5 October 2018 APFF Roundtable

Translation disclaimer

The translations below of the CRA written responses 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 our summaries of questions posed at the 5 October 2018 APFF Federal Roundtable held in Gatineau, Quebec together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Yves Grondin, Urszula Chalupa and Michel Lambert). We use our own titles, and footnotes are (depending on how routine they are) either excluded or moved to the body of the answer.

The 5 October 2018 APFF Financial Strategies and Instruments Roundtable is provided on a separate page.

Q.1 Recovery of withholding tax following application of s. 18(4)

A corporation with a June 30 taxation year end makes monthly payments of interest on a loan from its non-resident parent, and remits withholding tax to CRA each month. In its annual return it recognizes that by virtue of s. 18(4) the interest is non-deductible and is deemed to be a dividend – and with the Treaty-reduced rate of withholding being less that the rate at which Part XIII tax actually was withheld. The NR-7 form permits the recovery of excess withholding, but only on the basis of a calendar year filing. What procedure should be followed in order to recover the excess withholding tax?

Preliminary CRA written response

Subsection 227(6) provides that where a person on whose behalf an amount has been paid under inter alia Part XIII to the Receiver General, and where the amount so paid is in excess of the amount that the person was liable to pay, the Minister shall, on written application made no later than two years after the end of the calendar year in which the amount was paid, pay to the person the amount so paid or such part of it as the person was not liable to pay, unless the person is or is about to become liable to make a payment to Her Majesty in right of Canada, in which case the Minister may apply the amount otherwise payable under subsection 227(6) to that liability and notify the person of that action. That application can be made using form NR7-R.

Where a corporation resident in Canada is denied a deduction of interest by virtue of subsection 18(4), paragraph 214(16)(a) deems each non-deductible amount of what otherwise would be an amount of interest paid or credited by the corporation to non-residents to be a dividend and not to be interest for the purposes of Part XIII.

However, paragraph 214(16)(b) allows the corporation to designate, in its return of income under Part I for the year, which amounts paid or credited as interest to the non-resident person in the year are deemed to have been paid as dividends and not as interest, up to the aggregate amount of interest payments to such non-resident that are otherwise deemed to be dividends under paragraph 214(16)(a). Paragraph 214(16)(b) therefore allows the corporation to determine the timing of payment of deemed dividends for purposes of Part XIII, allowing for flexibility and certainty with respect to the corporation’s withholding and payment obligations in respect of the amounts of such deemed dividends during a taxation year.

Thus, in the situation presented, by virtue of the application of paragraph 214(16)(a) and any designation under paragraph 214(16)(b), the non-resident parent could therefore file, no later than two years after the end of each calendar year in which overpayments were made to the Receiver General, a Form NR7-R to recover these amounts, unless these amounts are applied, as indicated above, against amounts owing to or about to become due to Her Majesty in Right of Canada.

Q.2 S. 104(6) claim re distribution of s. 84(2) dividend

In 2015, all of the shares of CanInvestments passed on the death of Mr. X to a spousal trust for his surviving spouse (Mrs. X) who, in turn, died in 2017. Mr. X’s will provided that on her death, the residue of the trust was to go in equal parts to their two children, and did not provide any extended definition of “income.” CanInvestments as well as the spousal trust did not have any claimed loss so as to satisfy the conditions for making a s. 104(13.1) designation. CanInvestments’ sole asset has been a GIC.

In its taxation year ending in 2017 on the death of Mrs. X, the trust will recognize the capital gain realized on the deemed disposition of the shares of CanInvestments, without making any designation to distribute that gain into the hands of Mrs. X. CanInvestments will be wound-up, thereby giving rise to a deemed dividend (that is an ineligible dividend) to the trust as well as to a capital loss to it. The trust will carry-back that capital loss against the capital gain realized in its preceding taxation year. It is in the interests of the beneficiaries (the children) for the dividend to be taxable in their hands rather than to the trust.

(a) Assuming that the beneficiaries have an indefeasibly vested right to the capital and income of the trust subsequent to the death of Mrs. X, can the trust obtain a deduction under s. 104(6) in light of the position in 2007-0259841E5 and the fact that Mr. X’s will did not provide any extended definition of “income” in order to qualify the deemed dividend as “income in its civil or common law sense?

(b) Would the response be different if the beneficiaries did not have an indefeasibly vested right to the capital and income of the trust so as for the trustees to be required to pay the deemed dividend in order to obtain a deduction under s. 104(6)?

Preliminary CRA written response

The situation set out in Technical Interpretation 2007-0259841E5 above differs from that stated in your question. Therefore, we will not consider that interpretation as part of our response. We are, however, prepared to provide the following general comments, which may be helpful to you.

In general, paragraph 104(6)(b) provides that such amount as the trust claims not exceeding the portion of its income for the year that became payable to a beneficiary may be deducted in computing the income of the trust for a taxation year. Subsection 104(24) stipulates inter alia that for the purpose of subsection 104(6), an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.

It should be noted that the income of a trust pursuant to paragraph 104(6)(b) is its income for tax purposes, which includes a deemed dividend under subsection 84(2). Furthermore, in order to determine whether a beneficiary is entitled to a payment within the meaning of subsection 104(24), reference must be made to the trust indenture and the principles of civil law or common law applicable in the particular situation.

The questions of whether a deemed dividend pursuant to subsection 84(2) is income of the trust and whether the income became payable to a beneficiary in the year pursuant to paragraph 104(6)(b) are questions of fact and law that can only be resolved after a thorough examination of all the facts, actions, circumstances and relevant documents surrounding each situation.

In a situation such as that stated in your question, if the terms of the trust indenture are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend for the purposes of subsection 84(2), we will generally allow a deduction by virtue of paragraph 104(6)(b) in respect of that deemed income. However, this deduction will be permitted to the extent that the trustee exercises this power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in satisfaction of the beneficiary’s interest in the capital of the trust.

Q.3 S. 73(1.01)(c) and charitable gifts clause

Ss. 73(1.01) and (1.02) specify conditions in order for an inter vivos transfer of capital property by an individual to a trust for the benefit of the individual (and/or a spouse or common-law partner) to be effected on a rollover basis, in particular:

  • no other person than the individual (and/or spouse or common-law partner) is entitled before the death of the individual to receive or obtain the use of any of the income or capital of the trust; and
  • in the case of a trust for the benefit of the individual or of the individual and spouse/common-law partner:
    • the individual has attained the age of 65 at the time the trust was created; or
    • the transfer did not result in a change in beneficial ownership of the property and immediately after the transfer there was no absolute or contingent right of a person (other than the individual) or a partnership as a beneficiary.

We understand that a qualified donee could receive the residual interest in such a trust on the death of the individual. In 2010-0359461C6, CRA stated that where a gift of a residual interest in a trust in favour of oneself is made to a registered charitable organization and it is not permitted to encroach on capital in favour of the settlor, the charitable receipt can be issued by the organization at that time equal to the value of the residual interest at the time that interest is received.

In the event that the terms of the deed of trust provide for the possibility of making gifts to a qualified donee before the death of the individual (and/or spouse or common-law partner) would this have the effect of disqualifying the trust for the purposes of the s. 73 rollover? In particular, notwithstanding that the deed of trust provided for such possibility, if no gift in fact was made during the individual’s life, would the result be the same?

Preliminary CRA written response

For purposes of a rollover provided for in subsection 73(1), no person other than the taxpayers referred to in paragraph 73(1.01)(c) can, before the death of the individual, receive or otherwise obtain the use of any of the income or capital of the trust.

The question of whether the condition set out in paragraph 73(1.01)(c) is satisfied is a question of fact and law that can only be resolved after a thorough examination of all the facts, actions, circumstances and relevant documents surrounding each situation.

Where the terms of a trust indenture provide for the possibility of making gifts to a qualified donee, that is to a person other than the taxpayers referred to in paragraph 73(1.01)(c), before the death of the latter, we are of the view that the condition set out in that paragraph is not satisfied.

The fact that no gift was made during the lifetime of the taxpayers referred to in paragraph 73(1.01)(c) does not change our position. Indeed, the mere possibility that a person other than the latter may, before their death, receive or otherwise obtain the use of any of the income or capital of the trust is sufficient to disqualify the trust for the purposes of the rollover provided for in subsection 73(1).

Q.4 Safe income allocation on pref share stock dividend and subsequent capital distribution

The 100 common shares of Opco, having an aggregate fair market value (FMV) of $1,000,000 and an aggregate paid-up capital (PUC), and aggregate adjusted cost base (ACB) to their holders, of $100 (equalling the original subscription price) are held equally by Holdco A (wholly-owned by Mr. A). Trust A (a discretionary family trust of which Mr. A is a beneficiary), Holdco B (wholly-owned by Mr. B). and Trust B (a discretionary family trust of which Mr. B is a beneficiary). The common shares (being all of the issued and outstanding shares) have an aggregate safe income of $400,000 ($100,000 each).

Opco now pays a $400 stock dividend (valued at $400,000) of high-low preferred shares so that each shareholder receives 100 preferred shares with a PUC of $100 and a redemption amount of $100,000.

