6 October 2017 APFF Roundtable
The translated written responses provided further below were prepared by Tax Interpretations Inc. The CRA did not issue these responses in the language in which they now appear, and is not responsible for any errors in their translation that might impact a reader’s understanding of them or the position(s) taken therein. See also the general Disclaimer below.
This page contains brief summaries of questions posed at the 6 October 2017 APFF Roundtable together with our translations of the Income Tax Ruling Directorate’s written answers (which were orally presented by Nicolas Bilodeau, Urszula Chalupa and Nancy Deslandes). We use our own titles.
We also provide links to the official CRA versions of the full questions and answers (released six months later under the severed letter program) as fully translated by us.
Q.1 Penalty relief for late filing by inactive corporation
At the 2016 APFF Conference, CRA indicated that an inactive corporation must file an income tax return, but could file a letter explaining the non-filing, and that a penalty would not be automatically imposed. What is the CRA position as to:
- the obligation to file a T2 return for each of the years in which there is no business activity and, thus, no tax payable; and
- the application of late-filing penalties?
CRA preliminary response to Q.1(a)
By virtue of clause 150(1)(a)(i)(A) of the Income Tax Act, R.S.C. 1985, C. 1 (5th Supp.) (the "ITA") a corporation resident in Canada is required, whether or not it has business activities or tax payable in a taxation year, to file an income tax return (a "T2") for that taxation year, as set out in T4012 T2 Corporation - Income Tax Guide. In addition, the Minister of National Revenue has not exercised the discretion conferred by subsection 220(2.1) to generally waive the filing of a T2 in relation to corporations in this situation. The CRA also has not developed an administrative practice under which such corporations would be exempt from the requirement to file a T2.
It should be noted that a corporation qualifying as a Canadian-controlled private corporation ("CCPC") that has net income for the year for income tax purposes equal to zero or a net loss may file a T2 Short Return (T2SHORT T2 Short Return) if certain other conditions are satisfied (see the instructions for this form and T4012 T2 Corporation - Income Tax Guide).
CRA preliminary response to Q.1(b)
The Federal Court of Appeal, in Exida.com Limited Liability Company v. The Queen, 2010 FCA 159, stated that the general penalty in subsection 162(7) was applicable in a situation as described above, which applies in circumstances where a person fails to comply with an obligation imposed on the person by the Income Tax Act or the Income Tax Regulations, CRC, c. 945 ("ITR") unless another provision of the Income Tax Act provides for a penalty for such default. Given that, in the circumstances, no penalty for failure to file an income tax return under subsection 162(1) can be applied, which is calculated on the basis of the tax payable for the year by the taxpayer, the taxpayer is not subject to any other penalty, so that the penalty under subsection 162(7) would apply.
However, and although this case has not been reversed to date, the CRA stated in Question 4 of the 2011 Canadian Taxation Foundation Annual Conference Roundtable that since this decision is based on a rather narrow interpretation of the relevant statutory provisions, the penalty under subsection 162(7) will generally not be imposed on resident corporations that failed to file their tax returns where they either had no taxable income or had incurred a loss for the year. The CRA does not intend to change its position in this regard.
Q.2 Penalty for failure to T4A a GST/HST-registered service provider
Where an invoice for services rendered bears a valid GST/HS registration number, would failure to file a T4A result in the application of the penalty?
CRA preliminary response
In 2010, the T4A form was amended to add box 048 "Fees for services--Business income" on a permanent basis. All fees for services rendered that were previously reported in Box 028 "Other income" under "Other Information" should now be reported in Box 048. At that time, the CRA had announced a temporary measure specifying that taxpayers would not be penalized for failing to properly fill in Box 048. However, this has never had the effect of relieving taxpayers of their responsibility to report these payments.
Thus, a penalty under subsection 162(7) is applicable for non-filing if payments for services are not reported on the T4A form, even if an invoice with valid tax numbers is provided to the payer.
Q.3 Loss of bonus year where Case 1 designation following principal residence sale
On page 2 of Schedule 3 of the return for the year of disposition of a principal residence, the individual checks the box for Case 1. By virtue of this effectively being a designation for all the years during which the taxpayer was owner, this could result in wasting the extra year under the “+1” computation.
- Is CRA prepared to treat this as a designation for all the years of holding minus one (for example, 2017 being the year of sale)?
- What evidence must the individual maintain for the event that there is a disposition of a second property that could be designated as a principal residence for 2017?
CRA preliminary response to Q.3(a)
If the principal residence exemption is claimed on the disposition of a property, Schedule 3 must be completed and filed with the individual’s income tax return for the year in which the property was disposed of. The individual must then complete the Table on page 2 of Schedule 3 by checking one of the three boxes.
Where a taxpayer owns only one property and designates it as his or her principal residence for all years in which he or she owned the property, the taxpayer must check Box 1.
