News of Note
Grenon RRSP – FCA finds that significant distributions of fund units to minors meant that those units had not been lawfully distributed – so that they were not MFTs
Email this ContentMr. Grenon’s RRSP subscribed $310 million for units of various income funds, which were intended to qualify as mutual fund trusts on the basis that, for each fund, 171 investors had subscribed for 100 (and only 100) units at $7.50 per unit. As they had more than 150 beneficiaries, the principal issue was whether they each satisfied the distribution condition in ITR 4801(a)(i)(A)—that there had been a lawful distribution of units of the trust to the public in circumstances in which a prospectus or similar document was not required to be filed (i.e., in reliance on a private placement exemption).
Here, the private-placement exemption that had been relied on was the offering memorandum exemption (OME) coupled with a condition stipulated in the offering memorandum (OM) that a minimum of 160 investors subscribe. The Grenon RRSP agreed that such minimum "was an essential term". The Tax Court had made a non-reversible finding that 39 of the subscribers in each fund were minors. Agreeing with the Tax Court that this thus established that such minimum had not been lawfully met, Monaghan JA stated that, like the Tax Court, she had "difficulty accepting that provincial securities regulators envisaged minors, some as young as two years old, subscribing for units based on the OME."
Moreover, she found no reasonable error in the Tax Court's “finding regarding adults signing subscriptions and paying for units for other adults and minors”, which further supported the conclusion that the income funds had not “complied with an essential term in their OMs: that they issue units to a minimum of 160 investors in compliance with the OME.”
The above finding established that the units held by Grenon RRSP were not qualified investments. In addition to assessing the Grenon RRSP for tax under s. 146(10.1) on its income, the Minister assessed it for Part XI.1 tax, computed at 1% of the non-qualified investments' acquisition date value. However, by virtue of s. 146(10), Part XI.1 tax did not apply where the acquisition date value was included in the income of the annuitant (Grenon). This was not done because he had not reported such amounts, and those years became statute-bared. Although the Crown accepted that the Minister did not have a choice as to whether to assess the annuitant pursuant to s. 146(10) or the RRSP pursuant to s. 207.1(1)(a), the Crown indicated that no amount "was included in the annuitant's income," as required for the exception from Part XI.1 tax to apply, so that such assessment of Part XI.1 tax could be made.
In rejecting this position, Monaghan JA noted that s. 56(1) provides that "there shall be included in computing the income of a taxpayer for a taxation year" the amount described in that section, including "amounts required by section 146 in respect of a [RRSP] … to be included in computing the taxpayer's income for the year," and s. 146(10), in turn, stated that where an RRSP acquired a non-qualified investment, the acquisition date value "shall be included in computing the income for the year of the taxpayer who is the annuitant." She stated that such language thus “mandates” the inclusion in the annuitant’s income irrespective of whether such income was reported or assessed by the annuitant.
Neal Armstrong. Summaries of RRSP of Grenon v. Canada, 2025 FCA 129 under Reg. 4801, s. 207.1(1)(a) and s. 152(3.1).
CRA confirms that a Realtyco, whose shares qualified as QSBCS based on a related corporation’s active business, would be a “relevant group entity” on a sale of the latter’s shares
The control test, contained in s. 84.1(2.31)(c), generally requires that the parent(s) not have de facto control, after the disposition to the children’s purchaser corporation, of such purchaser corporation, the subject corporation, or any other person or partnership (a “relevant group entity”) that carries on, at the disposition time, an active business that is relevant to the qualification of the shares of the subject corporation as qualified small business corporation shares (QSBCS). There is a parallel rule in s. 84.1(2.32)(c), restricted to the de jure control test.
Two spouses were the equal shareholders of Opco, with an active (telecommunications services) business. One of the spouses (Mr. A) wholly owned Realtyco, whose only asset of consequence was an immovable that it leased to Opco for use in the Opco operations.
