6 October 2017 APFF Financial Strategies and Instruments Roundtable
Translation and provisional status disclaimer
The translated written responses provided further below were prepared by Tax Interpretations Inc. The CRA did not issue its 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 Financial Strategies and Instruments Roundtable together with our translations of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Catherine Ayotte, Mélanie Beaulieu and Louise Roy), as well as those of the Department of Finance (provided by Robert Duong). We use our own titles, and footnotes, all of them routine, are not included.
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, including footnotes.
The (regular) 6 October 2017 APFF Roundtable is provided on a separate page.
Q.1 Rollover where separation agreement between common-law spouses that reflects their previous union agreement
In 2005-0134081E5, CRA indicated that two Quebec common-law partners [“conjoints de fait” - also translatable as de facto spouses] can, on the break-down of their relationship, access the provisions of s. 146(16)(b) pursuant to a written separation agreement governing the division of their assets and their respective rights following the break-down. Some advisors consider that the absence of legal rights in Quebec respecting a common-law union, as confirmed in Éric v. Lola, 2013 SCC 5, renders it impossible to settle the rights under such a break-down. Does CRA consider that the rollovers under ss. 73(1), 146(16) or 146.3(14) can apply where:
(a) at the time of their separation, they sign a written agreement governing the division of their assets and settling their respective rights (and with there being no previous written agreement); or
(b) at that time, they sign a written agreement providing for the division of their assets, but with such division being governed by a common-law “union” agreement which they had entered into quite a number of years previously?
Preliminary CRA response
The Éric v. Lola case concerned the constitutional validity of the legal protection measures recognized under the Civil Code of Québec for married spouses or civil union spouses in matters of support and division of property. The Supreme Court of Canada decided by a majority that the fact that these measures do not apply to common-law partners is not contrary to the Canadian Charter of Rights and Freedoms. The Supreme Court of Canada therefore refused to invalidate the distinction made by C.C.Q. between the legal status of married or civil union spouses on the one hand, and of common-law partners on the other. In this respect, the Supreme Court of Canada's decision did not change the state of the law applicable to common-law partners from what it was at the time of Technical Interpretation 2005-0134081E5.
This Technical Interpretation was effectively based on the premise that, although there is no right under the Civil Code of Québec arising out of a common-law partnership, it is not impossible for the annuitant to determine to create rights under a written separation agreement relating to the division of property with the annuitant’s common-law partner or former common-law partner.
The conclusion of the Supreme Court of Canada in the Éric v. Lola case does not change the position of the CRA.
The CRA therefore remains of the view that two common-law partners residing in Québec may, on termination of their partnership, avail themselves of the provisions of paragraph 146(16)(b) to transfer property accumulated in an RRSP under a written separation agreement relating to the division of property between the parties in settlement of rights arising on the breakdown of their common-law partnership. Such an agreement could be concluded at the time of separation, whether or not a common-law union agreement providing for the rights of each in the event of the union's failure has been previously signed.
The same reasoning applies in our view to the rollover rules in subsections 73(1) and 146.3(14).
Finally, and as indicated in Technical Interpretation 2005-0134081E5, the question of whether a particular agreement is a written separation agreement relating to the division of property in settlement of rights arising on the breakdown of a common-law relationship is a question of fact and law which can only be resolved by considering all the relevant facts.
Q.2 Excess RRSP contributions by deceased
Where an individual, having made an excess RRSP contribution, withdraws the excess, there will be an income inclusion under s. 146(8), but a deduction under s. 146(8.2) may be available.
(a) An individual, who made an excess contribution in 2015, dies in 2016. Will the excess contribution be added to the deceased’s income under ss. 146(8) and (8.8)?
(b) Where the time periods in s. 146(8.2) are met, can the executor complete the applicable forms (especially Form T746) in order that the deceased’s terminal return can benefit from the s. 146(8.2) deduction?
CRA preliminary response to Q.2(a)
Under subsection 146(8.8), where the annuitant of an RRSP dies before the maturity of the plan, the annuitant is deemed to have received, immediately before the annuitant’s death, as a benefit out of or under the RRSP, an amount equal to the fair market value ("FMV") of all the property of the RRSP at the time of death. Consequently, in the year of death, this amount must be included in computing the income of the deceased annuitant under subsection 146(8) and paragraph 56(1)(h). Subject to the rules set out under subsection 146(8.9), the amount to be included depends solely on the FMV of the RRSP property at the time of death. The fact that premiums paid to the RRSP prior to the time of death could not be deducted has no impact on the amount to be included.
CRA preliminary response to Q.2(b)
Under the conditions in subsection 146(8.2) for its application to a taxpayer in a particular taxation year (which must be one of the years referred to in paragraph 146(8.2)(c)), it is necessary in general terms that a payment from an RRSP in respect of undeducted premiums of the taxpayer, be received by the taxpayer in the year and that such payment is otherwise included in computing the taxpayer’s income for the year. If, as in the described situation, a taxpayer dies before the taxpayer has withdrawn the undeducted premiums, the taxpayer can no longer receive any payment related to these premiums. However, the CRA generally accepts that an amount deemed to be received by a deceased annuitant under subsection 146(8.8) and included in the annuitant’s income for the year of death under subsection 146(8) and paragraph 56(1)(h) should be treated as a payment received by the annuitant for the purposes of subsection 146(8.2). Thus, to the extent that all other conditions of subsection 146(8.2) are satisfied, the deduction provided under that subsection may be claimed in the deceased annuitant’s terminal return.
Respecting Form T746, it does not cover the situation where the annuitant has died. The executor of a deceased annuitant's estate who, in such circumstances, wishes to claim the deduction in the deceased annuitant’s terminal return should simply indicate the amount claimed in line 232 of the terminal return of the deceased annuitant and use the space to the left of the line to indicate that it is a deduction for the refund of unused RRSP contributions. To determine the amount of the claimed deduction, the executor could contact the CRA's Individual Income Tax Enquiries Service by telephone or obtain a worksheet [“feuille de calcul”] from the CRA by contacting the appropriate Tax Center in writing.
Q.3 Limitation of s. 110.6(15)(a) to life insurance policies
The two individual shareholders (A and B) of a small business corporation (an SBC) agree that on the disability of either of them, his shares will be purchased out of the proceeds of a policy purchased by the corporation. What is the policy reason for not applying the s. 110.6(15)(a) cash-surrender-value rule so as to exclude the death benefit for SBC purposes?
In general, paragraph 110.6(15)(a) of the Income Tax Act (the "ITA") provides relief in determining whether the gain realized on the disposition of a share qualifies for the lifetime capital gains exemption where the corporation holds an insurance policy on the life of a shareholder of the corporation (or a related corporation). A share of a corporation may qualify for the lifetime capital gains exemption if the corporation meets the asset test (the "Asset Test"). The Asset Test is found in the definition of "qualified small business corporation share" in subsection 110.6(1), in the definition of "share of the capital stock of a family farm or fishing corporation" in that subsection, and in the definition of "small business corporation" in subsection 248(1).
