Income Tax Severed Letters

This Week's Release

Conference

5 October 2018 APFF Roundtable Q. 1, 2018-0768721C6 F - Procedure re: refund of excess w/h under Part XIII

Unedited CRA Tags
18(4), 214(16), 214(17) and 227(6)
withholding on interest that does not reflect the benefit of a subsequent s. 214(16)(b) designation can be recovered only on a s. 227(5) annual basis
whether withholding on interest subject to the thin cap rules can take into account a subsequent s. 214(16)(b) designation

Principal Issues: What is the procedure to get a refund of withholding tax under Part XIII that has been made on interest payments when a part of the interest payments are re-characterized, pursuant to the application of subsections 18(4) and 214(16), as deemed dividends for the purposes of Part XIII and the withholding tax rate under the applicable treaty is lower on dividends.

Position: Minister must refund the taxpayer on written application made by the taxpayer not later than 2 years following the end of the calendar year during which the excess withholding tax was paid.

Reasons: Application of the ITA.

5 October 2018 APFF Roundtable Q. 2, 2018-0768901C6 F - Deemed dividend payable to trust beneficiary

Unedited CRA Tags
104(6), 104(13), 104(24)
deemed dividend realized by trust is deductible only if made irrevocably payable by the trustees in the year pursuant to trust deed terms

Principales Questions: Where a trust is deemed to have received a dividend by virtue of subsection 84(2) and the trust indenture does not provide a definition of “income” that would include a deemed dividend as determined under the Act, whether such deemed dividend can be deducted in computing the income of the trust under subsection 104(6)?

Position Adoptée: Question of fact.

Raisons: Where the terms of the trust indentures are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend under subsection 84(2), a deduction under paragraph 104(6)(b) will generally be allowed if the trustee exercises his power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in return of his or her capital interest in the trust.

5 October 2018 APFF Roundtable Q. 3, 2018-0768841C6 F - Rollover under 73(1) and gifts to charities

Unedited CRA Tags
73(1), 73(1.01)(c)
the terms of an alter ego trust cannot permit charitable gifts before death

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.

5 October 2018 APFF Roundtable Q. 4, 2018-0768891C6 F - Stock Dividend and Safe Income

Unedited CRA Tags
55(2) à (2.4), 107(2)
shift in safe income to high-low prefs paid as stock dividend
different effect of stock dividend of high-low preferred shares paid to Holdco and trust shareholders
different effect of stock dividend of high-low preferred shares paid to trust and corporate shareholders

Principales Questions: How does the safe income of a corporation contribute to gains on the stock dividend shares and the shares upon which the stock dividend is paid?

Position Adoptée: For corporations that are "dividend recipients", the rules in subsections 55(2.2) to (2.4) and paragraph 52(3)(a) are relevant. For individuals, a corporation's safe income contributes to the stock dividend shares and the shares upon which the stock dividend is paid based on the relative gains inherent in the shares, as determined immediately after the stock dividend is paid.

Raisons: Wording of the Act and previous positions.

5 October 2018 APFF Roundtable Q. 5, 2018-0768761C6 F - Partage de la déduction accordée aux petites entreprises

Unedited CRA Tags
125(1), 125(7), 125(8), 248(1)
use of personal holding companies precluded assignment

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.

5 October 2018 APFF Roundtable Q. 6, 2018-0768771C6 F - Determination for a foreign partnership

Unedited CRA Tags
152(1.4); 152(1.7); 152(4) and Reg. 229
CRA cannot make a partnership income or loss determination where the partnership has not T5013 filing obligation
where no T5013 obligation, CRA will assess the partners directlyf within the s. 152(4) limitations

Principales Questions: Can a foreign partnership, for which a T5013 isn't required to be filed by any of the partners, receive a determination under paragraph 152(1.4) from the CRA?

Position Adoptée: No, the minister cannot issue a determination under 152(1.4) if the filing of a T5013 is not required under Reg. 229.

Raisons: Wording of subparagraphs 152(1.4)(a) and (b).

5 October 2018 APFF Roundtable Q. 7, 2018-0768781C6 F - Avantage en vertu d’un emploi

Unedited CRA Tags
6; 62

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.

5 October 2018 APFF Roundtable Q. 8, 2018-0768791C6 F - Frais de repas

Unedited CRA Tags
8(4)
commissioned employees can deduct only 25% of the restaurant tab when they take out a client in the city
s. 67.1(1) applies to client portion of restaurant tab even where s. 8(4) applies to employee

Principal Issues: Est-ce que l’ARC est prête, par position administrative, à permettre à un employé à commission de déduire un montant correspondant à 50 % de son repas malgré la règle des douze heures prévue au paragraphe 8(4) ? / Whether the CRA is prepared, by administrative position, to allow a commission employee to deduct an amount equal to 50% of his meal despite the 12-hour rule under subsection 8(4)?

Position: Non. / No.

