News of Note

There are still numerous open questions on the taxation of Canadian trusts

Comments on the taxation of trusts resident in Canada include:

  • A CRA indication that a charity is a majority-interest beneficiary of a trust when the trustee has the discretion to make a gift to the charity under the declaration of trust may not be correct, given that “it is unclear whether the charity has the power to compel the administration of the trust, which is generally recognized as a necessary condition for a person to be considered a beneficiary.”
  • Given that the CRA has indicated in other contexts that an s. 84.1(1)(b) deemed dividend is not deemed to be paid on shares, this suggests that ss. 112(3) to (7) would not apply to a capital dividend that is deemed to be paid under s. 84.1(1)(b).
  • S. 107(1)(c), which generally reduces the amount of a loss realized on a disposition of a capital interest in a trust by dividends received under s. 104(19) or (20) could result in double taxation where the beneficiary is a second trust, and the second trust flows out those amounts to its beneficiaries.
  • Although a spousal trust that otherwise would qualify for rollover treatment under s. 70(6) but for having U.S. resident trustees may apply for competent authority relief under Article XXIX B(5) of the Canada-U.S. Treaty, that Article requires that the transfer to the spousal trust be made under a will – which is often a problem because US individuals often use an inter vivos trust to reduce or defer US estate tax.
  • The CRA view that a trust funded with insurance does not qualify as a spousal trust for purposes of s. 70(6) if the terms of the trust were not set out in the will appears to be incorrect: “A pre-existing declaration of trust that is funded and created pursuant to the terms of the taxpayer's will should be treated as having been created under the terms of the taxpayer's will because the trust did not exist before the transfer.”
  • The CRA view that a trust does not qualify as a spousal trust when its terms permit or require the trust to pay life insurance premiums, also is questionable.
  • A fully discretionary trust with resident and non-resident beneficiaries and receiving both dividends from shares of US public corporations and interest from Canadian sources should be able to allocate its dividend income first to its resident beneficiaries so that they can access foreign tax credits under ss. 104(19) and 126(1).

Neal Armstrong. Summaries of Elie Roth, Tim Youdan, Chris Anderson and Kim Brown, Chapter 3: “Taxation of Trusts Resident in Canada,” Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016 including under s. 251.1(4)(d), s. 112(3.2), s. 107(1)(c), Treaties Art. 29B, s. 70(6), 104(19).

Brookfield Asset Management intends to distribute an insurance-company subsidiary as a taxable dividend

Brookfield Asset Management is proposing to transfer subsidiaries, carrying on a Canadian, U.S. and international insurance business, to a newly-incorporated Ontario subsidiary (Trisura Group), and then distribute its shares of Trisura Group to the Brookfield shareholders as a taxable dividend. The Circular indicates that for non-Canadian beneficial shareholders, the Part XIII tax withholding tax obligations “will be satisfied in the ordinary course through arrangements with their broker or other intermediary.” This dividend is expected to occur as a tax-free distribution for Code purposes.

Neal Armstrong. Summary of preliminary prospectus of Trisura Group under Spin-offs & Distributions – Taxable dividends-in-kind - Subsidiary distribution.

CRA rules that 100% of the income and non-capital losses of a pipeline reclamation trust are allocable to the pipeline company

The NEB has been requiring pipeline companies to set up reclamation trusts to be funded by monthly contributions to the trust made by the pipeline companies based on identifiable charges therefor collected from their customers. CRA has provided three quite similar ruling letters indicating that the trust is a qualifying environmental trust, and that the contributions are deductible under s. 20(1)(ss).

The reclamation trust is a discretionary trust whose beneficiaries also include a federal not-for-profit corporation maintaining funds for the reclamation of abandoned pipelines in Canada, a.k.a., the Orphan Pipeline Fund. This concept of “beneficiary” is somewhat illusory as the trust deed specifies that “distributions from the ACo Reclamation Trust to a Beneficiary or a third party are to be made for the sole purpose of discharging the Beneficiary’s Reclamation Obligations.” CRA ruled that the pipeline company’s reasonable share of income or non-capital of the reclamation trust under s. 107.3(1) for purposes of computing its income and taxable income is 100%.

Neal Armstrong. Summary of 2015 Ruling 2015-0619281R3 under s. 211.6(1) - qualifying environmental trust.

