7 October 2022 APFF Roundtable

This page contains our summaries of questions posed at the 7 October 2022 APFF Federal Roundtable held in Montreal, Quebec together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Jean Lafrenière, Olivier Bergeron and Sophie Larochelle). We use our own titles.

The 7 October 2022 APFF Financial Strategies and Instruments Roundtable is provided on a separate page.

The final versions of these APFF Roundtable items have not yet been released under the Income Tax Ruling Directorate's severed letter program, at which time we will also provide a full-text translation of the questions posed.

Q.1 - Reduction in SIOH for contingent liabilities

2016-0672321C61 indicated that safe income on hand should be reduced by accounting contingencies, reserves and allowances because of their effect on the value of a share. Suppose that the FMV of Holdco’s shares of Opco (having a nil PUC) is $1,000,000, consisting of shareholder’s equity (i.e., share capital and retained earnings) of $800,000, unrealized gains of $500,000 and contingent liabilities and accounting provisions valued at $300,000, and suppose further that such retained earnings correspond to the safe income earned attributable to the Opco shares of Holdco.

In determining safe income on hand, should safe income be reduced by accounting contingencies and reserves? It would seem more appropriate that such amounts should instead be applied first to the unrealized gains. Note that as per Kruco2: "There is an implicit assumption that one can determine the portion of any gain arising on the sale of the shares that is attributable to the retention of post-1971 income and the portion that is attributable to something else."

CRA Response

The CRA is maintaining its longstanding position that to the extent that contingencies and accounting reserves have the effect of reducing the inherent gain on a corporation's share, such amounts should reduce the corporation's safe income on hand.

Consequently, safe income on hand of a corporation must generally be reduced by actual or potential cash outflows, such as non-deductible expenses, contingencies and accounting reserves, in determining the amount of safe income that can be considered to contribute to the gain on a share.

The CRA would, however, be prepared to consider more specific situations in the context of a request for advance rulings so as to make a safe income determination based on all the facts of a case.

Q.2 - Shareholder buy-sell provisions and TPS status

(a) Where common shareholders agree to redemption, tag-along or drag-along rights whose exercise would result in deemed dividends under Part VI.1 of the Income Tax Act3, would such shares not thereby be taxable preferred shares (TPS) because such rights would only be exercised at FMV?

(b) A shareholders' agreement provides that a shareholder may redeem its common shares at FMV. If the agreement also provides that compensation will be payable (for example, in the event of a public offering where the value of the shares exceeds the price agreed to at the time of redemption) within 12 months of a shareholder redemption transaction under such agreement, would that compensation result in shareholders not being considered to transact at FMV at the redemption time?

(c) If such compensation were instead paid by another shareholder, and such payment was included in computing the redeemed shareholder's income pursuant to s. 12(1)(g) or as proceeds of disposition, would such payment have the effect of causing the redeemed shares to be TPS because the amount received was in addition to the amount determined as FMV on the redemption?

(d) What if the compensation was provided for in the share repurchase agreement rather than in the shareholders' agreement?

(e) Would the fact of the compensation being paid within a particular specified period of time have an impact on the characterization as a TPS? (6 months vs 12 months vs 24 months)?

CRA Response

I.T.A. subsection 248(1) defines a TPS as any of the following:

  • a share issued after December 15, 1987 that is a short-term preferred share at that particular time within the meaning of the definition in subsection 248(1);
  • a share which, at that particular time, has terms or conditions, or there is an agreement to which the issuing corporation or a person related to the issuing corporation (within the meaning assigned by paragraph (h) of the definition of TPS in subsection 248(1) is a party in respect of the share which, inter alia, make it reasonable to consider, that the amount that the shareholder is entitled to receive in respect of the share on the dissolution, liquidation or winding-up of the corporation or on the redemption, acquisition or cancellation of the share (unless the requirement to redeem, acquire or cancel the share arises only in the event of the death of the shareholder or by reason only of a right to convert or exchange the share) or on a reduction of the paid-up capital of the share by the corporation or by a specified person in relation to the corporation is, by way of a formula or otherwise, fixed, limited to a maximum, or established to be not less than a minimum.

Subparagraph (f)(ii) of the definition of TPS in subsection 248(1) provides an exception (the "FMV Exception") by virtue of which an agreement in respect of a share is to be read without reference to, inter alia, a clause under which a person agrees to acquire the share for an amount that does not exceed the FMV of the share at the time of the acquisition - determined without reference to the agreement - or an amount determined by reference to the assets or earnings of the issuing corporation where that determination may reasonably be considered to be used to determine an amount that does not exceed the FMV of the share, determined without reference to the agreement, at the time of the acquisition.

Furthermore, paragraph (a) of the definition of STPS [short-term preferred shares] in subsection 248(1) generally defines a STPS to mean a share that at that particular time, is a share where, under the terms and conditions of the share, any agreement relating to the share or any modification of those terms and conditions or that agreement, the corporation or a specified person in relation to the corporation (within the meaning of paragraph (j) of the definition of STPS in subsection 248(1)) may, at any time within 5 years after the date of its issue, be required to redeem, acquire or cancel, in whole or in part, the share (unless the requirement to redeem, acquire or cancel the share arises only in the event of the death of the shareholder or by reason only of a right to convert or exchange the share) or to reduce the paid-up capital of the share.

Clause (a)(i)(B) of the definition of STPS in subsection 248(1) also contains a FMV Exception that provides that an agreement in respect of a share shall, inter alia, be read without regard to a clause under which a person agrees to acquire the share for an amount that does not exceed the fair market value of the share at the time of the acquisition, determined without reference to the agreement, or for an amount determined by reference to the assets or earnings of the corporation where that determination may reasonably be considered to be used to determine an amount that does not exceed the fair market value of the share at the time of the acquisition, determined without reference to the agreement.

The question of whether a share that otherwise constitutes an STPS and/or a TPS qualifies for the FMV Exception in clause (a)(i)(B) of the definition of STPS or the FMV Exception in subparagraph (f)(ii) of the definition of TPS in subsection 248(1) is a question of fact that can only be resolved after a thorough analysis of all the facts of a particular situation. Since the statement in this question only briefly describes hypothetical situations, it does not appear to us to be possible to make a definitive determination as to the application of the FMV Exception in the situations described therein. Depending on the circumstances, it is indeed possible that the conditions set out therein may be satisfied to the extent that an agreement relating to a share contains a provision that a person agrees to acquire the share for an amount not exceeding the FMV of the share at the time of the acquisition, determined without reference to the agreement.

Q.3 - CEWS effect of dividends

For Periods 23 and beyond, changes were made to the Tourism and Hospitality Recovery Program ("THRP") and the Hardest Hit Business Recovery Program.

We understand that publicly traded companies or their subsidiaries are not entitled to any grants for the claim period in which dividends were paid to individuals who are holders of common shares. For example, a parent company listed on the Paris stock exchange has a subsidiary in Canada. The company declares a dividend to be paid on March 31, 2022 and has individual shareholders.

CRA Response

The payment of taxable dividends during certain qualifying periods by certain qualifying entities to an individual who is a holder of common shares of its capital stock may engage both subsection 125.7(2.01) and subsection 125.7(14.1).

