News of Note

Grenon – Tax Court of Canada finds that the purported establishment of “alter ego” MFTs through which an RRSP invested in operating businesses was a GAAR abuse

In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis that 171 individuals (the “Investors”) - immediate and extended family members, friends, employees, business associates and others - each subscribed approximately $750 for units of each Income Fund. The taxpayer’s RRSP then invested a large sum (e.g., over $150 million for one of the Income Funds) in subscribing for additional units. The Income Funds invested in underlying LPs carrying on businesses through an intermediate sub trust and master limited partnership.

Smith J found that there had been a failure to satisfy the requirement in Reg. 4801(a)(i)(A) that there had been a “lawful distribution” of the units to the Investors in accordance with the offering memorandum exemption from a prospectus-filing requirement, given that a substantial number of the Investors were adults who did not pay for their own units, or minors. As the Income Fund units thus did not qualify as MFT units, the RRSP was subject to tax and penalty tax on the basis of not holding qualified investments.

In the alternative, Smith J considered whether GAAR should apply even if the units in the Income Funds were qualified investments. After finding that there was a tax benefit and avoidance transactions (being the establishment of the Income Funds through which the RRSP could invest in the businesses), Smith J also found that there was an abuse under s. 245(4), stating:

[T]he object, spirit and purpose of subsection 146(4) is to prevent an annuitant from making tax deductible contributions … and then using those funds for business purposes and thus take advantage of the tax-exempt status of the plan. …

[T]he acquisition by the RRSP Trust of 99% of the units of the Income Funds defeated the object, spirit and purpose of the provision and was contrary to the Parliament intention that a mutual fund trust was to be widely held. It was certainly not within the contemplation of Parliament that a mutual fund trust that was a qualified investment for RRSP purposes would effectively become one investor’s alter ego. …

[T]he Appellant sought to abuse the RRSP regime and the provisions of the Act by establishing the Income Funds … .

After finding that the Minister’s assessment of the taxpayer himself respecting the RRSP income pursuant to s. 56(2) was unsupported by the wording of that provision, Smith J went on to indicate that he would have upheld the reassessments of the taxpayer in those amounts on the basis of the GAAR, but for this resulting “in a duplication of the tax which the Minister has also sought to impose on the RRSP Trust pursuant to subsection 146(10.1)” – which could not “be considered ‘reasonable in the circumstances’ as contemplated in subsection 245(5).” Accordingly, only the assessments of the RRSP under s. 56(2) and not of the taxpayer under s. 56(2), were sustained.

Neal Armstrong. Summaries of Grenon v. The Queen, 2021 TCC 30 under Reg. 4801(a)(i)(A), s. 245(4), s. 204 2(1) and General Concepts - Window Dressing.

CRA no longer imputes interest on mismatched cross-border swap payments

At 1984 CTF Roundtable, Q.60, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.

CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247. CRA gave a similar response at 5 September 2020 IFA Roundtable, Q.2

CRA also stated that “CRA considers that all amounts payable or receivable under the terms of a swap agreement are on account of income and are to be included or deducted under section 9.” This is an over-simplification – for example, CRA would recognize that on a cross-currency swap hedging an FX borrowing, the hedge of the principal component generally would be on capital account.

Neal Armstrong. Summary of 7 October 2020 APFF Roundtable, Q. 16, 2020-0867071C6 F under s. 16(1) and s. 9 – capital gain vs. profit – swaps.

CRA indicates that s. 74.4(2) could apply to a s. 51 estate freeze-style reorganization by two spouses in favour of two discretionary trusts for them and their spouse

Mr. X and Mrs. X, each owning 50% of the common shares of corporation that is not a small business corporation, effect a s. 51 exchange of their respective shareholdings for the issuance of freeze preferred shares, with a discretionary trust created for each spouse (but with discretion to pay income or capital thereof to the other spouse) subscribing nominal and equal amounts for new common shares of the corporation.

