News of Note
Deshaies – Federal Court of Appeal criticizes the Federal Court for suggesting to CRA that it provide relief to a taxpayer
In affirming the decision below to deny judicial review of a decision of CRA to not recommend a remission order under s. 23(2) of the Financial Administration Act, Boivin JA stated:
The granting of a remission order is an exceptional measure which entails a derogation not only of the general taxation rules but also of the principle of equal treatment before the law.
The Court below, after denying relief, had added, in obiter:
Considering that the applicant likely doubly paid his taxes for the 2000 to 2003 taxation years, and considering the applicant’s mental health status during that period, the Court suggests that the CRA try to mitigate this taxpayer’s situation to the extent possible.
Boivin JA stated (at para. 7):
[These] remarks … were ill-considered. The tenor of the “Obiter” in leaving an impression that the appellant “likely” was doubly taxed and that the CRA should concern itself with this situation, not only contradicts the judgment but has the effect of creating expectations, which appear to us to be inopportune and unfortunate.
Neal Armstrong. Summary of Deshaies v. Canada, 2019 CAF 300 under Financial Administration Act, s. 23(2).
Church of Atheism of Central Canada – Federal Court of Appeal finds that refusal to register a Church of Atheism did not contravene the Charter
The Church of Atheism of Central Canada, whose application for charitable registration had been denied, unsuccessfully submitted that the common law test governing the advancement of religion as a head of charity was invalid as contrary to ss. 2, 15, and 27 of the Charter. Rivoalen JA stated:
[S]ection 2 of the Charter protects the rights of the appellant’s members to practise their beliefs in Atheism and the Minister cannot interfere with the practice of these beliefs … . However … the Minister’s refusal to register the appellant as a charitable organization does not interfere in a manner that is more than trivial or insubstantial with the appellant’s members ability to practise their atheistic beliefs. The appellant can continue to carry out its purpose and its activities without charitable registration … .
CRA reaffirms that income derived from a prior year’s sale of an excluded business is not excluded from the TOSI rules
ABC Co., which was wholly-owned by a family trust, of which Mr. and Mrs. A are beneficiaries, carried on a trucking business in which both were actively engaged on a regular, continuous and substantial basis throughout the many years of operation. The proceeds of the sale of this business in 2018 were used to establish an investment business in which only Mrs. A is active.
In finding that the excluded business exception under the split income rules will be unavailable to Mr. A, CRA indicated that any taxable dividends received by him are considered to be derived directly or indirectly from such investment business – so that, since he is not actively engaged in that business, such amounts will not be “derived directly or indirectly from an excluded business” of Mr. A “for the year.” Effectively, this is a finding that such amounts are not derived indirectly from the former trucking business, even though the proceeds of the sale thereof indirectly gave rise to such dividends. Consequently, the taxable dividend received by Mr. A in, say, 2019 are subject to TOSI unless another exception applies.
A more detailed response to the same question was provided in 2019-0792001E5 F.
Markou – Federal Court of Appeal finds that Quebec and ROC donations have similar requirements for a donative (impoverishing) intent
Ontario and Quebec taxpayers had engaged in the same leveraged donation program which Maréchaux had found did not give rise to any “gifts” for charitable credit purposes, even for the cash portions. In Markou, Paris J found that “donative intent in civil law, as in common law, is always an essential element of a gift, even a partial gift,” whereas here “there was just one interconnected transaction and no part of it can be considered a gift that was given in expectation of no return.” In dismissing the appeal, Noël CJ stated that this finding:
...necessarily flows from … the loan agreements which made each of the appellants’ entire donation conditional on the loan being approved by the lender.
As “no part of [the interconnected transaction] can be considered a gift that the appellant[s] gave in the expectation of no return” … [i]t follows that there was no gift whether the matter is considered from a common law or a civil law perspective. …
He also stated:
[W]here a person anticipates receiving tax benefits that exceed the amount or value of an alleged gift, the donative intent is necessarily lacking. Impoverishment being an essential element of a gift under both the civil law and the common law, the purported gift constituted by the cash contribution would fail on this account as well… .
CRA finds that shares distributed out of an inter vivos trust on an active individual’s death were received as a consequence of death for s. 120.4(1.1)(b)(ii) purposes
An individual (Mr. X) had been actively engaged in a business of a corporation (Investco). CRA found that where a discretionary inter vivos trust provided, on his death, for the distribution of Investco common shares to Mr. X’s adult children, s. 120.4(1.1)(b)(ii) deemed a specified individual (one of such children) who received a dividend on such shares to have also been actively engaged etc. in the Investco business for the same five years, so that such dividend qualified in her hands as being from an excluded business. S. 120.4(1.1)(b)(ii) was so engaged on the basis of a CRA position that that property received from an inter vivos trust, the terms of which unconditionally require that it distribute the property to the individual on the death of another person, can be considered as property acquired by the individual as a consequence of that person’s death. (Regarding GAAR where s. 120.4(1.1)(b)(ii) has been engaged, CRA looks for a sufficient connection between the deceased person and the property that is being distributed, and the specified individual, to support the application of the s. 120.4(1.1)(b)(ii) deeming rule.)
