News of Note

CRA treats additional benefit features of a supplemental pension plan as SDAs

CRA noted its position that a supplemental pension plan to top up the pension benefits for executives whose remuneration is such as to make the registered pension plan (RPP) contribution limits too low will not give rise to a salary deferral arrangement (SDA) where this plan operates similarly to an RPP but for exceeding the monetary limits. However, CRA stated that there likely will be an SDA where the plan also provides that members can elect to reduce or forego future bonus entitlements and accrued vacation pay entitlements for additional allocations (of equal amounts) to the member’s account (to be paid out at the earliest of termination of employment, retirement or death) – stating that these additional features “appear to be primarily motivated by tax deferral considerations.”

Neal Armstrong. Summaries of 11 January 2019 External T.I. 2018-0740741E5 under s. 248(1) – salary deferral arrangement and s. 6(14)(a).

CRA rules on a pipeline for an inter vivos trust

A Canadian inter vivos family trust (Trust1) which is coming up to its 21st anniversary will distribute some of its assets to a Canadian-resident individual beneficiary under s. 107(2) shortly before that date. However, for some reason, it will not distribute its preferred shares of Opco1 (a CCPC whose assets are mainly rental properties and shares of subsidiaries including an operating subsidiary) and instead will realize a capital gain under s. 104(4)(b)(ii) on the 21st anniversary and will include the resulting taxable capital gain in its income for the year. (Other beneficiaries might not be resident in Canada.)

Thereafter, Trust1 will engage in a pipeline transaction in which it will transfer its preferred shares of Opco1 to a new CCPC (Newco) in consideration for Newco preferred shares with full paid-up capital, at the same time as the other shareholders of Opco1 transfer their shares on a s. 85(1) rollover basis to Newco. The activities of Opco1 will be maintained over the years, and after one year Newco and Opco1 will amalgamate. Amalco will begin to progressively (over a period of XX months) redeem its Class C shares, with the redemption proceeds paid partly with the profits generated by Opco1 subsequently to the pipeline.

Neal Armstrong. Summary of 2018 Ruling 2018-0765411R3 F under s. 84(2).

6 further full-text translations of CRA interpretations are available

We have published a further 6 translations of interpretations released in August and July 2012. Their descriptors and links appear below.

These are additions to our set of 783 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 2/3 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-08-24 30 July 2012 Internal T.I. 2012-0436711I7 F - Reassessment beyond the normal reassessment period Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) CRA could reassess beyond normal reassessment period based solely on an ARQ audit report showing error and carelessness of the taxpayer
2012-08-10 3 July 2012 External T.I. 2012-0443421E5 F - 84.1 and partnership Income Tax Act - Section 245 - Subsection 245(4) s. 245(2) has been applied to the use of a partnership to avoid s. 84.1
Income Tax Act - Section 84.1 - Subsection 84.1(1) use of partnership to avoid s. 84.1 could be attacked through challenge to partnership validity or applying s. 245(1) re circumvention of s. 84.1
13 July 2012 External T.I. 2012-0443281E5 F - DPA- véhicule dans le cadre d'un bien locatif Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) CCA could be claimable on motor vehicle used to earn rental income
2012-07-20 9 July 2012 External T.I. 2012-0438751E5 F - Police d'assurance-vie Income Tax Act - Section 148 - Subsection 148(9) - Proceeds of Disposition proceeds of disposition arise when policy settled and are calculated by insurer
Income Tax Act - Section 237 - Subsection 237(1.1) provision of SIN by holder of matured policy to insurer is required
2012-07-06 28 June 2012 External T.I. 2011-0427871E5 F - Application des paragraphes 98(3) 98(5) et 73(1) Income Tax Act - Section 73 - Subsection 73(1) s. 73(1) available on transfer of undivided interest from one separate spouse to the other following s. 98(3) wind-up of their rental partnership
Income Tax Act - Section 98 - Subsection 98(5) rental operation generating property income is a business for s. 98(5) purposes
26 June 2012 External T.I. 2011-0417391E5 F - Bien remis à une fiducie Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Testamentary Trust being a contingent beneficiary of an inter vivos trust disqualified a testamentary trust as such
Income Tax Act - Section 248 - Subsection 248(25) testamentary trust that was included in the class of potential beneficiaries of a discretionary inter vivos trust was a beneficiary

Sutlej Foods – Tax Court of Canada finds that corporations but not individuals potentially can be represented in a general procedure case by their accountant

In Masa Sushi, Graham J found that a corporation could not appear “in person” in a General Procedure matter and had to appear through counsel, so that a Rule purporting to permit a corporation to appear in person with the Court’s consent would be ultra vires. Russell J has sided with the opposite conclusion reached by C Miller J in BCS Group (under appeal), stating that “meaning must be given to the clear subsection 17.1(1) Parliamentary language that a party, a term encompassing both corporate and non-corporate parties, may appear in person in a general procedure appeal.” However, Russell J went on to find that he had concerns about the corporate applicant before him being represented by its accountant rather than by counsel, and refused that application.

He also declined the application of the individual applicants to be represented by the same accountant, on the ground that, in a general procedure case, an individual must be represented by counsel, full stop. This of course illustrates a curious aspect of the Miller/Russell view, namely, that corporations, but not individuals, potentially can avoid the requirement for representation by a lawyer.

Neal Armstrong. Summary of Sutlej Foods Inc. v. The Queen, 2019 TCC 20 under Rule 30(2).

