4 June 2024 STEP Roundtable

This sets out the questions that were posed, and provides summaries of the preliminary oral responses given, at the 2024 STEP CRA Roundtable, which was held in Toronto on June 4, 2023. Various of the titles shown are our own. The Roundtable was hosted by: Michael Cadesky (Cadesky Tax); and Angela Ross (PwC).

CRA Panelists:

Steve Fron, CPA, CA, TEP, Oshawa: Manager, Trust Section Il, Income Tax Rulings Directorate
Marina Panourgias, CPA, CA, TEP, Toronto: Manager, Trust Section I, Income Tax Rulings Directorate

Q.1 - Subsequent spousal trust contribution

An inter vivos trust which meets certain conditions in section 73 (namely subparagraph 73(1.01)(c)(i)) is commonly known as a spousal or common-law partner trust. By virtue of paragraph 104(4)(a), a spousal or common-law partner trust will have its first deemed disposition of certain property at the end of the day on which the death of the beneficiary spouse or common-law partner occurs, and not on the 21st anniversary of the trust’s creation. If the trust initially meets the requirements of a spousal or common-law partner trust and after the spouse or common-law partner beneficiary dies the trust receives a contribution of capital property from a person other than the individual who created the trust, what are the implications? More specifically:

1. Does the trust cease to be a spousal or common-law partner trust for purposes of the Act?
2. When does the deemed disposition under subsection 104(4) arise in respect of the property added to the trust?

CRA Preliminary Response

Fron: Here there is a contribution to a spousal trust that has occurred after the death of the spouse beneficiary. Ss. 104(4)(a)(ii) and (iii) describe a spouse or common law spouse trust as a trust created during the lifetime of the taxpayer that was a trust under which the taxpayer’s spouse or common-law partner (the “spouse”) is entitled to receive all of the income of the trust that arises before the spouse’s death and no person except the spouse may, before their death, receive or otherwise obtain the use of any of the income or capital of the trust.

Ss. 73(1.01)(c)(i) and ss. 104(4)(a)(ii) and (iii) are identical in terms of who has to create the trust, and the conditions related to the income and the capital. After the death of the beneficiary spouse, where a spousal trust receives a contribution from a person other than the spouse who created the trust, the trust will continue to be a spousal trust for the purposes of the Act. However, the transfer of capital property will not occur on a tax-deferred basis under s. 73(1); it will occur on a FMV basis and generate a capital gain or a capital loss to the transferor.

Part B asks, what is the deemed disposition date of the property added to the spousal trust? By virtue of s. 104(4)(a), the spousal trust will have already had its first deemed disposition at the end of the day on which the beneficiary spouse had passed away. Where the trust continues beyond the death of the beneficiary spouse then, pursuant to s. 104(4)(b)(iii), the trust will have its next deemed disposition on the day that is 21 years after the day of death for which the first deemed disposition occurred. Any further deemed dispositions after that would occur every 21 years again, pursuant to s. 104(4)(c).

The time at which the property is contributed to the trust does not have any impact. The preamble to s. 104(4) states that the deemed disposition dates apply to each property of the trust – that is, the dates are not tied to specific properties.

S. 104 might not apply in the circumstance, because s. 108(1) – “trust” – (g) generally provides that the s. 104(4) will not apply to a trust in which all interests have vested indefeasibly. However, there are some carve outs from that relief. Certain types of trusts are carved out, and the trust in this case would be a post-1971 spouse or common law partner trust, so that the carve-out in subparagraph (i) of (g) of the definition of “trust” would apply, and so that the deemed disposition rule would apply.

Official Response

4 June 2024 STEP Roundtable Q. 1, 2024-1007861C6 - Spousal Trust and Contribution

Q.2 - S. 15(1) re family member salary

Scenario A (non-shareholder)

If a corporation (“Payor”) pays wages (“Wages”) to an individual employee (“Recipient”) who is not dealing at arm’s length with a shareholder of the Payor (“Shareholder”) and a portion of the Wages is subsequently determined to be unreasonable pursuant to section 67 (“Overpayment”), can the CRA confirm that:

1. subsection 15(1) will not apply to include the amount of the Overpayment in computing the income of the Recipient because he/she is not a shareholder (or a contemplated shareholder) of the Payor?, and
2. for the purposes of subsection 15(1), paragraph 15(1.4)(c) will not apply to include the amount of the Overpayment in computing the income of the Shareholder because it was included in the Recipient’s income?

CRA Preliminary Response

Although the application of s. 15(1) of the Act in a specific situation is a question of fact, we can provide some general comments on the limited facts provided in the question.

In this first scenario, the amount of the wages received by the recipient will be included in their income from employment pursuant to s. 5. Because the recipient does not own shares of the capital stock of the payor, and assuming that they do not qualify as a contemplated shareholder of the payor, and the overpayment qualifies as a benefit for purposes of s. 15(1), the amount of the overpayment will not be included in computing the income of the recipient pursuant to s. 15(1), because such a benefit is not conferred on the recipient in their capacity as a shareholder of the payor.

The rule provided in s. 15(1.4)(c) will not apply to include the amount or value of that benefit in computing the shareholder’s income pursuant to s. 15(1) because the amount of the overpayment is included in computing the recipient’s employment income.

Scenario B (shareholder)

If the amount of the Overpayment was paid to an individual shareholder of the Payor holding employment with the Payor (“Shareholder-Employee”) who is not dealing at arm’s length with a Shareholder, can the CRA confirm that:

1. in accordance with subsection 248(28), subsection 15(1) will not apply to include the amount of the Overpayment in computing the income of the Shareholder-Employee to prevent the same amount from being included twice in the income of the Shareholder/Employee?, and
2. for the purposes of subsection 15(1), paragraph 15(1.4)(c) will not apply to include the amount of the Overpayment in computing the income of the Shareholder because it was included in the Shareholder-Employee’s income?

