News of Note

CRA indicates that it has no discretion to extend the 2-year refund application deadline under s. 227(6)

CRA reassessed a Canadian-resident discretionary personal trust to deny the s. 104(6) deduction it claimed for income it had distributed to a Barbados-resident beneficiary, on the grounds that there had been an income inclusion to that beneficiary under s. 105(1) rather than s. 104(13). On the basis that there was no Part XIII tax on a s. 105(1) benefit, the beneficiary applied, beyond the two-year period under s. 227(6) for doing so, for a refund of the Part XIII tax that had been withheld on the distributions.

In finding that the refund application should be denied, the Directorate stated:

[W]here the specific conditions of subsection 227(6) have not been met, the implied exception rule … prevents relief from being available under the more general provision of subsection 220(2.1). Such relief would not be harmonious with … the intention of Parliament to limit Part XIII refund applications to two years after the end of the calendar year in which the amount was paid to the non-resident. …

[T]here is no relief available to a taxpayer under the Canada-Barbados Tax Convention to override the two-year limitation period required by subsection 227(6).

The above answer implies that CRA regarded s. 220(2.1) as having a potentially broad scope. There was no indication of whether CRA’s refusal to exercise discretion under s. 220(2.1) was challenged by the beneficiary on the usual Vavilov grounds.

Neal Armstrong. Summaries of 6 October 2022 Internal T.I. 2021-0911541I7 under s. 227(6), s. 227(10.1), and s. 221.2.

Income Tax Severed Letters 21 February 2024

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

CRA publishes a new Folio on inter-provincial corporate income allocation

CRA has released a new Folio on the corporate interprovincial income allocation rules in Part IV of the Regulations. Positions noted include:

  • Gross revenue for Pt. IV purposes including the general allocation formula in Reg. 402(3) (generally giving equal weight to relative gross revenues and relative salaries and wages) does not include expenditure-related credits, such as expenditure reimbursements, volume rebates (“as these amounts would normally relate to expenditures incurred”) and governmental assistance respecting taxpayer expenditures.
  • Reg. 402(5), which provides that, for Reg. 402(3) purposes, corporate gross revenue does not include interest on bonds, debentures or mortgages, dividends - or rentals or royalties from property that is not used in connection with the principal business operations – is broadly interpreted by CRA to also extend to interest on promissory and other notes, bankers’ acceptances, intercompany loans, certificates, guaranteed investment certificates, and any unsecured debt instruments.
  • Regarding the allocation pursuant to Regs. 402(4)(j) and 402(5) of rents from land that is used in the corporation’s principal business operations, CRA considers that gross revenue from non-financial leases (generally, operating leases) should be allocated:
    • to the permanent establishment in the province in which the leased property is being used, where the corporation has reasonable knowledge of such information (based on what it already was required to know for business reasons); or.
    • if the corporation does not have reasonable knowledge of where the property is being used, or does not have a permanent establishment in the jurisdiction described in (a) above, the gross revenue should be allocated to the permanent establishment to which the person negotiating the lease may reasonably be regarded as being attached.
  • Regarding the recharacterization under Reg. 402(7) of fees paid by a corporation to a services provider as salary where the services are in respect of services that would “normally” be performed by the corporation’s employees, CRA considers that these rules apply where:
    • The service or function performed by the service provider must be one that is already performed by an employee of the corporation. Subsection 402(7) will not apply in situations where the corporation does not have any employees.
    • The need for the individual service provider to perform a particular service or function is short-term.
  • Each member of a partnership has a permanent establishment where the partnership has PEs, and the gross revenue and salaries and wages of the partnership for a taxation year are considered to be allocated under Reg. 402(6) based on the respective corporate partners’ shares of the partnership income for that year.

Neal Armstrong. Summaries of Income Tax Folio S4-F3-C2, Provincial Income Allocation, 30 January 2024 under Reg. 402(3), Reg. 402(5), Reg. 402(4)(g), Reg. 402(4)(j). Reg. 402(7), Reg. 402(8), Reg. 402.1(1) and Reg. 402(6).

We have translated 8 more CRA interpretations

We have translated 2 CRA interpetations released last week and a 6 further CRA interpretations released during April of 2002. Their descriptors and links appear below.

