News of Note

Barwicz – Tax Court of Canada finds that a distribution by a discretionary trust in satisfaction of a capital interest occurred for no consideration for s. 160 purposes

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 s. 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.

CRA confirms that a RRIF may not make a Reg. 8303(6) qualifying transfer to a RPP in connection with a past service event

Reg. 8303(6) contemplates qualifying transfers from, for example, an RRPS or a money purchase provision of a registered pension plan, to a defined benefit provision of a registered pension plan (including an individual pension plan) to fund past service benefits, for example, when additional periods of pensionable service are credited. CRA confirmed that no transfer of property from a RRIF to a defined benefit provision of a registered pension plan can occur pursuant to Reg. 8303(6).

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 8, 2024-1007121C6 under Reg. 8303(6).

CRA rules that using employees to provide on-line health services to non-resident patients from home offices in Canada does not create a PE in Canada

Three corporate taxpayers, which are resident in three countries with which Canada has treaties, use employees residing in those respective countries to provide online (e.g., by phone or video) services to patients in the same time zone. The taxpayers have now started providing the same services to patients in the same time zone as a Canadian province (“western patients”) but will not provide services to any patients located in Canada.

In order to accommodate employees who do not wish to work on night shifts in providing services to western patients, the taxpayers will permit (and financially assist) them to rent short-term accommodation (they will stay no more than 183 days) in such province, so that they can use their home office there to provide the services to western patients using computers provided by their employer. The taxpayers will continue to maintain their servers outside Canada and will have no access rights to such home offices.

CRA ruled that the taxpayers will be considered to be carrying on business in Canada while such employees are providing such services, but that they will not be considered to be carrying on business in Canada through a permanent establishment, as defined in Article 5 or V of the applicable treaty, solely as a consequence of such services being so provided.

Neal Armstrong. Summary of 2024 Ruling 2023-0984281R3 under Treaties – Income Tax Conventions – Art. 5.

Income Tax Severed Letters 10 July 2024

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

CRA indicates that a PAC cannot be held by a trust not listed in Reg. 304(1)(c)(iii)(A)

A prescribed annuity contract (PAC) generally provides a more beneficial tax treatment to the annuitant than other types of annuities, which are subject to the accrual rules in s. 12.2(1). One of the requirements to be a PAC under Reg. 304(1)(c) is the requirement in Reg. 304(1)(c)(iii)(A) that the “holder” of the annuity contract be an individual (other than a trust) or a listed type of trust, i.e., an alter ego trust, joint spousal or common-law partner trust, post-1971 spousal or common-law partner trust, or qualified disability trust.

CRA rejected a suggestion that a PAC could be held in a non-listed trust in reliance on Reg. 304(3)(a), which deems the annuitant under an annuity contract to be the holder of the contract where the contract is held by another person in trust for the annuitant (defined in Reg. 304(4) as a person who is entitled to receive annuity payments under the contract) – so that (it was suggested) the holding of the mooted PAC by a non-listed trust could be deemed to be its holding by an individual beneficiary of the trust.

CRA indicated that Reg. 304(3)(a) could, for instance, permit a parent to hold an annuity contract for the parent’s child until the attainment of a specific age, so that Reg. 304(3)(a) would deem the child to be the holder of the contract, such that there thus would be an individual holder who satisfied Reg. 304(1)(c)(iii)(A). CRA concluded that “the expression ‘in trust’ in paragraph 304(3)(a) … is more akin to a nominee [arrangement]” and is not meant to accommodate non-listed trusts.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 7, 2024-1005821C6 under Reg. 304(1)(c)(iii)(A).

CRA illustrates the application of ss. 248(35) and (36) to gifts of life insurance policies

Pursuant to s. 248(35), the FMV of a gift to a registered charity of a life insurance policy is reduced (leaving aside other more adverse refinements) to its adjusted cost basis immediately before the gift if the policy had been acquired less than three years before the date of the gift (or less than 10 years before, if one of the main reasons for the donor’s acquisition of the policy was to gift it to a qualified done). S. 248(36) may further reduce the FMV if the FMV of the interest in the gifted policy was reduced under s. 248(35) because the donor acquired that policy within the 3-year or 10-year periods described in that provision, and the policy was, at anytime within the 3-year or 10-year periods, as applicable, acquired by a person not dealing at arm’s length with the donor.

CRA illustrated the two provisions’ application. S. 248(5) would apply where:

  • Within 2 years of the s. 98(5) wind-up of a partnership that had held a policy on the life of the sole proprietor (A) for over 10 years, A donated the policy to a registered charity (a “donation”) (CRA indicated that the period of holding by the partnership would not count for s. 248(25) purposes);
  • An individual transfers a newly-acquired policy for nil consideration to a wholly-owned corporation and, 35 months later, the corporation gifts the policy to a registered charity;
  • A parent purchased a policy on the life of the parent’s 8-year old child and then gifted it to the child on attaining 21, with the child then making a donation within 3 years (s. 248(36) did not apply since the policy had been held by the parent for over 10 years); and
  • A transfers a policy on A’s life that A had held for 15 years to A’s spouse (B) on a s. 146(8.1) rollover basis, and B makes the donation within 3 years thereafter (again s. 248(36) would not apply, and B’s gain under s. 148(7) would be attributed to A).