CRA Preliminary Response

Fron: Generally speaking, the results are similar, but the rationale is different because the recipient is now a shareholder-employee.

The wages are again going to be included in the recipient’s income pursuant to s. 5, and if the overypayment qualifies as a benefit conferred on the recipient in their capacity as a shareholder of the payor, the amount of the overpayment could also be included in computing their income pursuant to s. 15(1).

However, s. 248(28) will apply to prevent the amount of the overpayment from being included twice in computing the recipient’s income such that s. 15(1) would not apply to tax the amount of the overpayment of the shareholder benefit. The result is the same as it was in the first scenario for the person who is just the shareholder in that s. 15(1.4)(c) won’t apply, for the same reason – the amount of the wages are already included in the shareholder’s income – in this case, the shareholder-employee’s employment income.

Official Response

4 June 2024 STEP Roundtable Q. 2, 2024-1003641C6 - Salary to Family Members

Q.3 - Power of attorney and control

If a controlling shareholder of a corporation becomes incapable and an unrelated person (or persons) starts acting on the shareholder’s behalf under a power of attorney, does that constitute a loss restriction event for the corporation?

If there is a change of attorney in the future, will there be another loss restriction event?

Further, can a loss restriction event be prevented if the unrelated attorney is one of three attorneys, two of which are related to the incapable shareholder?

CRA Preliminary Response

Panourgias: S. 252.2(2)(a) of the Act states, in part, that a taxpayer is at any time subject to a loss restriction event if the taxpayer is a corporation and at that time control of the corporation is acquired by a person or group of persons.

In Buckerfield's, the central question before the Exchequer Court was the meaning of “control of a corporation” as that term in used in the Act. It was concluded that control contemplates the ownership of such a number of shares as carries with it the right to a majority of the votes in the election of the board of directors – i.e. de jure or effective control.

In Duha Printers, the Supreme Court of Canada provided guidance on the approach to determining control. The general approach to the determination of control is to examine the share register of the corporation to ascertain which shareholder, if any, possesses the ability to elect a majority of the board of directors and therefore has the type of power contemplated by the Buckerfields test. It goes on to say that the case law seems to point only to limited circumstances in which other documents may be examined, and then only to a narrow range of documents which may be considered. The court summarized which documents are relevant in determining de jure or effective control: the corporation’s governing statute; the share register of the corporation; and any specific or unique limitation on either the majority shareholder’s power to control the election of the board, or the board’s power to manage the business and affairs of the company as manifested in either the constating documents of the corporation or in a unanimous shareholders agreement. Documents other than the share register, the constating documents and any unanimous shareholders agreement are not generally to be considered for this purpose.

An agreement that is not a unanimous shareholders agreement would not generally be considered in determining the de jure control of the corporation, but one exception to this is where shares of a corporation are held by a trust. In Duha Printers, the court stated that a trust imposes upon the trustee a fiduciary obligation to act within the terms of the trust instrument and for the benefit of the beneficiary. That is, the trustee is not free to act other than in accordance with the trust document and, if the trust document imposes limitations upon the capacity of the trustee to vote the shares, these must accordingly be taken into account in the de jure control analysis.

Turning to the question, in our view, a power of attorney under which a designated attorney exercises the voting rights of a controlling shareholder of a corporation as a consequence of the incapacity of that shareholder who continues to be the legal and beneficial owner of those shares would not constitute an external document that has to be taken into consideration in determining the de jure control of the corporation. This view confirms our response to 2012 APFF Roundtable Q.17, 2012-0454111C6.

A power of attorney may be relevant in applying s. 251(5)(b), which sets out the rules that apply in determining whether persons are related, for the purposes of the definition of “Canadian control of a private corporation,” and for s. 256(1.4) of the Act, which sets out rules for determining whether a corporation is associated with another corporation.

Official Response

4 June 2024 STEP Roundtable Q. 3, 2024-1003471C6 - Acquisition of Control

Q.4 - Executor change and control

In archived document IT-302R3, the CRA adopted the administrative position that a change of executor, administrator or trustee of an estate does not result in an acquisition of control of a corporation controlled by the estate, if the replacement results from a death or inability to fulfill the function of an executor, administrator or trustee.

1. Can the CRA comment on whether this continues to be their position?
2. Would the position apply to a replacement trustee that is an independent trust company?

CRA Preliminary Response

Panourgias: Where the executor, administrator, or trustee of an estate is replaced as a result of that person’s death or inability to fulfill their function, control of the corporation would not be acquired solely as a result of that replacement.

This position is not conditional on the replacement trustee being related or otherwise connected to the executor, administrator or trustee being replaced.

Official Response

4 June 2024 STEP Roundtable Q. 4, 2024-1003461C6 - Acquisition of Control

Q.5 - GAAR and pipelines

To assist estates in managing the potential for double-taxation that can occur when a deceased dies while owning shares of a Canadian private corporation, the CRA has a long history of providing guidance and advanced income tax rulings on post-mortem planning strategies known as pipelines and subsection 164(6) loss carry back plans. New subsection 245(4.1) of the general anti-avoidance rule (“GAAR”) provides that if an avoidance transaction is significantly lacking in economic substance it is an important consideration that tends to indicate that the transaction results in a misuse or abuse under subsection 245(4).

Can the CRA provide any updates on its guidance on post-mortem pipelines and subsection 164(6) loss carry back plans in light of this amendment to the GAAR?