It is understood that the aggregate safe income of the common shares is reduced from $400,000 to $200,000 and that the ACB of the preferred shares to each shareholder is $100,000 (so that no capital gain would be realized on their redemption).

(a) How is the safe income allocated in light of the s. 55(2) amendments (especially ss. 55(2.2) to (2.4)), 2016-0668341E5 and the current CRA position?

(b) Where Trust A is taxable on the $100 stock dividend and makes an immediate capital distribution of those preferred shares to Holdco A, what safe income will be attributable to those preferred shares received by Holdco A?

Preliminary CRA written response

Q.4(a) response

We have assumed that one or more of the purpose tests in subsection 55(2.1) is satisfied with respect to the stock dividend declared and paid by Opco to its corporate shareholders, namely Holdco A and Holdco B.

Subsections 55(2.2) to (2.4) apply in respect of a stock dividend received by a dividend recipient. A "dividend recipient" is defined in subsection 55(2.1) (inter alia for the purposes of subsections 55(2.2) and (2.4)) as a corporation resident in Canada and, accordingly, those rules do not apply to Trust A and Trust B.

For the purposes of inter alia subsections 55(2), (2.1), (2.3) and (2.4), subsection 55(2.2) deems the amount of the stock dividend received by Holdco A and Holdco B and the amount deductible by them under subsection 112(1) to be equivalent to $100,000. This amount is the greater of (i) the amount of the increase, resulting from the payment of the stock dividend, of the paid-up capital of the corporation paying the dividend and (ii) the FMV of the 100 shares issued as a stock dividend at the time of payment.

Subsection 55(2.4) sets out three conditions that must be satisfied in order for subsection 55(2.3) to apply to a stock dividend. In this scenario, those three conditions would be met with respect to Holdco A and Holdco B.

Subsection 55(2.3) provides that where it applies to a stock dividend:

“(a) the amount of the stock dividend is deemed for the purpose of subsection (2) to be a separate taxable dividend to the extent of the portion of the amount that does not exceed the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received; and

(b) the amount of the separate taxable dividend referred to in paragraph (a) is deemed to reduce the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received.”

For the 25 common shares of the capital stock of OPCO held by Holdco A and Holdco B, respectively, the capital gain that could be realized on a disposition at the FMV of those shares, immediately before the stock dividend, is $249,975 (FMV of $250,000 minus ACB of $25). The amount of the dividend as indicated above would be $100,000 and this amount does not exceed the amount of income earned or realized that could reasonably be considered to contribute to the capital gain that could be realized on the 25 common shares immediately before the stock dividend (i.e., the $100,000 of safe income, as noted above).

Consequently, by virtue of paragraph 55(2.3)(a), the amount of the $100,000 stock dividend received by Holdco A and Holdco B will be deemed to be a separate dividend for the purposes of subsection 55(2). By virtue of paragraph 55(2.3)(b), the amount of $100,000 will be deemed to reduce OPCO's safe income that contributed to the capital gain on the 25 common shares of the capital stock of OPCO held respectively by Holdco A and Holdco B.

By virtue of subparagraph 52(3)(a)(ii), immediately after the stock dividend is paid, Holdco A and Holdco B will hold 100 high-low preferred shares with a FMV of $100,000 and an ACB of $100,000, and 25 common shares with an FMV of $150,000 and an ACB of $25, resulting in an unrealized gain of $149,975 for those 25 common shares of the capital stock of OPCO. Immediately following the payment of the stock dividend, the 25 common shares of the capital stock of OPCO held by Holdco A and Holdco B respectively would no longer have any safe income. By virtue of subsection 52(3), the safe income of $100,000 contributing to the capital gain on the 25 common shares of the capital stock of OPCO held respectively by Holdco A and Holdco B before the payment of the stock dividend is now reflected in the ACB of the 100 high-low preferred shares received as a stock dividend by Holdco A and Holdco B.

Subsection 55(2) should not apply to any future redemption of these 100 high-low preferred shares held by Holdco A or Holdco B. On the one hand, subparagraph 55(2.1)(b)(ii) does not apply to a dividend received on a redemption of shares and to which subsection 84(3) applies. On the other hand, subparagraph 55(2.1)(b)(i) should not apply since in a situation where the redeemed preferred shares would have a redemption amount equal to their ACB, the dividend referred to in subsection 84(3) would not have the effect of substantially reducing the portion of the capital gain that, absent the dividend, would have been realized on a disposition of a share of the capital stock at its FMV immediately before the dividend.

Regarding Trust A and Trust B, immediately after the stock dividend, each of them will hold 100 high-low preferred shares having a redemption amount of $100,000 and, by virtue of subparagraph 52(3)(a)(i) and paragraph (c) of the definition of "amount" in subsection 248(1), an ACB of $100. As a result, there would be an unrealized capital gain of $99,900 on those 100 high-low preferred shares. In addition, Trust A and Trust B will each hold 25 common shares with a FMV of $150,000 and an ACB of $25 resulting in an unrealized gain of $149,975.

OPCO's safe income contributing to the capital gain on the 25 common shares held by Trust A and Trust B, respectively, will be reduced by only $100, being the stock dividend received by Trust A and Trust B. The safe income contributing to the combined shareholdings held by Trust A or Trust B will therefore be $99,900. That amount of safe income will, however, be split between the two classes of shares held by Trust A and Trust B based on the unrealized gain on each class.

Under the scenario presented in Question 4(a), safe income that could reasonably be considered to contribute to the capital gain on the 25 common shares of the capital stock of OPCO held by Trust A and Trust B is $59,940 (149,975 / 249,875 X 99,900) and the safe income that could reasonably be expected to contribute to the capital gain on the 100 high-low preferred shares of the capital stock of OPCO held by Trust A and Trust B is $39,960 (99,900 / 249 875 X 99,900).

Q.4(b) response

By virtue of the definition of "amount" provided in subsection 248(1), Trust A would include in the calculation of its income an amount of $100 as a stock dividend paid by OPCO. As for the high-low preferred shares distributed by Trust A to Holdco A as a capital distribution, and assuming that Trust A was able to make such a distribution with no tax consequences by virtue of subsection 107(2), the safe income contributing to the capital gain of those shares would be the same as that determined in Question 4(a), namely $39,960.

It should be noted that the special rules regarding the amount of stock dividends that were added to the Income Tax Act by Parliament, including to subsections 55(2.2) to (2.4), were intended to address tax policy concerns associated with the use of this type of dividend in order to circumvent subsection 55(2) or to limit its application.

In that context, the type of transaction described in Question 4(b) could, depending on the facts and circumstances of a particular situation, constitute an avoidance transaction, which would lead the CRA to consider the potential application of the general anti-avoidance rule in subsection 245(2). In a particular actual situation, an analysis of the tax benefit, the avoidance transaction and the abuse of the Income Tax Act should be conducted as a part of a review of the potential application of subsection 245(2).

Q.5 Assignment of share of business limit by partner who is indirect shareholder of CCPC

ABCD LLP (a Quebec limited liability partnership, or “s.e.n.c.r.l.”) carries on a professional practice. Its partners hold Serviceco directly (in the cases of Merssrs. A, B and C, with 30%, 15% and 15% shareholdings, respectively) and indirectly in the case of Mr. D (who holds “his” 40% shareholding in Serviceco through Holdco D). Messrs. B and D hold their 15% and 40% partnership interests in ABCD LLP directly, whereas Mesrs. A and C hold theirs through their respective Holdcos.

Since Serviceco (which deals at arm's length with each partner) provides its services exclusively to ABCD LLP and one of the partners is a shareholder, it is a designated member of the partnership. It would appear that Mr. D, by virtue of his shares of Serviceco being held through Holdco D, cannot assign his portion of the business limit to Serviceco, whereas the other three partners are able to assign their portions of the business limit.

Does CRA agree that Mr. D cannot assign his portion of the business limit of the partnership to Serviceco whereas this is permitted for the other three partners?

Preliminary CRA written response

These comments are based on the following assumptions:

  • the corporations and the partnership have the same fiscal period end;
  • Serviceco is a Canadian-controlled private corporation ("CCPC") dealing at arm's length with a given person having a direct or indirect interest in ABCD LLP

The Income Tax Act contains, in subsection 125(7), the "specified partnership income" rules that limit the multiplication of the small business deduction ("SBD") in certain situations where inter alia partners of a partnership are CCPCs that are not associated (as provided in section 256) with each other.

Generally speaking, only one business limit is available with respect to the rules for the allocation of "specified partnership income" to the partners. Absent these rules, each CCPC that was a partner in a partnership could claim a separate SBD in respect of its share of the income from an active business carried on by the partnership.

In March 2016, changes were made to the Income Tax Act to tighten these rules. Among other things, the concept of "designated member" (subsection 125(7)) as well as subsection 125(8) have been added. The concept of "designated member" is relevant in the context where a CCPC, which is not a partner in a partnership but has a contract with it for the supply of goods or services, could be deemed to be a partner in this partnership and, where applicable, be required to share the partnership's business limit with the other "actual" partners. As for subsection 125(8), it sets out the conditions for the assignment by an "actual" partner “to a designated member" of “all or a portion of portion of the person’s specified partnership business limit”.