Subsection 125.7(2.01) provides that a qualifying entity that is a publicly traded company or a subsidiary of such a company is not entitled to any subsidy in respect of a particular qualifying period if, in the qualifying period, it paid taxable dividends to an individual who is a holder of common shares of its capital stock. Subsection 125.7(2.01) applies to the twenty-third and subsequent qualifying periods.

If subsection 125.7(2.01) applies to a qualifying entity in respect of a particular qualifying period, the qualifying entity is not eligible for any grant in respect of that particular qualifying period.

Consequently, in this example, the Canadian subsidiary will not be entitled to any THRP amount for the 27th qualifying period if it has paid taxable dividends during that qualifying period to individuals who are holders of common shares of its capital stock.

Subsection 125.7(14.1) imposes, in certain circumstances, an obligation on an eligible entity that is a publicly traded company or a subsidiary of such a company to repay, in whole or in part, an amount of grant received in respect of any qualifying period after the twenty-third qualifying period. The amount of such repayment shall be determined in accordance with a formula set forth in that subsection.

In particular, paragraph (b) of the description of A of this formula takes into account, in the case of a publicly traded company or a subsidiary of such a company, the amount of taxable dividends paid by such a corporation during the twenty-fourth and any subsequent qualifying period to an individual who holds common shares of its capital stock.

Consequently, in this example, the payment of taxable dividends by the Canadian subsidiary in the 24th and any subsequent qualifying periods to individuals who are holders of common shares of its capital stock will come within paragraph (b) of the description of A in subsection 125.7(14.1).

Q.4 - Reg. 1101(5b.1) election requirements

Class 1 buildings may be eligible for an additional 6% of capital cost allowance (CCA) on eligible non-residential buildings used for manufacturing and processing in Canada, resulting in a combined CCA rate of 10%. An additional 2% CCA may be claimed on other eligible non-residential buildings, resulting in a combined CCA rate of 6%. The taxpayer must file an election pursuant to Reg. 1101(5b.1) of the Income Tax Regulations4 for each eligible non-residential building for which the taxpayer intends to claim the additional CCA.

Is the classification of an eligible non-residential building in a separate Class 1(a) or 1(b) sufficient for the taxpayer to be considered to have made such election?

CRA Response

The referenced rules are found in I.T.R. paragraphs 1100(1)(a.1) and 1100(1)(a.2), respectively. They provide, where certain conditions are satisfied, for additional CCA in respect of certain buildings acquired after March 18, 2007 that are included in Class 1 of I.T.R. Schedule II.

Among the conditions that must be met in order to benefit from this additional CCA is that a taxpayer must, under I.T.R. subsection 1101(5b.1), elect to include in a separate class any building that is an eligible non-residential building, as defined in I.T.R. subsection 1104(2). The text of I.T.R. subsection 1101(5b.1) states that a separate class is prescribed for each eligible non-residential building of a taxpayer in respect of which the taxpayer has (by letter attached to the return of income of the taxpayer filed with the Minister in accordance with section 150 of the Act for the taxation year in which the building is acquired) elected that the subsection apply.

Because of this prescribed requirement, the categorization of an eligible non-residential building as a separate class on the appropriate schedule of a taxpayer's income tax return is not sufficient, in and of itself, to allow a taxpayer to access the election provided for in I.T.R. subsection 1101(5b.1). The taxpayer must, therefore, send to the Tax Centre serving the taxpayer a letter attached to the taxpayer's income tax return stating the taxpayer's election for each eligible non-residential building for the taxation year in which the subject building is acquired.

For information purposes, where a taxpayer is a corporation that files its income tax return over the Internet, it is possible for the taxpayer to make the election under subsection 1101(5b.1) I.T.R. over the Internet using either of the following methods:

  • by using the "T2 Attach-a-doc" service
  • indicating this election in the notes to the financial statements in the General Index of Financial Information (GIFI) of the tax return.

The electronic services offered by the CRA are constantly evolving. With this in mind, we refer you to the T2 Guide5 which contains annually updated information on how to electronically file elections that may be required of taxpayers, including the election under I.T.R. subsection 1101(5b.1).

Q.5 - LP loans avoiding s. 40(3.1) gains

2016-0637341E56 indicated that s. 53(2)(c)(v) potentially could apply respecting the amount of loans made by a partnership to a limited partner. That situation entailed loans made by a limited partnership to a limited partner, the proceeds of which could be considered to be received by the limited partner on account of, or in full or partial payment of, the allocation (i.e., distribution) of the limited partner's share of the partnership's profits.

What is the CRA's current position in situations where loans from a limited partnership are received by a limited partner in order to avoid a gain under s. 40(3.1)?

CRA Response

Depending on the facts and circumstances of a particular situation, money or other property received by a limited partner by way of loan from a partnership may or may not be considered to be received "as, on account or in lieu of payment of, or in satisfaction of” the limited partner's distribution of the profits or partnership capital, for the purposes of I.T.A. subparagraph 53(2)(c)(v).

The CRA will generally not seek to include a loan received (as, on account or in lieu of payment of, or in satisfaction of a distribution of the taxpayer's share of the profits or partnership capital) by a limited partner of a partnership under subparagraph 53(2)(c)(v) if all of the following conditions are satisfied:

1. The loan is not made on account of or in full or partial payment of a withdrawal of a limited partner's capital contribution.

2. The total amount of all loans received by the limited partner in respect of a fiscal period of the partnership does not exceed the total of the limited partner's "share of the adjusted net income of the partnership"7 for the fiscal year and the adjusted cost base ("ACB") of the limited partner's interest at the end of the fiscal period (the ACB being determined before the application of subparagraph 53(2)(c)(v) in respect of the loans); or, if there is an excess amount, it is not material in the circumstances.

3. Shortly after the end of the fiscal period, the partnership declares a distribution payable to the limited partner in an amount equal to the total amount of the loans received by the limited partner during the fiscal period and the distribution is used to settle the loans to the limited partner (in cash or by way of set-off).

4. The loan (made in lieu of the cash payment of the distribution) is made primarily for the purpose of avoiding a deemed gain to the limited partner pursuant to subsection 40(3.1) that would be realized at the end of the fiscal period of the partnership caused solely by the difference between the time of the addition and the time of the deduction of the following respective amounts in computing the ACB of the limited partner's interest in the partnership:

(a) the limited partner's share of the adjusted net income of the partnership for the fiscal period; and

(b) the distributions to the limited partner for the fiscal period pursuant to subparagraph 53(2)(c)(v), where no portion of such distributions were made in the form of loans.

5. The partnership interest is not a tax shelter,8 and the partnership or transactions involving or related to the partnership are not part of a larger series of transactions that includes an avoidance transaction (as defined in subsection 245(3)) to which subsection 245(2) should apply.

Where one of the above conditions is not satisfied, the CRA could consider the full amount received as a loan to be received "as, on account or in lieu of” a distribution of the limited partner's share of the profits of the partnership or the partnership capital for purposes of applying subparagraph 53(2)(c)(v), but without any further reduction in the ACB of the interest pursuant to that subparagraph in respect of the distribution made by the partnership to repay the loan; or the CRA may consider applying the general anti-avoidance rule ("GAAR").

