Income Tax Severed Letters

Principales Questions: (1) In the case of an alter ego, a spousal, a joint spousal or a common law partner trust, whether the rollover provided in subsection 73(1) is available if the terms of the trust deed allows the trustee to make donations in favor of charities before the death of the individual, his spouse or his common law partner, as the case may be? (2) Whether our position would be different if the trustee does not make any donation during the individual, his spouse or his common law partner’s lifetime?

Position Adoptée: (1) No, the trust will generally not qualify for a rollover under subsection 73(1). (2) No, our position remains the same.

Raisons: (1) As a result of the possibility to make donations to charities out of the trust capital or income, persons other than the individual, his spouse or his common-law partner may obtain the use of the trust income or capital before the death of the individual, his spouse or his common-law partner, as the case may be. (2) The mere possibility of a person other than the individual, his spouse or his common law partner, as the case may be, receiving or obtaining, before the latter’s death, the use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.

Principales Questions: Est-ce qu'une personne, qui est associée d'une société de personnes, peut attribuer, en vertu du paragraphe 125(8) de la Loi, en tout ou en partie, sa part du plafond des affaires de société de personnes déterminé à une entreprise qui rend des services à cette société de personnes mais dans laquelle la personne n'est pas actionnaire? / Can a person, that is a member of a partnership, assign, in accordance with subsection 125(8), part or all of his/her specified partnership business limit to a corporation that provides services to the partnership but in which the individual is not a shareholder?

Position Adoptée: Non. Dans la présente situation le particulier ne peut faire cette attribution en vertu du paragraphe 125(8) de la Loi. / No. In this particular situation, the individual will not be able to make such an assignment in accordance to subsection 125(8) of the Act.

Raisons: La personne doit, à la fois, être actionnaire de la société qui rend des services à la société de personnes et détenir une participation directe dans la société de personnes. / The person must be a shareholder of the corporation that provides the service to the partnership and, at the same time, must hold directly an interest in that partnership.

Principales Questions: Est-ce que les sommes versées par un employeur pour le déplacement du conjoint et des enfants de son employé représentent un avantage imposable dans une situation où l’employé doit s’absenter pour une longue période dans le cadre d’un perfectionnement? / Whether amounts paid by an employer for the travel of his employee’s spouse and children represent a taxable benefit in a situation where the employee must be absent for a long period of time as part of a professional development?

Position Adoptée: Aucune. / None.

Raisons: Question de fait. / Question of fact.

Principales Questions: Holdco holds all of the issued and outstanding shares of the capital stock of Opco. Mr. X and his spouse, Ms. X, hold respectively 90% and 10% of the voting and participating shares of the capital stock of Holdco. Mr. X and Ms. X are both age 35. Ms. X is not involved in any manner in Opco’s business. Holdco has no source of income other than Opco. In Situation A, Opco pays dividends of $100,000 to Holdco. Then, Holdco pays dividends of $90,000 to Mr. X and $10,000 to Ms. X. In Situation B, Holdco owns passive investments which were acquired from proceeds of dividends received by Holdco on its Opco shares. Holdco has not received any dividends or any other payments from Opco in its last taxation year. In its last taxation year, Holdco earned $100,000 of income from its passive investments. Holdco pays dividends of $67,000 to Mr. X and $7,500 to Ms. X. Question 1: Whether the CRA can confirm its position as to whether shares of a holding corporation qualify as excluded shares, taking into consideration its responses to Questions 6 and 7 of the 2018 STEP CRA Roundtable (2018-074403) versus: a) examples 8 and 12 of the Guidance on the Application of the Split Income Rules for Adults; and b) the Department of Finance Technical Backgrounder on Measures to Address Income Sprinkling published in support of its December 13, 2017 press release. Question 2: In Situation A, whether the shares of the capital stock of Holdco are excluded shares of Ms. X. If not, whether this result was intended. Question 3: In Situation B, whether the shares of the capital stock of Holdco are excluded shares of Ms. X.

Position Adoptée: Question 1: General comments provided. Answer to question 7 of the 2018 STEP CRA Roundtable was based on the assumption provided in the question that the corporation was not carrying on a business while in examples 8 and 12 of the Guidance it was assumed that the corporations in both examples were carrying on a business. Under the Income Tax Act, a corporation can carry on a business the purpose of which is to derive income from property. Question 2: Generally no. Question 3: Yes. It can be argued that Holdco’s investment income is not derived, directly or indirectly, from one or more related businesses in respect of Ms. X. Instead, Holdco’s income is derived from its own business.