Where an individual sells the only principal residence owned by the individual (House A) and acquires a new principal residence in the same year (House B), the CRA is of the view that Box 1 may be checked to designate House A as the individual’s principal residence for all years (or for all years less one year). In this situation, the CRA will not require Form T20911 to be completed with the individuals’ income tax return for the year. This position is referenced on the Government of Canada Web page, “Reporting the sale of your principal residence for individuals (other than trusts)”.2
In other situations, the CRA is of the view that Box 2 or Box 3 should be checked as applicable to the individual’s situation. Form T2091 should also be filed with the individual’s income tax return. Such an approach allows the individual to clearly indicate the taxation years for which the individual is making a principal residence election. The representative of a deceased person must instead use Form T1255.
CRA preliminary response to Q.3(b)
A written copy of the individual’s election should be retained for future reference, especially for when there is a sale of House B or another property that will qualify as the individual’s principal residence, as applicable.
The forms may be modified and our response is based on the documentation currently available. The individual must read this response taking into account any changes that may be made to the forms.
Q.4 Capital dividend election amount on a s. 88(2) winding-up
Where, at the moment of a winding-up described in s. 88(2), the corporation holds portfolio investments or other assets whose fair market value (“FMV”) fluctuates, it is not possible to determine in advance the capital gain that is deemed to arise on the winding-up, so that it is not possible to make an election within the time required under s. 83(2). Is relief available?
CRA preliminary response
In a context similar to that described in this question and where the winding-up dividend exceeds the corporation's CDA balance, the portion of the winding-up dividend, which is deemed to be the total amount of a separate dividend (the "Separate Dividend") for the purposes of an election under subsection 83(2) (the “Election"), will always be equal to the CDA balance at the time of computation. Accordingly, the accuracy of the amount of the Separate Dividend depends on the final CDA balance, as determined by the CRA.
While a corporation remains responsible for computing its CDA balance as accurately as possible in light of all known facts at the time an election is to be made, the CRA recognizes that special circumstances may make this computation extremely difficult.
Consequently, when the balance of the CDA, as determined by the CRA, differs from the balance calculated by the corporation at the time an election is to be made, the CRA will adjust the amount of the Separate Dividend as well as the form T2054 - Election for a Capital Dividend under Subsection 83(2) to reflect the CDA balance as determined. This follows from our understanding that the Income Tax Act contemplates permitting a corporation, inter alia, to distribute its CDA in a winding-up governed by subsection 88(2).
In order to facilitate the CRA's handling of the Election in such circumstances, the resolution of the corporation’s directors should be drafted so as to clearly indicate that the Separate Dividend, in respect of which Form T2054 is filed, constitutes a portion of a winding-up dividend to which subsection 88(2) applies.
While the CRA usually expects a resolution to refer to the total amount of a dividend subject to an Election, which should correspond to that indicated in the Form T2054, the CRA will accept, in these particular circumstances, such amount not being specifically stated in the resolution.
In general, the CRA considers an Election as invalid when it is not made in respect of the total amount of a declared dividend. However, the CRA will accept an exception to this requirement where the winding-up dividend exceeds the corporation's CDA.
Q.5 Short-cut method for eliminating Pt III tax
In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income. Is the short-cut method generally available or only in exceptional circumstances?
CRA preliminary response
The short-cut method (or direct assessment method) is an administrative measure adopted by the CRA to permit direct assessments of the shareholders of a corporation who were paid an excess amount in connection with an election under subsection 83(2). This administrative measure avoids, as applicable, the CRA issuing a Notice of Assessment for Part III tax to the corporation and a subsequent Notice of Reassessment to reverse that Part III tax where the corporation and the shareholders of the corporation agree to be taxed on a taxable dividend equal to the amount of the excess. This is a method that benefits both the taxpayers concerned and the CRA, as it reduces the time required to process an excess election and taxes the shareholders directly on the amount of the excess.
This administrative practice is still in effect and the CRA is generally prepared to apply it to a file, both at the taxpayer's request and during an audit of an election under subsection 83(2). The use of this method, however, remains in the discretion of the CRA to determine whether the circumstances of a file are appropriate for its application. If the CRA determines that the short-cut method is not appropriate for a file, it will inform the taxpayer, and the terms and conditions set out under subsections 184(2) and following must then be followed.
Q.6 Services PE (U.S. Treaty, Art. V, 9(b)) in subsequent year
Where the conditions in Art. V, 9(b) of the Canada-U.S. Convention (respecting a services PE) are satisfied during a taxation year respecting a particular project, which continues for several months longer in the following taxation year, but with the 183-day criteria not met in that subsequent year, will CRA consider that the enterprise nonetheless is deemed to have a permanent establishment in Canada during the subsequent year?
CRA preliminary response
Since paragraph 9(b) of Article V of the Convention specifies that the 183-day test applies to "any twelve-month period", that period may not correspond to the taxation year of the taxpayer. For example, the 183-day test may take into account not only the current taxation year but also the taxpayer's previous and subsequent taxation years in determining whether the 183-day threshold has been reached over a twelve-month period.