CRA Preliminary Response

Fron: Turning first to pipelines, in 29 February 2024 Internal T.I. 2023-0987941I7, the Income Tax Rulings Directorate made the following comment regarding potential application of the amended GAAR in a post-mortem pipeline transaction:

The Directorate does not consider the use of a pipeline transaction as a means to preserve the capital gain arising on the death of a shareholder while limiting double taxation on the subsequent distribution of Opco’s assets to be a misuse described in paragraph 245(4)(a) or an abuse within the meaning of paragraph 245(4)(b). Accordingly, the Directorate will continue to issue favourable Rulings on the non-application of the amended GAAR in the context of post-mortem pipeline transactions that meet our existing administrative guidelines described in [29 May 2018 STEP Roundtable Q. 10, 2018-0748381C6].

As for the s. 164(6) loss carrybacks, the Directorate is not aware of any specific concerns relating to the potential application of the amended GAAR in circumstances involving the carryback of losses under s. 164(6), and has not provided any general guidance in this respect.

Official Response

4 June 2024 STEP Roundtable Q. 5, 2024-1003541C6 - Post-Mortem Planning and GAAR

Q.6 - S. 84.1(2.31)/ (2.32) activity threshold

Section 84.1 is an anti-surplus stripping rule. In general terms, section 84.1 may apply where an individual resident in Canada disposes of shares (the “subject shares”) of the capital stock of a Canadian resident corporation (the “subject corporation”) to another corporation (the “purchaser corporation”) with which the individual does not deal at arm’s length, and immediately after the disposition, the subject corporation would be connected (within the meaning of subsection 186(4)) to the purchaser corporation.

The Fall Economic Statement Implementation Act, 2023 (Bill C-59) includes new provisions, which, if enacted, would deem a taxpayer and a purchaser corporation to deal with each other at arm’s length at the time of the disposition of the subject shares if the conditions in proposed subsection 84.1(2.31), which deals with immediate intergenerational business transfers, or proposed subsection 84.1(2.32), which deals with gradual intergenerational business transfers, are met.

One of the conditions that must be met in relation to both types of intergenerational transfers requires that the child(ren) carry on the acquired business. Specifically, the child or at least one member of a group of children who are the indirect purchasers of the subject shares must be actively engaged on a regular, continuous and substantial basis in “a relevant business of the subject corporation or a relevant group entity” for at least 36 months in the case of an immediate intergenerational business transfer (see proposed subparagraph 84.1(2.31)(f)(ii)) or 60 months, in the case of a gradual intergenerational business transfer (see proposed subparagraph 84.1(2.32)(g)(ii)). For this purpose, there is a reference in both proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) to paragraph 120.4(1.1)(a) which provides that an individual shall be deemed to be actively engaged on a regular, continuous and substantial basis in a business if that individual works in the business on average at least 20 hours per week throughout the portion of the year when the business operates.

We have the following questions in relation to the application of proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii):

1. Assuming that a group of children are the indirect purchasers of the subject shares, must it be the same individual who meets the threshold of being actively engaged on a regular, continuous and substantial basis in a relevant business of the subject corporation or a relevant group entity throughout the relevant period, or can it be different members of the group of children provided there is at least one member from the group of children who meets the threshold at all times throughout the relevant period?
2. Would this condition be met if there is an individual who, prior to the transfer of the subject shares, worked full-time in the relevant business for 5 years?
3. If there are multiple businesses being carried on by several different corporations, would this condition be met if an individual is only considered to be actively engaged on a regular, continuous and substantial basis in one of the businesses?

CRA Preliminary Response:

A (successor active child)

Fron: First, some background: the purpose of proposed ss. 84.1(2.31)(f) and 84.1(2.32)(g), as indicated in the Department of Finance Explanatory Notes, is to ensure that the taxpayer’s child or group of children continues to control and carry on the acquired business. It is considered to be one of the hallmarks indicative of a genuine intergenerational business transfer.

As noted in the question, proposed ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) require that the child, or at least one member of the group of children, is actively engaged on a regular, continuous and substantial basis within the meaning of s. 120.4(1.1)(a) in the relevant business of a subject corporation or in relevant group entities. This condition (the “activity threshold”) must be satisfied from the time of a disposition of the subject shares by the parent until 36 months after that time in the case of an immediate intergenerational business transfer or until 60 months after that time in the case of a gradual intergenerational business transfer.

There are some relieving rules to the applications of ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) found in proposed s. 84.1(2.3), but let us assume that none of these relieving rules are or will be applicable.

For this part of the question, is it one person that has to satisfy the test, or can it be satisfied by different members of the group? The answer is, briefly, yes. For the purpose of this part of the question, we assume that each member of the group of children is (i) a “child,” pursuant to the extended definition found in proposed s. 84.1(2.3)(a); and (ii) that they are 18 years of age or older, and that as well the purchaser corporation is controlled by the group of children.

Those two proposed provisions, ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii), clearly indicate that it would be sufficient if at least one member of the group of children meets the activity threshold. Accordingly, where those two paragraphs, as the case may be, would apply in relation to a group of children, the CRA would not require that a single member of the group of children meets the activity threshold for the entirety of the relevant period.

Provided that at least one member from the group of children meets the activity threshold at all times throughout the relevant period, we would consider that the condition in proposed ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii), as the case may be, is met.

B (pre-sale activity)

Fron: Proposed ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) require that, from the time of the disposition of the subject shares until either 36 months after that time (or 60 months after that time depending on whether there is an immediate or gradual transfer), the child or at least one member of the group of children satisfies the activity threshold.

Any previous engagement or involvement by an individual prior to the disposition of the subject shares by the parent to the purchaser corporation would not be considered in determining whether the condition in proposed ss. 84.1(2.31)(f)(ii) or 84.1(2.32)(g)(ii) is met. This would be consistent with the stated purpose of proposed ss. 84.1(2.31)(f) and 84.1(2.32)(g) which is to ensure the continued involvement of the taxpayer’s child or group of children in the acquired business.