RevCon – Federal Court of Appeal finds that s. 231.7 continues to apply to non-lawyers

Stratas JA found that Chambre des notaires and Thompson did not invalidate s. 231.7, and that there the Supreme Court instead had merely “read down section 231.7 to exclude lawyers and notaries,” so that the taxpayer was required to disclose materials which were not covered by solicitor-client privilege.

The decision below of Mosley J, which was affirmed, included findings that:

The name of a law firm, without more, is not protected by solicitor-client privilege. Nor is the revelation of shorthand tax language used by tax planning advisors.

Neal Armstrong. Summary of Revcon Oilfield Constructors Inc. v. Canada (National Revenue), 2017 FCA 22 under s. 231.7(1) and summary of MNR v. Revcon Oilfield Constructors Inc., 2015 FC 524, aff’d 2017 FCA 22 under s. 232(1) – solicitor-client privilege.

Changes to the life insurance policy taxation rules are impacting UL LCOI policies

The accumulating fund of a life insurance policy, which is intended to represent its savings element, is compared to that of a notional exemption test policy so as to determine whether the policy holder is exempt from taxation on accruing income. A number of changes to the rules for calculating the accumulating fund will, in a majority of situations, not have much impact – but could have a significant impact for universal life level cost of insurance (UL LCOI) policies, especially for younger ages. Furthermore, respecting changes to the calculation of the 15% Part XII.3 (IIT) tax payable by life insurance companies on the investment income accumulating within life insurance policies:

It is expected that the change in IIT on UL LCOI policies, if flowed through to policyholders, will have a significant impact on [cost of insurance] rates at younger ages (in the range of 6 to 9 percent), gradually decreasing at older ages (for example, 3 percent or less for insured individuals over the age of 60). There will also be an impact on level limited-pay universal life policies (whether on a level cost or yearly renewable term cost).

Neal Armstrong. Summaries of Kevin Wark and Michael O'Connor, “The Next Phase of Life Insurance Policyholder Taxation is Nigh,” Canadian Tax Journal (2016) 64:4, 705 - 50 including under Reg. 1401(1)(c).

In limited circumstances it may make sense for a CCPC target to make an s. 89(11) election

In the situation where, for example, a non-resident enters into an agreement to acquire a Canadian-controlled private corporation on September 1 and the agreement closes on December 1, it might be desirable for the target to make an election under s. 89(11) to be considered to not be a CCPC from the commencement of that year. This will have the advantage that it will not have a deemed year end on August 31 of that year (i.e., at the time immediately before that at which it otherwise would have ceased to be a CCPC), so that it will only have one deemed year end (immediately before the acquisition of control on December 1) rather than two.

Although making this election will also apply for small business deduction and LRIP/GRIP purposes, it will not affect the target's ability to claim the enhanced ITC for SR&ED, nor the ability of its shareholders to claim an allowable business investment loss or the capital gains deduction for qualified small business corporation shares.

Neal Armstrong. Summary of Manon Thivierge, “Income Tax Due-Diligence Considerations in Mergers and Acquisitions,” 2015 Conference Report (Canadian Tax Foundation), 18:1-29 under s. 89(11).

CRA finds that a notice of determination of partnership income or loss need not be sent to each partner

S. 152(1.5) provides that a determination of income or loss (or other items) for a partnership shall be sent to each partnership member. CRA applied s. 244(20) and Menzies to find that this requirement is deemed to be satisfied by sending the notice to the latest known partnership address.

Neal Armstrong. Summary of 18 October 2016 Internal T.I. 2016-0640321I7 under s. 244(20).

Income Tax Severed Letters 15 February 2017

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

CRA takes an expansive view of what constitutes regular places of employment so as to render reimbursements for related travel as taxable benefits

CRA considers that if an individual has multiple regular places of employment (RPE) and travels between them during the day, the trip from the individual’s home to the first RPE and the trip home from the last RPE is personal, whereas travel between RPEs is considered employment-related – so that reimbursement of or allowances respecting the former but not the latter would give rise to employment benefits. In this context, CRA stated that “travel between an employee’s home and their employer’s business location is personal, even when the employee has a home office that is a regular place of employment” (cf. Cork), and that “a location may not be a RPE for an individual if, for example, the individual works at that particular location only once during the year or perhaps for only a few days in the year.”