However, if it instead was preferred shares of Investco that Mr. X bequeathed to his children, and the inter vivos trust at all relevant times held the common shares of Investco, s. 120.4(1.1)(b)(ii) would not apply to a dividend paid, following Mr. X’s death, on those common shares to the trust and distributed by it to the children.
We have published a further 6 translations of CRA interpretations released in April 2011, including 3 items from the 2010 APFF Roundtable. Their descriptors and links appear below.
These are additions to our set of 1,023 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA considers that a s. 247(12) secondary-adjustment deemed dividend paid by Canco to an LLC sister qualified under Art. IV(6) for the 5% Treaty-reduced rate on dividends to its U.S. parent
Canco, which is wholly-owned by a disregarded US LLC (Parentco LLC which, in turn is wholly-owned by a corporation residing in the US for Treaty purposes (Parentco),), will be assessed by CRA to include in its income, under s. 247(2), the difference between an arm’s length price for goods sold by Canco to a sister company (Sisterco LLC, a disregarded LLC wholly-owned by Parentco LLC) and the consideration paid, and also will be assessed for a secondary adjustment under s. 247(12) on the basis that the resulting benefit conferred on Sisterco LLC was deemed to be a dividend that was paid by Canco and that was subject to a Pt. XIII remittance obligation.
In finding that this deemed dividend would be eligible for a Treaty-reduced rate, CRA had to address Art. IV(6) of the Canada - U.S. Treaty having regard to the requirements thereunder that the deemed dividend amount be considered under U.S. tax law to have been derived by Parentco through Sisterco LLC and Parentco LLC and that by reason of those LLCs being fiscally transparent, the U.S. treatment of such amount was the same as its treatment would be had it been derived directly by Parentco.
CRA considered that even if there was no adjustment in the U.S. pursuant to competent authority proceedings, this test would be satisfied given that from a US tax perspective, Parentco would have a reduced cost of the inventory considered, from that perspective, to have been purchased by it directly from Canco, so that the s. 247(12) deemed dividend corresponded to income (i.e., inventory profit) generated by Parentco. Consequently, Art. IV(6) would result in the s. 247(12) deemed dividend being derived by Parentco for purposes of Art. X(1) and (2), and Parentco would benefit from the 5% dividend rate under Art. X(2)(a).
The requirements of Art. IV(6) would be more obviously satisfied if a corresponding adjustment were made in the U.S. to consider that Canco had paid a dividend that was derived by Parentco through Parentco LLC. Thus, either way, the s. 247(12) amount would not be disregarded for U.S. tax purposes.
CRA considers that a s. 107(2) rollout of Cdn Realtyco shares (i.e., TCP) to a NR-owned corporate beneficiary is inherently abusive
CRA indicated that 2016-0669301C6 and 2017-0693321C6 dealt with an abusive circumvention of s. 104(5.8) through a s. 107(2) rollout by a Canadian-resident discretionary trust to a Canadian corporation whose shares were wholly owned by a newly established Canadian-resident discretionary trust; and 2017-0724301C6 dealt with the circumvention of ss. 107(5) and (2.1) by such a trust rolling out, under s. 107(2), property that was not taxable Canadian property to a newly-formed Canadian corporation which was a corporate beneficiary.
The GAAR Committee recently reviewed a similar distribution by a Canadian resident discretionary trust, but with the distributed property being taxable Canadian property (TCP) that did not come within the carveouts to s. 107(5) (principally, property described in ss. 128.1(4)(b)(i) to (iii).) Such distributed property was the shares of a private Canadian real estate corporation.
The Committee recommended that GAAR be applied to that distribution on the basis that, even though the distributed property was TCP, it was not the type of property that was specifically carved out in s. 107(5). Such transfer was considered as an abuse of ss. 107(2), (2.1) and (5). CRA noted that it would be appropriate to apply the same conclusion whether or not the transactions are undertaken to avoid the 21-year disposition rule under s. 104(4) (which seems to ignore that you don’t get to the abuse test under s. 245(4) if there is no avoidance transaction.)
CRA effectively confirms that a pipeline transaction where there are non-resident beneficiaries currently generates Pt XIII tax
In a post-mortem pipeline transaction, the estate typically sells its shares of a Canadian private corporation (Canco) having full ACB but a lower paid-up capital to a non-arm’s length newco (Holdco) for a note of Holdco, which on its subsequent repayment effectively extracts the corporate surplus of Canco. CRA indicated that under the new look-through rule in s. 212.1(6)(b), the non-resident beneficiaries of the estate generally will be subject to a deemed dividend based on their proportionate share of the excess of the note over the paid-up capital of the transferred Canco shares.
CRA adverted to the recent Finance comfort letter, but noted that it did not extend to non-GRE trusts (which would include life interest trusts, such as alter ego or spousal trusts).