10 October 2024 APFF Financial Strategies & Instruments Roundtable

This page contains our translations of the questions posed at the 10 October 2023 APFF Financial Strategies and Instruments Roundtable held in Gatineau and of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Mélanie Beaulieu and Isabelle Bruolotte.) Some of the titles are our own.

The 10 October 2024 APFF Roundtable is provided on a separate page.

Q.1 Inter-company loans and taxable benefits

The financing of private corporations can take several forms depending on the shareholding and the expected risk: participating shares, preferred shares, subordinated debt, shareholder's advance, etc. In addition, financing is also influenced by the availability of cash, its flow and its taxation.

Question to the CRA

Can you confirm the CRA's longstanding position that an interest-free loan between two corporations owned by different shareholders does not constitute a payment or transfer of property and that no transfer of value is generated by such loans? Consequently, no taxable benefit is generally triggered by the application of subsections 15(1) or 246(1) of the Income Tax Act.[1]

CRA Response

It should first be noted that in order to determine whether a benefit may result to a taxpayer from a particular situation, an examination of all the particular facts and circumstances relating to such a situation must be undertaken. In this respect, the facts described in the statement of the present question are very limited. Despite this, we can make the following general comments.

Subsection 15(1) essentially provides that the value of a benefit that a corporation confers, at a particular time, on a shareholder, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder (within the meaning of the definition in paragraph 15(1.4)(a)) is to be included in computing the income of the shareholder, member or contemplated shareholder, as the case may be, for its taxation year that includes the time, except to the extent that the amount or value of the benefit is deemed by section 84 to be a dividend or that the benefit is conferred on the shareholder by means of one of the transactions described in paragraphs 15(1)(a) to 15(1)(d).

For the purposes of subsection 15(1), paragraph 15(1.4)(c) provides that a benefit conferred by a corporation on an individual is a benefit conferred on a shareholder of the corporation, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder of the corporation — except to the extent that the amount or value of the benefit is included in computing the income of the individual or any other person — if the individual is an individual, other than an excluded trust in respect of the corporation, who does not deal at arm’s length with, or is affiliated with, the shareholder, member of the partnership or contemplated shareholder, as the case may be. Thus, subsection 15(1) could apply to the extent that it is established that a benefit is conferred by a particular corporation (“Aco”) on, for example, an individual who does not deal at arm's length with, or is affiliated with, a shareholder of Aco or its contemplated shareholder. That said, our Directorate does not generally consider that a benefit is conferred under subsection 15(1) in the context of a bona fide inter-corporate loan made in the ordinary course of the corporations' business. Whether, in a particular case, a bona fide loan has been made by one person to another is a question of mixed fact and law. Subsection 15(1) could apply, for example, if at the time the loan is made by Aco, the other corporation (“Bco”) is unable to repay the loan and/or provide reasonable security, with the result that the value of Aco would be impaired.

In addition, in summary form subsection 246(1) provides where a person confers a benefit at any time, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in computing the taxpayer’s income under Part I, be included in computing the taxpayer’s income or taxable income earned in Canada under Part I for the taxation year that includes that time, to the extent that it would be included in computing the taxpayer’s income if the amount of the benefit were a payment made directly by the person to the taxpayer.

Since the facts set out in this question are very limited, it is not possible to determine whether that last condition for the application of subsection 246(1) is satisfied. However, to the extent that it were determined that the shareholder of Bco and/or Bco would not have an interest in Aco (and, among other things, that the shareholder of Bco and/or Bco would not be shareholders or contemplated shareholders of Aco), it would appear that the last condition for the application of subsection 246(1) would not be satisfied. On that basis, subsection 246(1) would be inapplicable in the given situation.

Subsection 246(2) also limits the application of subsection 246(1) in certain circumstances. Specifically, where it is established that a transaction was entered into by persons dealing at arm’s length, bona fide and not pursuant to, or as part of, any other transaction and not to effect payment, in whole or in part, of an existing or future obligation, no party thereto shall be regarded, for the purpose of section 246, as having conferred a benefit on a party with whom it deals at arm's length. This exception obviously applies only if all the conditions are satisfied, and determining whether or not there is an arm's length relationship is a question of fact.

Finally, consideration should be given to the possible application of other provisions of the Income Tax Act, depending on the facts and circumstances of the particular situation, such as subsection 56(2), if it were otherwise determined that the loan was not made in good faith.

Q.2 Clarification regarding the exchange rate and deemed accrued interest

In the context of the APFF 2023 Conference Financial Strategies and Financial Instruments Round Table,[2] the CRA indicated that where the stripped coupon is denominated in a foreign currency, the exchange rate that must be used is the exchange rate applicable to the conversion of such currency into Canadian dollars for the portion accrued during each of the days during which such deemed accrued interest must be calculated pursuant to subsections 12(3), 12(4) and 12(9).

Question

Could the CRA accept, for practical reasons, the use of an average exchange rate for the conversion of this deemed accrued interest into Canadian dollars?

CRA Response

Paragraph 261(2)(b) requires that any foreign currency amount taken into account in computing Canadian tax results be converted into its Canadian dollar equivalent using the relevant spot rate for the day on which the particular amount arose.

Subsection 261(1) defines the term “relevant spot rate”. Paragraphs 261(1)(a) and 261(1)(b) give the Minister discretion to accept an exchange rate other than the rate defined in paragraph 261(2)(b) that is acceptable to the Minister.

In paragraph 1.6.1 of Income Tax Folio S5-F4-C1,[3] the CRA states that, for practical reasons, the use of an average of exchange rates over a period of time in order to convert certain income items is accepted. However, if exchange rates fluctuate significantly, the use of the average exchange rate for a period will not generally be accepted.