Neal Armstrong. Summary of May 2016 Alberta CPA Roundtable, Q.3 under s. 6(1)(b).

Further full-text translations of severed letters (including on “spousal sharing”) are now available

Full-text translations of the French technical interpretation released last week and of seven technical interpretations released between December 2, 2015 and September 30, 2015 are now available - and are listed and briefly described in the table below.

These (and the other translations covering the last 16 months of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2017-02-08 19 January 2017 External T.I. 2015-0576751E5 F - Trust, Disposition of depreciable property, Assumption Income Tax Act - Section 248 - Subsection 248(1) - Personal Trust non-commital as to whether assumption of debt could constitute tainting consideration
Income Tax Act - 101-110 - Section 107 - Subsection 107(2.1) s. 13(7)(e) applicable to depreciable property distribution
Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) trust cannot have a NAL relationship with itself
Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) s. 13(7)(e) applicable to s. 107(2.1) distribution but not s. 104(5) deemed disposition
Income Tax Act - 101-110 - Section 107 - Subsection 107(2) s. 107(2) generally available where beneficiary assumes trust debt
2015-12-02 18 February 2015 External T.I. 2012-0471731E5 F - Déductibilité du droit d’usage pour automobile Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(f) reduced auto enjoyment not an expenditure
Income Tax Act - Section 6 - Subsection 6(2) no reduction in benefit amount for benefits provided by employee to employer
2 November 2015 External T.I. 2014-0558991E5 F - Loan from an Amateur Athlete Trust Income Tax Act - Section 143.1 - Subsection 143.1(1.2) - Paragraph 143.1(1.2)(d) genuine loan to athlete with adequate prospect of repayment not a transfer of property
18 February 2015 External T.I. 2012-0466691E5 F - Revenu d’un Indien hors réserve Other Legislation - Federal - Indian Act - Section 87 fact that work performed by non-reserve Indian was for benefit of reserve Indians was insufficient connecting factor
15 December 2014 Internal T.I. 2014-0547191I7 F - Chantier particulier
15 December 2014 Internal T.I. 2012-0445361I7 F - Remboursement de frais de déménagement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) reimbursement of moving expenses not a taxable benefit if such moving expenses otherwise deductible under s. 62 which, in the case of multiple moves, can turn on whether there is ordinary residence at each location
Income Tax Act - Section 2 - Subsection 2(1) criteria for determining “ordinarily resides” under s. 62 (coterminous with “ordinarily resident” under s. 250(3))
Income Tax Act - Section 248 - Subsection 248(1) - Eligible Relocation expenses re selling a Canadian home after a 2nd relocation abroad are non-deductible if no ordinary residence at 1st location abroad
15 December 2014 Internal T.I. 2014-0544121I7 F - Chantier particulier Income Tax Act - Section 6 - Subsection 6(6) work engagement ceased to be temporary based on a change in circumstances
4 March 2015 Internal T.I. 2014-0527751I7 F - Soutien de revenu accordé aux individus Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r) includes amounts received under the active employment measures of Emploi-Québec
2015-11-25 3 November 2015 External T.I. 2015-0584261E5 F - Blood relationship - step brother Income Tax Act - Section 252 - Subsection 252(1) - Paragraph 252(1)(c) step brothers are related
2015-11-11 2 October 2015 External T.I. 2015-0595111E5 F - Amount paid pursuant to 104(24) Income Tax Act - 101-110 - Section 104 - Subsection 104(24) amount payable can include a payment in kind if authorized by trust deed
30 September 2015 External T.I. 2015-0590501E5 F - Spousal sharing Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts gift allocation between spouses still permitted after 2015
15 September 2015 External T.I. 2015-0583221E5 F - Redemption by a cooperative of its own shares Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) no gain to cooperative corporation from redemption of its own preferred shares
2015-10-07 20 August 2015 External T.I. 2015-0581681E5 F - Non-resident trust rules Income Tax Act - Section 248 - Subsection 248(1) - Corporation Liechtenstein Foundation a trust
Income Tax Act - Section 94 - new - Connected Contributor Liechtenstein Foundation with Canadian-resident beneficiary not subject to s. 94(3)
2015-09-30 9 September 2015 External T.I. 2014-0563611E5 F - Call Centre - Location of the services performed Income Tax Regulations - Regulation 105 - Subsection 105(1) non-resident call centre not rendering services in Canada