C (multiple businesses)

Fron: Where there are multiple businesses in several corporations, we assume that each corporations is a “relevant group entity”, within the meaning of proposed ss. 84.1(2.31)(c) and 84.1(2.32)(c), in relation to a single subject corporation, the shares of which have been disposed of to a purchaser corporation by an individual. Assume that each of the corporations referred to in this question is carrying on an active business referred to as “the relevant business” that is relevant to the determination of whether the subject shares are qualified small business corporation shares or are shares of the capital stock of a family farm or fishing corporation as these terms are defined in s. 110.6(1).

As previously noted, proposed ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) require that the activity threshold be satisfied in relation to a relevant business of the subject corporation or a relevant group entity. Accordingly, if an individual is actively engaged on a regular, continuous and substantial basis within the meaning of s. 120.4(1.1)(a) in a relevant business of a subject corporation or relevant group entity, the CRA would consider the condition in proposed ss. 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) to be met.

What about where an individual disposes of shares of more than one subject corporation to a purchaser corporation in relation to which there may be one or more relevant group entities? In that case, the response refers to each subject corporation and any relevant group in relation to it simply as a “group of entities.” If you had that kind of scenario, you would have to make sure that the conditions in ss. 84.1(2.31)(f)(ii) or 84.1(2.32)(g)(ii), as the case may be, are satisfied for any of the groups of entities or each of the groups.

Official Response

4 June 2024 STEP Roundtable Q. 6, 2024-1003601C6 - Succession of a Family Business

Q.7 - Alter ego trusts and s. 75(2)

Can the CRA confirm whether subsection 75(2) will apply to an alter ego trust (“AET”) that meets all of the conditions of subparagraph 73(1.01)(c)(ii) and subsection 73(1.02) with the following attributes:

• The AET is settled by an individual (the “Settlor”).
• There are three trustees of the trust, one of which is the Settlor, and the trust indenture requires that all decisions be made by a majority vote of the three trustees.
• The trust indenture provides that no capital distributions, including any capital gains, can be made from the trust while the Settlor is alive.
• The trust indenture provides for income and capital distributions that are to be made to various beneficiaries after the death of the Settlor, but does not include any provision that grants the Settlor a power to direct these future distributions.

CRA Preliminary Response

Panourgias: S. 75(2) generally applies when property is held by a trust on the condition that the property or property substituted for it may revert to the person from whom it was directly or indirectly received, or pass to persons to be determined by the person at a time subsequent to the creation of the trust or, during the existence of the person, the property may be disposed of only with the person’s consent or in accordance with the person’s direction.

Whether the property is held by a trust under any of the conditions in s. 75(2) is a question of fact. The determination of whether any of these conditions have been met in respect of a particular property can only be made on a case-by-case basis following a review of all of the facts and circumstances of a particular situation including a review of the complete trust indenture.

Having said this, we do have a few comments that we can share in respect of the situation outlined in this question. First, the fact that a trust will only qualify as an alter ego trust if the settlor is entitled to all of the income of the trust that arises before the settlor’s death does not necessarily mean that the property contributed by the settlor or property substituted for it can possibly revert to the settlor. In this particular case, the trust indenture provides that no capital distributions, including capital gains, can be made from the trust while the settlor is alive. It therefore does not appear that the settlor has a capital interest in the trust. (In a situation where the settlor does have a capital interest in the trust, s. 75(2) will generally apply.) This particular case also provides that there are three trustees, one of which is the settlor, and the trust indenture requires that all decisions are required to be made by majority vote of the three trustees, and does not include any provision that grants the settlor power to direct future distributions.

The fact that the settlor is one of three trustees acting in their fiduciary capacity and deciding issues by majority will not normally, in and by itself, give rise to the application of s. 75(2). S. 75(2) could still apply where the terms and conditions of a trust expressly require the settlor’s consent or direction with respect to any decision made by the trustees. This could include a situation where decisions are made by the majority of trustees provided that that settlor-trustee is one of that majority.

Ultimately, whether property is held by a trust under the conditions described in s. 75(2) is a question of fact.

Official Response

4 June 2024 STEP Roundtable Q. 7, 2024-1003611C6 - AET and Subsection 75(2)

Q.8 - Bare trust disposition

An express trust arrangement has been established under which the trust can reasonably be considered to act as agent for the sole beneficiary with respect to all dealings with all of the trust’s property. This trust is referred to as the “Bare Trust”. The Bare Trust is not a trust described in any of paragraphs (a) to (e. 1) of the definition “trust” in subsection 108(1). The sole beneficiary of the Bare Trust is either a natural person or a corporation. Throughout the year, the Bare Trust is resident in Canada and holds only a CDN$10,000 Government of Canada Bond (the “Bond”), which is a debt obligation described in paragraph (a) of the definition “fully exempt interest” in subsection 212(3), and money. The Bond is held by the Bare Trust as capital property.

The Bond matures in the current taxation year and is paid out in cash denominated in Canadian dollars. Thereafter the Bare Trust holds only this cash in Canadian dollars. Thus, throughout the current taxation year the Bare Trust has held no property other than the Bond and money, the fair market value of which did not exceed CDN$50,000, and therefore meets the conditions set out in paragraph 150(1.2)(b). Also, there is no tax payable by the Bare Trust for the current taxation year, as all income and capital gains in respect of the trust property are reported by the sole beneficiary of the Bare Trust, who is the beneficial owner of the trust property.

1. Does the CRA agree that subparagraph 150(1.1)(b)(ii), in itself, would not require the Bare Trust to file a T3 Trust Income Tax and Information Return (“T3 return”) for the current year because the Bare Trust has not disposed of the Bond within the meaning of "disposition" as that term is defined in subsection 248(1)?
2. If, following the maturity of the Bond, the Bare Trust is terminated during the current year and all of the money held by the Bare Trust is thereupon transferred to the beneficiary, would subparagraph (b)(v) of the definition of “disposition” in subsection 248(1) deem the Bare Trust to have had a “disposition” in the year, and if so, would the Bare Trust be required to file a T3return for the year?