The fair market value (FMV) of a life insurance policy may increase significantly in certain circumstances. An increase in the value of the policy could result in the corporation no longer satisfying the Asset Test. Consequently, subparagraph 110.6(15)(a)(i) provides that the FMV of a life insurance policy shall, at any time before the death of the insured, be deemed to be its cash surrender value (within the meaning assigned by subsection 148(9)) at that time.
Subparagraph 110.6(15)(a)(ii) applies where a corporation is a beneficiary of a life insurance policy on the life of a shareholder of that corporation (or another corporation). Without this rule, the proceeds received or receivable by the corporation on the death of the shareholder would not normally be considered to be used in an active business carried on by the corporation if they were to be distributed by the corporation for the purpose of financing an acquisition or the redemption of shares under an agreement for the purchase and sale of shares. Using the proceeds of the policy this way could result in the corporation not meeting the Asset Test.
To address these situations, subparagraph 110.6(15)(a)(ii) provides that the fair market value of the life insurance policy will be deemed to be its cash surrender value (within the meaning assigned by subsection 148(9)) In general, the fair market value of the life insurance policy is deemed (until the acquisition, redemption, or cancellation of the shares) not to exceed the cash surrender value of the policy immediately before the death of the shareholder to the extent that the proceeds have been used (directly or indirectly) to redeem, acquire or cancel shares of the capital stock of that corporation (or an affiliated corporation or corporation associated with such a corporation) held by the person whose life was insured under the policy.
You asked if the tax policy reasons underlying the relief rule in 110.6(15)(a) could extend to situations where a corporation uses proceeds received under a disability or critical illness insurance policy to acquire shares held by the insured person. In terms of tax policy, the examination of such an issue could only be made in the context of a comprehensive review of the taxation of disability and critical illness insurance policies - unlike life insurance policies, the Act does not provide a comprehensive set of tax rules for disability and critical illness insurance policies. In addition, there may be significant differences between life insurance and disability or critical illness insurance, including the fact that an insured event under disability or critical illness insurance does not necessarily imply that the insured person ceases to participate in the corporation's business on a permanent basis.
Q.4 S. 146(8.2) where larger withdrawal than needed to avoid Pt X.1 tax
In the following situations, can the taxpayer claim a deduction under s. 146(8.2) for the withdrawal of an excess (otherwise deductible) contribution made to the taxpayer’s RRSP?
(a) In 2016, the individual contributes the maximum deductible amount of $25,370 and then, later in the year out of inadvertence (and without the intention described in s. 146(8.2)(f)), contributes a further $30,000, so that there is a resulting cumulative excess amount (as per s. 201.2(1.1)) of $28,000. In order to cut off Part X.1 tax for 2017, the individual withdraws $30,000 in February 2017. However, also in 2017, the individual and employer contribute $26,010 to a group RRSP. Is the $30,000 withdrawal deductible under s. 146(8.2), and is the $26,010 contribution deductible under s. 146(5)?
(b) An individual makes an RRSP contribution that does not exceed the RRSP deduction limit for the year. However, later in the year, the individual wishes to withdraw the contribution and to not claim a deduction (for example, because of cash flow issues, or deciding that a TFSA contribution was preferable). If the conditions in ss. 146(8.2)(a) to (d) were satisfied, would s. 146(8.2)(e) preclude a deduction?
Preliminary CRA response
In general, where a payment from an RRSP is received by a taxpayer, the payment constitutes a benefit as defined in subsection 146(1) and is included in computing the taxpayer’s income in accordance with subsection 146(8) and paragraph 56(1)(h). This is the case whether or not the amounts received from the RRSP had been deducted at the time the taxpayer had paid them to the RRSP as premiums.
Where the conditions for the application of subsection 146(8.2) are satisfied, this provision allows a taxpayer to deduct, in computing the taxpayer’s income for a taxation year, a payment the taxpayer received from an RRSP in the year if the payment is related to undeducted premiums and it is otherwise included in computing the taxpayer’s income for the year. This provision may, in particular, permit a taxpayer to reduce, without further tax impact, an RRSP cumulative excess amount to which Part X.1 tax applies. That being so, the existence of an RRSP cumulative excess amount giving rise to Part X.1 tax is not a condition for the application of subsection 146(8.2). This provision can apply whether or not the annuitant is subject to Part X.1 tax at the time the payment is withdrawn from the RRSP.
In this respect, the fact that, in Situation (a), the payment received by the taxpayer in 2017 is more than the payment required to extinguish the tax under Part X.1, would not, by itself, preclude the application of subsection 146(8.2). Similarly, the fact that, in Situation (b), the taxpayer is not subject to tax under Part X.1 before receiving the payment would not in and of itself preclude the application of subsection 146(8.2).
By virtue of paragraph 146(8.2)(e), a taxpayer cannot claim a deduction under subsection 146(8.2) if it was reasonable to consider at the time the undeducted premiums were paid to the RRSP that the taxpayer did not reasonably expect that the full amount of the premiums would be deductible in the taxation year in which the premiums were paid or in the immediately preceding taxation year. In other words, under this paragraph, if undeducted premiums have resulted in an overcontribution then, subject to paragraph 146(8.2)(f), the deduction will only be possible if such excess contribution was in fact made inadvertently. The question whether this condition is satisfied is one of fact which can be determined only after having considered all the relevant circumstances and facts relevant to a particular situation. Whether or not the taxpayer has an RRSP cumulative excess amount at the time the taxpayer receives the payment for which he or she wishes to claim the deduction does not directly affect that determination. We have advised the Department of Finance of this position.
Finally, subsection 146(5) essentially provides that a taxpayer may generally deduct in computing his or her income for a taxation year the lesser of:
- the total of the premiums paid by the individual to his or her RRSP after 1990 and on or before the day that is 60 days after the end of the year to the extent that they were never deducted in computing his or her income for a preceding taxation year, and
- the taxpayer’s RRSP deduction limit for the year.
This deduction can be claimed either in the year the taxpayer pays the premiums to his or her RRSP or in a subsequent year.
Thus, in Situation (a), the amount of $26,010 paid by the taxpayer to his or her RRSP after receiving the $30,000 would generally be deductible under subsection 146(5).
Q.5 Transfer to separated, surviving spouse’s RRIF pursuant to settlement with executor
A couple separated in 2010 without proceeding to an official division of their assets. When Monsieur subsequently died, his will excluded Madame. She made a claim against the executor, and they then agreed in writing to transfer the property in the deceased’s RRIF to her for contribution to her RRIF. However, the depositary for the deceased’s RRIF refused to sign the Form T2220 for such property transfer to her RRIF on the grounds that it was not authorized to do so.
(a) Is use of Form T2220 appropriate?
(b) Is the executor authorized to sign the form?
(c) Can the amounts be transferred to her RRIF as “designated benefits” (as defined in s. 146.3(1)?)