In the current situation, given that Serviceco exclusively provides services to ABCD LLP, Serviceco is not a partner of ABCD LLP, and at least one of Serviceco's shareholders has a direct or indirect interest in that partnership (Mr. A and Mr. C have an indirect interest, while Mr. B has a direct interest, in ABCD LLP), Serviceco is a "designated member" of ABCD LLP

These are the conditions of application listed in subsection 125(8) for determining whether ABCD's partners are in a position to assign to Serviceco all or any portion of their share of the business limit allocated to them by the partnership.

The CRA has applied the facts of this situation to the conditions set out in subsection 125(8) as explained in the Explanatory Notes of the Department of Finance:

“In general terms, under new subsection 125(8), a person can assign an amount to the CCPC [Serviceco] only if the person is an actual member [Holdco A, Mr. B, Holdco C et Mr. D] of the partnership [ABCD LLP] in a taxation year and is […] a shareholder of the CCPC who holds a direct interest [Mr. A, Mr. B, Mr. C and Holdco D] in the partnership […]. Such a person may assign to the CCPC (for a taxation year of the CCPC) all or any portion of the person's specified partnership business limit in respect of the partnership for the person's taxation year." (Our emphasis)

Given that Mr. B is a partner of ABCD LLP and that he is also a shareholder of Serviceco, he will be able to assign all or any portion of the business limit which has been allocated to him by ABCD LLP if he makes an election as provided in subsection 125(8).

In the case of Mr. D, he is also a partner of ABCD LLP, but given that he is not a shareholder of Serviceco, he does not satisfy the condition provided in paragraph 125(8)(a). Mr. D will therefore not be able to assign to the "designated member", Serviceco, his share of the partnership's business limit determined by the partnership ABCD LLP.

With respect to Holdco A and Holdco C, they are partners of ABCD LLP, but they are not shareholders of Serviceco and, therefore, they will not be able to assign all or any portion of their share of the "specified partnership business limit" allocated to them by the partnership.

In summation, the CRA agrees that Mr. D cannot assign his share of the specified partnership limit to Serviceco. However, of the other three shareholders, only Mr. B could make an assignment by virtue of subsection 125(8), if he meets the other conditions.

Q.6 Prescription period where no T5013 was required

Reg. 229 does not require a T5013 return to be filed respecting a partnership which does not carry on a business in Canada, and is not a Canadian partnership or SIFT partnership. Thus, a Canadian partner can be a partner of a partnership that has not filed such a return. Pursuant to s. 152(1.4), the Minister may determine the income of a partnership for a fiscal period respecting a partner for the three years following the later of the day on or before which a partner would be required under Reg. 229 to file the return, and the day of such filing.

How does CRA apply the statute-barring rules respecting a Canadian partner of a partnership for which no information return under Reg. 229 was required?

Preliminary CRA written response

By virtue of subsection 152(1.4), the Minister may determine, inter alia, the income of a partnership for the fiscal year of the partnership that is to be included in computing, for a taxation year, the tax payable by one of its members within 3 years after the day that is the later of: the day on or before which a member of a partnership is required under section 229 of the Income Tax Regulations (ITR) to complete a T5013 information return for a fiscal period of the partnership; and the day the return is filed. As you stated in your question, where the partnership is not a Canadian partnership or a SIFT partnership and it does not carry on business in Canada, then its partners will not have an obligation to file a T5013 under ITR section 229.

The long-standing position of the CRA is that the Minister cannot make a determination where the partners of the partnership are not required to file a T5013 under ITR section 229, given that the conditions provided for in paragraphs 152(1.4)(a) and (b) cannot then be satisfied.

However, the Minister could instead make an assessment under the general rules in subsection 152(4) of, where applicable, the tax, interest or penalties to be paid by the Canadian partner for its taxation year. Thus, a Canadian partner who did not declare the partner’s share of the partnership's income could, for instance, be considered to have made a misrepresentation that is attributable to neglect, carelessness or wilful default or to have committed a fraud in filing the return, and the Minister could then assess that taxpayer at any time under subparagraph 152(4)(a)(i).

Q.7 Payment of travel expenses during sabbatical

Under their employment agreements, university professors may be entitled to absent themselves from their regular duties in order to professionally advance themselves abroad while remaining in the employ of the university. Would their receipt of amounts to cover their travel expenses (e.g., airfare and lodging) be taxable under s. 6(1)(a) or excluded under s. 6(6)?

Preliminary CRA written response

The tax consequences to an employee of a specific payment made by the employer can only be determined in the light of all the facts, circumstances and relevant documents relating to a particular situation. Relevant documents include, among other things, the employment contract and the collective agreement.

The CRA can only make such a determination during an audit or as part of an advance ruling request.

Furthermore, given that the statement in this question only briefly describes a particular situation, the CRA is not in a position to provide general comments. Indeed, the CRA cannot establish in the present situation certain elements having a tax impact on a taxpayer. In particular, it should be determined whether the amounts paid are for the performance of the duties of an office or employment, whether they are a reimbursement or an allowance, and whether they are paid for travel or instead as moving expenses.

Q.8 Application of s. 8(4) where s. 67.1(1) applies to client meal

By virtue of the combined operation of s. 8(4) and s. 67.1(1), the deduction for where a commissioned employee takes a client out to a restaurant within the metropolitan area of the employer is limited to 25% of the bill, i.e., a complete denial for the employee’s portion under s. 8(4), and a 50% denial for the client’s portion under s. 67.1(1). The Quebec equivalent of s. 8(4) provides an exception where the commissioned employee takes a meal with a client and the 12-year rule is not satisfied.

(a) Is CRA prepared to recognize that the employee portion of the cost should not be subject to s. 8(4), so as to generate a 50% deduction?

(b) If not, would CRA be prepared to recommend to the Department of Finance that s. 8(4) be amended?

Preliminary CRA written response to Q.8(a)

Paragraph 8(1)(f) provides that a taxpayer who was employed in the year in connection with the selling of property or negotiating of contracts for the taxpayer’s employer, may deduct in computing the taxpayer’s income amounts expended by the taxpayer in the year for the purpose of earning income from the employment subject to certain conditions provided for in that paragraph.

Furthermore, subsection 8(4) provides, in particular, that amounts expended by an employee on a meal of the employee may not be deducted under paragraph 8(1)(f) unless the meal was consumed during a period while the taxpayer was required by the taxpayer’s duties to be away, for a period of not less than 12 hours, from the municipality where the employer’s establishment to which the taxpayer ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located.

There is nothing in the Income Tax Act that allows the CRA to not apply subsection 8(4) where an employee's meal was not consumed during a period while the taxpayer was required by the taxpayer’s duties to be away, for a period of not less than 12 hours, from the municipality where the employer’s establishment to which the taxpayer ordinarily reported for work was located and away from the metropolitan area, if there is one, where it was located

Preliminary CRA written response to Q.8(b)

Responsibility for the development of tax policies and amendments to the Income Tax Act is the responsibility of the Department of Finance. At the request of the APFF, the situation described in the statement of the question and the response of the CRA will be brought to the attention of that Department.

Q.9 Split income exclusion for “excluded shares”

(a) 2018 STEP Roundtable Q.6 and Q.7 confirmed that the shares of a holding company (or of a company generating no business income) cannot qualify as excluded shares, whereas Examples 8 to 12 of CRA’s “Guidance on the application of the split income rules for adults” and the Department of Finance’s “Technical Backgrounder on Measures to Address Income Sprinkling” provide that such shares so qualify. What is CRA’s position in this regard?

(b) In Situation A, Mr. and Mrs. X (both age 35) respectively hold 90% and 10% of the voting common shares of Holdco, whose only source of revenue is dividends on its shares of Opco (wholly-owned by it), which Holdco dividends pro rata to Mr. and Mrs. X. Mrs. X is not involved in the Opco business. Are her shares “excluded shares” and, if not, is this not incongruous given inter alia that she could instead have held a direct 10% interest in Opco?

(c) Situation B is the same, except that Holdco in its preceding year did not receive any dividends from Opco and it holds passive investments (acquired some time ago out of dividends received from Opco) which, in the previous year, generated interest and dividends of $100,000, a portion of which is now dividended pro rata to Mr. and Mrs. X. Are her shares “excluded shares”?

Preliminary CRA written response to Q.9(a)

The CRA's response to question #7 of the STEP Canada CRA Roundtable of May 29, 2018 ("Question 7") was based on the assumption made in the statement of that question that the corporation had no business income. Thus, since the condition set out in subparagraph (a)(i) of the definition of "excluded shares" in subsection 120.4(1) was not satisfied, the shares of the corporation at issue could not qualify as excluding shares. As a result, the CRA response was dependent on the specific statement in Question 7.

The purpose of the Guidance Document is to provide, inter alia, general guidance on how the CRA intends to administer the different types of exclusions described in the definition of "excluded amount" in subsection 120.4(1).