CRA Preliminary Response:

Panourgias: Part A of the question describes a situation in which the Bare Trust continues to hold the proceeds received on the maturity of a government of Canada bond throughout the remainder of the tax year. The answer to this question of whether s. 150(1.1)(b)(ii) in itself would require the Bare Trust to file a return comes down to whether the Bare Trust has disposed of the bond when the bond matures and the proceeds are paid to the Bare Trust. S. 104(1) provides that the Bare Trust would be considered to be a trust for certain provisions of the Act, including s. 150 and only parts of the definition of “disposition”.

One of the relevant provisions of the definition of “disposition” is subparagraph (b)(v) which deals with the situation in which the Bare Trust ceases to act as agent for a beneficiary under the trust with respect to any dealing with any of the trust property. But this provision is not applicable in respect of Part A of the question although it is relevant for Part B. The Bare Trust would also be considered to be a trust for the purposes of paragraph (k) of the definition of disposition. But that provision is not applicable for either Part A or Part B of this question.

Finally, a Bare Trust would be deemed not to be a trust for the purposes of the remaining parts of the definition of disposition. So in the situation described in Part A of the question, although a disposition of the bond may well be considered to have occurred on the maturity of the bond, this is not considered to be a disposition by the Bare Trust.

It is our conclusion that s. 150(1.1)(b)(ii) in itself would not require the Bare Trust to file a T3 return for the current year.

Part B of the question describes a situation in which, following the maturity of the bond, the Bare Trust is wound up and the cash proceeds from the bond are transferred to the beneficiary of the Bare Trust. The question asked here is whether this would amount to a disposition by the Bare Trust because of the application of subparagraph (b)(v) of the definition of “disposition,” and, if so, would the Bare Trust be required to file a T3 return for the year.

Provided that there is no change in the beneficial ownership of the property owned by the Bare Trust when the property is transferred from the Bare Trust to the sole beneficiary, then, notwithstanding the wording in subparagraph (b)(v) of the definition of “disposition,” the exception in paragraph (e) of the definition would be applicable. Accordingly, if paragraph (e) applies, then the distribution would not result in a disposition.

Because the Bare Trust is not considered to be a trust for the purposes of subparagraph (e)(ii) of the definition of “disposition,” and provided that the property is transferred directly to the beneficiary and not to a trust for their benefit, paragraph (e) of the definition of “disposition” would apply in this situation.

The result is that the termination of the Bare Trust would not be considered to result in a disposition of the property held by the Bare Trust.

Official Response

4 June 2024 STEP Roundtable Q. 8, 2024-1007841C6 - Disposition of Property Held in a Bare Trust

Q.9 - GICs and s. 150(1.2)(b)

Pursuant to paragraph 150(1.2)(b), subsection 150(1.1) can apply to a trust for a particular tax year where, the trust holds assets with a fair market value that does not exceed $50,000 throughout the year, if the only assets held by the trust throughout the year are one or more of

(i) money,

(ii) a debt obligation described in paragraph (a) of the definition fully exempt interest in subsection 212(3),

(iii) a share, debt obligation or right listed on a designated stock exchange,

(iv) a share of the capital stock of a mutual fund corporation,

(v) a unit of a mutual fund trust,

(vi) an interest in a related segregated fund trust (within the meaning assigned by paragraph 138.1(1)(a)), and

(vii) an interest as a beneficiary under a trust, all the units of which are listed on a designated stock exchange.

Can the CRA advise whether Guaranteed Investment Certificates (“GICs”) issued by a Canadian bank or trust company are assets listed in paragraph 150(1.2)(b)?

CRA Preliminary Response

Panourgias: The first asset listed in s. 150(1.2)(b) is money. Because “money” is not defined in the Act, we need to look to the ordinary meaning of the term. Our written response will expand on this point, but for now we’ll just say that a GIC is not money.

CRA’s general position is that a GIC is similar to bonds, debentures, notes, or mortgages.

The next asset listed refers to a debt obligation described in s. 212(3) - “fully exempt interest” - (a). This provision refers to certain debt obligations of or guaranteed by the government of Canada other than being insured by the Canada deposit insurance corporation, as well as, inter alia, certain provincial debt obligations. It does not include debt obligations issued by a Canadian bank or trust company.

The remaining assets listed in s. 150(1.2)(b) also do not include such a debt obligation.

CRA therefore concludes that a GIC issued by a Canadian bank or trust company does not meet the description of any of the assets listed in s. 150(1.2)(b). If a trust holds such a GIC, it would thus not be a trust described in that provision.

Official Response

4 June 2024 STEP Roundtable Q. 9, 2024-1020351C6 - Paragraph 150(1.2)(b) and GICs

Q.10 - Update on recent case

Can the CRA provide an update on any recent trust or estate issues that may be of interest to the STEP audience?

CRA Preliminary Response

Fron: There is one item that I want to mention, and which serves as a good reminder of a 2005 technical interpretation that we released and whose number will be in the written answers (2005-0159081I7?). It relates to a 2023 unreported decision of the Tax Court of Canada which dealt with the question of whether an amount had been made payable for the purpose of s. 104(6)(b). Based on the transcript of oral reasons for judgment, the relevant facts that the Tax Court considered (and the reference to the case is in the written response) can generally be summarized as follows: the trust in question was a personal family trust, the beneficiaries of which included two minor children who were under the age of 18. The declaration of trust specifically provided that no minor beneficiary shall receive or otherwise obtain the use of any of the income or capital of the trust while being a designated person under the Act in respect of their father, who was also the trustee of the trust. As for the term “designated person,” the relevant provision in this particular circumstance would have been s. 74.5(5)(b).