Q.6 - Charitable donations by testamentary spousal trust

Mrs. X's late husband created a testamentary spousal trust. Prior to his death, they regularly made substantial charitable donations. They wanted her to continue to make donations after his death through the trust. 2010-0370511C69 indicated that gifts made from the capital of the trust do not affect the characterization of the trust as a spousal trust, if the gifts can only be made after the death of the surviving spouse.

Considering that charitable donations have always been part of Mrs. X's cost of living, would donations made by the trust during her lifetime affect its characterization as a spousal trust within the meaning of s. 70(6)?

CRA Response

Subsection 70(6) applies, inter alia, in respect of a capital property described in subsection 70(5) that is, as a consequence of a taxpayer's death, transferred or distributed to a trust created by the taxpayer's will and that meets the conditions set out in paragraph 70(6)(b). In particular, under subparagraph 70(6)(b)(ii), no person except the spouse or common-law partner may, before the spouse’s or common-law partner’s death, receive or otherwise obtain the use of any of the income or capital of the trust.

Whether the condition in subparagraph 70(6)(b)(ii) is satisfied is a question of fact and law that can only be resolved after a full review of all the relevant facts and documents surrounding a particular situation.

Where the will establishing the testamentary spousal trust provides for the trustee of the trust to make gifts out of the income or capital of the trust to a charity, i.e., to a person other than the spouse or common-law partner, prior to his or her death, we are of the view that the condition in subparagraph 70(6)(b)(ii) is not satisfied.

The mere possibility that a person other than the spouse or common-law partner may, before his or her death, receive or otherwise obtain the use of any of the income or capital of the trust is sufficient to disqualify the trust for purposes of the rollover under subsection 70(6).

Q.7 - Teleworking home as PE

Mr. X, who has been living in Quebec and commuting to the sole permanent establishment of his employer in Quebec, from which he receives his remuneration, has now agreed with his employer that he will telework at his cottage in Ontario for three days a week, and continue commuting to work at his employer's facility in Quebec two days a week. He has the authority to enter into contracts for his employer.

(a) Would Reg. 400(2) deem Mr. X's employer to have an Ontario permanent establishment at his cottage?

(b) If so, would he be considered to report for work at an Ontario permanent establishment of his employer in Ontario for payroll deduction purposes?

(c) Has the CRA's position evolved in the context of the pervasiveness of teleworking?

CRA Response to Question 7(a)

The concept of permanent establishment is relevant for the purposes of determining taxable income earned in a province by a corporation, but is not relevant to the application of I.T.R. sections 100 and 102 I.T.R., which used in determining the province of employment for the purposes of deductions and withholdings from an employee's earnings.

Pursuant to the preamble to subsection 400(2), a permanent establishment means a fixed place of business of a corporation. I.T.R. paragraphs 400(2)(a) to 400(2)(e.1) also set out situations where a corporation is deemed to have a permanent establishment at a particular place.

Whether, within the meaning of I.T.R. subsection 400(2), Mr. X's employer has a permanent establishment in the province where his cottage is located is a question of fact that can only be resolved in light of all the facts, acts, circumstances and documents relating to the particular situation.

Generally speaking, a workplace is only a fixed place of business of the employer if it is owned or leased by the employer. The fact that an employee works from home is generally not sufficient to create a fixed place of business of the employer in the province from which the employee teleworks, within the meaning of the preamble to I.T.R. subsection 400(2).

On the other hand, I.T.R. paragraph 400(2)(b) provides, inter alia, that a corporation, to the extent that it carries on business through an employee at a particular place and that employee has general authority to contract for the employee’s employer, is deemed to have a permanent establishment at that particular place. It is the CRA's view that the fact that an employee of a corporation can contract for the employer from the employee’s home should not be a factor that, in and of itself, creates a permanent establishment in a particular province. In other words, in order for the presumption in I.T.R. paragraph 400(2)(b) to apply, the employee must not only have general authority to contract for the employer, but the employer must also carry on business in the province through the employee established there. The issues of whether the employee is established in the province where the cottage is located and whether Mr. X's employer carries on business through him in that province are questions of fact that can only be resolved after a full examination of all the relevant facts, acts, circumstances and documents.

CRA Response to Question 7(b)

Even if the CRA were to conclude that, within the meaning of I.T.R. subsection 400(2), Mr. X's employer had a permanent establishment at Mr. X's cottage, that determination would not lead to the conclusion that Mr. X "reports for work" at an establishment of his employer located in Ontario for the purposes of deductions and withholdings from Mr. X's remuneration.

As stated above, the definition of permanent establishment and the deeming rules in I.T.R. subsection 400(2) are relevant only for the purposes of Part IV of the I.T.R.. They do not, therefore, extend to I.T.R. sections 100 and 102, which are relevant to determining whether an employee reports for work at an establishment of the employee’s employer located in a particular province, as well as in determining the amounts to be deducted or withheld by the employer from the employee's remuneration.

CRA Response to Question 7(c)

The CRA is reviewing the appropriateness of updating Guide T400110 and other CRA guidelines on payroll deductions and withholdings in an environment where telework is becoming more prevalent.

Q.8 - Avoidance of s. 84.1 by selling through a Newco/ s. 256(5.11)

Brother, who owns half of the shares (being common shares) of Opco, having a nominal paid-up capital and ACB, wishes to sell all of his shares to Sister (who is younger) in order to generate cash that he will gradually require after his imminent retirement; however, s. 84 would apply if he sold directly to a corporation owned by Sister. The following series of transactions is proposed:

  1. Brother transfers all his Opco shares to a newly-incorporated corporation wholly-owned by him (“Brother-Portfolioco”) at an s. 85(1) agreed amount of his nominal ACB.
  2. Brother-Portfolioco sells its Opco shares to a newly-incorporated corporation wholly-owned by Sister (“Sister-Holdco”) for $1 million (the "Sale"), thereby realizing a capital gain and an addition to its capital dividend account ("CDA").
  3. Of the $1 million sum, $200,000 is paid immediately and the balance of $800,000 is paid over the next four years at the rate of $200,000 per year together with interest at 5%, with such balance secured by the purchased Opco shares.
  4. A capital gains reserve could be claimed unless Sister-Holdco was controlled, directly or indirectly, in any manner whatever, by Brother-Portfolioco.
  5. In the following taxation years, Brother-Portfolioco pays capital dividends to Brother. as well as taxable dividends.

(a) Can the CRA confirm that in a bona fide business transaction between siblings as described above, it would not apply s. 245(2) because of the specific creation of Brother-Portfolioco to minimize the tax consequences of the Sale? Note that if Brother already held the shares of Opco through a holding company or through a family trust providing for a corporate beneficiary, the appropriate corporate structure to implement the series of transactions would have already been in place for a number of years.

(b) Would the CRA's conclusion be the same if Brother-Portfolioco were instead to sell 20% of the Opco common shares per year for the next five years at their applicable FMV on each of those dates rather than immediately selling all his shares with a balance of sale price owing?

(c) Would Brother-Portfolioco be able to claim the capital gains reserve?

CRA Response to Question 8(a)

The potential application of the GAAR pursuant to subsection 245(2) requires an analysis of all the facts and circumstances relating to a particular situation. Consequently, only a detailed analysis of all the facts would allow us to make a definitive decision as to the application of the GAAR to a particular situation. That said, we can make the following general comments.