CRA agreed to fictional transfer pricing adjustments and rules that they also did not affect the exempt surplus calculation (other than for the foreign taxes adjustment)

CRA assessed a Canadian subsidiary (Canco 1) in a Canadian multinational group under s. 247(2) on the basis that the fees earned by a sister company (Forco 1) resident in Country A from a customer were too high from a transfer-pricing perspective and the fees earned by Canco 1 under a services contract as part of the same business arrangements were correlatively too low. After negotiations between the competent authorities for Canada and Country A, it was agreed that Canco 1 would not appeal this assessment, and the income of Forco 1 (which was from an active business) would be reduced by assessment by the Country A taxing authority, thereby generating income tax refunds for those years. It was agreed that there would be no adjustment to the actual fees charged to the (apparently arm’s length) customer(s) and that there would be no secondary adjustments.

CRA ruled that these downward adjustments to the business income of Forco 1 reduced its (exempt) earnings as determined under s. (a)(i) of the definition of “earnings” in Reg. 5907(1), i.e., its earnings as computed in accordance with the Country A income tax law – but that such adjustments were to be added to its earnings pursuant to Reg. 5907(2)(f), stating in its summary in the latter regard that:

The money realized and retained by the foreign affiliate [i.e., Forco 1], but excluded from its income for foreign income tax purposes as a result of the corresponding adjustment by the foreign tax authority, would be "revenue, income, or profit" derived by the foreign affiliate for purposes of paragraph 5907(2)(f) ... .

CRA also ruled that upon receipt of the Country A reassessment reflecting such downward income adjustments for the relevant years, the “net earnings” of Forco 1 for those years as defined in Reg. 5907(1)(a) would be increased by the amount of income taxes that had been correspondingly overpaid.

Neal Armstrong. Summary of 2018 Ruling 2017-0729431R3 under Reg. 5907(2)(f).

Ark Angel Foundation – Federal Court of Appeal confirms CRA’s revocation of charitable registration for paying unsubstantiated consulting fees to a director

The Foundation, a charitable foundation, received most of its revenues from three other registered charities (including the Humane Society of Canada Foundation) that were dominated by the same individual, and disbursed most of those revenues to those three charities, except that it paid approximately 1/3 of its revenues to the individual. Woods JA found that the failure of the Foundation to provide any records that substantiated the basis for the consulting fees justified the CRA’s decision to revoke the Foundation’s registration under s. 168(1)(e) (failure to maintain adequate records) and also on more substantive grounds under s. 168(1)(b) (failure to establish that the consulting services fees represented the devotion of Foundation resources to charitable activities).

Neal Armstrong. Summaries of Ark Angel Foundation v. Canada (National Revenue), 2019 FCA 21 under s. 168(1)(e) and s. 168(1)(b).

Milne – Ontario Divisional Court confirms that the executors per se do not hold their property in trust

The Ontario Divisional Court has overturned a decision of Dunphy J below that a primary will that covered property which needed probate in order to be transferred (as opposed to all the other property of the testator, such as private company shares, which was covered by a secondary will) was void because it did not satisfy one of the requirements for a valid trust, namely, that there be certainty of subject matter.

First, Marrocco ACJ, speaking for the unanimous Court, stated that “A will may contain a trust, but this is not a requirement for a valid will” – so that it did not matter whether the primary will satisfied the test of the “three certainties” for the existence of a trust. In this regard, he quoted Williams on Wills that “the property comprised in residue is not held in trust for the beneficiary under the will so as to invest any equitable interest in him.”

Second, even if there were a requirement for certainty of subject matter, that requirement was satisfied here as the criterion for distinguishing the included and excluded property could be objectively applied.

This decision is of course of interest for supporting the use of a secondary will that is not probated and, thus, avoids probate duties. Although the confirmation that a will is not a trust is not directly applicable for ITA purposes given that s. 104(1) effectively deems an estate to be a trust, such finding may assist in analysing what is going on, and when, where a residue is held on, or transferred to, trusts.

Neal Armstrong. Summary of Milne Estate (Re), 2019 ONSC 579 under s. 104(1).

CRA expansively interprets “on” in the s. 93(4) stop-loss rule

But for s. 93(4), a Canadian corporation (ACo) would have realized a capital loss on the liquidation and dissolution of a wholly-owned non-resident subsidiary (FA1) which, in turn, held FA2 and FA3. CRA found that s. 93(4) applied to deny the loss and add it to the ACB to ACo of the shares of FA2 and FA3 on the basis that ACo had acquired those shares “on” its disposition of the shares of FA1 – even though such acquisition in fact occurred before the dissolution of FA1. Its reasoning suggested that it considered the “on” test to be satisfied by virtue of the fact that “ACo acquired the shares of FA2 and FA3 as part of the process of liquidating and dissolving FA1, which included ACo disposing of its shares of FA1.”

Neal Armstrong. Summaries of 5 September 2018 Internal T.I. 2017-0698241I7 under s. 93(4), s. 93(2.01) and s. 93(1).

CRA confirms that partnership draws generally are exempted as a financial service rather than under ETA s. 272.1(1)

CRA ruled that distributions made by a limited partnership, which held investments, to its general and limited partners were exempt from GST/HST pursuant to para. (f) of the financial services definition, which explicitly exempts dividends on shares but also exempts distributions on other financial instruments, evidently including partnership distributions. Like other aspects of the financial services definition, this legislative drafting is conceptually confused and backwards as it focuses on the distribution by the investee being exempt rather than on explicitly exempting this distribution viewed as consideration for the capital provided by the investor. (See BLP cf. ING.)

CRA made no mention of s. 272.1 (other than to state that its letter did not address the recent amendments to s. 272.1). This confirms that in CRA’s view s. 272.1 does not oust the application of the financial services definition, so that partnership draws generally are exempted under para. (f) of that definition rather than under s. 272.1(1) (apparently referencing services provided qua partner rather than business operator.)

Neal Armstrong. Summary of 17 September 2018 Ruling 182403 under ETA s. 123(1) – financial service – para. (f).

Income Tax Severed Letters 13 February 2019

This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.