CRA indicated that the s. 74.4(2) could apply following this transaction, given that “one of the spouses could potentially be entitled to more than 50% of the income of the Corporation because of his or her beneficial interest in both trusts,” so that there could be a resulting transfer of income from one spouse to the other.

Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 15, 2020-0852271C6 F under s. 74.4(2).

Income Tax Severed Letters 14 April 2021

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

CRA comments on when utilities can be added to rent for CERS purposes and notes CERS/CEWS similarity for computing revenue reduction

The definition of “qualifying rent expense” for purposes of the CERS (rent subsidy) refers to “rent … including … regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease.” In clarifying (so to speak) what this means, CRA stated:

[I]f a net lease requires an amount to be paid to a third party as a regular instalment of operating expenses customarily charged to the tenant under a net lease, this payment may be a qualifying rent expense. Examples of third parties might include property managers or utility service providers.

CRA also confirmed that an eligible entity must compute its qualifying revenue using the same approaches and elections for both the CEWS (wage subsidy) and the CERS for a particular qualifying period.

For example, if Corporations A and B have jointly elected that the qualifying revenue of the affiliated group is to be determined on a consolidated basis under s. 125.7(4)(b) for qualifying period 9 for CEWS purposes (i.e., period 2 for CERS purposes) then, even if Corporation B did not apply for the CEWS for that period, it must determine qualifying revenue on a consolidated basis for that qualifying period in determining its revenue reduction for CERS purposes.

In addition, CRA provided a useful table showing all the upcoming application deadlines for periods 8 to 13 for the CEWS, along with the corresponding periods for the CERS (periods 2 to 6).

Neal Armstrong. Summaries of 23 March 2021 TEI Roundtable, 2021-0879631C6 under s. 125.7(1) – qualifying rent expense – (a)(i)(C)(II), rent subsidy percentage and s. 125.7(2.1).

CRA confirms that auditors must submit unclaimed GST/HST rebates for processing effective the return due date for the audited reporting period

In confirming that ETA s. 296(2.1) requires CRA auditors to allow GST/HST unclaimed rebates as a deduction from assessments of net tax, CRA stated:

Current audit procedures require the auditor to verify the validity of the unclaimed rebate and, if the rebate claim is valid, to send the rebate claim to be keyed into our system and processed with an effective date that is the same as the due date of the registrant's return for the reporting period under audit.

Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.9 under s. 296(2.1).

CRA finds that an Indian who is now working at a home office on the reserve for COVID reasons has become exempt from the resulting employment earnings

CRA’s Guideline 3 exempts from tax all income earned by a status Indian from employment if more than 50% of the duties of the employment are performed on a reserve and the employer or employee lives on a reserve.

Applying this Guideline, CRA found that the employment income of an employee, who previously worked at a location of the employer that was not on a reserve, but is now working from home on a reserve due to the COVID-19 pandemic, has now become tax exempt.

Neal Armstrong. Summary of 4 February 2021 External T.I. 2020-0875231E5 F under Indian Act, s. 87.

CRA indicates that Quebec supplementary maternity benefits subsidized childcare centres are taxable, but may not be subject to EI deductions

CRA indicated that supplementary maternity benefits paid under a plan for Quebec's subsidized childcare centres were taxable income subject to source deductions and T4 reporting, and also were subject to EI deductions unless:

  • The total amount of the combined supplement and weekly EI benefits did not exceed the employee's gross regular weekly earnings; and.
  • The supplement did not reduce the employee's accrued credits such as for a retiring allowance, unused sick leave or vacation leave.

Neal Armstrong. Summary of 27 August 2020 Internal T.I. 2016-0675801I7 F under s. 6(1)(a).

We have translated 11 more CRA Interpretations

We have published translations of 3 interpretations released by CRA last week, and a further 9 translations of CRA interpretation released in June and July, 2008. Their descriptors and links appear below.