As stated in the response to Question 3 of the APFF 2022 Financial Strategies and Financial Instruments Roundtable,[4] the CRA's acceptance of an average rate is based on the condition that it is reasonable to conclude that the use of an average rate will provide a faithful approximation of the taxpayer's income as if the taxpayer had used daily exchange rates.

That response sets out the four conditions that must be met for the CRA to accept the use of an average exchange rate, namely that:

• the amounts to be converted (as determined in foreign currency) are relatively stable and evenly distributed over the given period (for example, annual, quarterly or monthly);
• the amounts arising in the particular period are sufficiently frequent and spread out to not distort income;
• the relevant exchange rate does not fluctuate significantly over the period; and
• the average rate is the rate used by the taxpayer each time these conditions are met.

Deemed accrued interest calculated as provided for in the Income Tax Act in respect of stripped coupons satisfies the first two conditions above.

As for the first condition, the amounts of deemed accrued interest on stripped coupons are effectively stable and evenly distributed over the given period. The interest rate is determined pursuant to subsection 7000(2) of the Income Tax Regulations[5] in foreign currency on the assumption that the coupon will be held to maturity, and the computation applies throughout the holding period of the coupon. Consequently, this computation distributes the deemed interest evenly on a daily basis until the coupon maturity date.

As for the second condition, the interest amounts arise during each of the days on which the deemed accrued interest must be computed pursuant to subsections 12(3), 12(4) and 12(9). The daily computation of the deemed interest amounts is frequent enough that the use of an average exchange rate does not distort income.

The third condition depends on the unfolding of the foreign exchange market. If the exchange rate in question fluctuates significantly over the period, this condition will not be satisfied. What constitutes a significant difference can be determined in light of the exchange rate difference and the impact of that difference on the amount to be converted.

The fourth condition requires that the taxpayer use the same approach from period to period. The taxpayer using the average rate undertakes to use the chosen approach consistently from one year to the next. The existence of a difference in exchange rates having a significant impact on the converted amount, such that the third condition above is not satisfied during a given period and preventing the use of the average rate during that period, would not affect the use of the average rate to the extent that the average rate is used during all prior and subsequent periods during which the third condition is satisfied.

Those conditions are intended to ensure that the use of the average exchange rate cannot be made with a view to obtaining a tax advantage.

Q.3 Flipped property and self-construction

Subsection 12(13) defines "flipped property" as property (other than inventory) that is:

(a) prior to its disposition, a housing unit (or a right to acquire a housing unit) located in Canada;

(b) held by the taxpayer for less than 365 consecutive days before its disposition, with certain exceptions.

The Income Tax Act uses the term “housing unit” [“logement” in the French version], whereas the Department of Finance Explanatory Notes refer to a “housing unit” [“unité d’habitation” in the French version]. If we draw a parallel with the Home Buyers' Plan (“HBP”) and the First Home Savings Account (“FHSA"), the CRA has stated that the date of acquisition of the housing unit is the date on which the property becomes habitable (running water, electricity, heating, functional bathroom, etc.). We are of the view that this same definition should apply to the flipped property rules. David Sherman, a tax expert and author who comments on the Income Tax Act for Thomson Reuters, asked the following question, without giving an answer:

“New homes: If the property is held for over a year, but the house is torn down and rebuilt, is the “housing unit” (sold shortly after construction finishes) owned for less than 12 months? The unit did not exist for more than 12 months, even though the property was owned."[6]

He appears to have the same analysis as we do, that the housing unit must have existed for at least 365 days.

Question

In the context of the construction, self-construction and replacement of an existing housing unit, does the CRA apply the same concepts as those for the HBP and the FHSA to determine the date on which ownership of the property begins?

CRA Response

Subsection 12(13) defines “flipped property” as a housing unit (or the right to acquire one) situated in Canada and that, subject to certain exceptions, is owned or, in the case of a right to acquire, held by a taxpayer for a period of less than 365 consecutive days prior to its disposition. The holding period for the housing unit does not begin until the taxpayer becomes the owner.

In the situation where an individual constructs, has constructed or replaces the individual’s housing unit on land that the individual owns, the CRA is of the view that, generally, the individual will be considered to own a housing unit for the purposes of the flipped property rule as soon as the housing unit is habitable. In other words, the date on which ownership of the property begins for the purposes of subsection 12(13) is the date on which the housing unit becomes habitable.

It should be noted that determining when a housing unit has become habitable is essentially a question of fact that must be assessed in light of all the facts and circumstances specific to each situation.

Q.4 Flipped property and change of use

When there is a change of use, section 45 provides for a deemed disposition and acquisition at fair market value ("FMV"). For example, consider a situation where a taxpayer owns a residence that he has used for personal purposes for many years. In June 2024, he decides to rent out his residence and does not make the election under subsection 45(2). In April 2025, he receives an attractive offer and decides to sell the residence. As we understand it, subsection 12(13), which defines a property subject to flipped property, refers to the term "owned".

“Definition of flipped property

(13) For the purposes of subsections (12) and (14), a flipped property of a taxpayer means a property (other than a property, or a right to acquire property, that would be inventory of the taxpayer if the definition inventory in subsection 248(1) were read without reference to subsection (12)) that is

(a) prior to its disposition by the taxpayer, either

(i) a housing unit located in Canada, or

(ii) a right to acquire a housing unit located in Canada; and

(b) owned or, in the case of a right to acquire, held, by the taxpayer for less than 365 consecutive days prior to its disposition, other than a disposition that can reasonably be considered to occur due to, or in anticipation of, one or more of the following events:…”

In addition, the Explanatory Notes of the Department of Finance refer to "owned by the taxpayer".