These are additions to our set of 2,756 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 21 3/4 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
2024-02-14 26 June 2020 External T.I. 2017-0688121E5 F - Déductibilité des intérêts et pénalités imposées sur les taxes foncières Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose interest on municipal taxes incurred as a business expense is deductible
Income Tax Act - Section 67.6 tardiness “penalty” added by municipality to unpaid property taxes came within s. 67.6
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures interest paid on property taxes incurred as a business expense is itself deductible
29 November 2023 External T.I. 2019-0812661E5 F - Allocation pour usage d’un véhicule à moteur Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(x) a carpooling arrangement is inherently unreasonable under s. 6(1)(b)(x)
2002-04-12 21 February 2002 External T.I. 2001-0105715 F - Choix prévu à 107(2.11) Income Tax Act - 101-110 - Section 107 - Subsection 107(2.11) election applies to all s. 107(2.1) distributions
21 February 2002 External T.I. 2001-0105725 F - Modification à 107(2.1) Income Tax Act - 101-110 - Section 107 - Subsection 107(2.1) s. 107(2.1) distribution can trigger capital loss to trust or beneficiary
21 February 2002 External T.I. 2001-0105735 F - Intérêts sur remboursement - gains en capital Income Tax Act - Section 132 - Subsection 132(2) MFT obligation to pay tax, if unpaid, will be reduced by application of capital gains refund
Income Tax Act - Section 132 - Subsection 132(2.1) MFT incurs interest charges if it waits for its capital gains refund to be applied to its Pt. I tax
27 February 2002 External T.I. 2001-0109675 F - Période admissible et vacance Income Tax Act - Section 122.3 - Subsection 122.3(1) period of employment abroad does not include vacation days that could have been taken abroad, but were not
18 March 2002 External T.I. 2002-0120065 F - Avoir fiscal français - 20(11) Income Tax Act - Section 90 - Subsection 90(1) French avoir fiscal did not reduce the dividend from a French company required to be included in the resident individual shareholder’s income
Treaties - Income Tax Conventions - Article 10 subsequent refund to Canadian shareholder of French avoir fiscal treated as a dividend payment for dividend withholding purposes
2 May 2002 Internal T.I. 2002-0122607 F - BIENS A USAGE PERSONNEL Income Tax Regulations - Regulation 1102 - Regulation 1102(2) effective severance for ITA purposes of land and building by Reg. 1102(2) does not apply to personal-use property
Income Tax Act - Section 248 - Subsection 248(1) - Property where Reg. 1102(2) does not apply, land and building are a single property generating a single gain

Messrs. Jones and Love discuss numerous fund taxation issues including restrictions on pushing out capital gains, and the onerous investment fund and EIFEL rules

There is space in this post to mention only a few of the fund issues discussed.

S. 132(5.3)(b) produced an inappropriate result for exchange-traded funds (ETFs) where a market maker, in order to avoid the units trading at a significant discount to NAV, would purchase units on the exchange and redeem them, and also subscribe for units, so that effectively all the redemption proceeds were paid to a unitholder (the market maker) with full cost for its redeemed units, without account being taken of the gains of the unitholders selling their units to the market maker.

This led to s. 132(5.31). However, if a significant portion of an ETF’s capital gains related to satisfying units redemptions rather than being from ordinary course trading activities, and the amount paid to redeeming unitholders was small relative to the aggregate NAV of all ETF units, then the ETF would only be able to allocate a small portion of those capital gains to redeemed unitholders (and a July 29, 2020 IFIC submission suggested that the ETF should be allowed to allocate to redeemed unitholder a proportionate amount of the ETF’s unrealized gains at the beginning of the day on which the redemptions occurred).

A trust breaching any of the conditions in paras. (a) or (b) of the definition of investment fund, even momentarily, will permanently lose its investment fund status and thus lose protection from the occurrence of a loss restriction event.

In practice, it is possible for funds to violate the concentration test in (b)(vi)(D) of the investment fund definition by investing in a bottom fund that is a partnership, a Canadian resident trust that is not an investment fund, or a non-resident trust or corporation, given that the fund might have obtained exemptive relief in this regard from the application of NI 81-102.

The s. 18.2 limitations on deducting interest and financing expenses can be relevant to a fund, for example, if the bank-owned asset manager (by virtue of providing seed capital) or the bank-owned broker-dealer (by virtue of its market-maker function) owned more than 50% of the FMV of the fund units.

The adjusted taxable income (ATI) definition in relation to a trust requires adding back (under Variable B(g)) the s. 104(6) deductions of the trust except to the extent of any portion designated under s. 104(19) in respect of taxable dividends, and Variable C(h) deducts any s. 104(13) inclusion to the trust except to the extent of the portion designated under s. 104(19).

A trust with interest and financing expenses of $30 (e.g., loan interest) which invested in Canadian equities, received $100 of taxable dividends and distributed $70 to its unitholders which it designated under s. 104(19), would have an ATI of $30 (reflecting the add-back of the IFE, but with not the add-back of the $70 under B(g) because of the s. 104(19) designation) so that the trust could deduct no more than $9 of interest in the year, thereby requiring a further distribution of $21 of income.

