News of Note

CRA considers that a “survivor payment” can be made out of the deceased’s TFSA even where this occurs in the executor’s discretion

In general, a surviving spouse of the deceased, if designated as a beneficiary, can contribute and designate all or a portion of a “survivor payment” from the deceased’s TFSA as an exempt contribution to his or her own TFSA. The definition of “survivor payment” references a payment to the survivor “directly or indirectly” out of the former TFSA because of the deceased’s death.

CRA considered that these requirements could be satisfied (in light inter alia of s. 248(8)(a)) where an executor in his discretion chooses to satisfy a specific legacy out of TFSA property, rather than this being spelled out in the will.

Neal Armstrong. Summary of 11 May 2017 External T.I. 2016-0679751E5 Tr under s. 207.01(1) - exempt contribution – para. (b).

Mady – Tax Court of Canada finds that the series of transactions can inform whether an included property transfer has a bad s. 74.5(11) purpose, and that the taxpayer is not responsible under s. 163(2) for the unbeknownst sharp practice of his tax advisor

As a result of Dental College requirements, the common shares of the professional corporation through which the taxpayer carried on his dental practice (“MDPC“) had to be transferred from a family trust to him. This was accomplished by those shares being distributed out of the trust to his wife qua capital beneficiary, followed by their immediate gifting to him. Dividends paid by MDPC to the taxpayer were reported as his wife’s income under s. 74.1(1).

In confirming CRA’s application of s. 74.5(11) (applicable where one of the main reasons for a transfer was to reduce Part I tax on income on the transferred property), Hogan rejected a submission that since s. 74.5(11) only referred to the purpose of the transfer, not of the series, and the wife was not accomplishing any reduction in her Part I tax by transferring her shares to her higher income husband:

[Lehigh Cement] accepts that, even in the absence of a “series of transactions” concept, the entire series of transactions may form part of the relevant circumstances in determining the purpose of the transfer of property.

Years later, the same dentist executed an agreement to sell all his MDPC shares for $4.5 million and then implemented tax planning. He did a s. 86 “estate freeze” transaction on the morning of the closing in which he exchanged all his common shares of MDPC for preference shares with a redemption value of $2 million and for new common shares. He then sold 85% of his new common shares to his wife and two children at a sale price of $0.01 per share, and they sold the same shares later in the day to the purchaser for $8,645 per share.

Hogan J found that the fair market value of the shares sold by the taxpayer to his wife and children was $8,645, not $0.01, per share, so that the taxpayer realized a corresponding capital gain under s. 69(1)(b)(i). However, he vacated the imposition of a gross negligence penalty on the taxpayer. The preferred shares’ redemption value equalled the $2 million equity value of MDPC as estimated by a colleague at the same accounting firm as the taxpayer’s tax advisor, who had not been informed by him that the purchaser had agreed to purchase that equity for $4.5 million. Hogan J stated:

While [the tax advisor] acted imprudently in failing to disclose the pending sale of MDPC to his colleague, I do not believe that the Appellant can be held accountable for his actions. … It is well established that a taxpayer is responsible for the actions of his agent only where the taxpayer is privy to the gross negligence of that agent or wilfully blind… .

Also of assistance to the taxpayer’s penalty defence:

  • “the so-called freeze transaction had been discussed with his advisor well before the date of those [most recent financial] statements”
  • CRA had assessed the taxpayer under the s. 86(2) conferral-of-benefit rule, which Hogan J had found to be inapplicable, and the alternative (successful) s. 69(1)(b)(i) ground was raised for the first time in the appeal – and “it is difficult to say that the Appellant, knew about, or was wilfully blind to, the application of a provision, i.e. subparagraph 69(1)(b)(i), that the CRA auditor overlooked during the assessment process.”
  • “the transfer agreements between the Appellant and his wife and daughters all contained purchase price adjustments… [and] he believed that this type of clause allowed for greater leeway in setting the price paid by the related parties.”

Respecting the price adjustment clause, he indicated that he had no jurisdiction to comment on its application where the affected taxpayers (the wife and children) were not appellants.

Neal Armstrong. Summaries of Mady v. The Queen, 2017 TCC 112 under s. 74.5(11), General Concepts – FMV – Shares, General Concepts – Ownership, s. 86(2), s. 163(2) and General Concepts – Price Adjustment Clause.

CRA rules that a medical clinic receiving a share of the clinic doctors’ billings to the provincial health care plan was supplying GST/HST taxable administrative services to them

CRA ruled that a medical clinic providing its facilities to doctors in exchange for a percentage of their provincial health-care plan billings was making a single taxable supply of administrative services to them. CRA has pronounced that fee-sharing arrangements can be structured so as to minimize the GST/HST drag relating to the use of the shared health-care facilities (see P-238), but the above arrangement did not so qualify.

Neal Armstrong. Summary of 10 January 2017 Ruling 165757 under Sched. V, Pt. II, s. 9.

CRA indicates that a corporate partner receives no ACB addition for a s. 34.2(2) stub period inclusion

CRA considers that an amount included in a corporation’s income under s. 34.2(2) will not be added to the adjusted cost base of its partnership interest. The reason is that s. 53(1)(e)(i) only boosts ACB for a pro rata share of income earned at the partnership level rather than (imputed) income earned directly by the partner.

Neal Armstrong. Summary of 10 May 2017 External T.I. 2017-0687051E5 Tr under s. 53(1)(e)(i).