(d) Is there an income inclusion and contribution exclusion pursuant to the statement of designated benefits?
CRA preliminary responses to Q.5(a) and (b)
Form T2220 is the appropriate form in the case of the application of subsection 146.3(14) and other provisions permitting the direct transfer of amounts between certain registered plans in the event of the breakdown of the marriage or common-law partnership [“union de fait”]. Subsection 146.3(14) permits the transfer of property held in the RRIF of an annuitant by the issuer of the RRIF directly to certain registered plans, such as an RRSP or RRIF, whose annuitant is such annuitant's spouse. For this purpose, the payment or transfer must be made under an order or judgment of a court of competent jurisdiction or under a written agreement relating to the division of property between the annuitant and the spouse, in settlement of the rights arising out of, or on the break-down, of their marriage. The CRA is of the view that subsection 146.3(14) does not apply where one of the spouses has died. Where, as in the situation described, the last annuitant of the transferor RRIF is deceased, the RRIF no longer has an annuitant within the meaning of subsection 146.3(1), so that a transfer of property from the RRIF of an annuitant is no longer possible. In any event, subject to the rules relating to a designated benefit under subsection 146.3(6), the last annuitant is deemed to have received, immediately before death, an amount out of or under the RRIF equal to the FMV of the property of the RRIF at the time of the annuitant’s death. Even if subsection 146.3(14) were applicable after the death of the last RRIF annuitant, it would not have the effect of rendering subsection 146.3(6) inapplicable immediately before the death of the last annuitant. This confirms in our view that subsection 146.3(14) cannot be applied after the death of the last RRIF annuitant. Since subsection 146.3 (14) does not apply in the situation described, Form T2220 would not be appropriate in this situation.
CRA preliminary response to Q.5(c)
Under paragraph (a) of the definition of "designated benefit" in subsection 146.3(1), amounts paid under an RRIF after the death of the last annuitant to the legal representative of that annuitant may be designated jointly by the legal representative and an individual where the amounts paid would have been "refunds of premiums" within the meaning of subsection 146(1) had they been paid under the RRIF to the individual and the RRIF had been an RRSP that had not matured before the annuitant's death.
Under the definition of "refund of premiums" in subsection 146(1), where the annuitant of an RRSP died before the maturity of the plan, any amount paid out of or under the RRSP as a consequence of the death of the annuitant (other than a tax-paid amount in respect of the RRSP) to an individual who was, immediately before the death, a spouse of the annuitant, is a refund of premiums.
Under paragraph 248(23.1)(a), where a property is, after the death of a taxpayer, transferred or distributed to a person who was the taxpayer’s spouse or common-law partner at the time of the death, or acquired by that person, as a result inter alia of the family law regime relating to the division of assets [“règles concernant le partage du patrimoine familial”], the property is deemed to have been so transferred, distributed or acquired, as the case may be, as a consequence of the death.
As a result, in the situation described, if the amounts were paid directly to the surviving spouse out of a RRIF that would have been an RRSP that had not matured before the death, the amounts would be refunds of premiums.
Consequently, amounts paid out of the RRIF to the legal representative of the deceased annuitant, which the legal representative would like to transfer to the surviving spouse in settlement of her rights in the family patrimony, could qualify as a designated benefit, provided that these amounts are designated jointly by the legal representative and the surviving spouse on Form T1090 filed with the Minister in accordance with subparagraph (a)(ii) of the definition "designated benefit" in subsection 146.3(1).
CRA preliminary response to Q.5(d)
Under subsection 146.3(6), where the last annuitant under a RRIF dies, that annuitant shall be deemed to have received, immediately before death, an amount out of or under the RRIF equal to the FMV of all the property of the RRIF at the time of the death. Consequently, in the year of death, this amount must be included in computing the income of the deceased annuitant under subsection 146.3(5) and paragraph 56(1)(t). However, subsection 146.3(6.2) reduces the amount deemed received by the last deceased annuitant under subsection 146.3(6) where amounts qualify as a "designated benefit" within the meaning of subsection 146.3(1).
By virtue of subsection 146.3(6.1), where an amount qualifies as a designated benefit by reason of a joint designation made by the legal representative and the surviving spouse in accordance with subparagraph (a)(ii) of the definition of "designated benefit" in subsection 146.3(1), a designated benefit is deemed to be received by the surviving spouse, and not by any other person, out of or under the RRIF at the time it is received by the legal representative.
Thus, an amount that qualifies as a designated benefit can reduce the deemed benefit received by the last deceased annuitant under subsection 146.3(6). Any amount so deducted within the limits of subsection 146.3(6.2) will not be taxable as the income of the deceased last annuitant. However, this amount will be included in computing the surviving spouse's income in accordance with subsection 146.3(5) and paragraph 56(1)(t).
However, where the conditions of paragraph 60(l) are met, the designated benefit included in computing the surviving spouse's income pursuant to subsection 146.3(5) and paragraph 56(1)(t) can be deducted from his or her income.
In particular, where in a particular taxation year, amounts are included in the computation of the income of the spouse of a deceased last annuitant of an RRIF as a designated benefit under that RRIF, paragraph 60(l) accords the spouse a deduction not exceeding the eligible amount as defined in subsection 146.3(6.11) to the extent that an amount equalling that amount is paid by or on behalf of the spouse in the year or within 60 days after the end of the year:
(i) as a premium under an RRSP under which the spouse is the annuitant;
(ii) to acquire a qualifying annuity that meets certain conditions and under which the spouse is the annuitant; or
(iii) in consideration for an RRIF under which the spouse is the annuitant.
For this purpose, subsection 147.5(11) provides that any contribution made to a pooled registered pension plan ("PRPP") by a member of such a plan is deemed to be a premium paid by the member to an RRSP under which the member is the annuitant.
In summary, the inclusion, under subsection 146.3(5) and paragraph 56(1)(t), of amounts that qualify as a designated benefit, in the income of the spouse of the deceased last annuitant, when combined with the deduction provided under paragraph 60(l), effectively permits a tax-free transfer - subject to the computation of the eligible amount - of amounts that were held under the deceased annuitant's RRIF, a PRPP, a qualifying annuity, or a RRIF under which the spouse is the annuitant.
In the situation described, and subject to the calculation of the eligible amount, the transfer of the designated benefit to the surviving spouse could possibly be tax-free, provided that the surviving spouse pays an amount equal to the eligible amount as a premium under an RRSP, or a PRPP contribution, to acquire a qualifying annuity that meets certain conditions, or in consideration for an RRIF, as the case may be, within the time period provided in paragraph 60(l).