If we apply these principles to a practical case which is slightly different from yours but which retains its spirit, we obtain the following results. Pursuant to Article V, subparagraph 9(b) of the Convention, a United States enterprise, whose fiscal year-end is December 31, which provides services on an ongoing basis from January 15, 20_1, to January 25 20_2 shall be deemed to provide such services through a permanent establishment in Canada for the entire period. Indeed, the 183-day test is respected during any twelve-month period for all the services rendered in 20_1 and 20_2. More specifically, the 183-day test is met for the twelve-month period commencing on January 15, 20_1 and ending on January 14, 20_2. The 183-day test is also met for the remainder of the work performed in January 20_2 since the threshold of 183 days is reached for the twelve-month period beginning on February 26, 20_1 and ending on January 25, 20_2.
On the other hand, if additional services for this project were provided from January 1, 20_3 to January 31, 20_3, and no other services were provided from January 26, 20_2 to December 31, 20_2 as well as after January 31, 20_3 with respect to this project or a related project, such supplementary services should generally not be deemed to be provided through a permanent establishment under Article V, subparagraph 9(b) of the Convention, since such services would not be provided during a twelve-month period where the 183-day test is met; that is, the 183-day threshold is not met during the twelve-month period beginning on February 1, 20_2 and ending on January 31, 20_3 or any other twelve-month period that includes the time when these additional services are provided.
Q.7 Application of damages on the cancellation of a purchase contract
In 2016-0652851C6 F, as a result of breach of a third party's agreement to purchase an individual's personal residence, the individual received $50,000 in damages from the defaulted purchaser, which CRA stated was proceeds of disposition of a promise giving rise to a capital gain of $50,000. However, in IT-365R2, para. 9 (archived), CRA states that where an amount of compensation is received respecting a particular asset that was not disposed of, that amount reduces the cost of the asset. Will CRA accept that this position applies in the situation described in 2016-0652851C6?
CRA preliminary response
Paragraph 9 of Interpretation Bulletin IT 365R2 effectively provides that "[w]here the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer." However, the CRA is of the view that the scope of this paragraph, which was written under the heading "Receipts in Respect of Non-Performance of Business Contracts" should be restricted to such a context.
Consequently, the CRA would not accept that the position set out in paragraph 9 of Interpretation Bulletin IT 365R2 applies to the situation described in the question. Thus, the CRA is still of the view that the amount received by the vendor would be treated as proceeds of disposition of its right arising from the promise. If this right is capital property, within the meaning of section 54, the vendor would realize a capital gain of $50,000.
Q.8 NR4 filing for withholding-exempt amounts
Is the filing of an NR4 required where an amount is credited to a non-resident which is not subject to Part XIII tax, e.g., interest paid to an arm’s length lender?
CRA preliminary response
As stated by the CRA at the IFA 2017 International Taxation Conference, the filing requirement under ITR subsection 202(1) is independent of the obligations to withhold and remit Part XIII and XIII.2 tax. Where a person resident in Canada pays or credits, or is deemed under Part I, XIII or XIII.2 of the Act to pay or credit, to a non-resident person an amount as, on account or in lieu of payment in whole or in part of an amount described in paragraphs 202(1)(a) to (h) of the ITR, the CRA is of the view that the resident person has an obligation to file an information return (i.e., an NR4 slip) in respect of that amount, whether or not the amount is subject to tax under Parts XIII or XIII.2 of the Act. Thus, in the above example, the resident of Canada who has paid or credited an amount as interest to a non-resident person with whom the resident is not dealing at arm's length would have an obligation to file an information return, regardless of whether or not that amount is subject to Part XIII tax. The CRA is also of the view that this position applies to any other amount described in ITR subsection 202(1).
It is also important to note that the Minister of National Revenue has not waived this filing requirement pursuant to the authority to do so conferred under ITA subsection 220(2.1).
Q.9 Designated person status where refreeze by family trust
As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (the “Initial Trust”) holds the non-voting common shares. The Initial Trust’s beneficiaries are A, his adult children and his wife and its trustees are A, his brother (B) and an arm’s length individual. Now a further estate freeze is effected under which Initial Trust exchanges its shares for preferred shares under s. 51 and a newly-formed discretionary family trust (“New Trust” – also having grandchildren and family corporations as beneficiaries and with a different unrelated individual as the third trustee) subscribes for new non-voting common shares. Is A’s spouse a designated person in relation to the Initial Trust?
CRA preliminary response
First, for the purposes of this question, we have assumed that Mr. A and Initial Trust reside in Canada at all relevant times. We have also assumed that Initial Trust and New Trust are discretionary trusts.
Subsection 74.4(2) is a very broad corporate attribution rule. Briefly, subsection 74.4(2) can apply to a transfer or loan of property by an individual to a corporation where one of the main purposes of the transfer or loan may reasonably be considered to be to reduce the income of the individual and to benefit, either directly or indirectly, by means of a trust or by any other means whatever, a person who is a designated person in respect of the individual.
The concept of a transfer or loan of property is also very broad in application as it can be effected directly or indirectly, by means of a trust or by any other means whatever.