CRA confirmed that, in relation to a sale of the shares of Opco by the two spouses to the Holdco of their adult child for non-share consideration, Realtyco would not be considered a relevant group entity, so that continued control of Realtyco by Mr. A would not oust the exception from the application of s. 84.1 for intergenerational transfers of QSBCSs.
Conversely, on a sale of Realtyco by Mr. A to Holdco, would Opco be considered a relevant group entity? CRA indicated that, since Opco carried on an active business and such business of a related corporation was relevant to the qualification of the shares of Realtyco as QSBCS, Opco would be a relevant group entity in connection with such disposition of Realtyco shares.
Neal Armstrong. Summary of 29 April 2025 External T.I. 2024-1036641E5 F under s. 84.1(2.32)(c)(iii).
CRA indicates that where real estate is rolled out to a non-resident beneficiary under s. 107(2), the s. 116 certificate will be based on the property’s ACB
A resident trust deriving its value primarily from Canadian real estate transferred one of the properties on an s. 107(2) rollover basis to a non-resident beneficiary. CRA indicated:
- Although s. 116(5.1) will deem the consideration paid by the trust for purposes of s. 116 to be the FMV of the Canadian real estate received, if greater than its ACB, on an administrative basis, CRA will accept the rollover amount under s. 107(2) as representing the proceeds for purposes of issuing a certificate of compliance under s. 116, where there clearly is no risk to the Canadian tax base - which would include situations where the transferred property is Canadian real estate or other property described in s. 128.1(4)(b)(i) to (iii).
- In the above circumstances, CRA would issue a certificate of compliance under s. 116 showing proceeds of disposition of the capital interest in the trust equal to the ACB of the distributed property to the trust. The FMV, as disclosed to CRA during the notification process, would be listed in the notes on the certificate of compliance.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.15 under s. 116(5).
CRA will process a late-filed notification under s. 116(3) as long as it is complete and received on or before the due date of the non-resident vendor's Part I return
The non-resident beneficiary of an estate does not file a Form T2062 notice respecting the disposition (occurring on a distribution) of a portion of their capital interest in an estate that is taxable Canadian property and not excluded property, and the estate does not file a notice under s.116(5.02).
CRA indicated:
- No late notification by the purchaser (considered here to be the estate) is allowed under s. 116(5.02).
- If the purchaser does not file the s. 116(5.02) notice within the required 30 days, then the non-resident vendor is required to file the s. 116(3) notice because the excluded property exemption is not available.
- Administratively, CRA will process a late-filed notification under s. 116(3) as long as it is complete and received on or before the due date of the non-resident vendor's Part I income tax return for the taxation year during which the disposition occurred. When the CRA has verified the information provided in the notice, the CRA will issue a certificate of compliance to the non-resident vendor with a copy to the purchaser. The issuance of the certificate of compliance will relieve the purchaser of their obligation even though the notification was late.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.14 under s. 116(3).
Income Tax Severed Letters 25 June 2025
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Haworth – English Court of Appeal finds that the place of effective management of trusts for treaty tie-breaker purposes was in the UK even though their CMC might be in Mauritius
The UK-resident taxpayers sought to avoid capital gains tax respecting the disposal of shares by family trusts of which they were the settlors by relying on a "Round the World" tax plan. This plan depended upon the trusts being resident in Mauritius at the time of the disposal of the shares and resident in the UK later in that year. During their time of residence in Mauritius, the trusts were required under the plan to have their "place of effective management" (“POEM”) in Mauritius rather than the UK for purposes of the tie-breaker rule for residence of a trust under the Mauritius–United Kingdom Income Tax Convention.
Newey LJ rejected the taxpayers’ submission that the POEM referred to the place of central management and control (“CMC”) which, under Wood v Holden, was a test as to the place at which the relevant decisions were made by the trustees unless that decision-making function had been usurped during the relevant period or an outsider had dictated the relevant decisions to be made by the trustees, which was submitted not to be the case here.