With particular reference to the examples mentioned above, Example 8 was intended to illustrate the exclusion for excluded shares. As for Example 12, the latter covered not only the exception for excluded shares, but also the deeming rule in subparagraph 120.4(1.1)(c)(i) providing relief for spouses of business owners who turned 64 before the end of the year.

Furthermore, to demonstrate that the various exclusions were applicable not only to entities carrying on an active business, such as a manufacturing corporation, but also to entities carrying on a business whose principal purpose is to derive income from property, including interest, dividends, rents and royalties, such as investment management corporations (in Examples 8 and 12), the CRA assumed that these corporations maintained a sufficient level of activity such that their income could be considered as derived from such a business.

That being said, the income or loss from a business or property is computed in Subdivision b of Division B of Part I. Nevertheless, those are two separate sources of income for purposes of the Income Tax Act.

In this regard, the question of whether particular income constitutes business income or income from property is a question of fact that can only be resolved as a result of an exhaustive analysis of all facts with respect to a particular situation.

The term "business" is not defined in the Income Tax Act, as subsection 248(1) simply expands the concept of "business" for the purposes of the Income Tax Act by including, inter alia, an undertaking of any kind whatever.

Furthermore, the Income Tax Act contemplates that the principal purpose of a business may be to derive income from property, including interest, dividends, rents and royalties (see the definition of “specified investment business” in subsection 125(7).)

Based on the foregoing, if the assumptions in Question 7 were modified so that the corporation carried on a business, the condition in subparagraph (a)(i) of the definition of “excluded shares" in subsection 120.4(1) would be satisfied.

Although it was determined - taking into account the wording of Question 7 - that the shares of the capital stock of the corporation in question could not qualify as excluded shares, an amount received from that corporation by a particular individual could nevertheless be an excluded amount.

For example, subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1) provides that, in respect of an individual who has attained the age of 17 before a particular taxation year, an amount is an excluded amount if it is not derived directly or indirectly from a related business in respect of the individual.

The expression "related business" in respect of a specifed individual for a taxation year is defined in subsection 120.4(1) of the Income Tax Act and means, in respect of a corporation, (1) a business carried on by the corporation, if a source individual in respect of the specified individual at any time in the year is actively engaged on a regular basis in the activities of corporation related to earning income from the business; or (2) a business of a corporation, where a source individual in respect of the specified individual owns shares of the capital stock of the corporation, or property that derives, directly or indirectly, all or part of its fair market value from shares of the capital stock of the corporation, and the aggregate FMV of the foregoing shares and property is equal to or greater than 10% of the FMV of all issued and outstanding shares of the capital stock of the corporation.

Thus, if it is determined that a corporation does not carry on a business, and that that corporation pays a dividend to a specified individual, the amount of that dividend, provided it does not come directly or indirectly from a related business in respect of the specified individual, could be an excluded amount for the individual. Consequently, the amount of the dividend would not be included in the calculation of the split income of the specified individual and the specified individual would not be subject to split income tax in respect of the amount of that dividend.

Preliminary CRA written response to Q.9(b)

The CRA generally agrees with the stated conclusion in this question that shares of the capital stock of Holdco held by Mrs. X are not excluded shares for Mrs. X.

Shares of the capital stock of a holding corporation should generally not qualify as excluded shares of a specified individual because, in the case of a holding corporation, the total income of the corporation would come from another related business in respect of a specified individual (other than a business carried on by the holding corporation). Thus, the condition set out in paragraph (c) of the definition of "excluded shares" in subsection 120.4(1) would not be satisfied. Since shares of the capital stock of a holding corporation owned by a specified individual would not be excluded shares of the individual, the income earned, or the taxable capital gain (or profit) from the disposition of the shares would not be an "excluded amount", as that term is defined in subsection 120.4(1), and, consequently, would be split income for the specified individual unless another exclusion could apply.

Depending on the circumstances, the income earned, or the taxable capital gain (or profit) from the disposition of the shares of the capital stock of a holding corporation may not be split income if other exclusions apply. For example, where the income is from a related business that is an excluded business in relation to an individual, the income is an excluded amount of the specified individual and is not subject to the tax on split income.

The various exclusions, including the exclusion of excluded shares, are not intended to apply in all circumstances. Where the exclusions do not apply in a particular situation, the underlying logic is that, in such circumstances, the most appropriate test, to determine whether the income from a related business relative to a specified individual should be excluded from the computation of split income, should be based on the general test of whether the amount constitutes a "reasonable return" given the specific criteria applicable in the circumstances, including the work performed, the assets contributed, the risks assumed, the total amounts paid or payable and any other relevant factors.

Preliminary CRA response to Q.9(c)

To begin with, for the purpose of this question, we have assumed that the income earned by Holdco totalling $100,000 is derived from the carrying on of a business the purpose of which is to earn interest income and dividends. However, it must be emphasized that whether or not a corporation is carrying on a business whose purpose is to earn interest and dividend income is a question of fact that can only be resolved as a result of an exhaustive analysis of all the facts and circumstances in relation to a particular situation.

In light of the foregoing, the CRA is of the view that the condition provided in paragraph (c) of the definition of "excluded shares" in subsection 120.4(1) would be satisfied in respect of Holdco, notwithstanding the fact that the capital used in the acquisition by Holdco of the property used in carrying on its business was derived from dividends received from Opco.

In particular, at the time (the "Time") when Mrs. X received her Holdco dividend, the entire income of Holdco, for its last taxation year ending by the Time, was not derived, directly or indirectly, from one or more related businesses in respect of Mrs. X (e.g., Opco), but rather derived from the Holdco business.

Furthermore, considering that Holdco is not a professional corporation and assuming that the corporation carries on a business whose income, for its last taxation year ending by the Time, came solely from interest and dividends and not from the provision of services, the condition set out in paragraph (a) of the definition of "excluded shares" in subsection 120.4(1) is satisfied with respect to Mrs. X.

Finally, since Mrs. X held, immediately before the Time, shares of the capital stock of Holdco: (1) giving her 10% or more of the votes that could be cast at an annual general meeting of shareholders of Holdco; and (2) having a FMV of 10% or more of the FMV of all of the issued and outstanding shares of the capital stock of Holdco, the condition set out in paragraph (b) of the definition of "excluded shares" in subsection 120.4 is satisfied with respect to Mrs. X.

Thus, the shares of the capital stock of Holdco held by Mrs. X would be excluded shares for her at the Time. Accordingly, the $7,500 dividend received by Mrs. X for that taxation year would constitute an "excluded amount" under subparagraph (g)(i) of the definition of that term in subsection 120.4(1) and Mrs. X would not be subject to the split income tax in respect of that dividend.

In closing, if it turned out that transactions were primarily effected so that shares of the capital stock of a particular corporation could qualify as excluded shares in order to circumvent the application of section 120.4, the CRA would consider recourse to the general anti-avoidance provision in subsection 245(2) in such circumstances.

Q.10 Discretionary trust interests and s. 120.4 – “related business” valuation

The definition of “related business” – (c)(i)(B) references a business of a corporation where a source individual owns property “that derives, directly or indirectly, all or part of its fair market value” from shares of the corporation.

(a) What are examples of such property?

(b) Is an interest in a trust (e.g., a beneficial interest) “property” for purposes of this definition even if the trust is entirely discretionary?

Preliminary CRA response to Q.10(a)

The Income Tax Act defines the term "property" in subsection 248(1). This definition is very broad and provides, inter alia, that a property may be of any kind whatever whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal and that such term may include a right of any kind whatever, a share or a chose in action.

The property referred to in clause (c)(i)(B) of the definition of "related business" in paragraph 120.4 may include, inter alia, shares of the capital stock of a corporation, interests in a partnership or interests in a trust.

The question of whether part or all of the FMV of a property is derived, directly or indirectly, from shares of the capital stock of a corporation is a question of fact.

Preliminary CRA written response to Q.10(b)

An interest in a trust is property for the purposes of the definition of "related business" in subsection 120.4(1), regardless of whether the trust is a wholly discretionary or non-discretionary trust.

Furthermore, the determination of the FMV of an interest in a discretionary trust is a question of valuation.

Q.11 Tracing dividends paid by Holdco to stock portfolio rather than related business

In 2002, CRA confirmed that a discretionary trust could distribute income from public company shares to a minor beneficiary and dividends from a private company to an adult beneficiary. Mr. X holds all the voting shares of Opco, a family trust (“Trust”) holds all the participating shares of Opco, and Child X (age 30 and not involved in the Opco business) holds all the voting participating shares of Holdco, which generated $150,000 of passive income in the prior year from stock market investments. Holdco (which along with Mr. and Mrs. X, and Child X, is a Trust beneficiary) also received in the prior year a $100,000 distribution of a dividend that Trust had received from Opco, and now wishes to pay a $75,000 dividend to Child X (the “Dividend”).

Would the dividend be subject to the tax on split income? Would it be possible for Holdco to pay the Dividend out of the income on its stock market investments and rather than from Opco, so as to avoid the split income tax, similarly to what can be done in the case of a trust?

Preliminary CRA written response

The Dividend will be split income of Child X by virtue of paragraph (a) of the definition of "split income" in subsection 120.4(1) unless it is an excluded amount.