These are additions to our set of 1,483 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2021-04-07 4 February 2021 External T.I. 2020-0875231E5 F - Revenu d’emploi d’un Indien en travail à domicile Other Legislation/Constitution - Federal - Indian Act - Section 87 an Indian who is now working at a home office on the reserve for COVID reasons has become exempt from the resulting employment earnings
27 August 2020 Internal T.I. 2016-0675801I7 F - Prestations de maternité complémentaires Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) Quebec supplementary maternity benefits subsidized childcare centres are taxable, but may not be subject to EI deductions
2008-07-25 11 July 2008 External T.I. 2008-0271941E5 F - Frais de déplacement-principal lieu d'affaires Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) use of their homes for voyage planning did not render pilots’ homes their principal place of business
2008-07-04 28 April 2008 External T.I. 2007-0238071E5 F - Voiturier public Treaties - Income Tax Conventions - Article 8 taxpayer need not own the vehicles or operate them provided that it is engaged in all other aspects of the transporting service and is responsible to the customers
23 June 2008 External T.I. 2008-0268121E5 F - 75(2) et Prêt consenti à une fiducie Income Tax Act - Section 75 - Subsection 75(2) in order for s. 75(2) not to apply to loan to trust, the loan must be independent of the trust terms
7 July 2008 External T.I. 2008-0275961E5 F - Crédit d'impôt pour études Income Tax Act - Section 118.6 - Subsection 118.6(1) - Qualifying Student post-doctoral fellow focusing on research is not a student
2008-06-27 16 June 2008 External T.I. 2008-0270251E5 F - Bien utilisé dans une entreprise agricole Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) tax effect remained the same following the 2006 amendments
13 June 2008 External T.I. 2008-0270721E5 F - Allocations pour l'usage d'un véhicule à moteur Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(vii.1) allowance for employees’ to return to work after regular shift to be on call was taxable
2008-06-20 29 May 2008 External T.I. 2007-0255321E5 F - Déclaration de renseignements Income Tax Regulations - Regulation 200 - Subsection 200(1) broad range of fees, reimbursements and honoraria paid by health centre required to be reported, but exclusive of GST
2 June 2008 External T.I. 2007-0262511E5 F - Obligation de produire un feuillet T4A Income Tax Regulations - Regulation 200 - Subsection 200(1) no T4A required by individual in personal capacity paying for professional or home-repair services
2 June 2008 External T.I. 2008-0264161E5 F - Benefit Conferred to a Shareholder Income Tax Act - Section 15 - Subsection 15(1) benefit on sole shareholder whose parents were the occupants of the corporate-owned home

We have translated the questions released by CRA from the 2020 APFF Roundtable

We have published translations of the 14 questions from the October 7, 2020 (regular) APFF Roundtable that were released last week. Although most of them have been covered in various News of Note posts, for your convenience, they are also summarized and linked in the table below.