The last scenario above is varied by A holding the policy for only 2 years before gifting it to B, who makes the donation within the next year. Here, s. 248(36) would apply given that the policy was acquired by A within the 3 year period before the time of the gift by B, so that s. 248(36) in conjunction with s. 248(35) would restrict the FMV of the interest in the gifted policy to the least of its FMV otherwise determined, its ACB to B immediately before the gift and its ACB to A immediately before the gift to B (again, B’s gain under s. 148(7) would be attributed to A.)

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 5, 2024-1007081C6 under s. 248(35).

We have translated 7 more CRA interpretations

We have translated an interpretation released last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.

These are additions to our set of 2,886 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 22 ¾ 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
2024-07-03 21 December 2022 Internal T.I. 2019-0826411I7 - Classification of a Burkina Faso SARL Income Tax Act - Section 248 - Subsection 248(1) - Corporation a Burkina Faso S.A.R.L. is a corporation rather than partnership
Income Tax Act - Section 96 a Burkina Faso S.A.R.L. is more akin to a Canadian corporation than partnership
2001-10-12 2 August 2001 External T.I. 2001-0074575 F - Désignation - Validité Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) overstatement of designation due to misestimate does not invalidate the designation
27 June 2001 Internal T.I. 2001-0084627 F - Crédit d'impôt pour emploi à l'étranger Income Tax Act - Section 248 - Subsection 248(1) - Business to be a business, there need not be a predominant purpose of earning a profit
30 July 2001 External T.I. 2001-0091655 F - Produit de Disposition pour Action Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (a) proceeds of disposition on share-for-share exchange were the stipulated fixed sale price rather than the FMV of the received shares, absent rollover treatment
16 October 2001 Internal T.I. 2001-0095967 F - revenu protégé en main Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) premium paid on open-market repurchases of a corporation’s shares did not reduce the safe income on hand of its remaining shares
10 October 2001 Internal T.I. 2001-0097597 F - Emprunt auprès d'une banque étrangère Income Tax Act - Section 214 - Subsection 214(15) - Paragraph 214(15)(b) setup fees came within s. 214(15)(b)
23 October 2001 Internal T.I. 2001-0102337 F - MONTANTS RECUS D'UNE EGLISE Income Tax Act - Section 3 - Paragraph 3(a) donations received by an evangelist from a foreign church in order to found and build up a Canadian church were taxable

CRA confirms its policy in IT-244R3 regarding gifts of a life insurance policy to a charity, but does not articulate any extension of this policy to split dollar arrangements

IT-244R3 indicated that a gift by an individual of a life insurance policy to a registered charity is considered to be a gift for purposes of s. 118.1 provided that the policy has been absolutely assigned to the donee, who becomes the registered beneficiary. CRA stated that “split-dollar” or other shared ownership arrangements are beyond the scope of its position in IT-244R3. 2003-0004315 indicated that there may be arrangements that could result in a charitable gift for purposes of s.118.1 within the spirit of the split-receipting rules but such a determination can only be made on a case-by-case basis.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 4, 2024-1007061C6 under s. 118.1(1) – total charitable gifts.

CRA confirms that it only applies its position, that there can be only be only one child life insured under a policy at the time of a mooted s. 148(8) rollover transfer, at the transfer time

2004-0065441C6 indicated that the s. 148(8) rollover would not apply to a transfer of a life insurance policy under which more than one person is insured even where all the lives insured meet the definition of child; and 2005-0116681C6 indicated that the rollover is available where there is a joint-last-to-die policy on the life of a parent and child, and the policy is transferred to the child by virtue of the child being the named contingent owner of the policy within the meaning of s. 199(1) of the Insurance Act (Ontario) on the parent’s death, where the child is the only life insured under the policy at the time of the transfer. Further to these positions, CRA commented on the situation where a parent acquires and is the sole policyholder of a joint-last-to-die life insurance policy on the life of a child and the child’s spouse, and the child then dies so that the spouse is the sole life insured.

CRA confirmed that the parent could then gift the policy on a s. 148(8) rollover basis given that there now was only one life insured under the policy who was the “child” (under the extended definition of that term) of the policyholder, or of the transferee.

If, subsequent to the child death, the parent instead named the child’s surviving spouse as the contingent owner of the policy upon death, within the meaning of s. 199(1) of the Insurance Act (Ontario) then, again, the spouse would be the only life insured under the policy at the time of the transfer to the spouse, so that such transfer could occur on a s. 148(8) rollover basis.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 3, 2024-1007101C6 under s. 148(8).

CRA finds that a Burkina Faso S.A.R.L. is a corporation rather than partnership

Before finding that a Burkina Faso limited liability company (S.A.R.L.) should be classified as a corporation for ITA purposes, CRA stated that, like a Canadian corporation, the SARL “has legal personality separate from that of its members; it owns its own property; it has its own obligations; and the liability of its members is limited since they are liable for the SARL’s corporate debts only up to the amount of their contributions.” It also has partnership features, e.g., a provision in the governing Act providing that a SARL “is created by (one or more) persons that agree, through an agreement, to contribute, to an activity, cash, or in-kind or services assets for the purpose of sharing profits or enjoying revenues that may derive therefrom” – but, overall, its attributes were closer to those of a Canadian corporation than of a partnership.

Neal Armstrong. Summary of 21 December 2022 Internal T.I. 2019-0826411I7 under s. 248(1) – corporation.