The Dividend could be an excluded amount of Child X under subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1) if it is not derived, directly or indirectly, from a related business in respect of Child X.

A related business in respect of a specified individual includes a business carried on by a corporation if a source individual in respect of the specified individual is actively engaged in the activities of the corporation related to earning income from the business (the "active engagement condition").

In this regard, since Mr. X is the father of Child X, those persons are connected by blood relationship and are, therefore, related to each other pursuant to paragraph 251(2)(a). Consequently, Mr. X is a source individual with respect to Child X.

A related business in respect of a specified individual also includes a business of a corporation, where a source individual in respect of the specified individual owns shares of the capital stock of the corporation or property that derives, directly or indirectly, all or part of its fair market value from shares of the capital stock of the corporation, and the total FMV of the shares or property owned by the source individual is 10% or more of the FMV of all of the shares of the capital stock of the corporation (the “ownership condition").

For the purposes of this question, we have assumed that Opco carries on a business and that Mr. X satisfies the active engagement condition with respect to Opco.

If it can be determined that Holdco will pay the Dividend to Child X out of the funds from the $100,000 dividend received from Opco or from any dividends previously received from Opco, then we are of the view that the Dividend would thus have come, directly or indirectly, from a related business - that of Opco - in respect of Child X. Thus, the Dividend would be added to the split income of Child X, unless it constituted an excluded amount by virtue of another exclusion in the definition of "excluded amount" in subsection 120.4(1).

On the other hand, if it can be determined that Holdco will pay the Dividend to Child X out of its after-tax income from its stock market investments, then that dividend would be an excluded amount for Child X and would not be included in calculating the child’s split income.

If, on the one hand, it were determined that Holdco carries on a business whose primary purpose is to earn income from its stock market investments, that business would not qualify as a "related business" within the meaning of the definition of that term in subsection 120.4(1). In particular, it appears from the statement in this question that no source individual in respect of Child X satisfies the active engagement condition or the ownership condition with respect to Holdco. Consequently, the Dividend would be an "excluded amount" in respect of Child X by virtue of subparagraph (e)(i) of the definition of that term in subsection 120.4(1) since, although it may be from a Holdco business, that business would not qualify as a related business with respect to Child X.

On the other hand, if it were determined that Holdco does not carry on a business, then the Dividend would also be an "excluded amount" in respect of Child X by virtue of subparagraph (e)(i) of the definition of that term in subsection 120.4(1). Indeed, one of the conditions to be met in the definition of "related business" in subsection 120.4(1) is that there must be, in the first place, a business carried on by an entity. Consequently, in the event that Holdco does not carry on a business, the Dividend could not come, directly or indirectly, from a related business in respect of Child X, but rather from property held by Holdco.

Based on the foregoing, Holdco must adequately monitor its funds derived from stock market investments in order to determine whether those funds were used to pay the Dividend.

Q.12 S. 120.4 non-application to partnership holding listed shares

The five partners of a family partnership that generates and distributes passive income from stock market investments are Mr. and Mrs. X and their Children X, Y and Z ages 15, 22 and 23, respectively. The children have not contributed to or been involved in the management of the partnership, whereas Mr. and Mrs. X have been so involved in the sense of communicating four times per year with their stock broker. Is the partnership income subject to the tax on split income?

Preliminary CRA written response

First, for the purpose of this question, we have assumed that the only income that the partnership derives from its stock market investments is dividend income in respect of shares of a class listed on a designated stock exchange referred to in subsection 248(1), as well as capital gains or losses from the disposition of such shares.

In addition, we have assumed that the partnership was validly created within the meaning of Article 2186 of the Civil Code of Quebec or the common law, as the case may be, and that all partners of the partnership are resident in Canada at all relevant times.

Subsection 120.4(2) provides that there is to be added to a specified individual’s tax payable under Part I for a taxation year the highest individual percentage for the year multiplied by the individual’s split income for the year.

In this case, Mr. X, Mrs. X and Children X, Y and Z are specified individuals for purposes of section 120.4. In particular, to the extent that Mr. X, Mrs. X, Children Y and Z are resident in Canada at the end of the year, or immediately before the time of their death, they are all specified individuals within the meaning of the definition of that term in subsection 120.4(1). With respect to Child X, that child is a specified individual for the additional reason that the child’s father or mother is resident in Canada at a time in the year.

The definition of "split income" in subsection 120.4(1) describes the types of income that are subject to the split income tax under subsection 120.4(2).

Paragraph (a) of the definition of "split income" in subsection 120.4(1) defines the split income of a specified individual for a taxation year as not including dividends received by the individual in respect of shares of a class listed on a designated stock exchange or shares of the capital stock of a mutual fund corporation.

Under paragraph (e) of the same definition, the taxable capital gain realized on the disposition of shares of a class listed on a designated stock exchange or a share of the capital stock of a mutual fund corporation is not subject to the income tax rules respecting split income.

Furthermore, by virtue of paragraph 96(1)(f), 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 a partner from that source or from sources in that particular place, as the case may be, for the taxation year of the partner in which the partnership’s taxation year ends, to the extent of the partner’s share thereof. This income will generally maintain its nature and characteristics to the partner.

Consequently, dividend income received by any of the partners of the partnership in respect of shares of a class listed on a designated stock exchange or shares of the capital stock of a mutual fund corporation, as well as the taxable capital gain realized on the disposition of such shares, would be excluded from the definition of split income.

Thus, the partners of the partnership described in this question who were allocated such income by the partnership would not be subject to the rules on split income under subsection 120.4(2).

That being said, the facts of the statement in this question, in particular the fact that Children X, Y and Z contributed nothing to the partnership and that they are not involved in the operations of the partnership, could lead the CRA to examine the potential application of other provisions of the Income Tax Act.

Without an exhaustive analysis or enumeration of the provisions that may be applicable in an actual particular situation, subsection 103(1) or subsection 103(1.1), inter alia, could be applied if, after an analysis of all the facts relating to a particular situation, it turned out that the division of the partnership's income among the partners was not reasonable in the circumstances. In addition, depending on the facts of a particular situation, certain attribution rules, inter alia, those provided in section 74.1 as well as section 96(1.8) could apply if the conditions for the application of one or other of those legislative provisions were satisfied.

Q.13 – Split income tax and distribution of reinvested capital gain

A family trust (“Trust”) distributed the taxable portion of its gain on the sale of qualified small business corporation shares (of Opco) to its beneficiaries (Mr. and Mrs. X, and their children, Child X and Y, aged 15 and 22) who claimed the s. 110.6 deduction. The Trust and its beneficiaries then used their sales proceeds to subscribe for the shares of a newly-incorporated holding company (Holdco): Trust – 50% of the Holdco shares; Mr. and Mrs. X – 20% each; and Child X and Y – 5% each). Holdco generated $150,000 from investing these funds in the stock market and paid a $100,000 dividend pro rata to its shareholders with Trust, in turn, distributing its $50,000 dividend to Mrs. X and Child X and Y.

Are the dividends paid by Holdco to Mr. and Mrs. X and Child X and Y, and distributed by Trust to the latter three subject to split income tax?

Preliminary CRA written response

Preliminary comments

To begin with, it appears from the question as stated that, pursuant to subsection 104(21.2), Trust has distributed to its beneficiaries, Mr. X, Mrs. X, Child X and Child Y, in respect of its eligible capital gains, amounts determined under subparagraph 104(21.2)(b)(i) and clause 104(21.2)(b)(ii)(B) in respect of shares of the capital stock of Opco, which qualified as qualified small business corporation shares. Accordingly, each of the beneficiaries of Trust is deemed, by virtue of paragraph 104(21.2)(b), to have disposed of shares of the capital stock of Opco and to have had a taxable capital gain from the disposition of those shares.

Such taxable capital gain should be an excluded amount for Mr. X, Mrs. X, Child X and Child Y under paragraph (d) of the definition of "excluded amount" in subsection 120.4(1).

Dividend paid by Holdco

With respect to the dividend paid by Holdco to Child X, it will be added to the child’s split income under paragraph (a) of the definition of "split income" in subsection 120.4(1). Child X did not attain the age of 17 before the year in which the child received the dividend from Holdco and it appears that none of the exclusions in the definition of "excluded amount" in subsection 120.4(1) is applicable to the dividend.

With respect to Mr. X, Mrs. X and Child Y, it must first be determined whether or not Holdco carries on a business whose primary purpose is to earn income from its stock market investments.

If it were determined that Holdco does not carry on a business, then the dividends received from Holdco would be excluded amounts for Mr. X, Mrs. X and Child Y by virtue of subparagraph (e)(i) in the definition of that term in subsection 120.4(1) since in order for Holdco's business to qualify as a related business in respect of Mr. X, Mrs. X and Child Y, it must, inter alia, carry on a business.

On the other hand, if it turns out that Holdco is carrying on a business, the Holdco business will be a related business with respect to Mr. X, Mrs. X and Child Y.