In spite of the prohibition in the terms of the trust, when the trust realized a substantial capital gain on the disposition of the shares of a small business corporation, it paid $100,000 to each of the two minor beneficiaries that same taxation year, and the trust claimed the deduction pursuant to s. 104(6)(b) in respect of those payments when it filed its tax return. Tax returns were also filed in respect of the two minors purporting to include the payment amounts in their income pursuant to s. 104(13) and claiming a capital gains deduction on their behalf. CRA reassessed the trust to deny the deduction claimed in respect of the payments to the two minors, on the basis that the conditions in s. 104(6)(b) were not met. CRA also considered the amounts which the two minors received as having been included in their respective incomes pursuant to s. 105(1) rather than s. 104(13).

The case was really about the deductibility of the amount to the trust under s. 104(6). The basis on which the CRA denied the deduction to the trust was that, in its view, the amount had not become payable in the year as is required by s. 104(6)(b) - which is kind of strange, because the amounts were actually paid. This was the issue on which the Tax Court had to rule, while noting that both the appellant and the crown had acknowledged that “payable” is not defined in the Act. The appellant suggested that “payable” is broad enough to include an amount paid to a beneficiary in violation of the trust terms. In support of its view, it raised an argument that, as a general principle, parties are subjected to tax on amounts received or earned illegally. The Tax Court rejected this argument, noting that the proceeds of crime are subjected to tax because the terms “business” and “profit” have often been widely construed both in the common law and under tax income statutes. The appellant also raised five Court decisions that it argued supported its view that “payable” should not be construed to exclude a payment to a beneficiary that is prohibited under the terms of the trust. However, in rendering his decision, Justice Hogan concluded that none of the cases cited by the appellant were relevant to the determination of the meaning of “payable” in s. 104(6)(b). The appellant also argued that the scheme of the Act allows a trust be treated as a flow-through in respect of income that becomes payable to a beneficiary each year. The Tax Court did agree with this general proposition, but noted that the flow-through status requires that the conditions of ss. 104(6)(b), 104(13) and 104(24) are satisfied.

The Tax Court concluded that if an amount cannot be paid under the terms of a trust it cannot be considered to be payable. We understand that the timeframe in which an appeal of this decision could be filed for this case has passed and it is our understanding that the taxpayer did not seek an appeal.

CRA is of the view that the Tax Court conclusion in this case is consistent with our longstanding views as to how to interpret the word “payable” in the context of the provisions of the Act relating to trusts. For example, technical interpretation 2005-0159081I7 provides a thorough discussion as to whether an amount has become payable for purposes of s. 104(6) and s. 104(13). The views expressed therein in our view are supported by the conclusion of the Tax Court in this case. And I want to pull one excerpt from that interpretation. I am going to paraphrase a little bit: the comment in the 2005 technical is that in order to determine whether an amount is payable, for the purposes of s. 104(6) and the other relevant provisions of the technical interpretation, first you have to determine what under the applicable general law (i.e. without regard to the Act) constitutes an amount payable. This is to ascertain what the requirement is for an amount prima facie to have become payable.

The important point to take from this is that, in deciding on allocations of income to beneficiaries where a deduction pursuant to s. 104(6)(b) is desired in computing the trust’s income, please consider the analytical framework for determining whether the amount would be considered payable to the beneficiary, as noted in the 2005 technical interpretation.

Official Response

4 June 2024 STEP Roundtable Q. 10, 2024-1010241C6 - Update on trust / estate issues

Q.11 - FTC for US estate tax

Article XXIX-B(6)(a) of the Canada-U.S. Tax Treaty (“Treaty”) allows a deduction in the terminal return of an individual who immediately before death was a resident of Canada of the amount of any U.S. Federal or state estate or inheritance taxes paid in respect of property situated within the U.S. Article XXIX-B(6)(a)(i) and (a)(ii) provide that deduction may be applied to reduce the amount of Canadian tax otherwise payable on the total of the following income earned by the individual in the taxation year in which the individual died:

(a)(i): any income, profits or gains arising in the U.S. within the meaning of Article XXIV(3) of the Treaty, and

(a)(ii): where, at the time of death, the individual’s entire gross estate (wherever situated) exceeded U.S. $1.2 million, any income, profits or gains of the individual from property situated in the U.S. at that time.

The post-amble of Article XXIX-B(6) further states that for purposes of that determination, property is situated within the U.S. if it is so treated for U.S. estate tax purposes.

A Canadian resident who is not a U.S. citizen dies while holding real property situated in the U.S. (“U.S. Realty”) and shares of a U.S. public corporation (“U.S. Shares”). The U.S. Shares did not form part of the deceased's Registered Retirement Savings Plan and they are not classified as a “U.S. real property interest” for the purpose of subparagraph 3(a) of Article XllI of the Treaty. The U.S. Realty and the U.S. Shares are both subject to U.S. estate tax under the Internal Revenue Code on the basis that they are U.S. situs property. As a result of the disposition deemed to occur on death under subsection 70(5), a capital gain is realized on the U.S. Realty and on the U.S. Shares. Will the executor be permitted to claim a credit in Canada in respect of the U.S. estate tax paid where:

1. the value of the deceased’s entire gross estate is equal to, or lower than, U.S. $1.2 million, or
2. the value of the deceased’s entire gross estate exceeds U.S. $1.2 million.

CRA Preliminary Response

Fron: In order to qualify for the purposes of the foreign tax credit under s. 126(1), an amount paid to a foreign jurisdiction must be an income or property tax. The US estate tax paid is not eligible for a foreign tax credit under s. 126(1), because an estate tax is not an income or property tax.

However, as noted in the question, Art. XXIX-B(6) of the Treaty provides that a Canadian tax credit shall be allowed in respect of estate taxes paid in the US where the conditions specified in that paragraph are met. Where the estate tax is imposed on an individual’s death, the credit that Canada shall allow is limited to the Canadian federal tax otherwise payable, calculated in accordance with Art. XXIX-B(6)(a).

