Income Tax Severed Letters - 2020-03-04

Principales Questions: À l’aide d’un exemple où un particulier transforme deux logements d’un duplex en un logement, on demande à l’ARC de préciser de quelle façon un particulier doit calculer et demander l’exemption pour résidence principale.
Using an example, where an individual transforms two housing units of a duplex in one housing unit, the CRA is asked to clarify how an individual should calculate and ask the principal residence exemption.

Position Adoptée: Lorsque plusieurs logements d’un immeuble peuvent faire l’objet d’une désignation de résidence principale pour différentes années, le particulier doit produire dans l’année de la vente de l’immeuble un formulaire T2091 pour chacun des logements de l’immeuble faisant l’objet de la désignation. Where several housing units of a building can be designated as principal residence for various years, the individual has to produce in the year of the sale of the building a form T2091 for each housing unit being designated.

PRINCIPAL ISSUES: When are the CDA components of a subsidiary wound-up into its parent corporation pursuant to subsection 88(1) included in the parent corporation’s CDA?

POSITION: The parent corporation is deemed to be the same and the continuation of the subsidiary for the purposes of computing its CDA. Thus the parent corporation will take into account the subsidiary’s CDA components when the subsidiary is wound-up pursuant to section 88(1) for the purposes of computing its CDA at a particular time. The CRA’s long standing position as when a corporation is wound-up for the purposes of subsections 88(1) and (2) is described in the IT-126R2 [archived].

REASONS: In accordance with the law.

Principales Questions: In a situation where one of the trustees of a spousal trust under paragraph 70(6) is changed and the trustees have, under the trust, the power to encroach on the capital for the benefit of the spouse, would paragraph 256(7)(i) apply to deem the control of a corporation not to have been acquired solely because of the change in the trustee?

Position Adoptée: No.

Raisons: Subparagraph 256(7)(i)(ii) could not be met when the trustees of a spousal trust have the discretion to encroach on the capital of the spousal trust for the benefit of the spouse.

Principales Questions: Opco is a Canadian-controlled private corporation as defined in subsection 125(7). Opco will issue a convertible debenture to a non-resident investor. The debenture will be convertible in common shares of the capital-stock of Opco only when a second round of financing occurs and the conversion ratio will be based on Opco’s fair market value at that time. How paragraph 251(5)(b) should apply under these circumstances?

Position Adoptée: Paragraph 251(5)(b) should apply at any particular time before the conversion and the conversion ratio should be based on Opco’s fair market value at that particular time.

Raisons: Application of paragraph 251(5)(b) and previous positions.

Principales Questions: Whether the directors of a corporation must have authorized the CDA election before the time the dividend is declared or before the late-filed CDA election is filed in order to meet the condition provided under paragraph 83(3)(c)?

Position Adoptée: The directors must have authorized the late-filed CDA election before the time the election is made.

Raisons: According to the law.

Principales Questions: M. X implements an estate freeze by exchanging his shares of the capital stock of a non-SBC pursuant to subsection 51(1). A family trust for the benefit of the spouse and the children of M. X subscribes to new common shares of the capital stock of the non-SBC for nominal consideration. Whether the CRA can confirm that the purpose test provided in subsection 74.4(2) is not met where a designated person in respect of an individual is subject to TOSI on the income distributed by the family trust and that, consequently, subsection 74.4(2) does not apply in such situation.

Position Adoptée: The fact that the designated person is subject to TOSI is not relevant for the purpose test in subsection 74.4(2). However, paragraph 74.4(2)(g) may apply to the amount of any deemed interest benefit by taxable dividends received by a designated person that can reasonably be considered to be part of the benefit sought to be conferred and are included in computing the designated person’s split income.

Raisons: According to the law.

Principal Issues: A corporation was incorporated in 2017. An individual is aged 30 and has been working on a full-time basis in the business of the corporation since its inception. The individual owns 5% (votes and value) of the common shares of the capital stock of the corporation. Whether the individual would be considered to be actively engaged on a regular, continuous and substantial basis in her 2020 taxation year in the following situations. Situation 1: the individual will give birth on December 31, 2019, will be on parental leave from January 1 to December 31, 2020 and intends to be back to work on January 1, 2021; Situation 2: the individual will suffer a work accident on January 1, 2020, will be on sick leave until December 31, 2020 and intends to be back to work on January 1, 2021; Situation 3: the individual will suffer a work accident on January 1, 2020, will become permanently disabled and will not be able to work for the rest of 2020 and the subsequent years. But for the accident, the individual would have intended to work full-time in the business of the corporation on a long-term basis.

Position: Situations 1, 2 and 3: no.

Reasons: Situations 1, 2 and 3: The business of the corporation would not constitute an excluded business of the individual for her taxation year 2020, under paragraph (a) of the definition of “excluded business” in subsection 120.4(1) because the individual will not be actively engaged on a regular, continuous and substantial basis in the activities of the business for the year (but for a portion of January 1, 2020 in Situations 2 and 3). The same conclusion would apply in Situation 3 for the subsequent taxation years. Whether an individual has been actively engaged in the activities of a business on a «regular, continuous and substantial basis» in a year will depend on the circumstances, including the nature of the individual’s involvement in the business and the nature of the business itself. Whether an individual is actively engaged in a business will generally turn on the time, work and energy that the individual devotes to the business. The more an individual is involved in the management and/or current activities of the business, the more likely it is that the individual will be considered to participate in the business on a regular, continuous and substantial basis. Likewise, the more an individual’s contributions are integral to the success of the business, the more substantial they would be. Furthermore, paragraph 120.4(1.1)(a) deems an individual to be actively engaged on a regular, continuous and substantial basis in the activities of a business in a taxation year of the individual if the individual works, on average, 20 hours per week or more in the business during the portion of the taxation year of the individual that the business operates.