News of Note

Milne – Ontario Divisional Court confirms that the executors per se do not hold their property in trust

The Ontario Divisional Court has overturned a decision of Dunphy J below that a primary will that covered property which needed probate in order to be transferred (as opposed to all the other property of the testator, such as private company shares, which was covered by a secondary will) was void because it did not satisfy one of the requirements for a valid trust, namely, that there be certainty of subject matter.

First, Marrocco ACJ, speaking for the unanimous Court, stated that “A will may contain a trust, but this is not a requirement for a valid will” – so that it did not matter whether the primary will satisfied the test of the “three certainties” for the existence of a trust. In this regard, he quoted Williams on Wills that “the property comprised in residue is not held in trust for the beneficiary under the will so as to invest any equitable interest in him.”

Second, even if there were a requirement for certainty of subject matter, that requirement was satisfied here as the criterion for distinguishing the included and excluded property could be objectively applied.

This decision is of course of interest for supporting the use of a secondary will that is not probated and, thus, avoids probate duties. Although the confirmation that a will is not a trust is not directly applicable for ITA purposes given that s. 104(1) effectively deems an estate to be a trust, such finding may assist in analysing what is going on, and when, where a residue is held on, or transferred to, trusts.

Neal Armstrong. Summary of Milne Estate (Re), 2019 ONSC 579 under s. 104(1).

CRA expansively interprets “on” in the s. 93(4) stop-loss rule

But for s. 93(4), a Canadian corporation (ACo) would have realized a capital loss on the liquidation and dissolution of a wholly-owned non-resident subsidiary (FA1) which, in turn, held FA2 and FA3. CRA found that s. 93(4) applied to deny the loss and add it to the ACB to ACo of the shares of FA2 and FA3 on the basis that ACo had acquired those shares “on” its disposition of the shares of FA1 – even though such acquisition in fact occurred before the dissolution of FA1. Its reasoning suggested that it considered the “on” test to be satisfied by virtue of the fact that “ACo acquired the shares of FA2 and FA3 as part of the process of liquidating and dissolving FA1, which included ACo disposing of its shares of FA1.”

Neal Armstrong. Summaries of 5 September 2018 Internal T.I. 2017-0698241I7 under s. 93(4), s. 93(2.01) and s. 93(1).

CRA confirms that partnership draws generally are exempted as a financial service rather than under ETA s. 272.1(1)

CRA ruled that distributions made by a limited partnership, which held investments, to its general and limited partners were exempt from GST/HST pursuant to para. (f) of the financial services definition, which explicitly exempts dividends on shares but also exempts distributions on other financial instruments, evidently including partnership distributions. Like other aspects of the financial services definition, this legislative drafting is conceptually confused and backwards as it focuses on the distribution by the investee being exempt rather than on explicitly exempting this distribution viewed as consideration for the capital provided by the investor. (See BLP cf. ING.)

CRA made no mention of s. 272.1 (other than to state that its letter did not address the recent amendments to s. 272.1). This confirms that in CRA’s view s. 272.1 does not oust the application of the financial services definition, so that partnership draws generally are exempted under para. (f) of that definition rather than under s. 272.1(1) (apparently referencing services provided qua partner rather than business operator.)

Neal Armstrong. Summary of 17 September 2018 Ruling 182403 under ETA s. 123(1) – financial service – para. (f).

Income Tax Severed Letters 13 February 2019

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

Montecristo Jewellers – Tax Court of Canada finds that export sales were not zero-rated

ETA Sched VI, Pt. V, s. 12(a) zero-rates a supply of tangible personal property where the supplier “ships the property to a destination outside Canada that is specified in the contract for carriage of the property.” A Vancouver retailer of expensive watches and jewellery would accommodate customers who purchased such items (the “Jewellery“) as gifts to take with them on flights back to China by essentially arranging (by going through various hoops) to have the Jewellery personally delivered to the customers just as they were about to board their flights and just after a CBSA officer stamped a customs form attesting to the immediate exportation of the Jewellery. Lyons J agreed with CRA that this was not good enough to satisfy the zero-rating requirement, stating:

As no third party carrier was engaged under a contract for carriage, I find that the appellant did not ship the Jewellery within the meaning of paragraph 12(a).

As the place of delivery of the Jewellery was in Canada (i.e., at the Vancouver airport), its sale was taxable.

Neal Armstrong. Summaries of Montecristo Jewellers Inc. v. The Queen, 2019 TCC 31 under ETA Sched VI, Pt. V, s. 12(a) and s. 142(1)(a).

Six further full-text translations of CRA interpretations are available

We have published a further 6 translations of interpretations released in August 2012. Their descriptors and links appear below.