Reasons: Aucune disposition de la Loi de l'impôt sur le revenu permet à l’ARC de ne pas appliquer le paragraphe 8(4) dans une telle situation. La situation qui est décrite dans l’énoncé de la question et notre réponse seront portées à l’attention du ministère des Finances. / There is no provision in the Income Tax Act that allows the CRA to not apply subsection 8(4) in such a situation. The situation described in the statement of the question and our response will be brought to the attention of the Department of Finance.

5 October 2018 APFF Roundtable Q. 9, 2018-0768801C6 F - Tax on Split

Unedited CRA Tags
120.4(1)
inactive spouse could receive excluded amount dividends from Holdco if its income was from an active business of reinvesting Opco dividends

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.

5 October 2018 APFF Roundtable Q. 10, 2018-0768811C6 F - Related business and subsection 120.4(1)

Unedited CRA Tags
120.4(1)
beneficial interests in discretionary trusts holding shares of a corporation with a mooted related business must be valued

Principales Questions: 1) Whether the CRA could provide some examples of property that derives, directly or indirectly, all or part of its fair market value from shares of the capital stock of the corporation as referred in clause 120.4(1)(c)(i)(B) of the definition “related business”. 2) Whether an interest in a discretionary trust is property for the purpose of clause 120.4(1)(c)(i)(B) of the definition “related business”.

Position Adoptée: 1) Examples of the property as referred in clause 120.4(1)(c)(i)(B) of the definition "related business”: shares of the capital stock of a corporation, interest in a discretionary or non-discretionary trust, interest in a partnership. 2) Yes.

5 October 2018 APFF Roundtable Q. 11, 2018-0768821C6 F - Tax on Split Income

Unedited CRA Tags
120.4(1)
dividends derived from stock portfolio of Holdco excluded because stock portfolio not a related business or not a business
stock market investing business of child's holdco not a related business as father not involved

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.

5 October 2018 APFF Roundtable Q. 12, 2018-0768831C6 F - Tax on Split Income and Partnership

Unedited CRA Tags
56(2), 56(4), 56(4.1), 56(5), 74.1(1), 74.1(2), 74.3(1), 74.5(13), 75(2), 96(1)f), 96(1.8), 103, 120.4, 248(1), 251, 262
family partnership investing in designated stock exchange shares not subject to TOSI rules
having non-contributing children as members of a family stock market partnership is subject to challenge under s. 103
having non-contributing children in a family portfolio investment partnership subject to potential challenge under ss. 74.1 and 96(1.8)

Principales Questions: Whether taxable dividends received by a partnership in respect of shares of a class listed on a designated stock exchange and taxable capital gains realized on disposition of those shares and attributed by the partnership to an individual are subject to tax on split income.

Position Adoptée: No.

Raisons: Wording of the Act, definition of split income provided in subsection 120.4(1).

5 October 2018 APFF Roundtable Q. 13, 2018-0778661C6 F - Tax on Split Income

Unedited CRA Tags
120.4(1)
returns to a spouse and older children from a Holdco in which they reinvested their Opco capital gains exemption could qualify as excluded amounts
no exclusion for arm’s length capital contribution where contribution derived from capital gain from related business

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.

5 October 2018 APFF Roundtable Q. 14, 2018-0768851C6 F - Avantage imposable découlant de l’utilisation d’un aéronef

shareholder benefit from corporate aircraft reduced by an interest-free loan made by the shareholder to fund its purchase

Principal Issues: Est-ce que la position énoncée au paragraphe 11 du bulletin d’interprétation IT-432R2 s’applique au calcul d’un avantage imposable qu’un actionnaire tire de l’usage personnel d’un aéronef appartenant à sa société? / Does the position set out in paragraph 11 of the Interpretation Bulletin IT-432R2 apply to the calculation of a taxable benefit that a shareholder derives from the personal use of an aircraft owned by his/her corporation?

Position: Lorsqu’un actionnaire accorde un prêt sans intérêt à sa société et que sa société utilise la somme pour acquérir un aéronef qui est mis à la disposition de cet actionnaire pour son utilisation personnelle, l’ARC pourrait accepter dans la détermination du montant pour la mise en service que le coût initial de l’aéronef soit d’abord réduit du montant du prêt sans intérêt en vigueur que l’actionnaire a fait à la société pour permettre à cette dernière d’acquérir cet aéronef. Le résultat doit toutefois respecter le principe énoncé dans la décision Youngman. / When a shareholder grants an interest-free loan to his/her corporation and the corporation uses the amount to acquire an aircraft that is made available to that shareholder for his/her personal use, the CRA may agree in determining the available-for-use amount that the initial cost of the aircraft is first reduced by the amount of outstanding interest-free loan that the shareholder made to the corporation to enable the corporation to acquire that aircraft. The result must, however, respect the principle enunciated in the Youngman decision.

Reasons: L’ARC applique le principe fondamental de l’évaluation des avantages accordés à un actionnaire tel qu’il est établi dans la jurisprudence notamment dans l’arrêt Youngman. / The CRA applies the fundamental principle of valuation of the benefits granted to a shareholder as determined in the case law, particularly in Youngman.