Newey LJ referred to the OECD Commentary, which stated inter alia that the "place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made". He indicated that CMC was not an appropriate test as to the POEM, given that CMC could be exercised in more than one place, whereas the POEM was intended as a tiebreaker concept that could be exercised in only one state.
He further stated:
… [Here] the role of the trustees in Mauritius was effectively pre-determined. … [T]he settlors, albeit with the advice and assistance of advisers, decided to adopt "an overall single plan" and, to that end, exercised their powers to appoint the Mauritius Trustees for a limited period "in the confident expectation that they would implement the plan". While the Mauritius Trustees genuinely made decisions and, in doing so, complied with their responsibilities, there was every reason to believe that they would decide as they in fact did and so further the "overall plan". Even, therefore, during the period in which the Mauritius Trustees were in office, "effective" or "realistic, positive" management was elsewhere. The decisions which the Mauritius Trustees made had been pre-ordained and the Mauritius Trustees were doing no more than the settlors had (with good reason) foreseen. The Mauritius Trustees were (without impropriety) playing their parts in a script which had been written by others.
Neal Armstrong. Summary of Haworth & Ors v Commissioners for His Majesty's Revenue and Customs [2025] EWCA Civ 822 under Treaties – Income Tax Conventions - Art. 4.
CRA indicates that a disproportionate allocation of DSI on a purchase spin-off can avoid the application of s. 55(2)
In Example 17 of CRA’s 2023 Safe Income Paper, the entire direct safe income (“DSI”) of a transferor corporation (“Opco”) was allocated to a transferee corporation (“Newco”) on an s. 55(3)(a) spin-out. Specifically, Opco (wholly-owned by Holdco) had DSI of $1,000 and two assets (Asset 1 with a nil ACB and $1,000 FMV, and Asset 2 with an ACB and FMV of $1,000). The DSI of Opco was reflected in Asset 2’s ACB.
Opco spun off, under s. 55(3)(a), Asset 2 to Newco (wholly-owned by Holdco). As part of the spin-out, Holdco transferred Opco shares with a nil ACB and $1,000 FMV to Newco for shares of Newco with a nil PUC and ACB, and $1,000 FMV. Opco then transferred Asset 2 to Newco in consideration for Newco shares with an ACB, PUC and FMV of $1,000. The cross-shareholdings were then redeemed for notes and the notes cross-cancelled, thereby generating a taxable dividend of $1,000 to Newco. CRA concluded that the entire $1,000 DSI of Opco was transferred to the shares of Newco held by Holdco.
Now, in a variant of Example 17, as part of the series the Opco shares were subsequently sold to an unrelated person so that (pursuant to s. 55(3.1)(b)) the s. 55(3)(a) exception would be unavailable.
CRA indicated that the entire $1,000 of DSI of Opco would continue to shift to such Newco shares of Holdco. The same analysis applied here as for Example 17: since the $1,000 of DSI of Opco was reflected in the ACB of Asset 2, which was transferred to Newco, it was reasonable to conclude that, after the spin-out, the $1,000 of DSI of Opco contributed solely to the gain on the shares of Newco held by Holdco. Accordingly, immediately prior to the redemption of Newco’s shares of Opco, the $1,000 in DSI of Opco reasonably contributed to the accrued gain on the shares of Opco held by Newco, so that s. 55(2) should not apply to that deemed dividend.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.12 under s. 55(2.1)(c).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in June of 2000. Their descriptors and links appear below.