According to the wording of this question, section 51 is applicable in respect of the exchange by Initial Trust of the common shares of the capital stock of Opco for freeze preferred shares of the capital stock of Opco. This exchange is deemed, by virtue of paragraph 51(1)(c), to be a transfer of the common shares of the capital stock of Opco by Initial Trust to Opco for purposes of the application of section 74.4.
However, whether it is reasonable to consider that one of the main purposes of a transfer of property is to reduce the income of the individual and to benefit, either directly or indirectly, a designated person (the "Purpose Test”) is a question of fact which must be resolved in light of all the circumstances and particulars of each case.
The term "designated person" is defined in subsection 74.5(5) and this definition also applies for the purposes of section 74.4.
A designated person, in respect of an individual, means a person who is the spouse or common-law partner of the individual, or who is under 18 years of age and does not deal with the individual at arm’s length, or is the niece or nephew of the individual.
In view of the fact that subsection 104(2) provides that a trust is deemed to be an individual in respect of the trust property, subsection 74.4(2) could apply to a trust, assuming that all of the conditions for the application of subsection 74.4 are satisfied.
However, only a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.
In light of the foregoing, the Mr. A’s spouse cannot not be a designated person in respect of Initial Trust.
On the other hand, Mr. A's spouse is still a designated person in respect of Mr. A.
Thus, while it is not possible to make a definitive determination in the context of this question, we note that subsection 74.4(2) could apply to the transfer of property made by Mr. A, in connection with the estate freeze carried out by Mr. A. in favour of Initial Trust, if the Purpose Test were satisfied.
In addition, we are of the view that the question of the application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property effected by this estate freeze was made indirectly by Mr. A through Initial Trust.
Consequently, if it were possible to establish that the Purpose Test was satisfied, subsection 74.4 (2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.
In a different vein, it was stated in this question that the unborn children of Mr. A will be beneficiaries of New Trust.
In this regard, the CRA is of the view that an unborn child is not a person for the purposes of section 74.4 and subsection 74.5(5) and cannot constitute a designated person under paragraph 74.5(5)(b). In contrast, from birth, a grandchild may be a designated person in respect of an individual.
In addition, a grandchild of Mr. A will be connected to him by blood relationship under subsection 251(6). A grandchild, and Mr. A, will therefore be persons related to each other under subsection 251(2) and, therefore, will be deemed not to deal at arm's length with each other under paragraph 251(1)(a).
In light of the foregoing, a grandchild of Mr. A, and Initial Trust, can be deemed not to deal at arm's length with each other by virtue of paragraph 251(1)(b) assuming that Mr. A's right under the Initial Trust constituted a beneficial interest, if subsection 248(25) applied without taking into consideration subdivisions (b)(iii)(A)(II) to (IV) thereof.
If the latter assumption proved to be correct, a minor grandchild of Mr. A would be a designated person in respect of Initial Trust.
Thus, subsection 74.4(2) could apply to the transfer of property made by Initial Trust, in connection with the estate freeze made by it in favour of New Trust, if the Purpose Test was satisfied.
Q.10 S. 184(3) election on declared but unpaid dividend or where CDA confirmation
The s. 184(3)(b) excess dividend election is made respecting the amount of the original dividend that was payable. S. 184(3)(d) deems the shareholder to have received the excess dividend.
- Does the excess portion of a dividend, that was declared but not paid and that was elected upon under s. 184(3), remain non-taxable to the shareholder for so long as it remains unpaid?
- If following, a request for confirmation of the CDA balance, a capital dividend is paid based on such confirmation, is the capital dividend statute-barred?
- If in that situation the capital dividend is excessive and is outside the reassessment period, will s. 184(3) apply?
CRA preliminary response to Q.10(a)
Subparagraph 184(3)(d)(ii) provides that it is at the time that any separate dividend determined under any of paragraphs (a) to (c) became payable, that each of the persons who held shares of the class of shares of the capital stock of the corporation on which the initial dividend was paid is deemed to have received the proportion of that dividend that the number of shares of that class held by the person at the particular time is of the number of shares of that class outstanding at the particular time.
The portion of the excess of the initial dividend over the CDA referred to in paragraph 184(3)(c) is deemed to be a separate taxable dividend that became payable at the particular time. The particular time is the time when the initial dividend was payable.
Consequently, under the current wording of subparagraph 184(3)(d)(ii), as the separate taxable dividend is deemed, for the purposes of paragraph 12(1)(j) and subsection 82(1), to have been received at the time the initial dividend was payable, such dividend may be taxed in a taxation year preceding the year in which the dividend was actually paid.
The CRA has already brought this matter to the attention of the Department of Finance.
CRA preliminary response to Q.10(b)
The capital dividend account is not technically subject to a limitation period.
With respect to a capital dividend and Part III tax, subsection 185(1) provides that the Minister shall, with all due dispatch, examine each election made by a corporation in accordance with subsection 83(2), assess the tax, if any, payable under Part III in respect of the election and send a notice of assessment to the corporation.