The CRA remains concerned about any form of corporate surplus stripping arrangement and tax planning that is contrary to the integration principle. Consequently, where the principles established by the jurisprudence can be applied in a file, the CRA continues to invoke the GAAR to counter such plans.

However, in a situation such as the one described, the CRA would not rely on the application of the GAAR solely because of the specific formation of Brother-Portfolioco to proceed with the Sale.

CRA Response to Question 8(b)

The CRA's conclusion would be the same even if Brother-Portfolioco instead sold 20% of the common shares in the capital stock of Opco per year for the next five years at their FMV at the time of sale.

CRA Response to Question 8(c)

Pursuant to subparagraph 40(1)(a)(iii), Brother-Portfolioco may claim a reasonable allowance if it can demonstrate that the conditions set out in that subparagraph are satisfied and that the restriction set out in paragraph 40(2)(a) do not apply, in particular, because immediately after the Sale:

  • Sister-Holdco was not controlled, directly or indirectly, in any manner whatever, by Brother-Portfolioco or by a person or group of persons who controlled, directly or indirectly, in any manner whatever, Brother-Portfolioco, or
  • Sister-Holdco did not control, directly or indirectly, in any way whatever, Brother-Portfolioco.

With respect to the Proposed Series of Transactions, such a determination is based on the ability to establish that immediately following the Sale:

  • Brother-Portfolioco or Brother did not have de facto control of Sister-Holdco; and
  • Sister-Holdco did not have de facto control of Brother-Portfolioco.

As provided for in subsection 256(5.11) and the applicable jurisprudence, any factor, whether contractual, commercial, economic, moral or familial, may be taken into consideration in order to determine whether a person or group of persons has influence, direct or indirect, the exercise of which would result in de facto control of a corporation ("Influence"). In this regard, only a complete review of all relevant facts, actions, circumstances and documents surrounding a particular situation can enable us to determine whether a person has Influence over a Corporation.

In view of the limited facts that have been provided, we cannot give a final opinion on this matter without first considering all the facts relating to the Proposed Series of Transactions.

Q.9 - Timing of s. 80 application/ whether s. 80(13) liability is provable claim

Pursuant to a proposal under the Bankruptcy and Insolvency Act11, a Quebec-based Canadian-controlled private corporation ("Opco") and its creditor agree to write off $600,000 of its $1 million debt and to revise the terms of repayment of the new balance of $400,000, including providing for payments over four years.

The proposal is signed on September 30, 2022, the Superior Court of Quebec approves it on January 20, 2023, the first payments are made in February 2023 and the last payment is made in December 2026 (with a discharge).

According to IT-293R12, the settlement of the debt occurs when the debtor's obligations are extinguished. However, the creditor retains full recourse to the full original amount of the debt (i.e. $1 million) until the new balance is paid in full, suggesting that s. 80 is not triggered until 2026 (the year of discharge). However, in Richer v. The Queen,13 the Tax Court of Canada held that a debt is settled or extinguished when the creditor and debtor agree to fix or modify their existing rights and obligations, which occurs in January 2023.

Furthermore, assuming that the triggering of s. 80 results in the inclusion in income of the balance of the forgiven amount not applied against the tax attributes, what happens with the balance of the taxes becoming due? Specifically, if the $600,000 gain in the above example results in a tax liability of $100,000 (resulting from an inclusion in income after reduction of all tax attributes), is that the full amount of tax that would be payable or only a fraction of it?

Indeed, in the Quebec Court of Appeal decision in Sous-ministre du revenu du Québec v. Leblond, Buzetti et associés ltée,14 the Court ordered the Deputy Minister of Revenue of Quebec to split an assessment, i.e., that the tax liability for the pre-proposal period of the arrangement was to be included in the provable claims for the proposal. Assuming that the debtor corporation's year-end was December 31, this would imply that the 1/12 portion of the pre-proposal tax liability, or approximately $8,300, would be a provable claim and the debtor would not have to pay this amount.

a) When will there be a gain on forgiveness for the purposes of s. 80, assuming that the agreement between the debtor and the creditor is subject to the rules of the Civil Code of Quebec?

(b) Is the CRA of the view that an assessment for the purposes of s. 80 should be split into a portion attributable to the pre-proposal period and a portion attributable to the post-proposal period?

CRA Response to Question 9(a)

The question of when an amount is considered a forgiven amount to a debtor is a mixed question of law and fact that can only be resolved after analyzing all the facts relevant to a particular situation. Due to the fact that the statement of the present question only briefly describes a particular situation, it is impossible for us to give a definitive opinion on this question. Nevertheless, we can make the following general comments.

Paragraph 12(1)(z.3) provides that the result of the computation under subsection 80(13) is to be added in computing the debtor's income for a taxation year (from the source in respect of which the debt was issued) in the event of the settlement, at any time in the year, of a commercial obligation issued by the debtor. Under paragraph 80(2)(a), an obligation issued by a debtor is settled at any time where the obligation is settled or extinguished at that time (otherwise than by way of a bequest or inheritance or as consideration for the issue of a share described in paragraph (b) of the definition excluded security in subsection 80(1). In determining whether an obligation is settled or extinguished, the CRA must analyze whether the debt is reduced or resolved in a final manner that is legally binding on the debtor and creditor, from the perspective of the debtor and not the creditor.15

An accepted proposal is a contract between the debtor and its creditors with the effect of extinguishing claims and replacing them with a right to receive dividends in the proposal proceedings, and releasing the debtor from the outstanding balance of provable claims in accordance with the terms of the proposal upon approval of a court.16 Such a proposal implies that the creditor discharges its debtor from its obligation in whole or in part.

According to paragraph 6 of Interpretation Bulletin IT-293R, a debt or obligation is settled or extinguished when the obligation to pay ceases to exist, and payment, cancellation, set-off, substitution of debtors and release are among the means of settlement. Subsection 248(27) may also lead to the application of section 80 in the context of a partial forgiveness of a debt. As stated in paragraphs 16 and 26 of that Bulletin, our position may apply both in the context of B.I.A. proposals and in other situations.

Furthermore, the passages in Richer indicating that "in the context of section 80, the word 'settle' connotes a final and legally binding resolution that terminates or reduces the debtor’s obligations”17 and “that a debt or obligation was settled when the “. . . creditor and debtor deliberately agree to fix or vary their existing rights and obligations . . .”,18 are consistent with Interpretation Bulletin IT-293R.

In light of the foregoing, the CRA is of the view that Opco's debt to its creditor should be considered to have been settled on January 20, 2023 (i.e., the date on which the court approved the proposal and the proposal is binding on the parties involved) in the amount of $400,000 for the purposes of section 80. Consequently, the balance of $600,000 should be considered to be the forgiven amount of the debtor corporation's commercial obligation on that date.

CRA Response to Question 9(b)

The CRA is of the view that Opco's debt attributable to the amount of income tax payable arising from the application of I.T.A. subsection 80(13) is not a "provable claim" for the purposes of a proposal, as the tax liability of the debtor corporation arising from the application of subsection 80(13) is generally not determinable until after the proposal is approved by a court.

The time at which the creditors' claims are determined is the time of filing of the notice of intention or proposal under subsection 62(1.1) of the B.I.A. However, the tax payable by a debtor under I.T.A. subsection 80(13) is not the same as a liability to which it is subject on the date it filed a proposal or an obligation it incurred before that date, and therefore cannot be a provable claim for the purposes of the proposal under subsections 66(1) and 121(1) of the B.I.A.