"Subsection 12(13) provides the definition “flipped property”, which is relevant to new subsections 12(12) and (14). Together, these subsections provide a deeming rule to ensure profits from flipping residential real estate are always subject to full taxation.

A flipped property of a taxpayer is a housing unit that:

• is located in Canada
• would not be inventory of the taxpayer if the definition “inventory” was read without reference to new subsection 12(12) (this prevents circularity and ensures that only a property that would otherwise be a capital property is subject to the rules in subsections (12) and (14)); and
• was owned by the taxpayer for less than 365 consecutive days prior to the disposition of the property"[7] .

Thus, in our view, even if there is a disposition and a deemed acquisition, the change in use will not change the taxpayer's ownership of the property. In the situation presented, since the property was held for more than 365 days, the measure on flipped property does not seem to apply.

Question

Does the CRA agree with our analysis that a change of use does not trigger subsection 12(12) if the taxpayer has owned the housing unit for more than 365 days?

CRA Response

Subsection 12(12) provides a deeming rule that the gain resulting from the disposition of a flipped property, as defined in subsection 12(13), is fully taxable as income.

The definition of “disposition” in subsection 248(1) lists various transactions or events that may or may not give rise to a disposition for the purposes of the Income Tax Act. Furthermore, this definition makes no mention of changes in use.

In short, if a taxpayer ceases to use the taxpayer’s residence for personal purposes in order to use it to earn income, and does not make the election provided for in subsection 45(2), it is pursuant to subsection 45(1) that the taxpayer is deemed to have disposed of a property, namely the taxpayer’s residence in the present case, and to have acquired it again, immediately thereafter, at FMV. However, this deeming rule, provided for in subsection 45(1), is limited in scope since that subsection applies only for the purposes of subdivision c of Division B of Part I, entitled “Taxable Capital Gains”.

Consequently, the deeming rule provided for in subsection 45(1) cannot be considered for the purposes of the flipped property rules set out in subsections 12(12), 12(13) and 12(14) since they are found in subdivision b of Division B of Part I entitled “Income or loss from a Business or Property”.

Thus, in the example given, a taxpayer who ceases to use the taxpayer’s residence for personal purposes in order to use it to earn income and who does not make the election provided for in subsection 45(2) would not be deemed to dispose of the taxpayer’s property for the purposes of the flipped property rules provided for in subsections 12(12), 12(13) and 12(14). Those rules would therefore not apply.

Q.5 Pay equity payment received after the deadline for filing a rights or things return

A retroactive payment from employment for which the right was established before death represents a right or property that may be the subject of a separate income tax return for the year of death pursuant to subsection 70(2).

Such a separate return must be filed not later than the later of the day that is one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death.

Consider the following situation:

An individual died on October 5, 2021, after the June 2021 pay equity settlement with the Quebec government. In the spring of 2022, the deceased's final income tax and benefit return (“Final T1 Return”) for the 2021 taxation year was filed, along with a trust information and income tax return[8] for the estate. No rights or things return (“Rights or Things Return”) under subsection 70(2) was filed for the year of death.

At the end of 2022, more than one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death, a pay equity amount was received by the estate. At the beginning of 2023, the executor of the estate received a T4 slip[9] for the adjustment under the pay equity agreement, as well as a T5 slip[10] for interest on that amount. The slips were dated 2022.

While it is obvious that the interest was taxable to the estate, the tax treatment of the salary adjustment received in 2022 when the death occurred in 2021 may lead to confusion.

Questions

(a) In the situation presented, given the delays in filing a Rights or Things Return under subsection 70(2), can the CRA confirm that the only possible option for the executor is to include the salary adjustment in the deceased's T1 Final Return for the year of death (2021), even if the income is received in a subsequent year (2022)? The executor would therefore have to amend the deceased's T1 Final Return for the 2021 taxation year to include an amount received in 2022.

(b) To avoid losing the option of filing a Rights or Things Return under subsection 70(2), would it have been possible to file such a return by including an estimated amount of salary adjustment as rights or things (provided, of course, that the deceased was entitled to receive such an amount at that time)? If so, would it have been possible to amend the Rights or Things Return filed under subsection 70(2) to adjust the amount reported to reflect the actual amount received?

CRA Responses

General Comments

Generally, salary, wages, taxable benefits and other amounts owing to an employee by the employer for work performed up to the date of the employee's death are considered to be periodic payments of remuneration that must be included in computing the employee's income for the year of death pursuant to subsection 70(1).

Furthermore, subsection 70(2) provides that if a taxpayer who has died had at the time of death rights or things (other than any capital property or any amount included in computing the taxpayer’s income by virtue of subsection 70(1) and 70(3.1)), the amount of which when realized or disposed of would have been included in computing the taxpayer’s income, the value of the rights or things at the time of death shall be included in computing the taxpayer’s income for the taxation year in which the taxpayer died.

Generally, for a right to receive an amount to be considered a right or thing of an individual within the meaning of subsection 70(2), the individual must be legally entitled to it at the time of death and the value of the right must be determinable at that time. It is not necessary, however, for the amount to be payable at the time of death, for example, because it would be subject to a term.

The existence and value of a right or thing of a taxpayer under subsection 70(2) depends on the facts and circumstances existing at the time of the taxpayer's death. Whether an amount constitutes a right or thing for a taxation year can only be determined by taking into account all the relevant facts and documents pertaining to a given situation.