Raisons: Question 1: According to the law and previous positions. Questions 2 and 3: In accordance with the legislation and tax policy.

Principales Questions: Mr. X holds the voting shares of the capital stock of a corporation (“Opco”) and a family trust (“Trust”) holds the participating shares of the capital stock of Opco. Mr. X’s child, (“Child X”) holds all of the voting and participating shares of the capital stock of a holding corporation (“Holdco”). Mr. X, Ms. X (Mr. X’s spouse), Child X and Holdco are beneficiaries of Trust. Mr. X and Ms. X are both age 50 and Child X is age 30. Child X is not involved in any manner in Opco’s business. Holdco owns portfolio investments that have generated $150,000 of passive income in its last taxation year. In the same taxation year, Opco paid dividends of $100,000 to Trust. Trust distributed the Opco dividends to Holdco. Holdco intends to pay dividends of $75,000 to Child X. Whether it is possible for Holdco to pay dividends to Child X with the after-tax income earned on its portfolio investments and not from Opco’s dividends in order to avoid the application of the tax on split income (“TOSI”) for Child X.

Position Adoptée: If Holdco pays dividends to Child X with the funds received from the dividends paid by Opco, which is a related business in respect of Child X, the dividends would be added to Child X's split income unless one of the exclusions provided in the definition of “excluded amount” applies. If Holdco pays dividends with the after-tax income earned on its portfolio investments, the dividends would be an excluded amount for Child X, whether or not Holdco carries on a business. If Holdco carries on a business, the principal purpose of which is to earn income from its portfolio investments, the dividend would not be derived, directly or indirectly, from a related business as it appears that there is no source individual in respect of Child X who either meets the activity test or the ownership test in respect of Holdco for the purposes of the definition “excluded business”. If Holdco does not carry on a business, the dividend could not be derived, directly or indirectly, from a related business. This will require an adequate tracing of funds in order to establish that the funds used by Holdco to pay the dividends come from its after-tax income earned on its portfolio investments.

Raisons: In accordance with the legislation and tax policy.

Principales Questions: A family Trust (“Trust”) has sold its shares of the capital stock of a corporation (“Opco”) and has allocated the taxable portion of the resulting capital gain to Mr. X, Ms. X (Mr. X’s spouse) and their children (“Child X” and “Child Y”). The shares of the capital stock of Opco held by Trust qualified as small business corporation shares as defined in subsection 110.6(1) and the beneficiaries claimed the capital gains exemption with respect to the taxable capital gain allocated by Trust. Child X and Child Y are age 15 and 22, respectively. A holding company (“Holdco”) was incorporated and Trust, Mr. X, Ms. X, Child X and Child Y subscribed to, respectively, 50%, 20%, 20% 5% and 5% of the shares of the capital stock of Holdco with the proceeds of disposition received from the sale of the Opco shares. Ms. X, Child X and Child Y were not involved in Opco’s business. Holdco used the proceeds received from the issuance of its shares to purchase portfolio investments. The following year, Holdco earned $150,000 of passive income from its portfolio investments. Holdco intends to pay dividends to its shareholders ($50,000 to Trust, $20,000 to each of Mr. X and Ms. X, and $5,000 to each of Child X and Child Y). Trust intends to allocate the dividends received from Holdco to Ms. X, Child X and Child Y. A) Whether the dividends paid by Holdco to Mr. X, Ms. X’ Child X and, Child Y are subject to TOSI. B) Whether the allocation of the dividends by Trust is subject to TOSI.