The situation described in the questions is different from the one described in Leblond. In that case, an individual had earned income from self-employment during his 1993 taxation year, and had filed a proposal on September 3, 1993, which was homologated by the court on October 13 of the same year. In summary, the Quebec Court of Appeal concluded that the individual's tax debts for his 1993 taxation year should be considered a provable claim based on a proportional allocation of the debts for 1993 according to the number of days in the year before the date of the proposal and the period beginning on that date, on the grounds that the individual's tax debts had arisen as his income had been earned. However, the tax debt related to the application of subsection 80(13) in the situation described above can only arise when the proposal is homologated by a court, and therefore only after it is filed.

Q.10 - Recurring changes of use

S. 45(2) allows an individual to elect to be deemed not to have begun to use a property for the purpose of earning income, where there has in fact been a change in the use of the property, i.e., the property that was previously used for personal purposes is now used to earn income. Where such an election is made, the general rule as to a deemed disposition at FMV does not apply.

S. 45(3) provides that an individual ceasing at any time to use a property acquired for the purpose of earning income is not deemed to have disposed of the property at that time and to have reacquired it immediately thereafter if the property becomes the taxpayer's principal residence and the taxpayer elects in writing before a certain date.

Folio S1-F3-C219 states in para. 2.54 that an election under s. 45(3) cannot be made respecting a property for which there has been a s. 45(2) election where the property is no longer used for the purpose of earning income. This is understandable, since once an election under s 45(2) is in effect, the property subject to such an election is deemed not to be used for the purpose of earning income, so that it is difficult to argue that the individual has ceased to use the property for the purpose of earning income if s. 45(2) deems it not to be used for the purpose of earning income.

For example, an individual owns a chalet that is personally occupied for six months of the year (May to October) and is rented out to others for the remaining six months of the year. Technically, the chalet undergoes a change in use both in May when the individual begins to live in it, and in November when the individual begins to rent it out.

(a) Assuming the individual does not make an election under ss. 45(2) and (3), must the individual report a deemed disposition at FMV each time there is a change in use of the cottage?

(b) If the individual makes a valid election under s. 45(2) on the first change in use, must a deemed disposition be reported when the cottage ceases to generate income six months later? If no deemed disposition occurs at that time, must the taxpayer file a new election under s. 45(2) when the cottage resumes generating income the following year?

CRA Response to Question 10(a)

The application of the rules in section 45 requires an analysis of all the facts and circumstances of a particular situation. Since the statement in this question describes only a summary example, the CRA cannot make a definitive or final determination as to their potential application to the example submitted. We can, however, make certain assumptions in order to provide general comments regarding the applicable tax treatment that may be useful in these hypothetical situations.

Paragraph 45(1)(a) applies only where there is a complete change of use of a property, i.e., where a taxpayer has acquired a property for another purpose and at a later time begins to use it for the purpose of earning income, or vice versa.

Consequently, paragraph 45(1)(a) does not apply in this example because the chalet is used partly for the purpose of earning income and partly for some other purpose. Paragraphs 45(1)(b) and 45(1)(c) could, however, apply in certain circumstances.

Paragraph 45(1)(b) applies where property has, since it was acquired by a taxpayer, been regularly used in part for the purpose of gaining or producing income and in part for some other purpose. Consequently, paragraph 45(1)(b) could apply in the example submitted where, since the acquisition of the chalet by the taxpayer, the taxpayer lives in it for six months of the year and rents it out to others for the other six months.

In such a situation, paragraph 45(1)(b) deems the taxpayer to have acquired, for a purpose other than the purpose of gaining or producing income, the proportion of the property used for that other purpose at a cost to the taxpayer equal to the same proportion of the cost to the taxpayer of the entire property. If, in this case, the property is disposed of, the proceeds of disposition of the portion of the property deemed to have been acquired for that other purpose are deemed to be equal to the same proportion of the proceeds of disposition of the whole property.

However, where a principal residence is used in part to produce income, it is CRA's practice not to apply the apportionment in paragraph 45(1)(b) so that the entire property retains its character as a principal residence, if all of the conditions described in paragraph 2.59 of Income Tax Folio S1-F3-C2 are met, namely:

  • the income-producing use is ancillary to the main use of the property as a residence;
  • there is no structural change to the property;
  • no capital cost allowance is claimed on the property.

The question of whether all these conditions are met requires an analysis of all the facts and circumstances of a particular situation. Since the statement in this question describes only a summary example, it is not possible for us to give an opinion on the submitted example.

On the other hand, where a property has, since its acquisition by the taxpayer, been regularly used partly for the purpose of earning income and partly for another purpose, there will be no change in the use of the property for the purposes of section 45 by the mere fact that it is rented out from year to year in the same ratio as between the use regularly made of it for the purpose of earning income and the use ordinarily made of it for another purpose.

However, there will generally be a change in use of a property under paragraph 45(1)(c) if there is a change in the relationship between the taxpayer's use regularly made of the property for the purpose of gaining or producing income and the taxpayer's use regularly made of the property for some other purpose at some time after the acquisition of the property by the taxpayer.

Consequently, paragraph 45(1)(c) could apply in this example if at some point after the taxpayer's acquisition of the chalet there is a change in the relationship between the taxpayer's use regularly made of the chalet for the purpose of earning income and its use regularly made for some other purpose.

Paragraph 45(1)(c) governs situations where there has been a change in the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes. Under that paragraph, the taxpayer is deemed in such a situation to have disposed of the property at that time for proceeds equal to the proportion of the FMV of the property at that time that the amount of the increase in the use regularly made by the taxpayer of the property for those other purposes is of the whole use regularly made of the property. Paragraph 45(1)(c) also deems the property to have been reacquired immediately thereafter at a cost equal to that same amount.

Consequently, paragraph 45(1)(c) generally applies whenever there is a change in the relationship between a taxpayer's use regularly made of a property for the purpose of earning income and the use regularly made of the property for some other purpose. As indicated in paragraph 2.58 of Income Tax Folio S1-F3-C2, however, paragraph 45(1)(c) applies where the partial change in use of the property is substantial and of a more permanent nature. In addition, as previously stated, it is CRA's practice not to apply the deemed disposition rule if all the conditions described in paragraph 2.59 of Income Tax Folio S1-F3-C2 are met.

Since the application of paragraph 45(1)(c) requires an analysis of all the facts and circumstances relating to a particular situation, and since the statement in this question describes only a summary example, we are unable to pronounce on its application to the example submitted.

CRA Response to Question 10(b)

As stated above, there will be no change in use of a property for the purposes of section 45 solely by leasing a property from year to year in the same ratio as between its use regularly made for the purpose of earning income and its use regularly made for another purpose. Consequently, the taxpayer in this situation will not have to make the election under subsection 45(2) each year solely because of the six-month rental period in each year. In this example, the election under subsection 45(2) may be made in a situation where, at some time after the taxpayer acquires the chalet, there is an increase in the use of the chalet for the purpose of earning income over the usual total use of the property described in subparagraph 45(1)(c)(ii).

Where a taxpayer has made an election under subsection 45(2), the taxpayer is deemed not to have begun to use the property for the purpose of earning income. In such a case, there is therefore no change in use for the purposes of section 45 where the property or part of the property is converted to personal use.