We consider that retroactive payroll adjustments, where a collective agreement or other authorizing document was signed prior to the date of the taxpayer's death, generally constitute rights or things referred to in subsection 70(2). In such a case, the amount of the adjustments is taxable in the year of the taxpayer's death and not in a subsequent year in which the amount is actually paid. This is the case even though the employer is required to issue the taxpayer a T4 slip for the year in which the amount is paid.

By virtue of subsection 70(2), the taxpayer's legal representative may elect to file a separate income tax return including the value of the deceased's rights or things and pay the corresponding tax for the taxation year in which the taxpayer died, as if there were another person. However, the election to file such a separate return must be made not later than the later of the day that is one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death.

(a)

In this case, the time limits for making the election provided for in subsection 70(2) have expired and it is no longer possible for the executor to file a separate Rights or Things Return. The executor should therefore file an amended T1 Final Return to include the amount of the salary adjustment to the extent that the taxpayer's entitlement to the salary adjustment existed and was determinable at the time of death.

(b)

Where it is not possible, for example because of administrative delays, to obtain from the employer the precise amount of the pay equity adjustment payment within the time required to make the election under subsection 70(2) and to file a Rights or Things Return, the CRA will generally accept the filing of such a declaration where the taxpayer declares an amount estimated on the basis of the best information available at the time the declaration is filed. Once the value of the rights or things referred to in subsection 70(2) has been determined with greater certainty, the representative must, if necessary, amend the return.

Q.6 FHSA - separation and specified individual

The FHSA rules provide that an amount from an individual's FHSA may be transferred tax-free to the individual's spouse or former spouse if that person is entitled to the amount under a decree, order or judgment of a competent tribunal, or under a written agreement, relating to a division of property between the holder and the individual, in settlement of rights arising out of, or on a breakdown of, their marriage or common-law partnership.

In such a case, the transfer will be non-taxable if it is limited to the value of the FHSA less the excess FHSA amount, if any, and the transfer is made directly to the spouse's or former spouse's FHSA, or to a registered retirement savings plan (“RRSP”) or registered retirement income fund (“RRIF”) under which that person is the annuitant.

To be able to make a tax-free transfer to the spouse's or former spouse's FHSA, the spouse or former spouse must already have a FHSA or must open a FHSA.

Questions

(a) Will an individual who does not have a FHSA and who does not qualify as a “qualifying individual” at the time of the transfer be able to open a FHSA to receive the transfer from the individual’s spouse's or former spouse's FHSA?

(b) If not, can the CRA confirm that the only options available would be a tax-free transfer to the spouse's or former spouse's RRSP or RRIF?

CRA Responses

General

Generally, the holder of a FHSA cannot transfer FHSA property to a spouse or common-law partner without tax consequences.

However, in certain circumstances provided for in subsection 146.6(7), it is possible for the holder of a FHSA to make a direct transfer of an amount from the holder’s FHSA to the FHSA, RRSP or RRIF of the holder’s spouse or common-law partner, or former spouse or common-law partner, without any immediate tax consequences, pursuant to subsection 146.6(8). To do so, the following two conditions must be satisfied:

1) a spouse or common-law partner or former spouse or common-law partner of the holder of the transferor FHSA is entitled to the amount under a decree, order or judgment of a competent tribunal, or under a written agreement, relating to a division of property between the holder and the individual, in settlement of rights arising out of, or on a breakdown of, their marriage or common-law partnership.

2) The maximum amount that is transferred to the FHSA, RRSP or RRIF of the holder's spouse or common-law partner, or former spouse or common-law partner, is the total FMV of all of the holder's FHSAs minus any “excess FHSA amount”, as defined in subsection 207.01(1).

Where those two conditions are satisfied, the transfer has no impact on the unused FHSA contribution room[11] of the spouse or common-law partner, or former spouse or common-law partner, or on the unused RRSP deduction room.[12]

(a)

Subsection 146.6(1) defines a “qualifying individual” at a particular time as an individual who is at least 18 years of age, who is a resident of Canada and who generally meets certain conditions relating to occupancy and ownership of a housing unit during the period preceding the opening of the FHSA.

If, at the time the transfer is to be made, the individual to whom the transfer is to be made does not already hold a FHSA and is not a “qualifying individual” within the meaning of subsection 146.6(1), the transfer cannot be made to a FHSA.

Indeed, even in the situation described above where the individual is entitled to an amount in settlement of rights arising out of, or on the breakdown of, a marriage or common-law partnership, if the individual wishes to have that amount transferred to a FHSA of which the individual is the holder but has not yet opened a FHSA, the individual would have to open a FHSA and, to do so, enter into a “qualifying arrangement”[13] with an “issuer”. [14] However, the individual can only enter into a qualifying arrangement to open a FHSA if the individual is a qualifying individual at that time.

(b)

If it is not possible to transfer an amount tax-free from one FHSA to another FHSA because the individual for whose benefit the transfer is made does not already have a FHSA and cannot open one, the amount may be transferred directly, within the specified limits, tax-free to the individual's RRSP or RRIF.

If the individual does not already have an RRSP or RRIF, it should generally be possible for the individual to open an RRSP or, if age 71 or over, a RRIF.

The only direct, tax-free transfers from a FHSA to a spouse's or common-law partner's or former spouse's or common-law partner's plan are those provided for in subsection 146.6(7).

Q.7 FHSA and death - indirect transfer via estate

When the holder of a FHSA dies and the surviving spouse is the beneficiary of that FHSA as a consequence of the death, a transfer can be made directly from the deceased's FHSA to the surviving spouse's FHSA (subs. 146.6(7) and 146.6(8)). It is also possible for the amounts in the deceased's FHSA to be deposited into the estate's account and for the estate to pay the amounts to the surviving spouse or directly to the surviving spouse’s FHSA, RRSP or RRIF (subs. 146.6(14) and 146.6(15)).