Mr. X and Mrs. X are connected by marriage or common-law partnership. Child Y is connected by blood relationship with Mr. X and Mrs. X. Consequently, these three persons are related persons by virtue of paragraph 251(2)(a). Mr. X, Mrs. X and Child Y are therefore source individuals in relation to each other within the meaning of the definition of "source individual" in subsection 120.4(1).

Since Mr. X and Mrs. X each hold 20% of the voting and participating shares in the capital stock of Holdco, they both satisfy the ownership condition of the definition of "related business" in subsection 120.4(1).

Consequently, Holdco's business is a related business with respect to each of Mr. X, Mrs. X and Child Y.

Mr. X and Mrs. X could benefit from the exclusion for excluded shares provided in subparagraph (g)(i) of the definition of "excluded amount" in subsection 120.4(1).

First, under the assumptions that Holdco is not a professional corporation and that it is carrying on a business whose income for its most recent taxation year was derived solely from stock market investments and not from providing services, the condition set out in paragraph (a) of the definition of "excluded shares" in subsection 120.4(1) is satisfied with respect to Mr. X and Mrs. X.

Second, Mr. X and Mrs. X each hold shares of the capital stock of Holdco: (1) giving them 10% or more of the votes that could be cast at an annual meeting of the shareholders of Holdco; and 2) having a FMV of 10% or more of the FMV of all the issued and outstanding shares of the capital stock of Holdco. The condition set out in paragraph (b) of the definition of "excluded shares" in subsection 120.4(1) is therefore satisfied with respect to Mr. X and Mrs. X.

Third, all of Holdco's income is not derived, directly or indirectly, from one or more related businesses in respect of Mr. X and Mrs. X, but rather is derived from Holdco's business. The condition set out in paragraph (c) of the definition of "excluded shares" in subsection 120.4(1) is therefore satisfied with respect to Mr. X and Mrs. X.

As for Child Y, since that child is 22 years old and holds only 5% of the voting and participating shares of the capital stock of Holdco, that child is not able to benefit from the exclusion for excluded shares.

Child Y also cannot benefit from the exclusion for arm’s length capital contributions provided in subparagraph (f)(ii) of the definition of "excluded amount" in subsection 120.4(1). The expression "arm’s length capital" in respect of a specified individual is defined in subsection 120.4(1) as the property of the individual - the shares of the capital stock of Holdco held by Child Y - or a property for which the individual’s property is a substitute - the amount of money distributed by Trust to Child Y as a result of the disposition, by Trust, of shares of the capital stock of Opco.

Since that amount of money was acquired by Child Y as a taxable capital gain from the disposition of another property - the shares of the capital stock of Opco - which directly or indirectly came from a related business - Opco - in respect of Child Y, the condition set out in paragraph (a) of the definition of "arm’s length capital" in subsection 120.4(1) is not satisfied, thus preventing Child Y from benefiting from that exclusion.

On the other hand, Child Y could benefit from the exclusion for a safe harbour capital return of a specified individual provided in subparagraph (f)(i) of the definition of "excluded amount" in subsection 120.4(1). The term "safe harbour capital return" of a specified individual is defined in subsection 120.4(1) and is the amount which does not exceed the product of the highest prescribed rate of interest in effect for a quarter in the taxation year in question, and the FMV of property contributed by the specified individual determined in respect of a related business. With respect to Child Y, this safe harbour capital return is calculated based on the amount the child subscribed for the issuance of shares of the capital stock of Holdco.

Trust distribution

With respect to Mrs. X, Child X and Child Y, the distribution received from Trust (the "Distribution"), which was derived from the $50,000 dividend from Holdco, could constitute split income, unless it qualifies as an excluded amount.

With regard to Child X, considering that that child did not attain the age of 17 before the year in which the child received the Distribution, it appears that none of the exclusions in the definition of "excluded amount" in subsection 120.4(1) is applicable to that child. As a result, Child X is subject to the split income tax with respect to the Distribution.

With respect to Mrs. X and Child Y, if it turns out that Holdco was not carrying on a business, then Holdco would not be a related business for each of those specified individuals.

Thus, the Distribution would be an excluded amount for Mrs. X and Child Y under subparagraph (e)(i) of the definition of that term in subsection 120.4(1) since it did not come, directly or indirectly, from a related business in respect of Mrs. X and Child Y.

On the other hand, if it turns out that Holdco is carrying on a business, then the Distribution would come, directly or indirectly, from a related business with respect to Mrs. X and Child Y, as explained above.

Mrs. X could benefit from the reasonable return exclusion provided for in subparagraph (g)(ii) of the definition of "excluded amount" in subsection 120.4.

The term "reasonable return" in respect of a specified individual is defined in subsection 120.4(1). It is an amount derived directly or indirectly from a related business in respect of the individual that, inter alia, must be reasonable having regard to the factors described in subparagraphs (b)(i) to (v) of that term relating to the relative contributions of the specified individual and each source individual to the related business.

Given that, on the one hand, the statement of this question only briefly describes a hypothetical particular situation and, on the other hand, the amount of the Distribution that is distributed to Mrs. X is unknown, it is impossible for us to determine whether Mrs. X could benefit from the reasonable return exclusion.

Finally, Child Y could benefit from the exclusion for a safe harbour capital return of a specified individual provided in subparagraph (f)(i) of the definition of "excluded amount" in subsection 120.4(1) with respect to the Distribution, as discussed above.

Q.14 Interest-free loan and shareholder benefit from aircraft use

IT-432R2, para. 11 indicates that the value of a taxable benefit conferred on a shareholder respecting property made available by the corporation can usually be determined by multiplying a normal rate of return by the greater of the cost and fair market value of the property and adding the operating costs related to the property - but that the amount representing the greater of the cost and fair market value of the property may first be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder. This position was not repeated in AD-18-01. Is this position nonetheless applicable to the calculation of the taxable benefit to a shareholder from the personal use of an aircraft belonging to the corporation?

Preliminary CRA written response

The fundamental principle of valuing the benefits granted to a shareholder is established in the jurisprudence, in particular, in Youngman v. The Queen, 90 DTC 6322 (FCA). The CRA applies that principle both in Interpretation Bulletin IT-432R2 and in the guidelines in Communiqué AD-18 01. According to this principle, the value of a benefit corresponds to the price that a shareholder would have paid in similar circumstances to receive the same benefit from a corporation of which the shareholder was not a shareholder.

Communiqué AD-18-01 is intended to provide general guidance and is not intended to cover all possible circumstances or situations.

Where a shareholder grants an interest-free loan to the shareholder’s corporation and that corporation uses that amount to acquire an aircraft that is made available to that shareholder for the shareholder’s personal use, the CRA could accept in determining the available-for-use amount that the initial cost of the aircraft is first reduced by the amount of the interest-free loan that the shareholder made to the corporation to enable the corporation to acquire that aircraft. The result must, however, respect the principle set out in the Youngman decision.

Q.15 Statute-barring period for rollover transactions

(a) At what time would the following transactions be considered to have become statute-barred for ITA purposes assuming that the individual had made a fair and reasonable effort to value the corporation’s shares and that the individual had not made a misrepresentation attributable to carelessness or neglect (or fraud) and assuming the presence in each case of a price adjustment clause (PAC):

(i) In the 2017 taxation year, the individual proceeded with a share exchange utilizing section 85, filed the T2057 within the statute-barred time, reported the disposition on Schedule 3 and received the notice of assessment on April 15, 2018.

(ii) In the 2017 taxation year, the individual proceeded with a share exchange utilizing section 86, reported the disposition on Schedule 3 and received the notice of assessment on April 15, 2018.

(iii) In the 2017 taxation year, the individual proceeded with a share exchange utilizing section 51. There was no disposition to report. The notice of assessment for that year was received on April 15, 2018.

(b) If the above transactions should never become statute-barred, what must a taxpayer do in order to engage the statute-barring period?

Preliminary CRA written response to Q.15(a)

Notwithstanding the PAC, in each of the three particular situations, the CRA by virtue of paragraphs 152(3.1)(b) and 152(4)(a) will generally not be able to reassess the income tax for the individual's taxation year ending December 31, 2017 after the expiry of the normal reassessment period. To that end, in each of the three particular situations, according to the stated facts, the normal reassessment period should generally expire on April 15, 2021, three years after the day of sending of the notice of the original assessment.

However, the Minister may reassess the taxpayer's taxation year ending on December 31, 2017 at any time in two cases. The first case is where a taxpayer, or the person filing the return, made a misrepresentation that is attributable to neglect, carelessness or wilful default or committed any fraud in filing the return. The second case is where a taxpayer submits a waiver to the Minister during the normal reassessment period for the year.

It should be noted that paragraph 152(4)(b) allows the Minister to assess three years after the end of the normal reassessment period in certain special circumstances. For example, in the case of the exchange of shares by virtue of section 86 or 51, if the corporation whose shares are exchanged is a non-resident corporation with which the taxpayer is not dealing at arm's length and the assessment is made as a result of that exchange of shares, the Minister by virtue of subparagraph 152(4)(b)(iii) could have until April 15, 2024, i.e., three additional years after the end of the normal reassessment period, to reassess respecting income tax for the taxation year ended December 31, 2017.