However, the taxpayer will have to re-elect under subsection 45(2) if the property or part of the property subsequently undergoes a new change of use described in subparagraph 45(1)(a)(i) or subparagraph 45(1)(c)(ii).

Q.11 - Changing year end through objection

2020-0874951I720 indicated that if a request for a retroactive change to a fiscal period end is made after the tax returns are filed but before the first Notice of Assessment for that year is issued, it will generally be granted – but not if such request is made after such issuance.

Suppose that a corporation incorporated on June 1, 2021 initially chose December 31, 2021 as its fiscal period end, and such calendar taxation year was assessed by CRA on February 20, 2022 accordingly. It now wishes to file its first year's tax return for the period June 1, 2021 to March 31, 2022, so as to change its fiscal period end to March 31 for each year.

Based on the date of the Notice of Assessment received for the December 31, 2021 tax return, the corporation has until May 24, 2022 to file a Notice of Objection to request cancellation of the assessment issued on February 20, 2022. Once this assessment is cancelled, it would then be possible to file a tax return for the desired period, i.e., from June 1, 2021 to March 31, 2022.

Is it possible to file a timely objection to an assessment issued as a result of filing the tax return for the first fiscal period in order to request its cancellation and to be able to retroactively change the fiscal period-end date chosen?

CRA Response

For the purposes of subsection 165(3), an assessment may generally be vacated upon receipt of a Notice of Objection if a taxpayer submits additional facts or compelling arguments that were not before the Minister at the time the assessment was made and that demonstrate that the assessment is either invalid (i.e., it would not have been made in accordance with the procedural provisions of the Income Tax Act), or was unfounded (i.e., it assessed an amount of tax that was not based on the applicable provisions of the Income Tax Act as properly interpreted and applied to the relevant facts).

In the present case, we are of the view that there is nothing to suggest that the assessment of February 20, 2022 would be invalid or unfounded so as to justify its cancellation by the Minister under subsection 165(3) More specifically, the mere fact that the corporation wishes to change the timing of its fiscal period end after tax has been assessed for the year corresponding to the fiscal period, even if it is the corporation's first fiscal period, does not, in and of itself, invalidate or render unfounded the assessment of February 20, 2022.

It should be noted that once the taxpayer has filed the taxpayer’s return for the year, an election as to the fiscal period end has been made. In this regard, we are of the view that an amended tax return with a different fiscal period end, filed before a notice of assessment is issued, constitutes a request for a change of fiscal period end that must be accepted by the Minister.

Q.12 - Ancillary rental income

ABC Inc. is a Canadian-controlled private company that operates a manufacturing business. It owns a building, 65% of which is used for its manufacturing business, and the remaining 35% is leased to a third party. This excess space could be used in the future in the manufacturing business if ABC Inc. were to need additional space.

Para. (a) of the definition of "income" in s. 129(4) provides that a corporation's income for a taxation year from a source that is property includes income from a specified investment business, and para. (b) provides that it does not include income from property that is incident to or pertains to an active business carried on by it or that is used or held principally for the purpose of gaining or producing income from its active business. This definition of "income" is relevant to computing "aggregate investment income" as defined in s. 129(4).

S. 125(7) relevantly defines a "specified investment business" as a business the principal purpose of which is to derive income from property, and "active business" as any business carried on by a corporation, other than a specified investment business or a personal services business, but including an adventure or concern in the nature of trade.

Based on these definitions, it appears that rental income (from the rental of 35% of the building) is not "income" within the meaning of s. 129(4), as it is income from property that is used or held principally for the purpose of earning income from an active business carried on by it (65% of the building is used in the manufacturing business).

Furthermore, if the rental income is not from a "specified investment business", it would qualify as “income of the corporation for the year from an active business" and would therefore qualify for the small business deduction. Even if there were a "specified investment business", para. 6 of IT-73R621 indicates that income from property that is employed or risked in the corporation's business operations could be considered active business income.

(a) Is such rental income from a "specified investment business", does it come within the definition of "aggregate investment income" and does it qualify as “income of the corporation for the year from an active business" for purposes of the small business deduction?

(b) Would the conclusions change if the space leased to third parties was instead residential housing, so that such portion of the building could never be used in the operation of ABC Inc.'s manufacturing business?

CRA Response

Specified investment business

As can be seen from the definition of a "specified investment business" cited in the statement of the question, the principal purpose of such a business is to derive income from property, including rents from real property.

Income from the rental of real estate is generally considered to be income from property. It can only be considered as business income where the landlord provides tenants or makes available to them services of some kind that take the rental activity beyond the mere rental of real property. The distinction between business income and income from property must be made in light of the facts of each situation. Interpretation Bulletin IT-434R22 provides criteria that must be considered in order to conclude whether a taxpayer's rental of real property results in income from property or income from a business.

Since the statement in this question only briefly describes a hypothetical situation, the CRA cannot make a definitive or final determination on this issue. In order to provide comments on the hypothetical situation submitted, the CRA assumes in the situation described in the statement of the question that the rental income from the building is income from property.

In such case, the rental activities of ABC Co. may constitute a specified investment business if the corporation's principal business is to earn rental income or if the rental activities result in a separate business of the corporation. In this case, the question of whether a particular business is a specified investment business must be answered for each business carried on by ABC Co.

Since the statement of the question only broadly describes a hypothetical situation, the CRA cannot make a definitive determination as to whether there is a specified investment business.

However, general information on the concepts of specified investment business and separate businesses can be found in Interpretation Bulletin IT-73R6 and Interpretation Bulletin IT-206R,23 respectively.

Income of the corporation for the year from an active business

For purposes of commenting on the characterization of the rental income of ABC Inc. in the situation described in the statement of the question as "income of the corporation for the year from an active business" as defined in subsection 125(7), the CRA has assumed that ABC Inc. has as its principal business a manufacturing business and that this business is an "active business" within the meaning of subsection 125(7)

The concept of "income of the corporation for the year from an active business" is defined in subsection 125(7) as, inter alia, the corporation’s income for the year from an active business carried on by it including any income for the year pertaining to or incident to that business, other than income for the year from a source in Canada that is a property (within the meaning assigned by subsection 129(4)).

The concept of "income" in subsection 129(4) provides, inter alia, that a corporation's income from a source that is property does not include the income or loss from any property that is incident to or pertains to an active business carried on by it, or that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.

Consequently, the income of ABC Inc. for the year from an active business carried on by it includes not only its business income from its manufacturing activities, but also any income from a source that is property:

  • that is incident to or pertains to that business (subparagraph (b)(i) of the definition of "income" in subsection 129(4)); or
  • from property used or held principally for the purpose of gaining or producing income from that business (subparagraph (b)(ii) of the definition of "income" in subsection 129(4)).

In determining whether income from property is incident to or pertains to the carrying on of the business, the comments in paragraph 5 of IT-73R6 may be helpful:

“5.[…] In examining the ordinary dictionary meaning of these words, "incident to" generally includes anything that is connected with or related to another thing, though not inseparably, or something that is dependent on or subordinate to another more important thing. "Pertains to" generally includes anything that forms part of, belongs to or relates to another thing.