Where certain conditions are satisfied, the payment may be deemed to be a direct transfer from the deceased's FHSA to the surviving spouse's registered account, provided that, among other conditions, the payment is so designated jointly by the deceased's legal representative and the surviving spouse in the prescribed form filed with the CRA, Form RC724[15] (subs. 146.6(15)).

Where the amounts are paid to the estate, the financial institution must withhold tax on the payment from the FHSA to the estate (subpara. 153(1)(v)(i)). There may therefore be a liquidity issue if the estate transfers the amount to the surviving spouse's FHSA, RRSP or RRIF, even though the transfer would be tax-free.

In addition, subsection 146.6(15)[16] provides that:

“If an amount is distributed at any time from the FHSA of a deceased holder to the holder’s legal representative and a survivor of the holder is entitled to all or a portion of the amount in full or partial satisfaction of the survivor’s rights as a person beneficially interested under the deceased’s estate, the following rules apply:

(a) if a payment is made from the estate to a FHSA, RRSP or RRIF of the survivor, the payment is deemed to be a transfer from the FHSA to the extent that it is so designated jointly by the legal representative and the survivor in prescribed form filed with the Minister;

(b) if a payment is made from the estate to the survivor, the payment is deemed for the purposes of subsection (14) to be a distribution to the survivor as a beneficiary to the extent that it is so designated jointly by the legal representative and the survivor in prescribed form filed with the Minister; and

(c) for the purposes of subsection (14), the amount distributed to the legal representative from the FHSA is deemed to be reduced by the amounts designated in paragraphs (a) and (b).”

Questions

(a) If, in the course of the winding up of the deceased holder's FHSA account, amounts are deposited into the estate's account and the estate subsequently transfers the amount directly to the surviving spouse's FHSA, RRSP or RRIF, can the CRA confirm that paragraph 146.6(15)(a) will apply to deem that indirect transfer to be a transfer from the FHSA, to the extent that it is so designated jointly by the legal representative and the surviving spouse in the prescribed form filed with the Minister?

(b) If the answer to (a) is yes, the amounts paid to the estate from the deceased holder's FHSA will be subject to withholding tax. If, as a result of that withholding, the estate does not have sufficient cash to pay the gross proceeds of the deceased holder's FHSA directly to the surviving spouse's FHSA, RRSP or RRIF, is it possible for the estate to roll over all of the gross proceeds to the FHSA, RRSP or RRIF?

(c) Reverting to Question (a), if the estate distributes the amount from the deceased holder's FHSA to the surviving spouse, can the surviving spouse make the tax-free transfer to the surviving spouse’s FHSA, RRSP or RRIF?

CRA Responses

(a)

Section 146.6 provides, among other things, certain rules where an amount is transferred directly from a FHSA to another FHSA, RRSP or RRIF. In particular, subsections 146.6(7) and 146.6(8) allow, provided certain conditions are satisfied, a direct transfer without immediate tax consequences to a FHSA, RRSP or RRIF where the holder or annuitant, as the case may be, is the survivor[17] of the deceased holder and is entitled to the amount from the deceased holder's FHSA as a consequence of the holder's death.

Generally, where a holder of a FHSA dies, and unless subsections 146.6(7) and 146.6(8) apply, subsection 146.6(14) provides that an amount distributed to or on behalf of a beneficiary[18] under the FHSA is to be included in computing the beneficiary's income for the year. Thus, an amount paid to the estate of a deceased policyholder is generally to be included in computing the estate's income.

However, where the survivor of the deceased policyholder is entitled to all or part of the amount in full or partial satisfaction of the survivor's rights as a person beneficially interested under the policyholder's estate, paragraph 146.6(15)(a) provides certain rules that allow, under certain conditions, the deceased holder's survivor to benefit from the tax rollover provided for in subsections 146.6(7) and 146.6(8) even if the proceeds of the FHSA were first distributed to the estate.

Paragraph 146.6(15)(a) allows the deceased holder's legal representative and the survivor to jointly designate, in the prescribed form filed with the Minister, payments made by the estate to a FHSA, RRSP or RRIF of the survivor to be deemed to have been transferred to the beneficiary's FHSA, RRSP or RRIF directly from the deceased holder's FHSA. In such a case, the amount so deemed to have been transferred directly could be transferred without any immediate tax consequences, provided the conditions of subsection 146.6(7) are satisfied. Whether those conditions are met in a specific situation is a question of fact.

In order to be eligible for a joint designation, amounts must be distributed from the FHSA to the estate before the deceased holder's FHSA ceases to be a FHSA, generally before the end of the year following the year of the holder's death, unless the FHSA ceased to be a FHSA at an earlier date under subsection 146.6(16). According to the instructions on the prescribed form, Form RC724, it must be completed within 60 days of the date on which the payment is made by the deceased holder's estate to the survivor's FHSA, RRSP or RRIF.

(b)

An amount distributed from the deceased holder's FHSA to the deceased holder's estate is generally required to be included in computing the income of the estate receiving it under subsection 146.6(14) and, in such circumstances, withholding tax is applicable under paragraph 153(1)(v).

Payments made by the estate to the survivor's FHSA, RRSP or RRIF may, however, be deemed by paragraph 146.6(15)(a) to have been transferred to the survivor's FHSA, RRSP or RRIF, as the case may be, directly from the deceased holder's FHSA, if all conditions are satisfied. The amount that can be designated jointly under paragraph 146.6(15)(a) is limited not only to the proceeds of the deceased holder's FHSA that are distributed to the estate, but also to the amount of the payment made to the surviving spouse's FHSA, RRSP or RRIF account. Therefore, to the extent that the estate does not have sufficient assets to make a payment equal to the gross proceeds of the deceased holder's FHSA to a FHSA, RRSP or RRIF of the surviving spouse, the amount of the joint designation cannot exceed the amount of the payment actually made.