In the present case, where the value of the deceased’s entire gross estate is less than or equal to US$1.2 million, Art. XXIX-B(6)(a)(i) would apply to allow a Canadian tax credit, which would be limited to the Canadian federal tax otherwise payable on income, profits or gains arising in the US. Pursuant to the combined operation of Art. XIII and Art. XXIV(3) of the Treaty, the gain arising from the deemed disposition of the US realty under s. 70(5) is deemed to arise in the US. However, the gain from the US shares is deemed to arise in Canada. Accordingly, the gain on the deemed disposition of the US shares will not be included in calculating the credit allowed under Art. XXIX-B(6)(a)(i), and this is a corollary of the US shares being carved out of the US estate tax by Art. XXIX-B(6)(a).

Therefore, the executor can claim a tax credit in accordance with Art XXIX-B(6)(a)(i) for the US estate tax paid on the US realty against the Canadian federal tax otherwise payable on the gain from the deemed disposition of the US realty, plus other US-sourced income, as defined under the Treaty.

US income taxes payable for the year of death are also creditable, and are included in calculating the aggregate foreign tax credit allowable in Canada.

The postamble to Art. XXIX-B(6) provides an ordering rule such that the Canadian federal tax otherwise payable is reduced by the foreign tax credit allowed under Art. XXIV before the calculation of the additional foreign tax credit allowed under Art. XXIX-B(6).

In the situation where the value of the deceased’s entire gross estate exceeds US$1.2 million, Art. XXIX-B(6)(6)(a)(ii) would apply to permit the calculation of the Canadian federal tax otherwise payable to also include tax levied on income, profits or gains on property situated in the US. In this circumstance, it includes the gain from the deemed disposition of the US shares, as they are property situated in the US. Therefore, in this case, the executor may claim a credit in accordance with Art. XXIX-B(6)(a) for the US estate tax paid against the Canadian federal tax otherwise payable on the gains from the deemed disposition of both the US realty and the US shares, plus other US-sourced income as defined under the Treaty. The ordering rule in the postamble to Art. XXIX-B(6) would still also apply.

2010-0379381E5 speaks to the idea that US estate taxes are eligible for provincial foreign tax credits only if allowed under provincial tax legislation. Art. XXIX-B(6) does not have force of law in the provinces and territories of Canada.

Official Response

4 June 2024 STEP Roundtable Q. 11, 2024-1003491C6 - Foreign Tax Credit for US Estate Tax

Q.12 - UCC of gift or legacy from non-resident

A non-resident relative (the “non-resident”) makes a gift in kind of a rental property situated in a foreign country to a Canadian resident individual (the “Canadian"). Assume for illustration the cost and fair market value (“FMV”) (in Canadian dollars) is:

	Cost	FMV
Land	$400,000	$600,000
Building	$1,000,000	$1,400,000

Assume depreciation on the building was claimed by the non-resident in the foreign country but not in Canada, since the relative was a non-resident of Canada and the building is not located in Canada.

For the Canadian, what would be the cost amount of the property, and what amount would be included in the undepreciated capital cost (“UCC”) in respect of the building?

Would the answer be different if the property were inherited by the Canadian as a consequence of the death of the non-resident? In this situation, assume that the property will form part of the deceased non-resident’s estate (the “estate”), and will subsequently be distributed from the estate to the Canadian in complete or partial satisfaction of their capital interest in the estate.

CRA Preliminary Response

Panourgias: The cost amount of the land and building for the Canadian receiving it from a non-resident relative for the general application of the Act, and for capital cost allowance purposes, does depend on whether the properties are gifted or inherited.

For the purposes of this response, we have made a number of assumptions. We assume that the non-resident trust rules in s. 94 are not applicable to the estate, and the estate is factually non-resident; the estate is a “personal trust” pursuant to the definition in s. 248(1); the land and building are “capital property” to the non-resident and to the estate, pursuant to the definition in s. 54; and the elections in ss. 107(2.001) and (2.002), and ss. 107(4)-(5) are not applicable.

In the situation where the land and building are gifted to the non-resident relative, the Canadian recipient is deemed to acquire these properties at their respective fair market values under s. 69(1)(c) for the purposes of applying the provisions of the Act, unless expressly otherwise provided.

The cost amount, and the undepreciated capital cost of the building to the Canadian, would generally be its fair market value at the date of the transfer, subject to adjustments. Because the gift is a non-arm’s length transfer, s. 13(7)(e)(ii) of the Act would apply on the basis that the building is depreciable property to the Canadian, and capital property to the transferor. This provision reduces the capital cost of the building to the Canadian for the purposes of ss. 8(1)(j) and (p), and ss. 13 and 20 of the Act, as well as any regulation relevant to s. 20(1)(a) of the Act.

Based on the information provided, the capital cost of the building to the Canadian would be reduced by one half of the amount that the transferor’s proceeds of disposition of the property exceeds its cost. That would be $200,000, being one half of $1,400,000-$1,000,000. The addition to the UCC of the building for the Canadian would be $1,200,000. The cost of the building to the Canadian taxpayer would be $1,400,000, and the cost amount of the land would be $600,000.

In the situation where the land and building are inherited as a consequence of the non-resident’s death instead of being received as a gift, the Canadian would be deemed to acquire those properties at a cost amount equal to their fair market value immediately before the non-resident’s death, pursuant to the application of ss. 70(5) and 107(2). In this situation, s. 13(7)(e)(ii) would not apply, since the provision is not applicable where property is acquired as a consequence of the death of the non-resident. Both the cost amount and the UCC of the building to the Canadian would be $1,400,000, and the cost amount of the land would be $600,000.

