News of Note

CRA’s position that s. 104(19)-designated dividends are not received until the trust’s year end suggests planning possibilities

CRA’s position (e.g., in 2016-0647621E5 and 2013-0495801C6) is that a dividend designated under s. 104(19) by a trust to a beneficiary is not received by the beneficiary for most ITA purposes until the year end of the trust. This position, if correct, raises some planning possibilities:

  • Suppose that Opco, whose shares are held by a family trust, pays a $1 million dividend to the trust on January 15, 2020 and claims a dividend refund of $383,300 for its taxation year ended January 31, 2020. The dividend is not allocated by the trust to Bankco (a connected resident corporate beneficiary with a November 30 year end) until the trust’s year-end of December 31, 2020, and is not reported by Bankco until its year ending November 30, 2021. If Opco’s dividend refund is received on June 30, 2020, 19 months pass before Bankco is required to pay its matching Pt. IV tax under s. 186(1)(b) – a tax deferral.
  • Suppose, instead, that on March 31, being a day that Opco and Bankco are not connected, a dividend is paid both by Opco to the trust, and by the trust to Bankco – but on September 30, a share ownership change results in Opco and Bankco now being connected, so that CRA’s position suggests that Pt. IV tax has been avoided.
  • Now suppose that Opco pays a dividend in excess of safe income in hand on January 15, 2020. Bankco need not report the resulting s. 55(2) deemed capital gain until its year ending November 30, 2021. In addition to deferral of the capital gains tax, a permanent tax saving might result through acquiring losses or other deductions in the meantime.

Neal Armstrong. Summary of David Carolin and Manu Kakkar, Estate Plans, Trusts, and Dividends: Is There a Gap Here? Tax for the Owner-Manager, Vol. 21, No. 1, January 2021, p. 1 under s. 104(19).

CRA indicates that a military pension form India was Treaty-exempt

CRA indicated that a military service pension and disability pension received by a Canadian resident from the Ministry of Defence of India would be exempted under Art. 18 of the Canada-India Treaty.

Neal Armstrong. Summary of 13 October 2020 External T.I. 2020-0860081E5 under Treaties – Income Tax Conventions - Art. 18.

Ifi – Federal Court finds that CRA unreasonably refused to cancel tax under s. 207.06(1) on the basis of a “repeated” mistake that in fact was new

In 2009, the taxpayer (Ms. Ifi) made a small over-contribution to her TFSA regarding which CRA assessed her a small amount of over-contribution tax. For quite a number of years thereafter, she made further contributions (including a substantial one for 2014) which would not have been over-contributions but for her having become a non-resident. She discovered the error herself in 2018, whereupon she promptly closed out the TFSA.

Pallotta J found that essentially the sole stated basis of CRA for denying waiver of the over-contribution tax “was that Ms. Ifi repeated a previous mistake after being warned by the CRA.” In granting Ms. Ifi’s application for judicial review on the basis that this decision “was unreasonable, as it lacked the requisite transparency, intelligibility and justification,” she stated:

The Delegate failed to recognize that Ms. Ifi’s excess contribution in 2009 and her subsequent excess contributions resulted from different errors. Ms. Ifi did not repeat a previous mistake—the one the CRA warned her about—when she made an excess contribution in 2014. The excess contribution in 2014 … was tied to Ms. Ifi’s status as a non-resident.

Neal Armstrong. Summary of Ifi v. Attorney General of Canada, 2020 FC 1150 under s. 207.06(1).

CRA indicates that CEWS amounts must generally be included in income under s. 9 or 12(1)(x) by the end of the CEWS periods in question even if not claimed until much later

S. 125.7(3) essentially feeds into s. 12(1)(x) by deeming “CEWS” wage subsidies to be government assistance received immediately before the end of the period (of approximately one month) in question. Notwithstanding that, CRA considers it to be quite possible that the assistance will be income under s. 9 rather than s. 12(1)(x). As for the timing of that income inclusion (under either s. 9 or 12(1)(x),) CRA indicated that the CEWS amounts must be included in the taxation year in which the periods fall even if the claims are not made (and received) until after the tax return has been filed for that taxation year. (This will require an amendment to the originally-filed return to be made.)