Q.6 Treatment of RRIF balance where survivor spouse dies before transfer
On the death of Mr. A on May 12, 2015, his Will provided a particular legacy of his RRIF to his surviving spouse (Mrs. B), which was subject to her assuming any applicable taxes. His Will also provided for a trust for her exclusive benefit out of the residue of his estate. Before his estate was administered (including a payment of the particular legacy), she died (on October 28, 2015), bequeathing all of her property to the children of their marriage. In 2015-0592681E5, CRA indicated that, in order for an amount to qualify as a "refund of premiums" as defined in subsection 146(1) (used in the "designated benefit" definition in s. 146.3(1)), the amount must be paid to an individual who was, immediately before the annuitant's death, the annuitant’s spouse, or a child, or grandchild, who was financially dependent on the annuitant (an "Eligible Recipient,") the Eligible Recipient must be alive at the time of the joint designation.
(a) Is Mrs. B considered to have received a designated benefit by virtue of her being alive at the time of the formation of the estate on the death of Mr A?
(b) Do the amounts of the particular legacy paid to the legal representative of Mrs. B’s estate qualify as “designated benefits” under para. (b) of the definition in s. 146.3(1)?
(c) Can the estate of Mrs B receive the RRIF amounts payable to Mrs B. notwithstanding her death and pay the tax on those amounts?
(d) If this solution is acceptable, what Form can be used to permit the transfer of those amounts free of tax from the estate of Mr. A to that of Mrs. B?
CRA preliminary response to Q.6(a)
The mere fact that Mrs. B was the surviving spouse of Mr. A at the time of his death is not sufficient to cause Mrs. B to be deemed, pursuant to subsection 146.3(6.1), to have received a designated benefit at the time the deceased annuitant's legal representative receives amounts from Mr. A's RRIF.
In particular, for subsection 146.3(6.1) to apply, the legal representative of the deceased annuitant must receive an amount that qualifies as a designated benefit for the purposes of that provision. The term "designated benefit" is defined in subsection 146.3(1). According to this definition, two types of amounts may be a designated benefit.
The first type of amount is referred to in paragraph (a) of the definition "designated benefit" in subsection 146.3(1) and corresponds to the amounts paid under an RRIF, after the death of the last annuitant, to the legal representative of that annuitant and that meet certain conditions.
The second type of amounts qualifying as a designated benefit is referred to in paragraph (b) of that definition. Under this paragraph, a designated benefit refers to amounts, paid out of or under an RRIF after the death of the last annuitant thereunder to an individual who is an Eligible Recipient, that would be refunds of premiums had the fund been an RRSP that had not matured before the death. In this situation, the amounts are not paid to the legal representative of the deceased annuitant, but directly to the Eligible Recipient. Subsection 146.3(6.1) has no application in this case since the legal representative receives nothing under the RRIF of the deceased last annuitant.
Thus, for Mrs. B to be deemed, pursuant to subsection 146.3(6.1), to have received a designated benefit at the time Mr. A's legal representative receives amounts from Mr. A's RRIF, the amounts received by Mr. A's legal representative must meet the conditions set out in paragraph (a) of the definition of "designated benefit" in subsection 146.3(1). These conditions are as follows:
(i) the amounts would be "refunds of premiums" as that term is defined in subsection 146(1), assuming that the amounts were paid to the individual under the RRIF and assuming that the RRIF was an RRSP that had not matured before the death of the annuitant; and
(ii) they are designated jointly by Mr. A’s legal representative and the individual on the prescribed form filed with the Minister.
In the situation you describe, since Mrs. B died before amounts were paid under the RRIF to the legal representative of the deceased last annuitant, the CRA is of the view that the conditions of paragraph (a) cannot be satisfied.
CRA preliminary response to Q.6(b)
As previously noted, paragraph (b) of the designated benefit definition refers to amounts paid directly from the RRIF to the individual who is an Eligible Recipient. In this situation, the amounts are not paid to the legal representative of the deceased annuitant, but directly to the Eligible Recipient. The amounts referred to in paragraph (b) of the definition are generally those that are paid directly under the RRIF to the Eligible Recipient who is named as an RRIF beneficiary under the RRIF contract or by virtue of a valid beneficiary designation in the will of the last annuitant.
Where, as you suggest in your question, such a beneficiary designation is not legally possible, an amount from the RRIF of the deceased last annuitant is paid to the estate of the deceased and an Eligible Recipient is a beneficiary of the estate (as legatee or heir), the amount is not paid to the Eligible Recipient "out of or under the fund" and this situation does not comply with paragraph (b) of the definition "designated benefit" in paragraph 146.3(1).
In any event, even in the situation where amounts could have been paid under the RRIF directly to the Eligible Recipient, when the Eligible Recipient dies before sums have been paid to him or her, the CRA is of the view that conditions for the application of paragraph (b) of the definition cannot be met.
CRA preliminary responses to Q.6(c) and (d)
Under subsection 146.3(6), where the last annuitant under an RRIF dies, that annuitant is deemed to have received, immediately before death, an amount out of or under an RRIF equal to the FMV of the property of the fund at the time of the death. Consequently, in the year of death, this amount must be included in computing the income of the deceased annuitant under subsection 146.3(5) and paragraph 56(1)(t). Only where an amount qualifies as a "designated benefit" within the meaning of subsection 146.3(1) can an amount be deducted from the amount deemed to be received by the deceased last annuitant, in accordance with subsection 146.3(6.2). In such a case, an amount equal to the deduction must then be included in computing the income of the Eligible Recipient who has received the designated benefit or is deemed to have received it in accordance with subsection 146.3(5) or subsections 146.3(5) and (6.1), as the case may be, and paragraph 56(1 (t).
In the situation you describe, the amounts from Mr. A's RRIF that would be received by Mrs. B's estate could not qualify as a "designated benefit" within the meaning of subsection 146.3(1), as noted above. Accordingly, the amount deemed to be received by Mr. A pursuant to subsection 146.3(6) would be equal to the FMV of the RRIF property at the time of death, with no deduction available to reduce this amount.
The amounts included in the computation of Mr. A's income that were subsequently paid under Mr. A's RRIF to his legal representative would not constitute taxable benefits to the estate of Mr. A, by virtue of paragraph 146.3(5)(a).
Q.7 Lack of ACB proration where multiple corporate beneficiaries
In 2017-0690311C6, Corporation A was the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C were each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A died after March 21, 2016 at a time that the adjusted cost basis (ACB) of the policy to Corporation A was $200,000. CRA considered that the addition to the capital dividend account (CDA) of each of Corporation B and Corporation C was $300,000 (=$500,000-$200,000), not $400,000. Could Finance comment on this situation?
This issue relates to amendments to paragraph (d) of the definition "capital dividend account" ("CDA") under subsection 89(1) of the Income Tax Act (the "ITA"), which were announced in the 2016 Budget. These amendments were adopted in response to tax plans allowing a shareholder corporation of another corporation to potentially extract the adjusted cost base (the "ACB") of a policy for the benefit of the holder of the policy tax-free rather than on a taxable basis.
In particular, subparagraph (d)(iii) of the CDA definition has been amended to provide that the amount, that can be added to a corporation's CDA when proceeds are received pursuant to a life insurance policy under which the corporation is a beneficiary, is reduced by the total of the amounts each of which is the ACB of a policyholder’s interest in the policy.