The courts have found that, in interpreting the meaning of "pertains to" or "incident to" in context, there has to be a financial relationship of dependence of some substance between the property in question and the active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation. In addition, the operations of the business have to have some reliance on the property such that the property is a back-up asset that could support the business operations either on a regular basis or from time to time. […]”

Although it is not possible to make a definitive statement on this issue, it seems difficult for ABC Inc. to argue that it uses the entire building in its manufacturing business and that the rental income is incidental to that business.

Rental income may constitute incidental income of a business if, for example, the excess space was rented on a temporary basis, i.e., with the intention of using that portion of the building for the very near future expansion of the business's activities, or because the rental is related to the business's activities. However, there is nothing in the facts submitted in the statement of the question to support such a conclusion.

In determining whether income is derived from property that is used or held principally for the purpose of gaining or producing income from an active business, the comments in paragraph 6 of IT-73R6 may be helpful:

“6. […] It is a question of fact whether a property is used principally in an active business. Factors to be considered in determining whether a property is used in an active business include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry. The issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court of Canada in Ensite Limited v. Her Majesty the Queen, [1986] 2 CTC 459, 86 DTC 6521. The court held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business to fulfil a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business. In other words, the property has to be an integral part of the financing of the business or necessary to the overall business operations in order for income from the property to be part of the "income of the corporation ... from an active business.[…]"

Although it is not possible to reach a definitive conclusion on this issue, the CRA is of the view that there are arguments to support the contention that the building used 65% by ABC Inc. in its manufacturing activities could be a property used or held principally for the purpose of earning income from its manufacturing business under subparagraph (b)(ii) of the definition of "income" in subsection 129(4) In such case, the rental income of ABC Inc. would qualify as "income of the corporation for the year from an active business" within the meaning of subsection 125(7).

Aggregate Investment Income

Finally, income from property that is not "income" within the meaning of subsection 129(4) is not included in computing "aggregate investment income" as defined in subsection 129(4).

Q.13 - Estate transfer from RRSP to ex-spouse

A judgment of legal separation recognized that Ms. Y had a claim of $100,000 arising from the partition of the family patrimony and the dissolution of the matrimonial regime on her separation from Mr. X. However, by the time of the death of Mr. X (whose will did not make Ms. Y an heir), no agreement had been signed to settle Ms. Y's claim. The estate intends to distribute $100,000 from Mr. X's RRSP (which had not matured at the time of his death) in settlement of her claim.

(a) Can the $100,000 be transferred from Mr. X's RRSP to Ms. Y on a tax-free basis under ss. 73(1) and (1.01)?

(b) Alternatively, can s. 248(23.1)(a) apply to treat the RRSP amount transferred to Ms. Y as a refund of premiums for the purposes of ss. 146(8.9) and 60(l)? In this regard, see 2004-0073441E5.24

(c) Would the answers change if there was no judgment of legal separation before Mr. X's death, and Mr. X's death still resulted in a claim of $100,000 in favour of Ms. Y arising from the division of the family patrimony and the dissolution of the matrimonial regime?

Note that under the laws of Quebec, a judgment of legal separation does not dissolve the marriage bond.25

CRA Response to Question 13(a)

For subsection 73(1) to apply, one of the requirements is that capital property of an individual (other than a trust) has been transferred in circumstances to which 73(1.01) applies. In the situation described above, since Mr. X is deceased, it is Mr. X's estate that intends to pay Ms. Y the $100,000 from Mr. X's RRSP. The definition of "trust" in subsection 248(1) indicates that a trust includes an estate. Consequently, one of the requirements of subsection 73(1) would not be met since the transfer would be made by the estate which is a trust.

CRA Response to Question 13(b) and 13(c)

Under subsection 146(8.8), where the annuitant under a RRSP dies before the maturity of the RRSP, the annuitant is deemed to have received, immediately before the annuitant’s death, an amount as a benefit equal to the FMV of all the property of the RRSP at the time of death. This amount must be included in computing the deceased annuitant's income in the year of death pursuant to subsection 146(8) and paragraph 56(1)(h).

Subsection 146(8.9), however, allows the amount deemed to be received under subsection 146(8.8) to be reduced by an amount not exceeding the amount determined by the formula in that subsection. In order for that provision to apply, an amount that qualifies as a "refund of premiums", as defined in subsection 146(1), must have been paid.26

A "refund of premiums" within the meaning of subsection 146(1) includes, inter alia, any amount paid to the spouse or common-law partner ("Spouse") of the annuitant under an RRSP where the annuitant has died prior to the maturity of the RRSP and the amount is paid to the Spouse as a result of the death, other than a tax-paid amount27 in respect of the RRSP.

Where the Spouse is named as the beneficiary of the RRSP under a valid beneficiary designation in the RRSP contract or in the annuitant's will, CRA considers that the amount received by the Spouse from the RRSP is paid to the Spouse out of or under the RRSP as a consequence of the death of the annuitant. The amount received by the Spouse may therefore be considered a refund of premiums without any further formality. On the other hand, where the proceeds of a deceased annuitant's RRSP are paid to the annuitant's legal representative28 and the Spouse receives the RRSP proceeds from the estate, the Spouse has not received the amounts under the RRSP. This situation does not meet the definition of "refund of premiums" under subsection 146(1).

In such a case, subsection 146(8.1) specifies that if a payment out of or under a RRSP of a deceased annuitant to the annuitant’s legal representative would have been a refund of premiums if it had been paid under the plan to an individual who is a beneficiary (as defined in subsection 108(1)) under the deceased’s estate, the payment is, to the extent it is so designated jointly by the legal representative and the individual in the prescribed Form T201929 filed with the Minister, deemed to be received by the individual (and not by the legal representative) at the time it was so paid as a benefit that is a refund of premiums. Thus, in order to be able to make the joint election, subsection 146(8.1) requires that the Spouse be a beneficiary (as defined in subsection 108(1)) of the annuitant's estate.

By virtue of 248(23.1)(a), where property is, after the death of a taxpayer, transferred or distributed to a person who was the taxpayer’s Spouse at the time of the death, or acquired by that person, under the laws of a province relating to the rights of Spouses to property arising out of a marriage (including, for example, rules relating to the division of family property or the dissolution of a matrimonial regime), the property shall be deemed to have been so transferred, distributed or acquired, as the case may be, as a consequence of the death. This paragraph does not, however, deem the deceased taxpayer's Spouse to be a beneficiary of the deceased's estate.

The determination of whether a person is a beneficiary or a creditor of an estate is a question of law and fact that can only be determined after a full examination of the applicable private law, the terms of the will, if any, and all the relevant facts surrounding a given situation.

Thus, in the situation described, paragraph 248(23.1)(a) would have the effect of providing that the transfer of amounts from Mr. X's RRSP paid by his estate to Ms. Y to satisfy a debt owed by the estate to Ms. Y, and resulting from the partition of the family patrimony and the dissolution of the matrimonial regime, would be deemed to have been made as a consequence of Mr. X's death. However, this paragraph would have no impact on the requirement in subsection 146(8.1) that Ms. Y be a beneficiary of Mr. X's estate. Consequently, to the extent that Ms. Y would receive the RRSP proceeds from the estate, not as a beneficiary of Mr. X's estate but, rather, as a creditor of his estate, subsection 146(8.1) could not apply.