The one exception to this is illustrated by the example of a June 30, 2020 taxation year of the eligible entity, where the end of period 4 falls on July 4, 2020 (i.e., a few days after the taxation year end). In that case, if s. 12(1)(x) rather than s. 9 is considered to govern, there is a deemed receipt of government assistance on that date, so that the s. 12(1)(x) inclusion will fall into the subsequent taxation year.

Neal Armstrong. Summary of 6 November 2020 Internal T.I. 2020-0865661I7 under s. 125.7(3).

Income Tax Severed Letters 13 January 2021

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

CRA confirms that bonuses generally can be prorated weekly for CEWS claim purposes, and now is getting its CEWS Registry running

The CEWS (wage subsidy) is generally computed on a weekly basis. In a November 23, 2020 revision to its CEWS Q&A webpage, CRA has confirmed that, in the case of a year end bonus “it would generally be reasonable to consider that the annual bonus was earned [evenly] throughout the fiscal period to which it relates” (both regarding the current and comparison period).

More complex allocation issues may apply to commissions. CRA states:

For example, if a car salesperson, who is remunerated by commission when a car is sold as provided in the employment contract, sells two cars in a given week in a claim period, it could be reasonable to consider that those commissions are paid “in respect of the week” in which those two sales occurred.

However, “wages in lieu of termination notice are not considered to have been paid in respect of a week, and therefore are not eligible for the wage subsidy.”

Last, but probably not least, CRA now has its “CEWS Registry” page working somewhat, i.e., particular corporations can be searched but “The ‘View full list of employers’ functionality is temporarily unavailable.” The Registry page states that "To protect the privacy of individuals, only corporations will be disclosed," and employees are told: “If you have reason to believe a CEWS applicant is misusing the subsidy, you can report suspicious activities to the CRA by submitting a lead to the Leads Program.”

Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 21 December 2020 under s. 125.7(4)(b), 125.7(1) – baseline remuneration, eligible remuneration, s. 125.7(4)(d) and s. 241(3.5).

London Clubs – UK Supreme Court finds that gaming profits from bets staked did not include chips and vouchers distributed free of charge for promotional reasons

It was held that non-negotiable chips and free bet vouchers provided free of charge by casino operators to selected gamblers to encourage them to gamble were not to be included in computing the casinos’ “bankers’ profit” from bets “staked” and, thus, were excluded from gaming duties. Although this finding is not relevant for HST purposes given that ETA s. 187(1) has effectively been overridden by s. 7(7) of the Games of Chance (GST/HST) Regulations, the decision includes an extensive description of the different attributes of such chips and vouchers. This may shed light on the sort of thing described in s. 7(7) regarding “a right to play or participate in a game of chance given away free of charge by the distributor [e.g., the casino operator].”

Neal Armstrong. Summary of Commissioners for Her Majesty’s Revenue and Customs (Appellant) v London Clubs Management Ltd (Respondent) [2020] UKSC 49 under Games of Chance (GST/HST) Regulations, s. 7(7)A-A3(ii).

CRA rules that a registered charity running an Ontario school was eligible for PSB rebates at the enhanced “school authority” rates

A registered charity that that operated an Ontario elementary or secondary school was ruled to be entitled to the 68% federal rebate and 93% Ontario rebate regarding non-creditable HST paid by it on its acquisitions of property or services for consumption, use, or supply in the activities engaged in by it in the course of operating the school given inter alia that the definition of “selected public service body” includes a school authority that is established and operated otherwise than for profit. The non-creditable HST on its other purchases generated rebates at the federal 50% and provincial 82% rate.

Neal Armstrong. Summary of 25 May 2020 GST/HST Ruling 125678r under ETA s. 259(3).

We have translated 5 more CRA Interpretations

We have published a further 5 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.