The Department of Finance is prepared to address this issue as part of its ongoing review of the rules of the Income Tax Act.
Q.8 Foreign currency deposit as capital property
Is a sum of money in a foreign currency, on deposit by an individual at a financial institution, a “capital property” and subject to s. 39(1) in the absence of s. 39(1.1) applying? Would s. 70(5) apply on the death of the individual, or would a rollover under s. 73(1) or 70(6) be available?
CRA preliminary response
The gain or loss attributable to fluctuations in the value of a currency can be on capital or income account. Whether such a gain or loss is on capital or income account is a question of fact. On the disposition of a property, where the gain or loss is attributable to fluctuations in the value of a currency is capital, subsections 39(1.1) or 39(1) will apply according to the property that is disposed of. The gain or loss attributable to fluctuations in the value of a currency must be included or deducted in computing income under section 9 where such gain or loss is on income account.
Briefly, subsection 39(1.1) applies if, because of any fluctuation in the value of a currency in relation to the Canadian currency, an individual has made a gain or sustained a loss from the disposition of currency other than Canadian currency and such gain or loss would, in the absence of subsection 39(1.1), be a capital gain or loss described under subsection 39(1).
In the current situation, subsection 39(1.1) would not apply since the individual does not own property that is a foreign currency but, rather, has a claim. Indeed, the relationship between a financial institution and its client, to which an individual entrusts his or her money, is usually the ordinary relationship of debtor and a creditor. However, the legal relationship between an individual who entrusts his or her money to a financial institution can only be definitively determined on a consideration of all the relevant facts.
A debt may or may not, depending on the facts, constitute a capital property. The question of whether a debt is a capital property of a taxpayer is a question of fact which can only be resolved after a full analysis of the facts of a given situation.
If it is determined that the debt is capital property within the meaning of section 54, any gain or loss attributable to fluctuations in the value of the currency comes is subject to subsection 39(1) at the time of the debt’s disposition or deemed disposition.
If the debt is not capital property, subsection 39(1) would not apply. This could be the case, for example, where the debt was claim was part of an adventure or concern in the nature of trade or was an inventory property. If the receivable is not a capital property, any gain attributable to a fluctuation in the value of the currency would be considered to be income from a business or property, and any loss sustained would be considered as a loss from a business or property.
If the debt is a capital property, subsections 70(5), 70(6) and 73(1) could apply where all the conditions set out in those subsections are met.
Q.9 Charity designated as contingent policyholder in lieu of testamentary gift
The will of Mr. Donor provided for a gift of his life insurance policy on the life of his daughter (which was originally intended to be transferred to his daughter, but this became inappropriate) to a private foundation (the “Private Foundation”). On his death, the policy had a cash surrender value (CSV), adjusted cost basis (ACB) and fair market value (FMV) of $200,000, $50,000 and $500,000, respectively. This gift was made by his estate (a graduated rate estate) within three years of his death.
(a) Does this gift generate a gain under s. 148(7) of $150,000 (being the CSV excess over ACB)?
(b) Could the GRE claim a gift of $500,000 in his terminal return (assuming sufficient income)?
(c) If the foundation was currently designated as contingent policyholder, so that on his death there would be an automatic transfer of the policy to it, would the above answers change?
CRA preliminary response to Q.9(a)
The provisions of subsection 148(7) apply where an interest in a life insurance policy is disposed of to any person with whom the policyholder was not dealing at arm’s length by way of inter alia gift or operation of law. Where subsection 148(7) applies, paragraph 148(7)(a) provides that the policyholder is deemed to become entitled to receive, at the disposition time, proceeds of the disposition equal to the greatest of the following amounts:
(i) the value of the interest at the disposition time;
(ii) the FMV of the consideration, if any, given for the interest; and
(iii) the ACB [f.n. 21: As defined in subsection 148(9)] to the policyholder of the interest immediately before the disposition time.
The term "value" is defined in subsection 148(9). Where the interest in the policy includes an interest in the "cash surrender value" of the policy as defined in subsection 148(9), the value is the amount respecting the policy that the holder would be entitled to receive if the policy were redeemed at that time.
In the situation described, the CRA is of the view that at the time of Mr. Donor's death there would be a disposition of his interest in the life insurance policy on his daughter’s life and that subsection 148(7) would apply to this disposition. To the extent that the $200,000 CSV represents the "value" of the interest within the meaning of subsection 148(9), Mr. Donor will be deemed to have become entitled to receive proceeds of disposition equal to $200,000 (the greatest of (i) the value of the interest to Mr. Donor ($200,000), (ii) the FMV of the consideration given for the interest ($0) and (iii) the ACB of the interest to Mr. Donor ($50,000)). Pursuant to subsection 148(1) and paragraph 56(1)(j), a gain of $150,000 ($200,000 less the $50,000 ACB) in respect of the disposition of Mr. Donor's interest in the policy should be included in computing his income for the taxation year of his death in Mr. Donor’s final return.
CRA preliminary response to Q.9(b)
According to the question, it appears that Mr. Donator wishes to make a donation of his interest in the life insurance policy on the life of his unfit daughter to a qualified donee, being a private foundation. In order for the CRA to make a final decision in this regard, it should first be demonstrated to the CRA that such a transfer is possible in practice under the relevant legislation (possibly the Civil Code of Quebec, the Quebec Act respecting insurance and the Regulation under the Act respecting insurance). In addition, it would be necessary for the transfer of the policy to occur in accordance with the relevant applicable legislation. These are matters of private law on which the CRA does not provide interpretations. However, we are prepared to provide the following general comments on the assumption that the described transactions are valid in law and that the described transfer would constitute a gift under the applicable private law.
Subsection 118.1(3) grants a tax credit to individuals for gifts, calculated on the basis of the "total gifts" as defined under subsection 118.1(1). The total of an individual's gifts for a taxation year includes, inter alia, subject to certain limits, the "total charitable gifts" as defined under subsection 118.1(1). The total charitable gifts are based on the "eligible amount … of a gift". Subsection 248(31) stipulates that the eligible amount of a gift is the amount by which the FMV of the property that is the subject of the gift exceeds the amount of the advantage, if any, in respect of the gift. Subsection 248(32) determines the amount of the advantage. The determination of the FMV of a property and the amount of the advantage is a question of fact which can be determined only after considering all relevant facts.
Where the individual is not a trust, paragraph (c) of the definition "total charitable gifts" in subsection 118.1(1) provides that the total charitable gifts of an individual for a particular taxation year includes, subject to the other conditions set out in the definition, the eligible amount of a gift that is made:
(a) by the individual, or the individual’s spouse or common-law partner, in the particular year or any of the five preceding taxation years (clause (c)(i)(A));
(b) by the individual in the year in which the individual dies if the particular year is the taxation year that precedes the taxation year in which the individual dies (clause (c)(i)(B)); or
(c) in respect of which the following conditions are met (clause (c)(i)(C)):
- the gift is made by the individual's estate;
- subsection 118.1(5.1) applies to the gift; and
- the particular year is the taxation year of the individual's death or the preceding taxation year.