(c)

In the situation described, once the estate has paid the amount to the deceased holder’s survivor, paragraph 146.6(15)(b) (and not paragraph 146.6(15)(a)) could apply to the distribution. Thus, in the situation described, the amount paid by the estate to the survivor would be included in computing the survivor's income by virtue of subsection 146.6(14), to the extent that it is the subject of a joint designation to that effect in the prescribed form, Form RC724. However, it cannot be deemed to be a direct transfer from the deceased holder's FHSA to the survivor's FHSA, RRSP or RRIF for the purposes of the rules in subsections 146.6(7) and 146.6(8)

Q.8 Foreign property disposition and computing NERDTOH

The ERDTOH[19] concept was introduced to comply with the principle of tax integration. That concept provides in particular that the amount identified for this purpose as the refundable portion of Part I tax (the “Refundable Portion”) under the Income Tax Act, which is the lesser of the amounts determined in subparagraphs (a)(i) to (iii) of the definition of NERDTOH in subsection 129(4), is included in the NERDTOH.

Pursuant to subparagraph (a)(i) of the definition of NERDTOH, the Refundable Portion corresponding to the amount determined by the formula “A – B”, where element A corresponds to 30 2/3% of the corporation’s aggregate investment income for the year (“AII”), which may be included in the NERDTOH of a corporation that is a Canadian-controlled private corporation (“CCPC”) throughout the year. This generally results in that amount being refunded to the corporation when it pays taxable dividends to its shareholders.

The AII on which the Refundable Portion is calculated in subparagraph (a)(i) of the definition of NERDTOH includes certain investment income from Canadian and foreign sources. In particular, it includes the eligible portion of taxable capital gains realized on the disposition of foreign property. In its Income Tax Folio S5-F2-C1,[20] at para. 1.65 and following, the CRA specifies that in the case of a disposition of securities resulting in a capital gain, the gain will have a foreign-source where the stock exchange on which the sale of shares takes place is located outside Canada.

Where the CCPC claims a foreign tax deduction under subsection 126(1) ("FTD"), a reduction is provided for in the description of B of the formula “A – B” in subparagraph (a)(i) of the definition of NERDTOH. More specifically, the reduction is equal to the amount by which the CCPC's deduction for the year under subsection 126(1) (the “FTD”) in respect of its foreign non-business income (clause (A) of element B of the “A – B” formula) exceeds 8% of the foreign investment income ("FII") (clause (B) of element B of the “A – B” formula).

Consequently, on the sale of shares of a foreign public company listed on a foreign stock exchange resulting in a capital gain, we understand that the amount to be deducted under subparagraph (a)(i) of the definition of NERDTOH in subsection 129(4) is insensitive to whether or not tax is withheld by the foreign country on that gain. Furthermore, the definition of “tax-exempt income” in subsection 126(7) does not apply to the calculations in subsection 129(4).

Questions

Can the CRA confirm the tax treatment that is applicable on the disposition of foreign property?

Specifically, does the amount to be deducted in computing the Refundable Portion in respect of foreign investment income always correspond to the FTD otherwise claimed by the corporation in respect of its foreign non-business income, reduced by 8% of the FII, regardless of whether or not tax is withheld by the foreign country on such investment income?

CRA Response

Under subparagraph (a)(i) of the definition of NERDTOH in subsection 129(4), a corporation that is a CCPC throughout the year includes in its NERDTOH calculation an amount equal to 30 2/3% of its AII (element A of the "A - B" formula). If the corporation deducts, for the year, an amount under subsection 126(1) (the FTD), element B of the "A - B" formula provides a reduction for the excess of the amount deducted by the corporation, for the year, under subsection 126(1) (clause (A) of element B of the "A - B" formula), over the amount corresponding to 8% of its FII[21] (clause (B) of element B of the formula "A - B"). Depending on the situation, the theoretical reduction of the amount equal to 8% of the FII could have no impact on the result of the "A - B" formula.

This notional calculation of 8% of FII in clause (B) of element B of the “A – B” formula applies regardless of whether a foreign country has levied a tax on foreign source income.

Q.9 Multigenerational Home Renovation Tax Credit and principal residence exemption

The 2022 Federal Budget proposed the addition of a new tax credit for the renovation of multigenerational homes. This new refundable credit, which is provided for in section 122.92, provides tax assistance when qualifying expenditures are incurred for qualifying renovation work. In particular, the work must be undertaken to enable the qualifying individual to reside in the dwelling with a qualifying relation of the qualifying individual by establishing a secondary unit within the dwelling for occupancy by the qualifying individual or the qualifying relation. For those purposes, a secondary unit is defined as, among other things, a self-contained housing unit that has a private entrance, kitchen, bathroom and sleeping area.

Furthermore, in the Supplementary Information on the tax measures in the 2022 Budget, the Department of Finance defined a qualifying relation as follows:

“For the purposes of this credit, a qualifying relation, in respect of an eligible person, would be an individual who is 18 years of age or older at the end of the taxation year that includes the end of the renovation period and is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the eligible person (which includes the spouse or common-law partner of one of those individuals).”[22] (our emphasis)

However, the definition of “qualifying relation” in subsection 122.92(1) does not seem to reflect such a result. Instead, paragraph (b) of that definition provides that a qualifying relation is, at any time in the renovation period taxation year, a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of either the qualifying individual or the cohabiting spouse or common-law partner (as defined in section 122.6) of the qualifying individual. Even applying the deeming rules set out in subsection 252(2) with respect to relationships, it appears that the spouse of a nephew or niece would not be a qualifying relation, contrary to what was stated in the Budget.

