News of Note

CRA has cancelled the obligation of bare trusts to file for their calendar 2023 years

CRA has announced:

In recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians, …CRA … will not require bare trusts to file a … T3 return … including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request for these filings.

Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement. The CRA will communicate with Canadians as further information becomes available.

Neal Armstrong. Summary of CRA News Release, “Bare trusts are exempt from trust reporting requirements for 2023,” 28 March 2024 under s. 150(1.2).

Animal Expert Maisonneuve – Federal Court finds that CRA could not be required to accept the taxpayer’s first return for a year after the normal reassessment period

CRA did not receive the taxpayer’s income tax return for its taxation year ending January 31, 2015 and assessed that year in June 2015 based on information in the taxpayer’s GST returns. On two occasions in 2017, the taxpayer attempted to file its 2015 return, but the CRA system did not accept the return and delivered an error message that such return had already been filed (when, in fact, what this was reflecting was that CRA had prepared the equivalent of a return in making its earlier assessment).

After the normal reassessment period had expired, the taxpayer sought an order of mandamus for CRA to accept a late-filed 2015 return.

In dismissing the application, Rochester J found that the Minister was not required to accept the return outside the normal reassessment period and that this did not change because of the misleading CRA error message, and noted that CRA had repeatedly requested that the taxpayer file the 2015 return.

Neal Armstrong. Summary of Animal Expert Maisonneuve Inc. v. Attorney General, 2024 CF 252 under s. 152(3.1).

Income Tax Severed Letters 27 March 2024

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

Sigma Chi – Federal Court of Appeal finds that a charity providing scholarships mostly to its frat members and not controlling a foreign scholarship program, breached ss. 149.1(1)(a) and (a.1)

Laskin JA found no reversible errors in the Minister’s findings that the charitable registration of the appellant (Sigma Chi), which described itself as an international fraternal organization, should be revoked:

  • it was devoting the majority of its scholarship funds to Sigma Chi members and pledges (i.e., providing private benefits to its members through such “in-house” scholarships, contrary to s. 149.1(1)(a));
  • it provided funds to non-qualified donees (contrary to s. 149.1(1)(a.1)) by making loans to Sigma Chi fraternity housing corporations, established to provide housing to members;
  • it failed (also contrary to s. 149.1(1)(a.1))to maintain direction and control over the Horizon Scholarship program, a program partially funded by Sigma Chi and administered in the United States. (It had only one of the eight seats on the governing board, and only two of 16 on the selection committee, so that it did not have direction and control over the use of its funds.)

Neal Armstrong. Summaries of Sigma Chi Canadian Foundation v. Canada (National Revenue), 2024 FCA 59 under s. 149.1(1)(a) and s. 149.1(1)(a.1).

CRA concludes that GST/HST should be backed out of the appraised value of newly constructed residence for GST/HST self-assessment purposes

ETA s. 191(3) requires the builder of a multiple unit residential complex to self-assess itself for GST/HST on the fair market value of the complex at the later of substantial completion and first occupation by a tenant, and a similar rule applies to other residential complexes. CRA has now accepted that the appraised value in this context should be treated as including GST/HST, and that such GST/HST should be backed out before determining the amount of GST/HST payable by the builder. This FMV reduction thus will reduce the self-assessed GST/HST (and any associated new residential rental property rebate).

Neal Armstrong. Summary of CRA internal communiqué dated May 17, 2023 “Updated guidance relating to embedded amount of GST or HST in Fair Market Value (FMV) under the Excise Tax Act (ETA) as it pertains to New Residential Housing” as described in PwC, “Tax Insights: Canada Revenue Agency confirms that fair market value of newly constructed residential complexes includes GST/HST,” Issue 2024-10, 22 March 2024 under ETA s. 191(3).

CRA finds that the flipped property rule does not apply to a sale to avoid future insolvency

Although s. 13(12) deems the gain of a taxpayer from the disposition of a housing unit within 365 days of its acquisition to be an inventory gain, s. 12(13)(b)(viii) provides an exception for a disposition which inter alia can reasonably be considered to occur in anticipation of the taxpayer’s insolvency. CRA indicated that this exception might apply where an individual disposed of a housing unit to improve a declining financial situation (the costs associated with the housing unit caused the individual to have severe cash outflows resulting in maximizing credit cards in order to pay for basic needs). It stated that the exception applied where the taxpayer disposed of the housing unit “due to or in anticipation of the inability or lack of means to pay their debts as they become due” and that:

This could include circumstances where a taxpayer is relying on other forms of debt (such as credit cards) to pay for their basic personal expenses, the situation is expected to continue or has been ongoing for some time, and disposing of the housing unit would allow them to significantly improve their financial situation, thereby avoiding insolvency or becoming insolvent.

In other words, “anticipation” of insolvency includes reasonable “avoidance” of insolvency – even where the individuals concerned may have been the authors of their own misfortune.

Neal Armstrong. Summary of 30 January 2024 External T.I. 2023-0991461E5 under s. 12(13)(b)(viii).

We have translated 6 more CRA interpretations

We have translated 6 further CRA interpretations released in March of 2002. Their descriptors and links appear below.