With respect to the first condition in clause (c)(i)(C), under subsection 118.1(5), certain gifts are deemed to have been made by the estate and not by any other person. Specifically, where subsection 118.1(5) applies to a gift, the gift is generally deemed to have been made by the individual's estate at the time the property to which the gift relates is transferred to the qualified donee and is deemed not to have been made by any other taxpayer and not at any other time.
Subsection 118.1(4.1) provides that subsection 118.1(5) applies to a gift made by the individual through a will, to a gift made by his or her estate and to a gift that is deemed by subsection 118.1(5.2) to have been made in respect of the individual's death. Subsection 118.1(5.2) does not apply to the transfer of an interest of a holder in a life insurance policy under which the life of a third party is insured.
The second condition of clause (c)(i)(C) requires that subsection 118.1(5.1) applies to the gift. Subsection 118.1(5.1) applies to a gift that is made no more than 60 months after the individual’s death and that is made by a GRE, or an estate that would be a GRE were it not for paragraph (a) of the GRE definition in subsection 248(1), if one of the following applies:
- the gift is an eligible transfer to which subsection 118.1(5.2) applies; or
- the subject of the gift is property that was acquired by the estate on and as a consequence of the death (or is property that was substituted for that property.)
In the situation where Mr. Donor's will provides for the gift of the interest in the life insurance policy on the life of his unfit daughter to the Private Foundation, subsection 118.1(5) would apply to the gift of interest in the policy. Therefore, in order for the eligible amount of the gift to be included in Mr. Donor's total charitable gifts for the taxation year of his death, the conditions in clause (c)(i)(C) of definition of "total charitable gifts" under subsection 118.1(1) must be satisfied.
If, as you stated, the transfer of ownership to the Private Foundation was made within three years of the death, subsection 118.1(5.1) would apply because the property that was the subject of the gift (the interest in the policy) was acquired by the estate on and as a consequence of the death. In such circumstances, the eligible amount of the gift could be included in the total charitable gifts for the taxation year of death under clause (c)(i)(C) of the definition of "total charitable gifts" in subsection 118.1(1). Consequently, the tax credit for charitable gifts could be claimed in Mr. Donor's final return.
CRA preliminary response to Q.9(c)
With respect to Mr. Donor's gain on the policy realized in this situation, our comments would be the same as those stated in response to Question 9(a).
On the question of charitable giving, our comments would be different. In the situation where, on the death of Mr. Donor, the interest in the policy was transferred to the Private Foundation as contingent policyholder, we are of the view that the eligible amount of this gift could not be included in the total charitable gifts for the taxation year of death under clause (c)(i)(C) of the definition "total charitable gifts" in subsection 118.1(1). Subsection 118.1(5) would not apply because in this situation the gift would not be made by Mr. Donor under his will nor would be made by his estate and would not be deemed to have been made as a consequence of the death of Mr. Donor by virtue of subsection 118.1(5.2).
As to whether the gift could be included in the "total charitable gifts" under clause (c)(i)(A) of that definition under subsection 118.1, it would be necessary to determine whether such a transfer would constitute a gift under the applicable private law, and at what point in time any such donation would be made under the applicable private law. This issue is a private law matter in respect of which the CRA will not provide an interpretation.
Q.10 Application of suspended loss rules where USD loan between affiliates is repaid
On the repayment (on maturity) of a U.S.-dollar loan that had been received from an affiliated trust, the borrower sustains a foreign exchange loss. The trust keeps the repayment proceeds as cash during the following 30 days or reinvests them.
(a) If the repayment proceeds of the loan (which, thus, has disappeared from the trust’s balance sheet) are kept in cash and no further loan is made during the period of 30 days before or after the repayment, can CRA confirm that the loss realized by the borrower on the repayment would not be a superficial loss?
(b) What if the trust makes a new U.S.-dollar loan to the borrower during the 30-day period following the initial loan’s repayment (or the 30 days before)?
CRA preliminary response to Q.10(a)
Paragraph 40(2)(g) applies, inter alia, to deem a loss of a taxpayer from the disposition of property that is a "superficial loss", as defined under section 54, to be nil.
A superficial loss does not include loss from a disposition that is subject to subsection 40(3.4). However, subsections 40(3.3) and 40(3.4) also provide a similar rule for deeming a loss on the disposition of property to be nil.
Subparagraph 40(2)(g)(i) and subsections 40(3.3) and 40(3.4) would not apply to a capital loss realized by a borrower on the repayment of its loan since the loss would not result from the disposition of property that would be acquired by the affiliated creditor or the borrower or that would have been replaced by an identical property acquired by the affiliated creditor or the borrower. In particular, the borrowing would be one of the borrower's liabilities and, as such, would not be property of the borrower. Consequently, repayment of the loan by the borrower would not, in itself, constitute the disposition of a property by the borrower. Furthermore, although subsection 39(2) deems there to be a capital loss arising from the disposition of a currency other than Canadian currency, subsection 39(2) does not deem the affiliated creditor to have acquired the foreign currency which the borrower is deemed to have disposed of.
CRA preliminary response to Q.10(b)
For subsection 39(2) to apply, it must first be determined whether a gain has been realized or whether the taxpayer has sustained a loss. For example, if there was an exchange of debts without their repayment or novation, there could be no event triggering the application of subsection 39(2).
On the other hand, the repayment of the principal amount of a loan by the debtor or the novation of such debt would be events giving rise to a gain or loss in accordance with subsection 39(2).
In this regard, for the borrower, the new loan would not represent an identical property to the original loan since the new loan would be a liability and not an asset.
Furthermore, the borrower would have received foreign currency by virtue of the new loan made to it. The issue is whether, for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4), that foreign currency would be identical property to the currency that the borrower is deemed to have disposed of in accordance with subsection 39(2). According to the definition of "property" in subsection 248(1), money could constitute property unless a contrary intention is evident. However, the CRA's position is not to consider money to be identical property for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4) in a circumstance such as this where a taxpayer sustains a loss under subsection 39(2).
Q.11 Excess of trust accounting income over taxable income
In 2015-0595851C6, CRA indicated that where a trust distributes all of its share of the accounting profits of a partnership but its share of the taxable income of the partnership is higher, it will be subject to trust-level taxation on the excess. What are Finance’s comments on the policy applicable in this situation?
This situation occurs within the general context of the income tax system that treats a trust as a person subject to tax under Part I of the Income Tax Act (the "ITA") on its taxable income (in this case, of a trust resident in Canada).
Taxable income is determined in accordance with Division C of the ITA, through adjustments to the income of a trust determined in accordance with Division B. In computing its income under Division B, a trust may deduct an amount under subsection 104(6) - the operating mechanism of this rule is sometimes described as a flow-through mechanism.