The statute-barring period requirement relates to the determination of tax consequences for a particular taxation year and not to a particular transaction. In addition, the Income Tax Act has ancillary application and is applied to the effects arising from rights, obligations and contracts between the parties. Parties may decide to include a PAC in their contract (see Income Tax Folio S4-F3-C1 Price Adjustment Clauses) in order to modify the legal transactions and such changes may then have an effect on the tax treatment of those transactions. Thus, as soon as a transaction creates legal impacts in a taxpayer's taxation year that are not otherwise statute-barred, the resulting tax consequences may be determined by the Minister. Thus, we are of the view that a taxable attribute, such as the ACB of a capital property, that was determined by a taxpayer to give effect to a rollover that occurred in a statute-barred taxation year, but for which a valid PAC or deeming provision, such as paragraph 85(1)(c), applies, may be adjusted for a taxation year that is otherwise not statute-barred if it has an impact on the tax consequences for that year. On the other hand, although a valid PAC may have retroactive effect, it does not, however, permit the Minister to reopen an otherwise statute-barred taxation year, except where one of the exceptions listed above applies.

Preliminary CRA response to Q.15(b)

Apart from a case where a taxpayer, or the person filing the return, made a misrepresentation that is attributable to neglect, carelessness or wilful default or committed any fraud in filing the return, the only situation in the scenarios presented where the taxation year ending on December 31, 2017 would never be statute-barred would be if the taxpayer had filed with the Minister a waiver in prescribed form pursuant to paragraph 152(4)(a)(ii).

Q.16 Home office and automobile expenses where not full ownership or expenses paid by another

What is the CRA position on the deductibility of home office and automobile expense (both of an employee and independent contractor) where such taxpayer is a co-owner of the property with another (who might be a spouse), or where the taxpayer owns the property and another person (who might be a spouse) pays such expenses?

Preliminary CRA written response

The CRA is being asked to clarify its position regarding the deductibility of certain business or employment expenses. You will find below some clarifications in the form of general comments.

1. Assumptions

These comments are based on the following assumptions:

  • the private law applicable in the particular situations is that of Québec, namely the provisions of the Civil Code of Québec;
  • the automobile is an "automobile", a "passenger vehicle" and a "motor vehicle" within the meaning of those words in subsection 248(1);
  • the individual does not perform functions related to the sale of property or the negotiation of contracts for the employer;
  • the expenses are reasonable in the circumstances.

2. Self-employed worker

2.1 General rules

Subsection 9(1) provides that, subject to the other provisions of Part I, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.

The Supreme Court of Canada considered the concept of profit in Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, and set out six principles relevant to the computation of income for the purposes of the Income Tax Act that must be applied in each particular case to determine, inter alia, whether that income accurately reflects the taxpayer's profit for the year in question. One of these principles is that a taxpayer is free to adopt any method which is not inconsistent with the provisions of the Income Tax Act, established case law principles or "rules of law" and well-accepted business principles. Furthermore, on reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture.

In general, a taxpayer may deduct reasonable expenses of a current nature incurred by the taxpayer to earn income from a business where the deduction is not otherwise restricted, including by the application of paragraphs 18(1)(a), 18(1)(b), 18(1)(h), subsection 18(12) and section 67.

Paragraph 18(1)(a) provides that in computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. The application of subsection 18(1)(a) remains a question of fact that can only be resolved after considering all the facts and circumstances in a particular situation.

2.2 Concept of "expense incurred"

The courts (Fédération des Caisses populaires Desjardins de Montréal et de l’ouest du Québec v. The Queen, 2001 FCA 27) have indicated that according to the jurisprudence of the Federal Court of Appeal, an expense is only "incurred" within the meaning of paragraph 18(1)(a) where there is an obligation to pay a sum of money. Since expenses cannot be considered to be incurred by an individual who is not thereby obligated to pay a sum of money, the CRA is of the view that expenses paid are not necessarily expenses incurred by a taxpayer.

The question of whether an expense has been incurred by a taxpayer is a mixed question of law and fact that must be resolved according to its particulars. All written or verbal agreements between the parties and the applicable private law must be taken into account.

For an expense to be considered to have been incurred for the purposes of paragraph 18(1)(a), it is not necessary that the expense be paid by the person incurring the expense. Consequently, the CRA is of the view that the mere fact that a taxpayer does not himself or herself pay an expense incurred by the taxpayer and that is instead paid by a third party is irrelevant in itself in determining whether paragraph 18(1)(a) prevents the deduction of the expense by the person who incurred it.

2.3 Current expenses for a home office

Depending on the circumstances, current expenses for a home office may be deducted in computing the income of a business.

For the purposes of section 9, title to a property is not a determining factor by itself in determining whether current expenses for a home office incurred for the purpose of earning income from a business are deductible in computing the income of the business or property.

Furthermore, notwithstanding any other provision of the Income Tax Act, subsection 18(12) provides for restrictions on the expenses that may be deducted in respect of a self-contained domestic establishment in which the individual resides.

Paragraph 18(12)(a) provides that no amount shall be deducted in respect of an otherwise deductible amount for any part of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either

(i) the individual’s principal place of business, or

(ii) used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business;

Paragraph 18(12)(b) provides that if part of a self-contained domestic establishment in which the individual resides is either the individual’s principal place of business, or used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business, the amount for the work space that is deductible in computing the individual’s income for the year from the business cannot exceed the individual’s income for the year from the business, computed without reference to that amount and sections 34.1 and 34.2.

Paragraph 18(12)(c) provides that any amount that is not deductible by reason only of paragraph 18(12)(b) for the immediately preceding taxation year is deductible in computing the individual’s income from the business for the year, subject to paragraphs 18(12)(a) and 18(12)(b).

The ownership of a property does not in itself have an impact on the application of subsection 18(12).

2.4 Current expenses for an automobile

Depending on the circumstances, current expenses for an automobile may be deductible in computing income from a business.

For the purposes of section 9, the ownership of a property is not by itself a determining factor in determining whether current expenses in respect of an automobile that a taxpayer incurs in order to earn income from a business are expenses that are deductible in computing the income of that business.

2.5 Capital cost allowance
2.5.1 Property title

In short, paragraph 18(1)(b) does not permit, except as expressly permitted by the Income Tax Act, deduction of capital expenditures in computing the income of a taxpayer.

Capital cost allowance is allowed under paragraph 20(1)(a), and section 1100 of the Income Tax Regulations (ITR). Under ITR section 1100, the deduction is calculated as a percentage of the "undepreciated capital cost" ("UCC") of depreciable property of each of the prescribed classes provided in ITR Schedule II.

UCC is defined in subsection 248(1) and has the meaning assigned by subsection 13(21). This definition is expressed in the form of a formula. To calculate the UCC at any given time, element A of the formula in that definition represents the total of all amounts each of which is the capital cost to the taxpayer of a depreciable property of the class acquired before that time.

The term "depreciable property" is defined in subsection 248(1) and has the meaning assigned by subsection 13(21). In short, depreciable property means property acquired by a taxpayer for which there is an entitlement to a deduction for capital cost allowance under paragraph 20(1)(a) in computing income earned by the taxpayer from a business for that year (or a preceding taxation year.)

The CRA is of the view that a taxpayer cannot claim capital cost allowance for property that the taxpayer does not own under the applicable private law and in which the taxpayer does not have a leasehold interest.

2.5.2 Undivided co- ownership

Where depreciable property is acquired by a taxpayer, depreciation is calculated based on the capital cost of the property to the taxpayer. The term "capital cost" is not defined in the Income Tax Act. Where a property is acquired in co-ownership, the CRA is of the view that the capital cost of the property to the taxpayer is the capital cost of its undivided interest in the property.

The term "cost" is not defined in the Income Tax Act. Where a property is acquired in co-ownership, the CRA is of the view that the cost of the property for the taxpayer is the cost of the taxpayer’s undivided share in the property.

2.5.3 Application of paragraph 13(7)(g) to a passenger vehicle

A passenger vehicle may be included in class 10 or class 10.1. A passenger vehicle whose cost (per subsection 13(2) and ITR paragraph 7307(1)(b)) to the taxpayer exceeds $30,000 is included in class 10.1. Other passenger vehicles fall within class 10.

If the cost of a passenger vehicle for a taxpayer exceeds $30,000, paragraph 13(7)(g) sets the capital cost of this passenger vehicle at $30,000.

In addition, section 67.4 provides an additional rule in respect of a motor vehicle owned by more than one person. Under that section, where a person owns a motor vehicle jointly with one or more other persons, the reference in paragraph 13(7)(g) to the amount of $30,000 is replaced by the product of the multiplication of that amount, by the ratio between the FMV of the person's interest in the vehicle and the FMV of the interests in the vehicle of all those persons.

For example, if a taxpayer has a $60,000 interest in a passenger vehicle worth $80,000, under section 67.4, the amount of $30,000 in paragraph 13(7)(g) which would be applicable to that taxpayer is $22,500 ($60,000 divided by $80,000, and multiplied by $30,000.)