Position Adoptée: The taxable capital gains distributed by Trust would be excluded amounts for Mr. X, Ms. X, Child X and Child Y under paragraph (d) of the definition of the expression “excluded amount”. A) Because Child X is minor, dividends paid by Holdco would be added to his split income and he would be subject to TOSI. If Holdco does not carry on a business, the dividend received by Mr. X, Ms. X and Child Y would not be derived, directly or indirectly, from a related business and would be an excluded amount for these three individuals. If Holdco carries on a business, Holdco would be a related business in respect of Mr. X, Ms. X and Child Y as Mr. X and Ms. X would both meet the ownership test in respect of Holdco for the purposes of the definition “excluded shares”. Consequently, dividends paid by Holdco would be excluded amounts for Mr. X and Ms. X as their shares held in the capital stock of Holdco would qualify as excluded shares. The dividends paid by Holdco could be an excluded amount for Child Y to the extent it does not exceed the safe harbour capital return exclusion. B) Because Child X is minor, the Trust’s distribution received would be added to his split income and he would be subject to TOSI. If Holdco does not carry on a business, the Trust’s distribution received by Ms. X and Child Y would not be derived, directly or indirectly, from a related business and would be an excluded amount for these two individuals. If Holdco carries on a business, the Trust’s distribution could be an excluded amount in respect of Ms. X if it is a reasonable return in respect of her. The distribution could be an excluded amount in respect of Child Y to the extent it does not exceed the safe harbour capital return exclusion.

Raisons: In accordance with the legislation.

Principal Issues: Whether a transaction that is made pursuant to section 85, 86 or 51 becomes statute-barred and if not, how can such a transaction be subject to a statute of limitation period?

Position: Based on the facts provided, the normal reassessment period should apply to each scenario.

Reasons: Reassessment period applies to a taxation year not to a specific transaction.

Principales Questions: Est-ce que le revenu d’une société gagné, provenant de la location d’immeubles, se qualifie de revenu provenant d’une « entreprise exploitée activement »? / Does income of a corporation earned from rental of real estate qualify as income from an « active business »?

Position Adoptée: Aucune. Explication d’ordre général. / None. General explanation.

Raisons: Question de fait. / Question of fact.

Principal Issues: Comparison of CRA’s response to Question 7 of the 2018 STEP CRA Roundtable (2018-074403) and examples 10 and 12 of the Guidance on the Application of the Split Income Rules for Adults.

Position: General comments provided. Answer to question 7 of the 2018 STEP Conference was based on the assumption provided in the question that the corporation was not carrying on a business while in examples 10 and 12 of the Guidance it was assumed that the corporations in both examples were carrying on a business. Under the Income Tax Act, a corporation can carry on a business the purpose of which is to derive income from property.

Reasons: According to the law and previous positions.

Principales Questions: Mr. X personally owned commercial rental property. On Mr. X’s death, the commercial rental property were transferred to a spousal trust ("Spousal Trust") for the benefit of his spouse, Mrs. X. Every year, Spousal Trust distributes all its net rental income to Mrs. X. Whether Mrs. X is subject to TOSI on the income distribution received from Spousal Trust under three assumptions: 1) Mrs. X’s son ("Son") is a trustee of Spousal Trust and manages the trust’s rental activities (repairs, collection of rents, etc.); 2) Son is not a trustee of Spousal Trust, is self-employed and manages the trust’s rental activities as in 1) above; and 3) Son is not a trustee of Spousal Trust and is an employee of the trust.

Position Adoptée: No. If it is established that Spousal Trust does not carry on a business, the trust distribution would be an excluded amount in respect of Mrs. X under subparagraph (e)(i) of the definition “excluded amount” in subsection 120.4(1). If it is established that Spousal Trust does carry on a business, the trust distribution would be deemed to be an excluded amount under subparagraph 120.4(1.1)(c)(ii).

Raisons: According to the law.

Principales Questions: Following the death of a taxpayer, when a spousal trust becomes the owner and the revocable beneficiary of an insurance policy on the life of the trust’s residual beneficiaries, whether the rollover provided in subsection 70(6) is available if the trustee is required to pay life insurance premiums out of the trust capital or income?

Position Adoptée: No, the spousal trust will generally not qualify for a rollover under subsection 70(6).

Raisons: As a result of the duty to pay life insurance premiums out of the trust capital or income, persons other than the surviving spouse or common-law partner may, before the survivor’s death, obtain the use of the trust income or capital.

Principales Questions: Whether issuance of a promissory note may be considered as a payment of accrued interest for the purposes of subparagraphs 74.5(1)b)(ii) and (iii) and paragraphs 74.5(2)(b) and (c)?

Position Adoptée: No.

Raisons: Textual, contextual and purposive interpretation of these provisions.