The operating mechanism of subsection 104(6) is consistent with the tax policy underlying the framework within which this subsection is included: this paragraph indicates that an adjustment is made only if an amount of income of the trust, determined under Division B, is paid or becomes payable to its beneficiaries. Note that the requirement in subsection 104(24) that an amount must become payable in a taxation year reflects the tax policy respecting not only according a deduction to the trust, but also including an amount in the income of the beneficiaries. As a corollary, according to this same tax policy, the balance of the taxable income of a trust that cannot be considered to have become payable to the beneficiaries is then taxable in the hands of the trust.
Q.12 $100 per-month late-filing penalty
What are the policy considerations for s. 220(3.5) penalties arising on making late elections as permitted in the Minister’s discretion under Reg. 600 and on making them more equitable, particularly for individuals? For example, an individual fails to make an election under s. 50(1), 86.1 or 45(2). The federal penalty of $100 per month (plus a further Quebec penalty) can harshly impact middle class individuals.
The Canadian tax system is based on the principle of self-assessment under which taxpayers report their income for each taxation year and estimate their tax payable while maintaining appropriate books and records. The Income Tax Act (the "ITA") and the Income Tax Regulations (the "ITR") provide rules allowing taxpayers to opt for a particular tax treatment in certain circumstances through filing tax elections. However, the ITA requires the taxpayer to file an election with the CRA by a certain deadline to ensure the predictability of the income tax system.
When the deadline for filing an election has expired, the Minister of National Revenue has the discretion as permitted by subsection 220(3.2) to extend the time for a taxpayer to make an election. A taxpayer who has made a late election must nonetheless still pay a penalty as required by subsection 220(3.5). Under this subsection, the penalty is $100 per month, up to a maximum of $8,000. The Minister has the discretion to cancel or waive all or part of this penalty (including interest) under subsection 220(3.1). In Information Circular IC07-1R1, Taxpayer Relief Provisions, the CRA sets out the elements that the Minister will consider in exercising discretion. For example, financial hardship, inability to pay, or serious emotional or mental distress are some of the things the Minister considers when exercising discretion.
As part of the ongoing review of the ITA rules, the Department of Finance Canada will consider situations where the application of late-filing penalties creates a disproportionate burden on low-income taxpayers.
Q.13 S. 15(2.16) B2B loan rules and “specified right”
The Explanatory Notes to s. 15(2.16) indicate that there is no objective of attacking commonplace loan transactions which are not intended to circumvent s. 15(2). Furthermore, as these rules apply to loans outstanding on March 22, 2016, this could prejudice numerous taxpayers who contracted loans in good faith. In addition, the "specified right" definition in s. 18(5) refers to an exclusion provided in s. 18(6)(d)(ii), which it would be difficult to consider applicable in the context of s. 15(2.16).
What is the policy respecting the date for application of ss. 15(2.16) to (2.192) as well as for the use of the definition “specified right” for purposes of their application?
The back-to-back loan rules in subsections 15(2.16) to (2.192) of the Income Tax Act (the "ITA") are intended to ensure that subsection 15(2) is not circumvented where a corporation provides funding in the form of loan through one or more intermediaries.
As in the other such rules, a "specified right" in subparagraph 15(2.16)(c)(ii) generally refers to situations where a corporation is itself the true source of the funds provided to one of its shareholders and not the intermediary. Where a right in the assets of the corporation has been granted as security to ensure that such assets are available to the intermediary and may be used by the intermediary without any restriction, the shareholder benefits rules will usually apply. On the other hand, where the right that is granted is a right usually granted as security for payment under arm's length commercial agreements between arm's length parties, so that the assets related to the right may be used only to pay the debt and related interest, the shareholder benefit rules will usually not apply.
Contextual changes to the definition of "specified right" in subsection 18(5) are necessary to give full effect to the reference to this definition in paragraph 15(2.192). In applying these contextual changes, references in the definition of "specified right" to amounts described in subparagraphs 18(6)(d)(i) or (ii) refer, in general terms, to a shareholder's debt to a creditor, or any other debt that a non-arm's length shareholder owes to a creditor. The right of the creditor should not be considered as a "specified right" if the net proceeds of the exercise of that right are to be applied to one or more of those debts.
By way of illustration, the following examples reflect the tax policy objective of the leveraged loan rules arising from a reading of the definition "specified right" with the appropriate adaptations:
Where a financial institution lends funds on commercial terms, including to an individual who is a shareholder of a corporation, the corporation grants a right over its assets to the financial institution as security, and such assets can only be used to pay the loan in the event of default under the loan agreement, such a right should generally not be considered a "specified right".
A right granted by a corporation to a financial institution that may be exercised in the event of default on a loan to pay more than one debt outstanding by the shareholder of the corporation to the lender should not be considered a "specified right" only because the right secures several debts.
Similarly, a right should not be considered a "specified right" simply because the right secures debts that the shareholder of the corporation and the corporation itself owe to a financial institution.
Date of application
The Department of Finance is aware that some taxpayers have been able to enter into financial arrangements that may be subject to the back-to-back loan rules, although these arrangements were made before March 22, 2016, without a wish to circumvent section 15(2). In terms of tax policy, the Department of Finance is of the view that the application of back-to-back loan rules to such arrangements is consistent with the objectives of these rules.
The effective date of the back-to-back loan rules depends on the presence of one or more intermediaries. In the case of a back-to-back loan arrangement involving only one intermediary, the rules apply to the loan received or debt incurred after March 21, 2016 and to the portions of loans received and debts incurred prior to March 22, 2016 that were outstanding at that date. In the case of back-to -back loan arrangements involving more than one intermediary, the rules apply to loans received and debts incurred after 2016 and to the portions of loans received and debts contracted before 1 January 2017 that were outstanding on that date.
The back-to-back loan rules apply as soon as the criteria are technically satisfied. Where the criteria set out in subsection 15(2.16) are satisfied, the shareholder benefit rules apply to an arrangement or mechanism, even if the facts and circumstances do not actually reveal an intention to circumvent the application of subsection 15(2). The rules are simply a function of the source of funds. This approach is consistent with the underlying technical approach of subsection 15(2), which is not articulated around a "purpose" test.
Q.14 Automatic application of penalties for late-filing of T1135s
At 9 October 2015 APFF Financial Strategies and Financial Instruments Roundtable Q. 4, 2015-0588971C6, CRA indicated that where there has been a voluntary disclosure for failure of the taxpayer to file T1135s for a period of years extending back more than 10 years, the current practice of CRA is to assess the $2,500 per-year penalty for the years before the 10-year period as being before the 10-year period for which CRA is permitted to waive penalties under s. 220(3.1). However, the proposition that “the late-filing penalty of $2,500 under subsection 162(7) applies automatically… is currently under study.” What is the current status of this study?
Preliminary CRA response
Having reviewed the question of the automatic application of the $2,500 late filing penalty under subsection 162(7), we are still of the opinion that it applies automatically where all the conditions of that subsection are satisfied.
Furthermore, subsection 220(3.1) does not permit the CRA to waive or cancel a penalty otherwise payable by a taxpayer for a taxation year of a taxpayer beyond the day that is 10 calendar years after the end of that taxation year.