Topic Descriptor
7 October 2020 APFF Roundtable Q. 1, 2020-0852131C6 F - Meaning of reasonable error Income Tax Act - Section 207.06 - Subsection 207.06(1) examples of what CRA has accepted as a “reasonable error” in making an RRSP or TFSA over-contribution
Income Tax Act - Section 204.1 - Subsection 204.1(4) meaning of "reasonable error"
7 October 2020 APFF Roundtable Q. 2, 2020-0852141C6 F - APFF 2020 Roundtable Q2 - Request for Information Income Tax Act - Section 231.1 - Subsection 231.1(1) CRA may request personal bank statements when conducting indirect reviews
7 October 2020 APFF Roundtable Q. 3, 2020-0852151C6 F - Safe income Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) repayment of loan, that had funded a dividend creating a safe income deficit, out of subsequent earnings reduced SIOH
7 October 2020 APFF Roundtable Q. 4, 2020-0852161C6 F - Election Income Tax Act - Section 164 - Subsection 164(6) CRA will not follow the ARQ in allowing a s. 164(6) loss carryback claim on a terminal return before the GRE’s T3 return is assessed
7 October 2020 APFF Roundtable Q. 5, 2020-0852171C6 F - Usufruct of a principal residence Income Tax Act - Section 248 - Subsection 248(3) application of s. 248(3) to usufruct created by will and terminated by death of usufructuary or surrender by her, or assignment or death by bare owner
Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(b) - Subparagraph 70(6)(b)(ii) s. 70(6)(b)(ii) not satisfied where residence of deceased passes to a usufruct for his surviving spouse for a fixed term of years
Income Tax Act - 101-110 - Section 107 - Subsection 107(4) application of s. 107(4) to termination of deemed s. 248(3)(a) spousal trust
Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) a deemed s. 248(3) testamentary usufruct trust might access the principal residence exemption on the spousal usufructuary’s death or on her surrendering her interest
7 October 2020 APFF Roundtable Q. 6, 2020-0852181C6 F - Par. 5(2)(b) of the Employment Insurance Act Other Legislation/Constitution - Federal - Employment Insurance Act - Section 5 - Subsection 5(2) - Paragraph 5(2)(b) CRA now applies a “proportionate attribution approach” in applying the s. 5(2)(b) test of “control … of … voting shares”
7 October 2020 APFF Roundtable Q. 7, 2020-0852191C6 F - Capital dividend and series of shares Income Tax Act - Section 83 - Subsection 83(2.1) s. 83(2.1) “should be considered” where one of the main purposes of a reorganization is to stream capital dividends
Income Tax Act - Section 83 - Subsection 83(2) capital dividends can be paid on one series and not the other
7 October 2020 APFF Roundtable Q. 8, 2020-0852201C6 F - Acheminement du CDC / CDA Streaming Income Tax Act - Section 83 - Subsection 83(2.1) s. 83(2.1) does not generally apply to the streaming of capital dividends to one of the original shareholders
7 October 2020 APFF Roundtable Q. 9, 2020-0852211C6 - Capital dividend Income Tax Act - Section 83 - Subsection 83(2) a s. 83(2) dividend election cannot be made on a formula amount
7 October 2020 APFF Roundtable Q. 10, 2020-0852221C6 F - Interest-free loan to a related foreign company Income Tax Act - Section 17 - Subsection 17(1.1) s. 17 generally does not apply to loans made by individuals, but s. 247 can apply
Income Tax Act - Section 247 - New - Subsection 247(2) - Paragraph 247(2)(a) s. 247 would apply to an interest-free loan made by a Canadian individual to a non-arm’s length non-resident corporation
7 October 2020 APFF Roundtable Q. 11, 2020-0852231C6 F - Designation under subsection 89(14) Income Tax Act - Section 89 - Subsection 89(14) dividend designation cannnot state it is the GRIP, if less
Income Tax Act - Section 185.1 - Subsection 185.1(2) an eligible dividend designation must state a dollar amount, and GRIP variances are addressable under s. 185.1(2)
7 October 2020 APFF Roundtable Q. 12, 2020-0852241C6 F - CRA role in the interprovincial arbitration process Income Tax Regulations - Regulation 400 a taxpayer can make representations at the first level of the process for resolving inter-provincial income allocation issues
7 October 2020 APFF Roundtable Q. 13, 2020-0852251C6 F - Small Business Deduction Income Tax Act - Section 125 - Subsection 125(5.1) s. 55(2) gain from active-asset shares do not grind business limit
Income Tax Act - Section 125 - Subsection 125(7) - Adjusted Aggregate Investment Income s. 55(2) gain from a share can qualify as a gain from an active asset for AAII purposes
7 October 2020 APFF Roundtable Q. 14, 2020-0852261C6 F - Section 128 E.T.A. Excise Tax Act - Section 128 - Subsection 128(4) a USA stripped away voting control of a parent over its wholly-owned subs so that it was not closely related to them for ETA purposes