In this regard, subsection 185(3) provides, inter alia, that subsection 152(4) applies to Part III, with such modifications as the circumstances require. Thus, without the application of any other statutory provision expressly providing for different rules (such as for objections and appeals), the Minister may only issue a new notice of assessment in respect of Part III tax according to the rules provided in subsection 152(4).
Consequently, where a situation does not involve a misrepresentation of the facts through negligence, carelessness or willful default or fraud, and where there has been no waiver in the prescribed form, the Minister would not be able to issue a Notice of Assessment in respect of tax under Part III after the normal reassessment period as defined in subsection 152(3.1). This normal reassessment period would be calculated by taking into account the date of the notice of first assessment issued in respect of the Part III tax, if any, in respect of the election made under subsection 83(2).
CRA preliminary response to Q.10(c)
If a corporation is required, in the absence of subsection 184(3), to pay a tax under Part III in respect of the excess of the initial dividend over the capital dividend account , the corporation may make an election in the prescribed form not later than the ninetieth day after the day of the notice of assessment relating to tax payable under Part III for the rules set out in subsection 184(3) to apply.
Thus, it would be possible to make an election under subsection 184(3) if a notice of reassessment were issued provided that the prescribed terms and conditions were followed and provided that the corporation elected not later than the 90th day on which the notice of reassessment was sent.
On the other hand, if the Minister could no longer assess under Part III, the condition for making an election under subsection 184(3) would not be satisfied given that the corporation would not have tax payable under Part III.
Q.11 S. 13(38)(d)(iii) election where calendar partnership with non-calendar partners
Where a partnership (the "Partnership") with a calendar year end, but whose corporate partners (the "Partners") have March 31 taxation year ends, disposed of eligible capital property in November 2016, must those partners make the s. 13(38)(d)(iii) election in order for the eligible capital property regime (the "Old Regime"), rather than the new Class 14.1 property regime (the "New Regime"), to apply to the gain?
CRA preliminary response
Paragraph 96(1)(a) provides that a partner’s income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or the taxable income earned in Canada for a taxation year, as the case may be, is computed as if the partnership were a separate person resident in Canada.
Paragraph 96(1)(f) provides that the amount of the income of the partnership for a taxation year from any source or from sources in a particular place constitutes the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof.
The rules of the Old Regime with respect to the disposition of eligible capital property, as well as of subsection 13(38), which adds transitional provisions because of the introduction of the New Regime, are statutory provisions for the computation of income. Consequently, in accordance with paragraph 96(1)(a), these provisions apply, as appropriate, at the level of the partnership as if it were a separate person resident in Canada. Thus, the Partnership would be considered to be the taxpayer for the purposes of paragraph 13(38)(d). Given that the Partnership’s taxation year would end on December 31, 2016, paragraph 13(38)(d) would not apply and the Partnership would not have to make an election under subparagraph 13(38)(d)(iii).
Since the computation of the Partnership income would not be made at the Partners’ level but at the Partnership level, so that they would be allocated their share thereof by the Partnership under paragraph 96(1)(f), the date of the taxation year end of the Partners would not be relevant for the purposes of paragraph 13(38)(d). Furthermore, a Partner could not make an election under subparagraph 13(38)(d)(iii) in respect of a disposition by the Partnership.
Q.12 Two-convention limitation where business expense
The two-convention limitation in s. 20(10) applies only to capital expenditures. Are expense of attending conventions which were incurred for earning income from a business not subject to this limitation?
CRA preliminary response
Generally, and subject to any provisions to the contrary, a taxpayer may deduct, in computing the taxpayer’s income from a business, reasonable expenses of a current nature incurred by the taxpayer for the purpose earning income from the business.
Where a taxpayer has incurred expenses related to a convention in order to earn income from a business and such expenses are not capital expenditures, such expenses may be deductible in computing its business income without reference to subsection 20(10).
Historically, the CRA's position with respect to convention expenses is that such expenditures are generally capital expenditures to which paragraph 18(1)(b) applies. In addition, paragraphs 18(1)(a) and (h) and sections 67 and 67.1 could apply, depending on the circumstances.
Q.13 Standby charge where purchaser leases car to related employer
Holdco acquires an automobile and leases it to a related corporation (Opco) at a fair market value rent, with Opco making the automobile available to one of its employees. Element C in the s. 6(2) formula appears to contemplate that the cost of the automobile to a person (Holdco) related to the employer is to be taken into account – but 2014-0529991E5 appears to indicate that the leasing cost to Opco should instead be used. Should Opco use its leasing cost or Holdco’s cost for standby charge purposes?
CRA preliminary response
For the purposes of paragraph 6(1)(e), subsection 6(2) sets out a formula for the calculation of a reasonable standby charge for an automobile for the total number of days during which the automobile is made available to a taxpayer by the employer of the taxpayer or by a person related to the employer.
The formula in subsection 6(2) is worded as follows:
A/B × [2% × (C × D) + 2/3 × (E – F)]
- Element C of this formula represents the cost of the automobile to the employer or to a person related to the employer if either of them owns the vehicle at any time in the year.