These are additions to our set of 2,786 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2002-03-01 5 March 2002 Internal T.I. 2001-0102757 F - PERTE FINALE Income Tax Act - Section 54 - Adjusted Cost Base cost of moving rental building off land for subsequent sale, in order to construct parking lot and create more space for existing rental buildings, was addition to ACB of land
Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) a rental building that was acquired with a view to then moving it off the subjacent land and then selling it, was not a depreciable property
6 March 2002 Internal T.I. 2001-0108587 F - AIDE A DOMICILE DE LA SAAQ Income Tax Act - Section 152 - Subsection 152(4) refunds not issued beyond Objection period based on favourable judgment rendered to another taxpayer
Income Tax Act - Section 3 - Paragraph 3(a) in cases similar to Maurice, parent caregivers may be exempted on compensation received
2002-02-15 7 March 2002 External T.I. 2001-0106275 F - BOURSE D'ETUDES ET DE PERFECTIONNEMENT Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) general discussion regarding foreign internship sponsored by Foreign Affairs
4 March 2002 External T.I. 2001-0106325 F - ALLOCATION POUR UNE AUTOCARAVANE Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(vii.1) allowance for motorhome must be for its use in travelling rather than as accommodation to come within s. 6(1)(b)(vii.1)
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(r) motor home is not an automobile and thus not within s. 18(1)(r)
1 March 2002 External T.I. 2002-0118215 F - ACTIONS EMISES GRATUITES AUX EMPLOYES Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) s. 7 rules applicable to shares issued for no consideration to employees
Income Tax Act - Section 7 - Subsection 7(1.1) s. 7(1.1) continues to apply after issuing employer ceases to be a CCPC
8 March 2002 External T.I. 2002-0123095 F - TRANSFERT - CREDIT DEFICIENCE Income Tax Act - Section 118.2 - Subsection 118.2(3) overview of requirements for transfer of severe impairment credit to parent

CRA provides guidance on the UHTA amendments

CRA has published a further Underused Housing Tax Notice providing some basic illustrations of the application of the proposed UHTA amendments released on November 21, 2023.

It notes that where, for example, a Canadian parent and Canadian adult child both hold title to a Canadian residential property, it now will not matter whether they are co-owners or whether one is holding in trust for the other because, either way, they will be excluded owners (i.e., not required to file a return). Similarly, it will no longer matter regarding exempt owner status whether two Canadian individuals are holding title as co-owners or partners.

Due to the addition of a Canadian corporation whose shares are listed on a designated Canadian stock exchange to the excluded owner definition, a Canadian subsidiary of such a listed corporation will now be an excluded owner even if there is substantial foreign ownership of the listed corporation.

Section 4.1 will require an owner to account separately for each capacity in which it holds title (as trustee, partner or for its own account). For example, a foreign national holding title to a Canadian residential property as to 10% as trustee for a specified Canadian trust and as to the other 90% in her individual capacity will, in her capacity of trustee, be an excluded owner, but will be required to file a UHT return as to the 90% interest.

CRA notes that the amended definitions of specified Canadian partnership and specified Canadian trust essentially provide a look-through rule to an upper-tier partnership or trust, so that, for example, a lower-tier partnership will be tainted if any of the members of the upper-tier partnership is not one of the listed Canadian entities. (in fact, these definitions are broader than this, and deal with multi-tier arrangements.)

None of the UHT Notices discuss bare trusts or Quebec nominees.

Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN16 Proposed Amendments to the Underused Housing Tax, 8 March 2024 under UHTA, s. 2, excluded owner – (a)(i), (b). (c)(iii), specified Canadian partnership – (a), specified Canadian trust – (a), s. 4.1, and Underused Housing Tax Regulations – s. 2(3).

CRA indicates that the flipped property rule may not apply where a beneficiary receives the devise of a house of a deceased parent and promptly sells it

Although s. 13(12) deems the gain of a taxpayer from the disposition of a housing unit within 365 days of its acquisition to be an inventory gain, s. 12(13)(b)(i) provides an exception for a disposition which inter alia can reasonably be considered to occur due to the death of a person related to the taxpayer. CRA seemed to accept that this exception might be available, depending on the circumstances, where an estate distributed a housing unit of the deceased to a child beneficiary and such child then sold the unit within 365 days of the distribution.

Neal Armstrong. Summary of 29 January 2024 External T.I. 2023-0990101E5 under s. 12(13)(b)(i).

Darmos Family Trust – Ontario Superior Court of Justice finds that “Alberta” family trusts whose major decisions were made in Ontario, were resident there

The assets of the two Darmos family trusts were mostly shares of corporations holding the investments derived from the sale of a company of which Mr. Darmos had been the principal. Two of the three trustees of each trust were an Alberta lawyer and Alberta trust company, and the third was an Ontario-resident lawyer (Alexopoulos), who had provided longstanding legal counsel to Mr. Darmos.

Ramsay J found that that the central management and control of the two trusts was in Ontario rather than Alberta. Most of the documentation demonstrated that the role of the trustees (other than Alexopoulos) was simply to implement and document the decisions of others, all based in Ontario, i.e., Mr. Darmos (who was actively involved with and directed the management of the trust property, and the assets of the corporations), the accountants for Darmos (KPMG, whose recommendations as to distributions were implemented when these decisions did not originate with Mr. Darmos), Alexopoulos (who handled dealing with the professional advisors) and RBC Dominion Securities (to whom Mr. Darmos had delegated significant investment management functions).

Neal Armstrong. Summary of Theodoros Darmos Family Trust v. Minister of Finance, 2023 ONSC 6431 under s. 2(1).