In addition, pursuant to subsection 152(4), the Minister may make an assessment, reassessment or additional assessment of tax for a taxation year, as well as of interest or penalties, payable by a taxpayer within the "normal reassessment period" applicable to the taxpayer for the year. For an individual, the normal reassessment period for a taxation year is set out in paragraph 152(3.1)(b) and generally corresponds to three years after the day of sending a notice of an original assessment. However, pursuant to paragraph 152(4)(b.2), the normal reassessment period is extended by 3 years where a Form T1135 (which is prescribed under subsection 233.3(3)) was not filed on time and an amount for a specified foreign property was not included in the taxpayer's return of income. An assessment imposing a penalty under subsection 162(7) for failure to file Form T1135 within the required time period must generally be made during the normal reassessment period.
Notwithstanding the normal reassessment period, under paragraph 152(4)(a) the Minister of National Revenue may at any time issue an assessment where the taxpayer or person filing the return has made a misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under the Income Tax Act. Failure to file Form T1135 when required by subsection 233.3(3) constitutes, in the CRA's view, a misrepresentation. However, whether this misrepresentation is due to neglect, carelessness, or willful default or to any fraud committed by the taxpayer or person filing the return is a question of fact determinable on a case-by-case basis.
Thus, although automatic, the penalty provided for under subsection 162(7) will not be assessed outside the normal reassessment period unless the Minister of National Revenue determines that the exception in paragraph 152(4)(a) is applicable.
Q.15 Double loanback reduction under s. 118.1(17) where multiple NAL donors
2009-0307941E5 dealt with two donors (not dealing with each other at arm’s length) who each made a cash gift to the same donee, and with one of the donors using part of the gift (as a result of the loan-back to it of gifted cash) as described in s. 118.1(16)(c)(ii). This resulted in a reduction not only in the amount of the gift made by that donor, but also by the other. What are the policy considerations in this situation?
The purpose of the charitable donation tax credit under section 118.1 of the Income Tax Act (the "ITA") is to encourage charitable donations by providing relief to donors in respect of charitable donations to a qualified donee. This tax credit is vulnerable to abuse in situations where a taxpayer obtains the tax credit, but does not give up control of the donated property. A loanback implies that the property donated by the donor is subsequently lent to or otherwise made available for the donor’s use.
Subsections 118.1(16) and (17) are anti-avoidance rules that specifically target loanback situations. In general, subsection 118.1(16) provides for a reduction in the value of the donation for the purposes of the charitable donation tax credit if the property donated by the donor is, within a period of 60 months, borrowed or used by the donor or a person with whom the donor does not deal at arm’s length. Subsection 118.1(17) provides an ordering rule in determining the value of a gift (first-in, first-out).
The objective of these subsections is to prevent potential abuse of the charitable donation rules, for example, where a taxpayer donates to a registered charity, receives an official donation receipt, and an individual who does not deal at arm's length with the donor benefits from the property as a result of a loan from the charity. Without these anti-avoidance rules, a taxpayer could develop a scenario where the charity is merely an intermediary in the loan of the property but where the taxpayer could receive a donation receipt.
The reduction in the value of a gift is calculated on an individual basis for each taxpayer. This means that if two or more persons not dealing at arm’s length make a donation to the same charity, the use of the property donated by one of them will reduce the value of each one's gift, even if one of them does not use the property. These provisions clearly evince a demarcation between a property owned and used by a charity and a property owned and used by a donor. Adding a rule to apportion the reduction in the value of the gift would add a great deal of complexity to the tax rules surrounding charitable giving while opening the door to new opportunities for abuse of the provisions of the ITA.
Where the value of a gift is reduced as a result of the application of subsections 118.1(16) and (17), and the property donated is subsequently returned to the donee, the value of the gift is not restored. The addition of such a rule could create problems where the use of the property alternates between the donor and the donee. In such circumstances, it would be necessary to constantly monitor the use of the property that was donated to a registered charity.
The Minister of Finance could consider specific examples to determine whether adjustments to the rules would be appropriate in terms of tax policy. However, in general, a reduction in the value of a gift in a situation involving several persons not dealing at arm's length, or the absence of a rule to restore the value of a gift that has previously been reduced, are not inconsistent with the objective of preventing taxpayers from obtaining benefits from gifts made to a qualified donee.
Q.16 Implications for derivatives of George Weston and MacDonald
The ITA does not specify the treatment of derivatives. George Weston declared that there was no judicial basis for the CRA administrative position that, to qualify as a hedge, a derivative must be anchored to an underlying transaction. Will CRA loosen its administrative position so as to align it with George Weston?
Preliminary CRA response
George Weston Limited
The CRA has already stated that it accepts the decision of the Tax Court of Canada (TCC) in George Weston Limited.
However, on August 8, 2017, the TCC issued a decision in James S. MacDonald v. The Queen. The issue in this case was essentially whether the payments made by Mr. MacDonald as partial and final settlements of a futures contract were capital expenditures because the futures contract was used in a hedging transaction relating to shares of a public corporation (i.e., capital property) held by Mr. MacDonald, or were expenses of a current nature because the futures contract was used by Mr. MacDonald in an adventure in the nature of trade (a contract used for speculative purposes in order to make a profit).
In the James S. A. MacDonald case, the TCC concluded that there was not a hedging transaction and that the expenditures were of a current nature. The approach taken by the TCC in this case respecting, inter alia, the linkage principle appears to be irreconcilable with previous jurisprudence, including George Weston Limited.
The decision of the TCC in James S.A. MacDonald has been appealed to the Federal Court of Appeal.
Nevertheless, the CRA is currently considering whether to change its approach pending the Federal Court of Appeal decision in James S. A. MacDonald. Therefore, it is not possible to answer your question definitively at this time.
Provisions of the Income Tax Act on Derivatives
It should be noted that the concept of derivative product is very broad, and includes, for example, options. The Income Tax Act now includes several provisions that determine the tax treatment of transactions in certain derivatives. Certain provisions of the Income Tax Act (see, for example, subsection 13(5.3) and the provisions of the Income Tax Act on character-conversion transactions including the definition of "derivative forward agreement” under subsection 248(1) and paragraphs 12(1)(z), 20(1)(xx), 53(1)(s), 53(2)(w) and (x) may have the effect of changing the nature of the gain or loss attributable to certain derivatives.
In addition, the March 22, 2017 Budget included proposed measures on derivatives. The 2017 budget proposed the provision of a mark-to-market election for eligible derivatives held on income account (section 10.1 as proposed in the March 22, 2017 Notice of Ways and Means Motions). A definition of "eligible derivative" is provided in proposed subsection 10.1(4) of the March 22, 2017 Notice of Ways and Means Motions. The 2017 Budget also proposed measures on straddle transactions that may be carried out with derivatives (proposed subsections 18(17) to 18(23) of the Notice of Ways and Means Motion of March 22, 2017).