These are additions to our set of 3,240 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 25 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 |
|---|---|---|---|
| 2000-06-23 | 12 June 2000 External T.I. 2000-0013555 F - construction - asphalte | Income Tax Act - Section 125.1 - Subsection 125.1(3) - Manufacturing or Processing - Paragraph (c) | application to operation of producing asphalt and using it both in laying it on roads and selling it |
| 23 May 2000 Internal T.I. 2000-0015647 F - DONATIONS D'ACTIONS A UN EMPLOYE-CLE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | gift of shares by sole shareholder to key employee likely would engage s. 6(1)(a) rather than the s. 69 gift rules | |
| 7 June 2000 Internal T.I. 2000-0017987 F - TRAVAIL A DOMICILE SUR UNE RESERVE | Other Legislation/Constitution - Federal - Indian Act - Section 87 | if a status Indian works at home because of being allowed by the employer to do so rather than being obligated to do so, the exemption will not apply | |
| 14 June 2000 Internal T.I. 2000-0018517 F - ASSURANCE POUR MALADIE REDOUTÉE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) | likely inapplicability of the exemption for non-illness portion of travel coverage | |
| 14 June 2000 Internal T.I. 2000-0021237 F - VALEUR RELATIVE D'UN JUGEMENT | General Concepts - Stare Decisis | the Agency was not bound to amend a return based on a favourable Informal Procedure judgment rendered to a taxpayer in similar circumstances | |
| Income Tax Act - Section 152 - Subsection 152(1) | Agency not bound to accept an amended return based on a favourable informal TCC decision re similar facts | ||
| 11 May 2000 External T.I. 1999-0009935 F - Droit recevoir allocations et emigration | Income Tax Act - Section 128.1 - Subsection 128.1(4) - Paragraph 128.1(4)(b) | end-of-career allowance receivable be emigrating physician was includible under s. 128.1(4)(b) | |
| Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) | end-of-career allowance received by physician after emigration and retirement was includible under s. 2 to extent of excess over s. 128.1(4)(b) inclusion | ||
| Income Tax Act - Section 248 - Subsection 248(1) - Property | physician’s entitlement to end-of-career allowance was property |
CRA indicates that a trust’s distribution of a corporation to an individual beneficiary would trigger a loss restriction event unless all 3 trustees were related to such beneficiary
Would a loss restriction event occur where an inter vivos discretionary trust with three trustees distributes a corporation to an individual as beneficiary?
CRA indicated that, in the absence of evidence to the contrary, it would presume that all of the trustees would constitute a group controlling the corporation. In this case, there would be a loss restriction event unless the individual beneficiary was related to each of the three trustees immediately before the distribution of the shares.
CRA did not unpack this further, but presumably it considered that, even if unusually the corporation should be considered to have been controlled by only two of the trustees (A and B) who were related to each other as well as to the beneficiary (C) and the third trustee (X) was unrelated, C would necessarily be considered to be acquiring the shares from all three trustees and, thus, acquiring those shares (in part) from an unrelated person (X).
Neal Armstrong. Summaries of 17 June 2025 STEP Roundtable, Q.11 under s. 256(7)(a)(i)(A) and Interpretation Act, s. 33(2).
CRA indicates that a principal residence designation must be made on the transfer of a principal residence to a life interest trust in order for the property to qualify as such in the trust’s hands
An individual over 65 transfers both a city property and a recreational property, each of which would otherwise have qualified as the transferor's principal residence, to a life interest trust (LIT), i.e., an alter ego trust, joint spouse or common-law partner trust, or spousal trust. Must the transferor choose which of the city or recreational property to designate as a principal residence at the time of such transfer in order for the property to qualify as a principal residence of the LIT for the pre-transfer period when it ultimately disposes of that property?
CRA indicated that there was a significant difference between the scope of s. 40(2)(b)(i), dealing with a transfer to an LIT on death, and s. 40(2)(b)(ii), dealing with an inter vivos transfer pursuant to s. 73(1). Property transferred on death was deemed to be the principal residence of the transferee for each year in which it was eligible to be the deceased transferor's principal residence, rather than for each year that it actually was the transferor's principal residence in the case of an inter vivos transfer.
The stricter language regarding an inter vivos transfer effectively meant that the transferor was required to designate which of the transferred residences was the transferor's principal residence by filing the required designation in respect of that particular property in the transferor’s return for the taxation year of the transfer.
Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.10 under s. 40(2)(b)(ii).
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Neal H. Armstrong editor and contributor