The CRA is aware that, in light of this conclusion and Technical Interpretation 2017-0707801C6,30 the result differs depending on whether the deceased taxpayer was, at the time of death, the annuitant of an unmatured RRSP or the annuitant of a registered retirement income fund. It is not clear that this difference is consistent with tax policy. We have advised the Department of Finance of this interpretation.

Q.14 - Triggering safe income determination time

On March 15, 20XX, a purchaser incorporates a corporation for the purpose of eventually purchasing the assets of another corporation (the vendor corporation). Upon the incorporation of the purchasing corporation, the computation of the safe income of the vendor corporation stops (the "safe-income determination time"), as this is one of the triggers under s. 55(3).

On April 4, 20XX, the vendor corporation sells its assets at FMV to the new purchasing corporation, necessarily after its incorporation, i.e., after the safe income computation has ceased. As a result, its taxable income from the sale will not be included in computing safe income. To the extent that the vendor corporation pays a dividend to its corporate shareholder, the dividend paid as a result of the asset sale would be recharacterized as a capital gain because of the lack of safe income. However, the asset sale has already been fully taxed.

(a) Is this how the CRA interprets the Act in such a situation?

(b) Is the safe income from the sale of the assets lost or will it be considered in a future computation of safe income?

CRA Response to Question 14(a)

The question considers that the incorporation of the corporation by the purchaser is part of the same series of transactions that includes the payment of the dividend by the vendor corporation and thus creates a triggering event described in subparagraph 55(3)(a)(ii), which constitutes the "safe-income determination time", as defined in subsection 55(1), for the vendor. This time would therefore be before the sale of assets. However, this determination remains a question of fact.

Assuming that the incorporation of the corporation is part of the same series of transactions that may create an increase in the total direct interest in a corporation of an unrelated person, we agree that the "safe-income determination time" defined in subsection 55(1) could be the time after that first increase in interest.

However, practical solutions to these types of technical issues exist and therefore the CRA does not consider that a flexible approach is necessary in the circumstances described in the question.

CRA Response to Question 14(b)

If the safe income from the sale of the assets is not included in safe income for the purposes of the dividend paid following the sale, this safe income is generally not lost and may be used in the subsequent payment of dividends to the extent that such subsequent dividends are not part of the same series of transactions as the sale of the assets.

In addition, it should be noted that, depending on the facts and circumstances of a particular situation, for example in situations of a total sale of assets of a corporation followed by a winding-up dividend pursuant to subsection 88(2), the CRA would be prepared to consider, after a detailed analysis of a file, that the subject matter of the dividend would not fall within paragraph 55(2.1)(b).

Q.15 - Dividend refund addition to safe income

A corporation, with a December 31 year-end, sells all of its assets on November 30 and realizes a capital gain resulting in refundable dividend tax on hand ("RDTOH").

According to Technical Interpretation 9429465,31 the CRA's position would be to consider the refund of RDTOH in the computation of safe income only at the time the credit is received or when it is applied against the payment of the refundable portion for the year.

Thus, if the corporation pays a dividend on December 1, its RDTOH will only be considered in the safe income calculation on December 31. This will result in a partial capital gain, as the portion of safe income related to the dividend refund ("DR") is missing. However, the corporation is simply distributing its cash after the sale of assets.

(a) Will the DR be considered safe income as of December 1st?

(b) If CRA considers it not to be included in safe income on December 1st, is it lost or will it be added to a future safe income calculation?

CRA Response

We understand from the situation presented that there is a sale of all the assets of a corporation followed by a dividend payment of an amount representing the net value of that corporation.

In the context of a situation as described in the question and to the extent that it is reasonable to consider that the DR contributes to the hypothetical capital gain in respect of the shares on which the dividend was received (assuming a disposition at FMV of the shares immediately prior to the dividend), the CRA would be willing to take the position that the DR receivable is to be considered in computing income earned or realized as of December 1.

Consequently, in such a situation, the taxes payable and not refundable in respect of the income arising from the sale of the assets will have to be subtracted from the safe income calculated for the period, as it is reasonable to assume that they do not contribute to the capital gain that would be realized on a share of the capital stock of the corporation.

Footnotes

1 Canada Revenue Agency, Technical Interpretation 2016-0672321C6, November 15, 2016.

2 2003 FCA 284

3 R.S.C. 1985, c. 1 (5th Supp.) ("I.T.A.").

4 C.R.C., c. 945 ("I.T.R.").

5 Canada Revenue Agency, T4012 "T2 Corporation - Income Tax Guide".

6 Canada Revenue Agency, Technical Interpretation 2016-0637341E5, June 27, 2016.

7 The limited partner's "share of the adjusted net income of the partnership" generally means for the partner the total of all amounts determined under subparagraph 53(1)(e)(i) for the fiscal period less the total of all amounts determined under subparagraph 53(2)(c)(i) for the fiscal period.

8 Tax shelter means "tax shelter investment" as that term is defined in subsection 143.2(1).

9 Canada Revenue Agency, Technical Interpretation 2010-0370511C6, October 8, 2010.

10 Canada Revenue Agency, T4001, "Employers' Guide - Payroll Deductions and Remittances".

11 R.S.C. 1985, c. B-3 (the "B.I.A.").

12 Canada Revenue Agency, Interpretation Bulletin IT-239R (Archived), "Debtor's Gain on Settlement of Debt", July 16, 1979.

13 2009 TCC 394 ("Richer").

14 2000 CanLII 8800 (C.A.) ("Leblond").

15 Carma Developers Ltd. v. The Queen, 96 D.T.C. 1789 (T.C.C.), paragraph 24.

16 See in this regard subsection B.I.A. 62(2) and Employer's Liability Assurance Corp. Ltd. v. Ideal Petroleum (1959) Ltd, [1978] 1 S.C.R. 230 and Société de protection des forêts contre le feu v. Desruisseaux, 2003 CanLII 47933 (C.A.).

17 Richer, supra, note 13.

18 Ibid.

19 Canada Revenue Agency, Income Tax Folio S1-F3-C2, "Principal Residence," July 25, 2019.

20 Canada Revenue Agency, Technical Interpretation 2020-0874951I7, December 24, 2020.

21 Canada Revenue Agency, Interpretation Bulletin IT-73R6, (archived), "The Small Business Deduction", March 25, 2002.

22 Canada Revenue Agency, Interpretation Bulletin IT-434R, (archived), "Rental of Real Property by Individual", April 30, 1982.

23 Canada Revenue Agency, Interpretation Bulletin IT-206R, (archived), "Separate Businesses", October 29, 1979.

24 Canada Revenue Agency, Technical Interpretation 2004-0073441E5, June 1, 2004.

25 Civil Code of Quebec, Article 739.

26 Where applicable, the amount that reduces the amount deemed to be received by the deceased annuitant under subsection 146(8.8) will not be taxable as the income of the deceased annuitant, but rather as the income of the taxpayer who receives that amount.

27 As defined in subsection 146(1).

28 As defined in subsection 248(1), the term "legal representative" includes the executor.

29 Canada Revenue Agency, Form T2019 "Death of an RRSP Annuitant - Refund of Premiums

30 Canada Revenue Agency, Technical Interpretation 2017-0707801C6, October 6, 2017.

31 Canada Revenue Agency, Technical Interpretation 9429465, February 3, 1995.