- Element E is the total of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile during such of the total available days as are days when the automobile is leased to the employer
In a situation where a lease and purchase are involved, the wording of the formula in subsection 6(2) requires that the cost of the automobile be added to C and that the leasing cost be added to E to calculate the reasonable standby charge for an automobile made available to an employee.
Consequently, under certain circumstances, the formula in subsection 6(2) could yield an unexpected result. This situation has been brought to the attention of the Department of Finance.
In specific situations, the CRA concluded that the reasonable standby charge should be based on the cost or the leasing costs of the automobile to the person who made the automobile available to the employee. In the example submitted and after taking into account all facts and circumstances relating to the situation, the CRA could consider only the leasing cost that Opco pays to Holdco for the purposes of the formula set out in subsection 6(2).
However, a taxpayer or its representative must exercise extreme caution when referring to a technical interpretation letter. Our comments are generally not written to cover all possible circumstances or situations. Thus, the interpretation to which you refer includes comments that have been issued taking into account the specific facts of an actual situation. In that case, only the cost of the automobile was relevant for the purpose of calculating the reasonable standby charge.
Q.14 Avoidance of s. 104(5.8) by distributing to Canco held by new trust
If the terms of a discretionary family trust (“Old Trust”) so permit, the trustees (as the 21st anniversary approaches) could choose to distribute the trust property to a corporate beneficiary (“Canco”), whose shares are held by a new discretionary trust (“New Trust”).
- Does CRA agree that s. 104(5.8) does not apply as the trust property is not transferred directly to New Trust?
- Would the response be different if the gain in the assets rolled out to Canco could not be realized at a date subsequent to the death of the discretionary beneficiaries who were alive on the 21st anniversary?
CRA preliminary response to Q.14(a)
The transactions described effectively result in Old Trust indirectly transferring property to New Trust on a tax deferred basis, thereby avoiding the application of the anti-avoidance provision in subsection 104(5.8) of the Act and restarting the 21-year clock. Thus, the capital gains that would otherwise be realized by Old Trust would be deferred beyond its 21st anniversary while the property continues to be held in a discretionary trust arrangement. Furthermore, the trustees of the New Trust are provided with another 21 years to decide who from the potential beneficiaries will receive the property which could result in deferring the unrealized gain beyond the lifetime of the individual beneficiaries alive on the date of the Old Trust’s 21st anniversary.
Generally, it is the CRA’s view that such planning circumvents the anti-avoidance rule in subsection 104(5.8) of the Act in a manner that frustrates the object, spirit and purpose of that provision, the deemed disposition rule in paragraph 104(4)(b) and the scheme of the Act as a whole as it relates to the taxation of capital gains. It is also the CRA’s view that if a distribution is made by an existing discretionary trust to a Canadian resident corporation wholly owned by a new discretionary trust resident in Canada, it will generally be inferred that the primary purpose of such distribution is to defer the income tax otherwise applicable in respect of the 21-year deemed disposition pursuant to subsection 104(4) of the Act. The CRA has significant concerns regarding these transactions and will apply GAAR when faced with a similar set of transactions unless substantial evidence supporting its non-application is provided.
The CRA is also concerned that the proposed transactions may be repeated where the terms of New Trust are similar to those of Old Trust. Thus the realization of the capital gains inherent in the property could be deferred for several generations or indefinitely. This contravenes one of the underlying principles in the taxation of capital gains regime, which is to prevent the indefinite deferral of tax on capital gains.
As a result, the CRA will not provide any Advance Income Tax Ruling where such a structure is proposed to be put in place unless substantial evidence supporting the non-application of GAAR is provided.
CRA preliminary response to Q.14(b)
Our response would not be different even if the transactions put in place ensured that the realization of the capital gain inherent in the transferred property could not be postponed beyond the lifetime of the Old Trust's discretionary beneficiaries, who could have received property directly before the 21st anniversary. Even under these circumstances, the CRA is of the view that such transactions would effectively permit taxpayers to circumvent the anti-avoidance rule in subsection 104(5.8) in a manner that frustrates the object, spirit and purpose of that provision, the deemed disposition rule in paragraph 104(4)(b) and the scheme of the Act as a whole. It is the CRA’s view that the object, spirit and purpose of these provisions is that realization of gains on property in a discretionary family trust should occur at least every 21 years. There are specific situations provided for in the Act to which the 21-year deemed disposition rule does not apply. In the CRA’s view, the Act does not contemplate any deferral beyond a 21-year period while property is directly or indirectly held in a discretionary trust and therefore, this situation raises the same policy concerns as in the situation described above.
Q.15 Step-up of goodwill on loss restriction event
The sole asset of a corporation sold to a 3rd party is goodwill with a fair market value of $200,000. Can the corporation make a s. 111(4)(e) designation respecting its goodwill, viewed as a Class 14.1 property with an FMV and capital cost of $200,000 and nil?