The Rulings Directorate summarizes the features of the FRULPA relevant to the status of Florida LLLPs as corporations

After providing a detailed description of the relevant provisions of the Florida Revised Uniform Limited Partnership Act of 2005 respecting LLLPs, including distinct entity status, perpetual duration and limited liability of the general partner, the Rulings Directorate concluded that two Florida real estate LLLPs had been corporations - but nonetheless suggested that they be treated as partnerships for the years in question given the transitional relief announced in 2016-0642051C6,

Neal Armstrong. Summary of 13 February 2017 Internal T.I. 2015-0568011I7 under s. 96.

CRA confirms that reassessing to increase closing inventory permits a s. 152(4.3) reassessment to increase the following year’s COS

CRA confirmed that a reassessment to increase closing inventory for Year 1 permits a consequential reassessment under s. 152(4.3) to reassess Year 2's taxes to reflect an increased cost of sales for Year 2 (which otherwise would be statute-barred).

The point of interpretation was that the definition of "balance" includes things like income and taxes payable for Year 1, but not Year 1's closing inventory balance. CRA appears to have effectvely treated the reassessment as increasing the taxes payable for Year 1 (viewed as a "balance,") and this balance can reasonably be considered to relate to the taxes payable balance for Year 2. Note that the increased Year 1 balance might not be exactly reversed in Year 2 if the effective tax rate changed.

Neal Armstrong. Summary of 29 May 2017 External T.I. 2014-0537111E5 Tr under s. 152(4.3).

Kaul – Tax Court of Canada allows an art appraiser to testify on her opinions formed in doing reports for the promoter

An art appraiser, who had been retained by the promoter to value and prepare brief appraisal reports on art to be donated in an art donation program, had previously been prohibited from acting as an expert in Tax Court proceedings respecting the fair market value of the donated art since inter alia she was not impartial. Rossiter CJ nonetheless found that she could testify to the contents of the Appraisal Reports which she had prepared many years previously for the developer, with that testimony to be limited to the opinions that she had formed while preparing those reports.

This finding was reached on the basis that she was a “participant expert” within the meaning of Westerhof v Gee Estate, 2015 ONCA 206. Under the Westerhof test, “the opinion to be given is based on the witness's observation of or participation in the events at issue; and the witness formed the opinion to be given as part of the ordinary exercise of his or her skill, knowledge, training and experience while observing or participating in such events.” This test was satisfied here as her appraisals had not been performed with a view to the subsequent Tax Court litigation.

Neal Armstrong. Summary of Kaul v. The Queen, 2017 TCC 55 under Tax Court Rules, s. 145.

2763478 Canada – Tax Court of Canada finds that not all the transactions in a value-shift scheme were infused with an estate-freezing purpose

An individual did not sell his shares of an operating company (Groupe AST) directly to a third-party purchaser. Instead he rolled his shares into a holding company (276), following which some internal transactions occurred in which the adjusted cost base of the Groupe AST shares was stepped up to fair market value - including a non-rollover drop-down of those shares to a subsidiary (9144) in exchange for high-basis common shares - with 276 realized corresponding capital gains. The Groupe AST shares were then sold to the purchaser at no additional gain.

276 then engaged in “value shift” transactions of the same general type as were struck down under GAAR in Triad Gestco and 1207192, i.e., a stock dividend of high-low preferred shares was paid on the high-ACB common shares that 276 held in 9144, thereby rendering those common shares almost worthless, and then the capital loss was realized by selling those common shares for $1 to a corporation owned by the son of 276’s shareholder.

Although, unlike Triad Gestco and 1207192, the capital gains – to be offset by the value-shift loss – were realized in internal transactions, this was not a relevant difference. In rejecting the taxpayer’s submission that there was no avoidance transaction as each transaction had an estate freezing objective, Paris J stated that although he accepted “that the global objective of the series was to effect an estate freeze,” one of the transactions was unnecessary from an estate freezing perspective.

Neal Armstrong. Summary of 2763478 Canada Inc. v. The Queen, 2017 CCI 98 under s. 245(3) and s. 245(4).

CRA indicates that a discretionary family trust may be unable to establish that expenses reimbursed by it were for the children’s benefit

A father who is the trustee of a discretionary family trust reimburses himself out of the trust funds for itemized expense of restaurant meals of the children and issues T3 slips to them.

CRA quoted its somewhat general statements in ITTN 11 (respecting trustee payments to children), which might be construed as consistent with this practice, but then quoted as “helpful” the statement in Degrace Family Trust that “the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of the beneficiary,” and also a statement in a 1999 technical interpretation that, where “the household expenditures [were] basically totaled and divided by the number of family members in order to determine the child’s share…it would be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.”

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.10 under s. 106(6)(b).

CRA indicates that a Cdn competent authority agreement with the Cdn shareholder of an S Corp. extends to income of a qualified subchapter S Corp. subsidiary thereof

Art. XXIX(5) of the Canada-U.S. Treaty contemplates the Canadian-resident shareholder of an S Corp. agreeing with the Canadian competent authority that the income of the S Corp will effectively be attributed to him or her as foreign accrual property income, so that the U.S. taxes payable by that shareholder can be eligible for a foreign tax credit. CRA indicated that since the template S-Corp. agreements provide that the FAPI that is so attributed is the income of the S Corp. computed under the Code, such income will include the income of a qualified subchapter S Corp. subsidiary of the S Corp – so that there is no need for the Canadian shareholder to enter into a separate S-Corp. agreement respecting the QSSS.

Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.9 under Treaties – Art. 29.

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