A trust receiving all of its income (being $100 of ordinary income) from a trust investment would have an ATI of nil - since, although it would have an addback of its $30 of IFE under B(a) and of $70 under B(g) for its s. 104(6) deduction, the $100 of income received from the subtrust and included in its income under s. 104(13) would be deducted under C(h), so that the IFE could not be deducted.

Neal Armstrong. Summaries of Josh Jones and Jeffrey Love, "Recent Developments in Asset Management", draft 2023 CTF Annual Conference paper under s. 132(5.3)(a), s. 132(5.3)(b), s. 104(7.1), s. 132(4) – capital gains redemption, s. 132(5.31), s. 251.1(2)(b), s. 251.2(1) – investment fund, s. 18.2(1) – excluded entity – (c), eligible group entity, adjusted taxable income, and s. 94(1) - fixed interest.

CRA finds that a carpooling arrangement is inherently unreasonable under s. 6(1)(b)(x)

In order to encourage carpooling and have a positive effect on the environment, a company pays a car travel allowance as follows:

  • Per kilometre rate: $0.50
  • Additional allowance of $0.10 per kilometre for each additional person accompanying the driver.

In finding that the additional allowance rendered the total allowance as a taxable benefit, CRA stated:

[T]he two parts of the allowance constitute a single allowance since they relate to the same use of the vehicle. … [T]his allowance is deemed not to be reasonable under subparagraph 6(1)(b)(x) because the use of the vehicle is not determined solely on the basis of the number of kilometres driven to perform the duties of the employment.

Neal Armstrong. Summary of 29 November 2023 External T.I. 2019-0812661E5 F under s. 6(1)(b)(x).

CRA finds that interest but not penalties on municipal taxes incurred as a business expense are deductible

Regarding interest on municipal taxes, CRA stated:

[I]nterest charged on an unpaid balance of property taxes will be deductible if the property taxes themselves are deductible.

Regarding a tardiness penalty of 0.5% per month of the unpaid taxes added by a municipality pursuant to s. 250.1 of the Quebec Act respecting municipal taxation ("AMT"), CRA stated:

[S]ection 67.6 … prohibits the deduction in computing income of any penalty imposed under the laws of a country or a political subdivision thereof. A penalty imposed under section 250.1 of the AMT therefore comes within this provision and cannot be deducted in computing business income.

It did not discuss whether the “penalty” was in substance something else such as interest.

Neal Armstrong. Summaries of 26 June 2020 External T.I. 2017-0688121E5 F under s. 18(1)(a) – income-producing purpose, and s. 67.6.

CRA has released the final version of the 3 November 2023 APFF Financial Strategies and Instruments Roundtable

We have translated the complete 3 November 2023 APFF Financial Strategies and Instruments Roundtable. Q.2 was released in final form on January 24, and the balance of the Roundtable was released by CRA in final form today. It does not vary significantly from the preliminary version that was provided in November. For your convenience, the table below provides links to the questions, and to the summaries that we prepared in November.