CRA preliminary response
Since January 1, 2017, goodwill relating to a business is Class 14.1 depreciable property. Consequently, it is capital property and, based on the facts set out above, was owned by the corporation immediately before the corporation was subject to a loss restriction event. In addition, according to the facts provided, the goodwill is not a depreciable property to which subsection 111(5.1) would apply in the absence of paragraph 111(4)(e), and no amount would be deductible under paragraph 111(4)(c) in the absence of paragraph 111(4)(e).
Therefore, the corporation can designate the goodwill in accordance with paragraph 111(4)(e). Thus, the corporation would be deemed to have disposed of the goodwill, immediately before the time that is immediately before the time that the corporation was subject to a loss restriction event, for proceeds of disposition equal to the lesser of:
- the FMV of the property immediately before the time the corporation was subject to the loss restriction event; and
- the adjusted cost base to the taxpayer of the property immediately before the disposition or, if greater, the amount that is designated by the taxpayer in respect of the property.
In this situation, the corporation should determine the FMV of the property so as to compare it with the designated amount for the property (if greater than the adjusted cost base) so as to establish the proceeds of disposition of the property.
Q.16 Farming land with non-severable residence
Mr. and Mrs. X each have had, for over 10 years, a 50% interest in a partnership (SENC) holding land which as to 80% has been used in the farming business and as to 20% has been used for their residence (with the residence not being legally severable).
- On a sale of the land, would it be viewed as a single property, so that it qualified as being used principally in a farming business?
- What if the partnership interests instead were sold?
- If the residence were regarded as a separate property, could the partnership interests and the land qualify for the exemption?
- Would the answers change if the residence could be severed?
- If the residence were disposed of immediately before the sale, could the partnership interests qualify for the exemption?
- In such event, would the land also qualify?
CRA preliminary response
Given that this question only summarizes a particular hypothetical situation, we cannot provide definitive answers or comment specifically on each of your questions. However, we can offer you the following general comments.
When a property is disposed of, an individual may claim the capital gains deduction inter alia where the property is "qualified farm or fishing property" as defined in subsection 110.6(1).
Under paragraph (a) of that term, a qualified farm property of an individual refers, in particular, to real or immovable property that, at the time of its sale, belongs to the individual or to a family farm or fishing partnership in which the individual holds an interest and that was used in the course of carrying on a farming or fishing business by the individual or a family farm or fishing partnership in which the individual holds an interest.
The CRA is of the view that an immovable referred to in paragraph (a) of the expression "qualified farm or fishing property" includes the building and the land on which the building is situated as one and the same property. Under Article 948 of the Civil Code of Québec, the ownership of property gives a right to what it produces and to what is united to it, naturally or artificially, from the time of union. This right is called a right of accession. An owner of an immovable (for example, a piece of land) is the owner by accession to all structures and works located on the immovable.
This position also applies to the term "property" used in the definition of "interest in a family farm or family fishing partnership" under subsection 110.6(1).
In addition, the CRA considers that each cadastral lot is a separate real property. Consequently, the entire property, in this case the entire lot, must be considered in determining whether a property was used primarily in the course of carrying on a farming business. If the lot is subdivided, then this determination will be made on a lot-by-lot basis.
Finally, with respect to the determination of whether or not property was used principally in the carrying on of a farming business, we refer to paragraph 18 of Interpretation Bulletin IT-373R2-CONSOLIDATED, Woodlots, which states:
When reference is made to an asset being used "principally" in the business of farming, the asset will meet this test where more than 50% of the asset's use is in the business of farming. Whether or not particular assets are "used principally in the business of farming" is a question of fact to be determined on a property by property basis (i.e., this test would have to be satisfied for each legal parcel of land). …
Q.17 Effect of buy-sell clause between related and unrelated Acquireco shareholders
X, who is the sole shareholder of a CCPC, sells 25% of his shares to Acquireco, whose two shareholders (both key employees) are his son (as to 49%) and an unrelated person (51%). The shareholders’ agreement for Acquireco accords the son the right to purchase the remaining shares in the event of that person’s death, or permanent illness or disability, but also on other specified events, such as voluntarily ceasing employment with the CCPC.
- Will s. 251(5)(b) apply to deem Acquireco to not deal at arm’s length with X, so as to engage s. 84.1?
- If the shareholders of Acquireco instead were the son (as to 30%) and 10 other key employees (each with 7%), and with the same clause in the shareholders’ agreement except that, on any such voluntary departure, the remaining shareholders have a proportionate right to acquire the departing employee’s shares, would the answer change?
CRA preliminary response
Subparagraph 251(5)(b)(i) provides inter alia that for the purposes of subsection 251(2), where at any time a person has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares of the capital stock of a corporation or to control the voting rights of such shares, the person will be deemed to have the same position in relation to the control of the corporation as if the person owned the shares at that time. However, the provisions of paragraph 251(5)(b) will not apply where the right is exercisable only by reason of the death, bankruptcy or permanent disability of an individual. In addition, the provisions of paragraph 251(5)(b) will not apply merely because an agreement between shareholders contains a clause providing for a right of first refusal or a shotgun arrangement (a “shotgun clause”).