Official Response

4 June 2024 STEP Roundtable Q. 12, 2024-1003521C6 - Gift from NR Relative

Q.13 - Scope of deemed residence under s. 94(3)(a)

A non-resident trust deemed to be resident in Canada pursuant to section 94 (“deemed resident trust”) owns a Canadian rental property. Is such a trust resident in Canada for purposes of determining rental income? Is such a trust resident in Canada for purposes of non-resident withholding tax on rent paid to the trust?

CRA Preliminary Response

Panourgias: When s. 94(3) of the Act applies to a non-resident trust in a particular tax year, the trust is deemed to be resident in Canada for the purposes outlined in s. 94(3)(a) throughout that year.

For the purposes of this question, it is notable that a trust is deemed to be resident in Canada for the purposes of s. 2 of the Act, for the purposes of computing the trust’s income for the particular tax year, and for the purposes of determining the liability of the trust for tax under Part I of the Act, and under Part XIII for amounts paid or credited to the trust.

A deemed resident trust is therefore generally required to compute its income and losses for the year according to the rules that are applicable to Canadian residents. The deemed resident trust is liable for Canadian tax under Part I of the Act. The rental income earned on real or immovable property in Canada would be included in the computation of a deemed resident trust’s income under Part I.

S. 104((7.01) restricts the amount that a deemed resident can deduct under s. 104(6) in computing its income, in the event that the trust has Canadian-sourced income such as income from rent from real or immovable properties in Canada, and also makes distributions to beneficiaries not resident in Canada.

As to Part XIII tax, a deemed resident trust is not subject to Part XIII tax on amounts paid or credited to it, but a deemed resident trust is not considered to be resident in Canada for the purposes of determining the liability of a person other than the trust to withhold and remit under s. 215 of the Act.

This means that, even though a deemed resident trust is not subject to Part XIII tax in respect of amounts paid or credited to it, there is still a requirement to withhold and remit Part XIII tax on the rent paid or credited, or deemed to be paid of credited, to the deemed resident trust.

To the extent that the amount on which the Part XIII tax is paid has been included in the calculation of the deemed resident trust’s income, the withholding amount is deemed to have been paid on account of the trust tax under Part I for the particular tax year.

S. 216(4.1) may provide relief in respect of the withholding required to be remitted on rent on real or immovable property in respect of a deemed resident trust, where the person who is otherwise required by s. 215(3) to remit the Part XIII tax in the year makes an election not to remit, provided that certain conditions are met.

Official Response

4 June 2024 STEP Roundtable Q. 13, 2024-1007851C6 - DRT and Section 216

Q.14 -Trust instalments

In response to question 6 in the 2016 STEP CRA Roundtable (2016-0641461C6), the CRA noted that for the 2016 and subsequent taxation years, all inter vivos trusts and testamentary trusts (other than graduated rate estates) would be required to make instalment payments. However, the CRA also noted that consistent with the current administrative practice, the CRA would continue to not charge interest and penalties where a trust does not make sufficient instalment payments.

Earlier this year, the CRA released two new forms - the T3 INNS3, Trust Instalment Voucher and the T3AO, Trust Amount Owing Remittance Voucher. Does the release of Form T3 INNS3 mean that the CRA plans to discontinue the administrative practice noted above?

CRA Preliminary Response

Fron: CRA has been modernizing its T3 return processing systems over the past few years, and the new instalment and remittance vouchers will ensure that payments made for a T3 account are correctly credited to the account as either an instalment payment or a payment of a balance due.

The current administrative practice will continue such that CRA will not charge interest or penalties for insufficient instalment payments – those are just forms to help us track the payments coming in.

However, should this administrative practice change in the future, sufficient and timely information will be given to educate trusts on the repercussions if their instalment requirements are not met.

Official Response

4 June 2024 STEP Roundtable Q. 14, 2024-1011571C6 - T3 Trust Instalments

Q.15 - Online access for trusts

Can the CRA provide comments on whether it will expand online access for trusts such as:

1. Viewing a trust’s Notice of Assessment or Notice of Reassessment;
2. Uploading elections or other documents related to a T3 Trust Income Tax and Information Return (“T3 return”) (e.g., subsection 164(6) election);
3. Requesting a clearance certificate;
4. Requesting remittance vouchers to pay tax payable at a financial institution, or paying an amount payable online; and
5. Providing authorization to a representative.

CRA Preliminary Response

Fron: The written response refers to a number of CRA webpages, which should be easy to find before the release of the written response.

A trust notice of assessment or reassessment can be viewed in My Trust Account, through the mail service.

Item B asks about uploading elections or other documents such as the 164(6) election. The Submit Document service exists for trusts within My Trust Account. The service accepts the following documents:

• application for a trust account number – form T3APP and supporting legal documents;
• supporting documentation required to be submitted with the current year T3 return, including a s. 164(6) election;
• supporting documentation requested by CRA, either to complete the assessment of a T3 return, or in relation to the audit of a T3 return;
• T3 adjustment requests (T3ADJ) and related supporting documentation; and
• documents requested by the Collections and Verification Branch.

Item C asks about clearance certificates. The ability to request a clearance certificate is currently being explored for a future release. The ability to request remittance vouchers to pay tax payable at a financial institution, or to pay an amount payable online, is now available in My Trust Account. The payment options available are:

• a pre-authorized debit agreement;
• My Payment;
• a QR code; or
• the principle remittance vouchers.

The last item talks about granting authorizations for representatives. Since February 2023, a primary trustee can authorize a representative for immediate access to a trust T3 account within My Trust Account. A representative can also submit an authorization request to access the T3 account electronically through Represent A Client in the same manner they would for personal and corporate accounts.

The primary trustee needs to be registered from My Trust Account to confirm or decline the request. The steps required for a primary trustee to register for their own online access can be found in About My Trust Account, and details regarding how to revive or obtain online access are available at Authorize a Representative.

Official Response

4 June 2024 STEP Roundtable Q. 15, 2024-1007831C6 - Online Access - Trust Compliance