) except to the extent that pursuant to s. 49(4) it files amended tax return to exclude such amounts from the computation of its income for those taxation years as proceeds of disposition.

Allocations made to the spouse of a retired partner pursuant to s. 96(1.1) would, depending on the circumstances, also be included in the income of the retired partner under s. 56(2) or (4). S.248(28) would not prevent this result.

Contrary to a previous position, CCRA has concluded that s. 248(28) does not preclude the application of s. 84(3) on the redemption of shares even where that redemption triggers an employment benefit that was deferred by s. 7(1.1): "The benefit under section 7 of the Act and the dividend computed under subsection 84(3) of the Act are determined as a result of different events and there is no amount that has been included in income under section 7 of the Act that is included a second time contrary to paragraph 248(28)(a) ... a taxpayer will generally have a capital loss on the disposition, which will already account for both the inclusion of the section 7 benefit and the subsection 84(3) dividend. This will mean the taxpayer will only be taxed once on the economic gain received as a result of the exercise of the option and the disposition of the shares."

The following example was provided respecting a preferred share held by a financial institution whose paid-up capital (and apparently, redemption amount) was increased:

The Agency commented that "it would have to be established that the increase in fair market value of the shares was solely the result of the increase in paid-up capital". The Agency also noted that "the use of subsection 248(28) in this situation is cumbersome and may not provide an appropriate result in all circumstances".

A Canadian resident corporation lends money to a foreign affiliate which, in turn, lends money to non-affiliated and non-resident corporations. In these circumstances, s. 248(28) does not affect the application of s. 17, which may cause an income inclusion in respect of the first amount under s. 17(1) and an income inclusion in respect of the second amount under s. 17(2). In these circumstances, "section 17 does not require a particular amount to be included in income more than once. That is, section 17 requires only one income inclusion in respect of any particular amount owing".

"Where an employee has income from employment under paragraph 7(1)(a) related to the disposition, by virtue of subsection 7(1.1), of shares and a deemed dividend under subsection 84(3) of the Act related to the redemption of shares in the same or a different year, we are of the view that subsection 248(28) of the Act will apply so that there will be no income inclusion under subsection 84(3) of the same amount as a deemed dividend resulting on the redemption of the shares."

Under the proposed version of s. 4(4), interest to which s. 18(4) applied in a previous year will not be required to be included in income under s. 9(1) in the year it is forgiven. Where s. 80 applies, the forgiven interest will not be included in income under s. 9(1).

There is no provision in the Act permitting a shareholder/manager to reduce the amount of salary received by him to the extent that such salary is not deductible by virtue of s. 67 to the payor corporation.

(a)…The provisions of subsection 248(36) do not apply to gifts acquired by reason of the death of an individual. Since…the property that is the subject of the gift by the taxpayer was acquired by reason of the death of an individual…the provisions of subsection 248(36) are not applicable. As the conditions in paragraph 248(37)(g) are satisfied, subsection 248 (35) does not apply.

A query was received respecting the donation of flow-through shares of a private company which were issued as part of a gifting arrangment which was registered as a tax shelter. CRA noted that as the exception in draft s. 248(37)(d) does not apply to the donation of private company shares, draft s. 248(35) would apply to deem the amount of the gift to be the nil adjusted cost base of the shares under s. 66.3(3). Accordingly, the eligible amount of the gift was nil, and the proceeds of disposition of the share also were deemed to be nil under s. 69(1)(b)(ii) (respecting inter vivos gifts).

Bédard J proceeded to find abuse.

…(b)… Gifts of property acquired in the circumstances contemplated in subsection 70(5) are not included in the list provided in paragraph 248(37)(g). Consequently, subsection 248(35) may apply if all conditions provided therein are satisfied. If the property that is the subject of the gift by the taxpayer was acquired during the three-year period ending at the time of the donation from a person with whom the taxpayer did not deal at arm's length, but the property was acquired by the taxpayer by reason of the death of an individual, as in the situation described, subsection 248(36) would not apply.