According to the question, the buy-sell clause provided for in the agreement between the shareholders of Acquireco would not come within the exceptions described above.
CRA preliminary response to Q.17(a)
Pursuant to subparagraph 251(5)(b)(i) and by virtue of the rights provided for under the Acquireco shareholders' agreement, Mr. X's son would be deemed, for the purposes of subsection 251(2), to hold the same position in respect of Acquirco's control as if he were the holder of shares of the capital stock of Acquireco held by the unrelated person. Mr. X's son would therefore be related to Acquireco pursuant to subparagraph 251(2)(b)(i) as he would be deemed to hold 100% of the shares of the capital stock of Acquireco. By the same token, Mr. X would be related to Acquireco under subparagraph 251(2)(b)(iii). Mr. X would therefore not deal at arm's length with Acquireco pursuant to paragraph 251(1)(a). Consequently, the provisions of section 84.1 could apply in the event that all the other conditions of application provided for in that section were satisfied.
CRA preliminary response to Q.17(b)
Subparagraph 251(5)(b)(i) creates a presumption for determining the control of a corporation in relation to a particular person. Thus, in the situation presented, under subparagraph 251(5)(b)(i) and by virtue of the rights provided for in the Acquireco shareholders' agreement, Mr. X's son would be deemed, for the purposes of subsection 251(2), to be in the same position in relation to Acquireco's control as if he were the holder of shares of the capital stock of Acquireco held by the other shareholders. As a general rule, the CRA will apply this presumption by taking into account the rights of Mr. X's son in respect of all other shareholders ("holder-by-holder" method). Accordingly, Mr. X's son would have rights to all of the shares because he would have rights to the shares of each of the shareholders if each of them became a shareholder affected by an event provided for in the agreement. Therefore, as with the previous question, Mr. X's son would be related to Acquireco under subparagraph 251(2)(b)(i). By the same token, Mr. X would be related to Acquireco under subparagraph 251(2)(b)(iii). Mr. X would therefore not deal at arm's length with Acquireco pursuant to paragraph 251(1)(a). Consequently, the provisions of section 84.1 could apply in the event that all the other conditions of application provided for in that section were satisfied.
Although the wording of the question states that, had it not been for the shareholders' agreement providing for the rights to acquire the shares and the application of paragraph 251(5)(b), Mr. X would be dealing at arm’s length with Acquireco, the CRA considers it appropriate to recall that paragraph 251(1)(c) makes the issue of whether or not unrelated persons are dealing with each other at arm's length a question of fact. As a result, unrelated persons may not deal at arm's length, depending on the facts and circumstances of a particular situation. Each file must be examined in light of its own facts.
The general position of the CRA on this matter is set out in paragraphs 1.38 to 1.41 of Folio S1-F5-C1, Related Persons and Dealing at Arm's Length. Paragraph 1.41 states, inter alia, that a situation where one party to a transaction is merely accommodating the other party in an attempt to obtain a certain tax result may be a situation where the parties are not dealing at arm's length because they do not have separate economic interests which reflect ordinary commercial dealings between parties acting in their own separate interests. In the scenario set out in this question, Acquireco may not have a separate economic interest in acquiring the shares held by Mr. X, other than to accommodate Mr. X, especially since Mr. X maintains a significant economic interest in the operating corporation. However, since this determination is a question of fact, we cannot pronounce on this without first analyzing the facts and circumstances of the particular situation.
Q.18 Dedicated Telephone Service update
Could CRA provide an update on its new dedicated telephone service?
CRA preliminary response
On June 5, 2017, the Income Tax Rulings Directorate staff assigned to the new Dedicated Telephone Service ("DTS") for income tax service providers began receiving calls from 500 participants. The latter accessed the service during a progressive launch of the project. Over the next few weeks, access to the service will be gradually expanded until 3,000 participants are registered. To date, the response from the initial participants is very positive, with telephone access to experienced CRA staff providing them with guidance on more complex technical issues related to income tax.
As part of the pilot project, registration is now available to accountants practising in Quebec, Ontario, Manitoba and New Brunswick who are sole proprietors, partners or shareholders of accounting firms with up to three partners or shareholders. As of April 2017, the CPA Institute for each of these provinces contacted its members who are eligible for the service and provided them with the necessary information to register and use the new DTS. Enrollment will continue to be accepted as part of the pilot on a first come, first served basis until 3,000 participants are enrolled in the service.
If the pilot project is successful, the DTS could become available to more income tax service providers on a permanent and national basis.
Although the DTS is intended to be a technical resource for income tax service providers, the service is not a problem solving line for a particular taxpayer. DTS agents therefore do not have access to taxpayers' accounts. It should also be noted that the DTS is not intended for specialized tax professionals whose services are focused on complex tax planning. The latter will continue to channel their tax applications through requests for technical interpretations or advance rulings. Further information on these and other services provided by the directorate is available in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.
To learn more about the DTS, we invite you to visit canada.ca/en/revenue-agency/campaigns/dedicated-telephone-service.