S. 120.2(1) generally provides for the generation of a credit from the carryforward of an AMT amount based on the the extent of the excess of the Part I taxes for relevant subsequent year excluding TOSI taxes (and other amounts) over the AMT amount for that year. CRA confirmed that the effect of this TOSI exclusion in the computation is that if the only reason that there was an excess of Part I taxes over AMT in the subsequent year was because of TOSI tax, no application of the AMT carryforward could occur in that year – even if the reason for the AMT carryforward amount was the realization of TOSI in the earlier year.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 11, 2024-1005801C6 under s. 120.2(1).

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Consequent on the breakdown of their marriage and separation, A, who held 80% of the shares of Opco, transferred a 20% shareholding to B such that para. (b) of the “excluded amount” definition in s. 120.4(1) now was satisfied. Although B was now deemed to not be related to A by virtue of s. 120.4(1.1)(e), the children of A and B, who held 20% of the Opco shares, continued to be “source individuals” in respect of B. Subsequent to such common share transfer, B’s common shares are converted on an Opco reorganization into Opco preference shares.

After noting that para. (b) referred only to property acquired by the individual (B) under a (marriage breakdown) transfer described in s. 160(4) and failed to refer to property substituted therefor, CRA indicated that since the preference shares were substituted property, the para. (b) exclusion ceased to apply when the common shares were converted to preference shares, so that B would be subject to TOSI on amounts derived from the preference shares if no other exclusion applied.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 10, 2024-1005811C6 under s. 120.4(1) – excluded amount – (b).

The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada on December 17, 2001 as a result of the replacement of its sole trustee by a Barbados corporate trustee. The taxpayer noted that an inter vivos by virtue of s. 249(1) generally had a calendar taxation year and argued that “year” in s. 94(1)(c)(i) referred to the 2001 calendar year, so that, by virtue of becoming a deemed resident trust under s. 94(1) on December 17. 2001, the taxpayer was deemed to have been resident in Canada for Part I purposes from the time of its formation in 2001 (i.e., both before and after the emigration time) – hence, s. 128.1(4) had no application and the trust avoided capital gains tax on shares held by it with an accrued gain. (This argument would have been more difficult under current s. 94(3)(a), which refers to the trust’s “particular taxation year.”)

In rejecting this submission and in finding that the trust realized gain on the shares pursuant to s. 128.1(4)(b), Gagnon J noted that the two provisions could be readily read as giving priority in this regard to s. 128.1(4), and that he could not see “any indication that Parliament's objective was to allow trusts such as the Trust to leave Canada without incurring the special emigration tax triggered by subsection 128.1(4).”

The trust subsequently made two substantial capital distributions to the taxpayer (the second of which effectively terminated the trust). Gagnon J confirmed the Crown’s position that the taxpayer had not given consideration to the trust for either distribution (e.g., in exchange for part or full satisfaction of his capital interest in the trust) so that he was liable under s. 160(1) for the trust’s unpaid departure tax. In this regard, Gagnon J first noted:

[I]f one party is enriched and the other impoverished by the same amount, it will be possible to conclude that the party who became richer did not offer equivalent consideration … .

In finding that that was the situation here, he indicated that:

• “the trustee's distributions had no impact on the rights of a beneficiary of the Trust who had or had not received a distribution;” and
• although the taxpayer “had a right under the Trust to be considered by the trustee for any distribution on the same basis as the other beneficiaries … there is no reason to believe that anyone would have paid even a very small amount for [this right].”

In also rejecting the taxpayer’s submission that the deeming by s. 107(2) of proceeds for the distributed property equal to its cost amount constituted the receipt by the trust of consideration for s. 160(1)(e) purposes, Gagnon J indicated inter alia that:

• the concept of “transfer” in s. 160 should not be muddied by tax deeming provisions,
• that the opposite view implied, for instance, that in the quintessential case of a parent gifting property to a child, s. 160 would not apply because the parent received deemed FMV proceeds under s. 69(1)(b) and,
• in any event, the deemed proceeds arising under s. 107(2) were not deemed to be paid by the beneficiary.

This case suggests that the CRA view -- that a trust, which distributes property to a non-resident in satisfaction of a capital interest in the trust which is taxable Canadian property, will be liable under s. 116(5) absent withholding or obtaining a s. 116 certificate (see, e.g., 2011-0399501E5) – may be incorrect where the trust is a discretionary trust.

Neal Armstrong. Summaries of Barwicz v. The King, 2024 CCI 93 under s. 128.1(4)(b), s. 160(1)(e) and General Concepts – FMV – Other.