Finally, for the purposes of the principal residence exemption, the CRA's position, notably in Technical Interpretation 2002-0143085,[23] is that only one unit in a building (for example, a duplex) can qualify as a principal residence for the purposes of that exemption, where there are separate and self-contained units.

Questions

(a) Can the CRA confirm whether the spouse of a nephew or niece of a qualifying individual qualifies as a qualifying relation for purposes of the Multigenerational Home Renovation Tax Credit?

(b) Suppose that an individual incurs qualifying renovation expenditures to create a secondary unit (Unit B) to house a qualifying individual. When the work is completed in 2024, the secondary unit represents 20% of the area of the entire building (which includes Unit A, occupied by the individual, and Unit B, occupied by the qualifying individual). Can the CRA clarify whether 100% of the building will still qualify as a principal residence for purposes of the principal residence exemption or whether the secondary unit created will result in the individual being able to designate only one of the two units as a principal residence?

(c) A taxpayer took advantage of the Multigenerational Home Renovation Tax Credit for renovations to the individual’s home that met all the criteria, including that of a separate unit for the taxpayer’s parents. In the short term (for example, in the following year), the taxpayer sold the unit to them for its FMV. Will the taxpayer still be eligible for the credit?

CRA Responses

(a)

Although the Supplementary Information on the Budget 2022 tax measures implied that the spouse or common-law partner of a nephew or niece of a qualifying individual could be covered by the expression “qualifying relation”, the current legislation does not allow for this. The expression “qualifying relation”, which is defined in subsection 122.92(1), refers only to the nephew or niece of the qualifying individual and not to their spouse or common-law partner. In addition, the expanded meaning given to the terms “nephew” and “niece” in paragraph 252(2)(g) does not include their spouse or common-law partner. Consequently, a legislative amendment would be required so that the spouse or common-law partner of the nephew or niece of a qualifying individual could qualify as a qualifying relation.

(b)

An immovable is normally considered to be a single property unless it is legally subdivided into two or more separate properties. An immovable may nevertheless include one or more housing units for the purposes of the principal residence exemption.

Determining the number of units in a building for the purposes of the principal residence exemption is a question of fact that can only be resolved after an analysis of all the relevant circumstances.

In the example, the immovable includes, in addition to a primary unit (Unit A), a secondary unit (Unit B) within the meaning of subsection 122.92(1), which means that it is a unit which has a private entrance, kitchen, bathroom and sleeping area in addition to meeting any local requirements to qualify as a secondary dwelling unit. In addition, we understand that Unit A is ordinarily inhabited by the individual and Unit B is ordinarily inhabited by the qualifying individual.

Consequently, in the hypothetical situation described, the taxpayer will generally be able to designate only one of the two units as a principal residence provided that all of the other requirements set out in the definition of that expression in section 54 are satisfied.

(c)

Any person claiming the Multigenerational Home Renovation Tax Credit must be an eligible individual for a taxation year in which the renovation period for qualifying renovation work ends. The term “eligible individual” is defined in subsection 122.92(1). According to that definition, the eligible individual, if a qualifying relation of a qualifying individual, must ordinarily reside, or intend to reside, in the eligible dwelling within 12 months after the end of the renovation period in respect of a qualifying renovation or be the owner of the eligible dwelling. In the example submitted, the taxpayer (a qualifying relation) was the owner of the eligible dwelling in the year in which the taxpayer claimed the Multigenerational Home Renovation Tax Credit. If all the other conditions of section 122.92 were satisfied, the sale of the unit to his parents would not disqualify the taxpayer from eligibility for the credit.

Q.10 Trust’s distribution of life insurance policy to its beneficiary

In Question 4[24] of the 2023 APFF Financial Strategies and Instruments Roundtable, CRA stated that where a personal trust transfers an interest in a life insurance policy to its beneficiary, as payment of a dividend in kind received by the trust, pursuant to subsections 104(6), 104(13) and 104(24) (and where designated pursuant to subsection 104(19)), in full or partial satisfaction of the beneficiary's interest in the income of the trust, subsection 106(3) could apply. In such a situation, subsection 106(3) deems the trust to dispose of the interest in the life insurance policy for proceeds equal to its FMV.

In addition, the CRA stated that subsection 148(7) could also apply in that situation. The CRA indicated that, to the extent that it is determined that, on the disposition of the beneficiary's interest in a life insurance policy, the beneficiary's income interest in the trust includes the right to require the trust to pay an amount equal to the FMV of that interest in the life insurance policy, the portion of the beneficiary's income interest in the trust that is satisfied for the interest in the life insurance policy would have a FMV equal to the FMV of that interest. In this context, the same consequences arising from the disposition of the interest in the life insurance policy to the trust and its beneficiary would be recognized, regardless of which of subsections 106(3) or 148(7) would prevail.

However, on several past occasions,[25] the CRA has stated that subsection 107(2) would prevail over subsection 148(7) where an interest in a life insurance policy held by a personal trust is distributed to a beneficiary resident in Canada in full or partial satisfaction of the beneficiary's capital interest, which would allow a tax-deferred rollover provided that subsection 107(4.1) does not apply to the distribution.

Question

Can the CRA confirm that the commentary in those technical interpretations, that subsection 107(2) takes precedence over subsection 148(7), is still valid?