These are additions to our set of 1,363 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 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
2009-06-19 12 June 2009 Internal T.I. 2009-0324511I7 F - Déductibilité des primes payées Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit substantial commissions generated to broker on policies where he paid the premiums were taxable given their substantial amount
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) premiums paid by broker on policies on which the insureds were family members were non-deductible notwithstanding that the related commissions earned by him were taxable
4 May 2009 External T.I. 2008-0299841E5 F - Garantie pour l'impôt de départ Income Tax Act - Section 220 - Subsection 220(4.5) posting of security for departure tax can generate refund of instalments paid in excess of regular tax
Income Tax Act - Section 164 - Subsection 164(7) refund of instalments paid in excess of Part I tax for year ignoring s. 128.1(4) departure tax permitted where s. 220(4.5) security posted for such departure tax
8 June 2009 External T.I. 2009-0314301E5 F - Société d'État provinciale, production T2 Income Tax Act - Section 150 - Subsection 150(1) - Paragraph 150(1)(a) provincial Crown corporations not required to file T2 returns and forms
2009-06-12 27 May 2009 External T.I. 2008-0303971E5 F - Transfer of a life insurance policy Income Tax Act - Section 148 - Subsection 148(7) gain under s. 148(7) on drop down of policy (with CSV exceeding its ACB) by individual to his corp.
3 June 2009 External T.I. 2009-0310231E5 F - Exonération des gains en capital Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(d) 24-month test in para. (b) of QSBCS definition met where during part of 24-month period, mooted QSBCS were held through a general partnership

Various pitfalls can attend inbound and outbound acquisitions

The foreign affiliate dumping (FAD) rules were intended to target two types of transactions:

  • debt dumping (for example, Canadian Opco borrows to acquire preferred shares of a non-resident Opco subsidiary of its non-resident parent and receives (s. 113(1)(a)) exempt dividends on those shares)
  • surplus stripping (for example, Canadian Opco, with distributable cash but whose shares have low paid-up capital (PUC), purchases (or subscribes for) such preferred shares)

However, their scope is wider. For example, they apply where the Canadian subsidiary (CRIC) uses cash on hand to invest in common shares of a wholly owned non-resident Opco for use in its foreign active business – even though there is no debt dumping or surplus stripping involved.

Similarly, it is unclear why it is necessary to meet all of the requirements of the s. 212.3(16) “closely connected business exception” where there is no debt dumping or surplus stripping. For example, where a Canadian public corporation with no operations in Canada becomes a CRIC on being acquired for cash by a foreign multinational, it cannot satisfy that exception because it does not carry on business itself - even if its executives have sole decision-making authority respecting the foreign Opcos. If a “bump and run” transaction could not be structured, this has caused potential foreign acquirors to abandon Canadian acquisitions.

The structure resulting where a Canadian public corporation, that has no operations in Canada, is acquired by a Canadian Acquisitionco as described in s. 212.3(10)(f), is undesirable since the PUC of the shares of Canadian Acquisitionco is reduced to nil pursuant to ss. 212.3(2) and (7), so that any investment (other than by way of PLOI) made in a foreign Opco by the Canadian public corporation or Canadian Acquisitionco would result in a cross-border deemed dividend. Accordingly, the FAD rules encourage a bump-and-run transaction, which provides no benefit to Canada.

Where a non-resident acquisition target is a holding company that has numerous operating subsidiaries that have made substantial upstream loans to it, an element of circularity can arise in determining whether the shares of such operating subsidiaries and, thus, the shares of the holding company, are excluded property.

Due to an upward cascading effect in a multi-tier structure of FAs, a non-resident target with non-excluded property of only 3% on a consolidated basis nonetheless might not have its shares qualify as excluded property. It may be possible to engage in purification transactions to achieve excluded property status.

In this regard, it would be more appropriate for the drafting of s. 17(8) to not require excluded property status “always and forever” and to instead provide for its application during the period in which the shares being financed are excluded property.

Reg. 5907(2.01) to some extent accommodates “pack and sale” transactions (respecting a drop down of a business unit to a foreign Newco followed by an arm’s length sale of the Newco) by rendering Reg. 5907(5.1) inoperative to transactions occurring on a rollover basis under the foreign tax law (so that exempt surplus may be generated) if certain conditions are met, one of which is that the only consideration received in respect of the particular drop-down disposition is shares of the capital stock of another FA of the taxpayer. Thus, the assumption of liabilities on the drop-down transaction would exclude access to Reg. 5907(2.01). See 2014-0550451E5.

Neal Armstrong. Summaries of Raj Juneja and Pierre Bourgeois, “International Tax Issues that Get in the Way of Doing Business", 2019 Conference Report (Canadian Tax Foundation), 36:1 – 42 under s. 212.3(1), s. 212.3(16), s. 212.3(10)(f), s. 251(5)(b), s. 18(5) – specified right, Reg. 105(1), s. 95(2)(a)(ii), s. 95(1) – excluded property – (b) and Reg. 5907(2.01).