2.6 Expense allocation

Any expenses related to a good or service that was used in part for the purpose of earning income from a business and in part for personal use must be allocated between the portion for personal use and the portion used to earn income from the business.

2.7 Other tax impacts of an expense paid by a third party

Where business expenses have been paid by someone other than the taxpayer carrying on the business, the amounts so paid could, depending on the circumstances, be included in the income of the taxpayer's business or give rise to the application of section 80.

The question of whether those amounts should be included in the income from the taxpayer's business is one of facts that can only be resolved after an analysis of all relevant facts specific to each situation.

The jurisprudence (Ikea Limited v. The Queen, [1998] 1 S.C.R. 196 and Canderel Ltd. v. The Queen, [1998] 1 S.C.R. 147) has established principles for determining whether an amount qualifies as income for the purposes of the Income Tax Act for a taxation year. The principles developed by the jurisprudence will help a taxpayer to determine whether the amounts paid by another person must be included in the taxpayer’s income under section 9.

3.1 Restriction in computing income from an office or employment

Subsection 8(2) sets out a general restriction on the deduction of amounts in computing income from an office or employment. Under that provision, only the amounts provided for in section 8 are deductible in computing a taxpayer's income for a taxation year from an office or employment.

Furthermore, subsection 8(10) provides that a taxpayer may not deduct an amount for a taxation year under inter alia paragraph 8(1)(h.1), or subparagraph 8(1)(i)(ii) or 8(1)(i)(iii), unless the taxpayer attaches to the taxpayer’s income tax return for the year a prescribed form, signed by the taxpayer’s employer, certifying that the conditions set out in the applicable provision of the Income Tax Act were met in the year with respect of the taxpayer.

3.2 Home office

Certain employment-related expenses may be deducted under paragraph 8(1)(i). For an employment-related expense to be deductible in computing a taxpayer's income for a taxation year from an office or employment, the preamble to paragraph 8(1)(i) specifies that the amounts must be paid by the taxpayer in the year, or on behalf of the taxpayer in the year if the amount paid on behalf of the taxpayer is required to be included in the taxpayer’s income for the year in respect of the amounts listed in subparagraphs 8(1)(i)(i) to 8(1)(i)(vii).

Subject to the conditions set out in the preamble to paragraph 8(1)(i), subparagraph 8(1)(i)(ii) allows a taxpayer to deduct in computing the taxpayer’s employment income office rent the taxpayer was required to pay for by the contract of employment,

Subject to the conditions set out in the preamble to paragraph 8(1)(i), subparagraph 8(1)(i)(iii) allows a taxpayer to deduct in the computation of the taxpayer’s employment income the cost of supplies that were consumed directly in the performance of the duties of the office or employment and that the taxpayer was required by the contract of employment to supply and pay for.

Home office expenses may include expenses such as electricity, heating, maintenance, property taxes, and home insurance costs associated with maintaining the office. However, they cannot include mortgage interest or capital cost allowance for a building.

Furthermore, subsection 8(13) provides, inter alia, that notwithstanding paragraph 8(1)(i), no amount is deductible in computing an individual’s income for a taxation year from an office or employment in respect of any part of a self-contained domestic establishment in which the individual resides, except to the extent that the work space is either:

(i) the place where the individual principally performs the duties of the office or employment, or

(ii) used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment;

The ownership of a property does not in itself have an impact on the application of subsection 8(13).

3.3 Costs relating to a motor vehicle

In short, subject to certain exceptions, paragraph 8(1)(h.1) allows a taxpayer to claim a deduction in computing income for amounts expended in the year on motor vehicle expenses where among other requirements the taxpayer was required under the terms of the contract of employment, to pay the motor vehicle expenses that the taxpayer incurred to travel in the performance of the duties of the office or employment.

The question in particular as to whether a taxpayer was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment is a mixed question of law and fact that must be resolved in the light of all the relevant facts. All written or verbal agreements between the parties and the applicable private law must be taken into account.

Furthermore, the wording of paragraph 8(1)(h.1) adds that the amounts must, in particular, have been "expended" by the taxpayer in order to be deducted in computing the taxpayer’s income under that paragraph. The term "expended" is not defined in the Income Tax Act. For the purpose of subsection 8(1), the CRA considers that the term "expended" is used in the sense of "paid".

Thus, if all the other requirements in paragraph 8(1)(h.1) are satisfied, the amounts paid during the year for motor vehicle expenses cannot be deducted in computing the taxpayer’s income under paragraph 8(1)(h.1) if they are not paid by that taxpayer.

The ownership of a property does not in itself have an impact on the application of paragraph 8(1)(h.1).

3.4 Capital cost allowance
3.4.1 Motor vehicle

Subject to certain conditions, in computing the income from an office or employment, a deduction for capital cost allowance for a motor vehicle is allowed under paragraph 8(1)(j) and ITR section 1100.

For a discussion of the capital cost allowance for a motor vehicle for purposes of determining the income of an office or employment, please refer to section 2.5 above, with any necessary adaptations.

For this purpose, the terms "UCC" and "depreciable property" are defined in subsection 248(1) and apply to the entire Income Tax Act.

3.4.2 Home office

The CRA is of the view that a taxpayer cannot deduct in computing income from an office or employment an amount as a depreciation expense for a building because there is no provision in section 8 which allows such a deduction.

3.5 Expense allocation

Any expenses related to a good or service that was used in part for the purpose of earning income from a business and in part for personal use must be allocated between the portion for personal use and the portion used to earn income from the business.

3.6. Application of paragraph 6(1)(a) to an expense paid by a third party

Where amounts are paid by someone other than the taxpayer, paragraph 6(1)(a) could, depending on the circumstances, apply to the benefit arising from such payment.

Paragraph 6(1)(a) is not limited to benefits received from the taxpayer's employer. In general, and subject to the exceptions in paragraph 6(1)(a), the taxpayer must add to the taxpayer’s income the value of the benefits received in the year in the course of, or by virtue of the taxpayer’s office or employment.

Whether the value of the benefits received by the taxpayer in the year is in respect of, in the course of, or by virtue of an office or employment is a question of fact upon which the CRA cannot make a determination without having analyzed all the facts relevant to a particular situation.

Q.17 Income from an active business of a rental property company

Realtyco is a CCPC holding in Canada six buildings each containing 50 residential units, which it rents out. The sole services provided by it to the tenants are maintenance of the common areas and snow removal. There is a full-time caretaker at each building (for six in total).

In order to determine that there is an “active business carried on” it is not sufficient for Realtyco to satisfy the more than 5 full-time employee test. It first must be considered to be carrying on a business. Would the income generated by Realtyco from the six buildings qualify as “income of the corporation for the year from an active business” for purposes of s. 125(1)(a)?

Preliminary CRA written response

The term "active business carried on by a corporation" is defined in subsection 125(7) as any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade.

In order to determine whether a corporation has an "active business carried on by a corporation" within the meaning of subsection 125(7), the first step is to determine whether its activities constitute a "business".

The concept of "business" is accorded an expanded meaning by subsection 248(1) by being defined in particular as including an undertaking of any kind whatever:

"Business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;

The question of whether the activities of a taxpayer constitute a "business", however, remains a question of fact that can only be resolved after a review of all relevant facts.

If the activities of a taxpayer constitute a "business", the second step is to determine whether that business is "carried on". In that regard, the Federal Court of Appeal commented on the term "carrying on a business" in Timmins v The Queen, [1999] 2 FC 563 (FCA) as follows:

[9] The expressions “carry on business,” “carrying on business” or “carried on business, while undefined must, when regard is had to the ordinary meaning of the words refer to the ongoing conduct or carriage of a business. It would seem to follow that where one “carries on” a business in the ordinary sense or by pursuing one or more of the included activities under ss. 248(1) over time, one is “carrying on business” under the Act.

The question of whether a business is carried on, however, remains a question of fact that can only be resolved after a review of all relevant facts.

If the activities of a taxpayer constitute a "business carried on", then it must be determined whether the business is a "specified investment business" or a "personal services business", as those terms are defined in paragraph 125(7).

A "specified investment business" is essentially a business, including a business of leasing real or immovable property, the principal purpose of which is to derive income from property, including rents. As stated in paragraph 12 of Interpretation Bulletin IT 73R6, the term "principal purpose" is not a defined term in the Act for the purposes of the definition of "specified investment business" in subsection 125(7), but it is considered to be the main or chief objective for which the business is carried on. In order to identify the "main objective", therefore, an analysis of all factors related to the process needed to earn income is required.

Where the principal purpose of a taxpayer's business is to earn income from property, paragraphs (a) and (b) of the definition of "specified investment business" in subsection 125(7) provide for exceptions. In particular, paragraph (a) provides that a corporation employing more than five full-time employees in the business in the year is not a specified investment business.

A "personal services business" generally means a business of providing services where an individual who performs services on behalf of the corporation is a specified shareholder of the corporation and that individual would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided. Paragraphs (c) and (d) of the definition of "personal services business" in subsection 125(7) provide for exceptions. Specifically, paragraph (c) provides that a corporation is not a personal services business if it employs more than five full-time employees throughout the year.