CRA Response

In several technical interpretations[26] the CRA has indicated that the distribution by a personal trust of an interest in a life insurance policy to its Canadian resident beneficiary in full or partial satisfaction of its capital interest in the trust would generally be made pursuant to subsection 107(2) so that the interest could be distributed from a trust to its capital beneficiary without any immediate tax consequences where all the conditions of that subsection are satisfied. Those technical interpretations indicated that subsection 107(2) would prevail over subsection 148(7) with respect to the distribution by a trust of the interest in the life insurance policy to its capital beneficiary. That comment is still valid and should generally continue to apply to the distribution by a personal trust of an interest in a life insurance policy to its beneficiary that gives rise to a disposition of all or part of that beneficiary's capital interest in the trust pursuant to subsection 107(2).

Q.11 HBP repayment and Sched. 7 designation

For an individual to be able to make an HBP withdrawal from the individual’s RRSP, one of the conditions that must be met is that the individual’s previous “HBP balance” from participating in the HBP be nil on January 1 of the year of the withdrawal.[27] See Question 3(c) of Form T1036.[28] .

As part of the Financial Strategies and Instruments Roundtable at the 2022 APFF Conference, a question was asked as to when an HBP repayment could be considered to reset the HBP balance to nil.

In the situation submitted, an RRSP contribution was made in February 2022 and this contribution was designated as an HBP repayment for the year 2021, thus making the HBP balance nil at the end of the 2021 year. The question was whether a withdrawal under a new HBP could be made in January 2022.

In its response published in Technical Interpretation 2022-0938221C6,[29] the CRA indicated that it was only after the individual had actually contributed amounts to his RRSP, no later than the first 60 days of the year, and had indicated the total amount that had been contributed as an HBP repayment for the previous taxation year on the prescribed form[30] attached to his income tax return, that the individual could declare the HBP balance to be nil at the beginning of the calendar year.

Thus, in the case submitted, the HBP repayment made in February 2022 could not be taken into account when the withdrawal was made under a new HBP in January 2022.

Following that response, at a meeting of the APFF Liaison Committee with the CRA held in June 2023, a supplementary question was asked to obtain clarification as to the exact date that could be taken into account to consider that an HBP repayment had been made so that the balance on January 1 of the year was nil, so as to be able to participate again in the HBP.

The facts submitted for this second question were as follows:

• An RRSP contribution was made in February 2022;
• the individual's tax return for the 2021 taxation year was filed on March 25, 2022, and the RRSP contribution made in February 2022 was designated as an HBP repayment on Schedule 7 for 2021;
• the Notice of Assessment was issued by CRA on April 18, 2022 indicating a nil HBP balance as at December 31, 2021.

The CRA responded that it was only from March 25, 2022, i.e., the day on which the individual validly filed Schedule 7 with the personal T1 income tax and benefit return for the 2021 taxation year, in which he indicated that he designated the amount contributed to his RRSP as a repayment under the HBP, that he will be able to consider that his HBP balance was nil on January 1, 2022 and that he will therefore be able to participate in the HBP again for the year 2022.

In light of these answers, we would like to submit the following situation to you.

• An individual had an HBP balance in 202X of $5,000;
• He made an RRSP contribution of $5,000 on May 7, 202X, in order to repay his entire HBP balance;
• He filed his 202X income tax return on March 25, 202X+1, designating this contribution as an HBP repayment for 202X on Schedule 7.

Question

In such a situation, will the individual be able to participate in the HBP again from January 1, 202X+1, or will he have to wait until March 25, 202X+1, the date on which he files his 202X tax return with Schedule 7, indicating that he is designating the amount contributed to his RRSP for the year 202X as an HBP repayment?

CRA Response

Where an individual receives an amount as a benefit out of or under an RRSP that is an “excluded withdrawal”, as defined in subsection 146.01(1), this amount does not have to be included in computing the individual's income under subsection 146(8).

In the context of the HBP, an excluded withdrawal is a withdrawal that constitutes, among other things, a “regular eligible amount” within the meaning of subsection 146.01(1). Among the conditions for an amount to qualify as a “regular eligible amount” within the meaning of that definition, paragraph (i) requires that the individual's “HBP balance” be nil at the beginning of the calendar year during which the individual receives the amount as a benefit out of or under an RRSP.

According to the definition of “HBP balance” in subsection 146.01(1) and subsection 146.01(3), amounts paid by an individual to an RRSP under which the individual is the annuitant and the total of which is indicated, in accordance with the limits set out in subsection 146.01(3), in a prescribed form[31] attached to the individual's income tax return, as a repayment for HBP purposes for the preceding year, will be taken into account in determining whether the individual's HBP balance at a given time in the year is nil.

In the situation described, the individual had an HBP balance of $5,000 at the beginning of the year 202X. On May 7, 202X, he contributed $5,000 to his RRSP to make a repayment. On March 25, 202X+1, he filed his income tax return for the year 202X and designated the $5,000 contribution he made during the year 202X, as an HBP repayment, on Schedule 7 of the individual's T1 income tax and benefit return for the year 202X.

Assuming that all other HBP eligibility conditions are satisfied, if the individual wishes to participate in the HBP again in 20XX+1, he will only be able to do so from March 25, 20XX+1, the date on which the individual's tax return for 20XX with Schedule 7 is filed, indicating that he designates the amount contributed to his RRSP in 20XX as a repayment under the HBP. It is only from the time he indicates that the amount paid during the year 202X is a repayment under the HBP, pursuant to subsection 146.01(3), that his HBP balance will be nil at the beginning of calendar year 202X+1, as required by paragraph (i) of the definition of “regular eligible amount”.