Topic Descriptor
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 1, 2023-0976911C6 F - CELIAPP - Changement d'usage / FHSA - Change in use Income Tax Act - Section 146.6 - Subsection 146.6(1) - Qualifying Withdrawal - Paragraph (d) a recent change of a home from rental to principal-residence use cannot ground an FHSA withdrawal
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 2, 2023-0978631C6 F - CELIAPP - Autoconstruction d'une habitation - FHSA - Self-construction Income Tax Act - Section 146.6 - Subsection 146.6(1) - Qualifying Withdrawal - Paragraph (c) written agreement for construction before October 1 could be satisfied with agreements with trades by self-constructing individual
Income Tax Act - Section 146.6 - Subsection 146.6(1) - Qualifying Withdrawal - Paragraph (a) acquisition of home is when it becomes habitable
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 3, 2023-0976921C6 F - CELIAPP - Acquisition d'une quote-part d'une habitation admissible / FHSA - Acquisition of a share of a qualifying home General Concepts - Ownership reference to acquiring a qualifying home includes acquiring a co-ownership interest
Income Tax Act - Section 146.6 - Subsection 146.6(1) - Qualifying Withdrawal a qualifying withdrawal from an FHSA can fund the purchase of a co-ownership interest in a qualifying home
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 4, 2023-0990531C6 F - Life insurance policy transfer Income Tax Act - 101-110 - Section 106 - Subsection 106(3) s. 106(3) could apply to a distribution of a dividend in kind
Income Tax Act - 101-110 - Section 107 - Subsection 107(2) s. 107(2) inapplicable to distribution in satisfaction of a trust debt owing to the beneficiary
Income Tax Act - Section 148 - Subsection 148(7) a trust distribution of a life insurance policy to a beneficiary was made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied
2 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 5, 2023-0978561C6 F - Partnership – distribution of a life insurance police Income Tax Act - Section 248 - Subsection 248(35) holding of policy by partnership prior to its distribution to partner does not count towards the latter’s holding period
Income Tax Act - Section 148 - Subsection 148(7) s. 98(2) generally prevails over s. 148(7)
Income Tax Act - Section 98 - Subsection 98(2) disposition of distributed life insurance policy at FMV pursuant to s. 98(2), rather than s. 148(7) applying
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 6, 2023-0994241C6 F - Consequences of Transfer of DSUs to a corporation Income Tax Act - Section 54 - Capital Property deferred share units were not capital property
Income Tax Act - Section 85 - Subsection 85(1.1) DSU rights are not eligible property and not capital property
Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement transfer of DSU to corporation would cause it to cease to qualify, perhaps retroactively
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 7, 2023-0994231C6 F - Additional reporting - trusts subject to exception Income Tax Regulations - Regulation 204.2 - Subsection 204.2(1) trusts not coming within the preamble to ITA s. 150(1.2) must still provide the additional Reg. 204.2(1) information if not excepted under ss. 150(1.2)(a) to (o)
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 8, 2023-0976901C6 F - RPP survivor benefit flowing through a GRE Income Tax Act - Section 60 - Paragraph 60(j) flow-through of pension benefit by estate to surviving spouse through cash and note issuance/ no FHSA deduction for s. 104(27) amount
Income Tax Act - 101-110 - Section 104 - Subsection 104(24) income can be distributed to estate beneficiary by issuing a demand note to her
Income Tax Act - 101-110 - Section 104 - Subsection 104(27) full flow-through of a pension benefit received by the estate to the surviving spouse for s. 60(j) purposes by the estate issuing her a note
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 9, 2023-0976941C6 - Withholding on registered plans Treaties - Income Tax Conventions - Article 18 RRSP/ RRIF payments are “pensions” under Art. XVIII rather than “other income” under Art. XXII of the US Convention, but must be "periodic pension payments" for 15% rate to apply
Treaties - Income Tax Conventions - Article 22 reduced 15% withholding rate under Art. 22 of the Canada-U.S. Convention applies to TFSA and RDSP trusts
3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 10, 2023-0978651C6 - Exchange rate for a stripped interest coupon Income Tax Act - Section 261 - Subsection 261(2) - Paragraph 261(2)(b) deemed interest on an FX-denominated stripped coupon should be translated on a daily basis

McCartie – Tax Court of Canada follows the exclusion in prior criminal proceedings under s. 24(2) of the Charter of much of the evidence against the taxpayers

CRA assessed the taxpayers to deny most deductions claimed by them and to impose gross negligence penalties. In addition, the taxpayers were charged with tax evasion. The BC Provincial Court in the criminal proceedings found that (i) the failure of CRA investigators to make notes, and the negligent loss of detailed notes made by another auditor, denied them of the right to a fair trial contrary to s. 11 of the Charter, and (ii) the failure by the CRA investigators to produce a copy of search warrant when asked was a significant breach of s. 8 of the Charter. The BC Court imposed remedies under s. 24 of the Charter in respect of these breaches at several stages of the criminal proceedings and, in the end, stayed the criminal charges on the basis that it would not be possible for the couple to receive a fair trial. The CRA assessments were based principally on bank records which CRA had collected pursuant to its statutory powers in an audit (the “second audit”) conducted by civil auditors but which had been prompted by a suspicion that the taxpayers had engaged in tax fraud.

In this voir dire, Boyle J held that s. 24 of the Charter permitted him to impose remedies for Charter breaches determined by another court for which it had already imposed its own remedy. This extended to breaches of the taxpayer’s rights under ss. 7 and 11 of the Charter, even though they could only be breached in the context of criminal proceedings. Boyle J exercised his discretion under s. 24(2) to determine that the Crown could not, in the context of the Tax Court proceedings, introduce or rely on any evidence that was (i) first collected from the search and seizure at the taxpayer’s home to justify (a) the amount of tax owing, or (b) reassessments after the normal assessment period had expired, and (ii) collected from the second audit of the taxpayers, or first collected from the search and seizure at their home, to support the penalties assessed.

He stated that “this Court [should] clearly impose consequences in the form of section 24 remedies to avoid Canadians losing faith in their Canadian justice system’s commitment and obligation to ensure that our shared tax burden is both lawfully shared by taxpayers, and lawfully administered and collected by our revenue authorities… .”

Neal Armstrong. Summaries of McCartie v. The King, 2024 TCC 16 under Charter s. 24(2) and General Concepts – Onus.

Income Tax Severed Letters 14 February 2024

This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.