These are additions to our set of 777 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ½ years of releases 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
2012-08-31 8 August 2012 External T.I. 2012-0442321E5 F - Pompiers volontaires Income Tax Act - Section 118.06 - Subsection 118.06(1) firefighter is not “volunteer” if remuneration is “comparable” to regular firefighter
3 July 2012 Internal T.I. 2012-0450821I7 F - Interaction of 84(3) and 69(1)(b) Income Tax Act - Section 84 - Subsection 84(3) s. 84(3) deemed dividend based on actual redemption proceeds rather than s. 69
Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) s. 69(1)(b) adjustment generates capital gain even though larger share redemption proceeds in the 1st place would have been exempt
27 June 2012 External T.I. 2012-0440721E5 F - Compte de gestion de santé Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangements conversion of future bonus into PHSP is taxable
10 July 2012 External T.I. 2012-0437531E5 F - Télétravail et revenu d'emploi d'un Indien Other Legislation/Constitution - Federal - Indian Act - Section 87 income of Indian required to telecommute from home office on reserve likely exempted
2012-08-24 14 June 2012 External T.I. 2012-0443711E5 F - RAP - Annulation de la vente de l'immeuble Income Tax Act - Section 146.01 - Subsection 146.01(1) - Eligible Amount subsequent court-ordered voiding of home purchase funded with HBP does not affect satisfaction of the HBP conditions
General Concepts - Effective Date subsequent court-ordered voiding of home purchase did not retroactively void satisfaction of the HBP conditions at home purchase time
26 July 2012 External T.I. 2012-0440261E5 F - Crédit d'impôt pour enfants Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b.1) end-of-year requirement not satisfied when child died in year before attaining 18

Crean – B.C. Supreme Court rectifies a sale agreement to turn it into a 2-step sale that no longer generated a s. 84.1 dividend

The executed documents indicated that an individual (Thomas) sold his shares of a corporation to the Newco of his brother (Michael) in consideration for a promissory note of the Newco. When the tax advisor realized this gave rise to a deemed dividend under s. 84.1, the parties applied successfully in the B.C. Supreme Court for a rectification order redoing the written agreement to provide that Thomas sold his shares to Michael directly for a promissory note, and that there was an immediate on-sale by Michael of those shares to his Newco in consideration for it assuming the promissory note.

Burke J relied on the terms of an agreement in principle that had been signed before the transactions were implemented which provided for a direct sale from Thomas to Michael and provided that “the transaction will be structured, to the extent possible, so that Tom receives capital gains treatment.” She also accepted the tax advisor’s testimony that, consistent with the agreement in principle, he had been instructed to provide for a direct sale and that the failure of the documents to so provide was an error on his part.

She accordingly found that the two brothers had a “prior definite and ascertainable agreement” to which the rectified written agreement was giving effect.

Neal Armstrong. Summary of Crean v Canada (Attorney General), 2019 BCSC 146 under General Concepts – Rectification.

Forbes Painting – Federal Court finds that CRA is required to consider financial hardship in s. 221.2 credit transfer requests

The taxpayer (Forbes) did not file its corporate income tax returns for its 2006 and 2007 years, showing a refund position, until well beyond the three-year limitation under s. 164(1) for claiming those refunds. CRA’s delegate denied the Forbes’ request that the statute-barred credits (SBCs) be reappropriated under s. 221.2(2) to its outstanding payroll account balance on the basis that there were no extraordinary circumstances that had prevented Forbes from filing its returns within the three-year period and that Forbes had not demonstrated that it took any action to resolve non-compliance within a reasonable time.

Before returning the matter for redetermination by another delegate, Boswell J stated:

The ability of a corporate taxpayer to continue as a going concern … is a factor that should be weighed … .

…When assessing a request for the re-apportionment of an SBC, the Minister should also have regard to whether denial of the request might possibly result in the Minister’s inability to collect outstanding tax arrears from a taxpayer. …

[T]he decision [is] unreasonable because it is not apparent or transparent that Forbes’ financial hardship was a factor in the decision-making process.

Neal Armstrong. Summary of Forbes Painting and Decorating Ltd. v. Canada (Attorney General), 2019 FC 160 under s. 221.2(2).

CRA rules on the use of special voting shares which keep corporations related for s. 55(3)(a) purposes

A DC which holds a rental property and an investment portfolio and is owned by Parent and his four children will spin off its investment portfolio in reliance on the s. 55(3)(a) exception to four TCs mostly owned by each of the four children. However, parent will have control of each TC by being issued special voting shares on their incorporation.

The CRA tags mention s. 55(4) as a provision that it considered relevant. In this regard:

  • access to the s. 55(3)(a) exception was assisted by or depended on Parent controlling all the corporations involved in the transactions;
  • the special voting shares of Parent likely had minimal economic attributes; and
  • Parent’s will bequeathed them to the respective children.

To help address this, the ruling letter represents that Parent is in good health and will control the TCs in order to protect his economic interest in notes that will be owing to him by the TCs.

Neal Armstrong. Summaries of 2018 Ruling 2018-0749491R3 under s. 55(3)(a)(ii), s. 55(4) and s. 186(1)(b).

CRA finds that entering into an agreement to pool administrative support services triggered an obligation to register for GST/HST purposes

A non-resident insurer which otherwise was only making exempt (insurance policy) supplies in Canada was found to have been required to register for GST/HST purposes as a result of entering into an agreement with another party under which each agreed to provide administrative services to the other at cost, to be billed annually. ETA 136.1(2) typically deems periodically billed services to be supplied at the beginning of each billing period, so that presumably the effective date of required registration was the effective date of this administrative services agreement.

Neal Armstrong. Summary of 30 August 2018 Ruling 185770 under ETA s. 240(1).