5 October 2018 APFF Roundtable Q. 15, 2018-0768861C6 F - Share exchange and statute of limitation

Unedited CRA Tags
85, 86, 51, 152(3.1), 152(4)
a price adjustment clause can operate re statute-barred transactions to affect a tax attribute that is used in the current year
retroactive ACB adjustment under PAC to statute-barred transaction may be taken into account in a current relevant transaction

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.

5 October 2018 APFF Roundtable Q. 16, 2018-0768871C6 F - Dépenses de bureau à domicile et d’automobile

Unedited CRA Tags
9(1); 18(1)a), 18(1)b); 18(1)h); 18(12), 20(1)a); 13(7)g); 67.4; 8(2); 8(10); 8(1)h.1); 8(1)i)(iii); 8(13); 8(1)j); 6(1)a), 67; Définition "FNACC" et "bien amortissable" au paragraphe 13(21) et 248(1); 1100 RIR; Folio : S3-F4-C1 « Exposé général sur la déduction pour amortissement »; Bulletin d’interprétation : S1-F3-C2 « Résidence principale »; IT-521R : IT-522R; IT-352R2; IT-285R2 : Site web ARC : Frais de véhicule à moteur admissibles; Catégorie de biens amortissables; Frais de location d’un véhicule pour les employés; Ligne 9281 Dépenses relatives aux véhicules à moteur.
example of proration of capped s. 13(7)(g) capital cost
payment of expenses of taxpayer by another does not preclude “incurring” by taxpayer
payment of taxpayer’s expenses by another might give rise to s. 9 or 80 inclusion

Principales Questions: Quelles sont les dépenses déductibles à l’égard du bureau à domicile et de l’automobile (tant pour un employé que pour un travailleur autonome) lorsqu’un particulier détient un titre de propriété dans un bien, seul ou avec une autre personne ou qu’il ne détient aucun titre de propriété? / What expenses are deductibles in respect of a work space in home and an automobile (both for an employee and for a self-employed individual) if the individual owns the property, alone or with someone else or if he/she does not own the property?

Position Adoptée: Aucune nouvelle position. Explication de certaines dispositions de la Loi. / No new position. Explanation of certain provisions of the Act.

Raisons: Questions d'ordre générales. / General questions.

5 October 2018 APFF Roundtable Q. 17, 2018-0768881C6 F - entreprise exploitée activement – revenu de location

Unedited CRA Tags
125(7); 248(1)
question of fact whether a CCPC with too many employees to have a specified investment business carries on a business
Words and Phrases
carry on
Words and Phrases
principal purpose

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.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 1, 2018-0761521C6 F - Life insurance policy as share redempt. proceeds

Unedited CRA Tags
148(7), 55(2)
more gain will be realized if an appreciated life insurance policy is distributed as redemption proceeds rather than a dividend-in-kind

Principales Questions: Whether a shareholder receiving an interest in a life insurance policy from a corporation as redemption proceeds for preferred shares the shareholder previously owned in the corporation should be considered as having given consideration for the interest in the life insurance policy?

Position Adoptée: Yes.

Raisons: Based on the meaning of the word "consideration", we are of the view that the shareholder is giving consideration for purposes of clause 148(7)(a)(ii)(B) when its shares are being redeemed. As we did in the case of a transfer of an interest in a life insurance policy through the payment of a dividend in kind, we will bring this issue to the attention of the Department of Finance as it appears questionable that the result under subsection 148(7) be different depending on whether the policy is transferred through a dividend in-kind or rather as proceeds for the redemption of shares.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 2, 2018-0765791C6 F - Tax on Split Income

Unedited CRA Tags
84(2), 120.4(1), 120.4(1.1), 125(7), 248(1)
shares of a rental property company potentially may qualify as excluded shares for TOSI purposes

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.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 3, 2018-0765801C6 F - Tax on Split Income

Unedited CRA Tags
120.4(1), 120.4(2)
deemed s. 104(21) capital gains retained their character as stock market gains
related business if children manage investment business of trust whose interest income is distributed to mother
s. 120.4(1.1)(c)(ii) exclusion where investment portfolio business of spousal trust had been carried on directly by deceased husband

Principales Questions: A taxpayer died in 2018 at the age of 80. Following the taxpayer’s death, proceeds of a life-insurance policy and non-RRSP investments were transferred to a testamentary trust ("Trust") for the benefit of his spouse (“Spouse”). The non-RRSP investments represent the taxpayer’s savings earned throughout his life. Two of the taxpayer’s children are trustees of Trust. The management of the investments is passive and generates no business income. The management of the investments is done by one of the following: 1) the trustees of Trust; 2) a third-party; or 3) another child of the taxpayer who is neither a trustee nor a beneficiary of Trust but is an investment broker. Whether the investment income earned by Trust and distributed to Spouse would be subject to the tax on split income (“TOSI”).

Position Adoptée: Generally not. The portion of a trust distribution attributable to taxable dividends from, or taxable capital gains from the disposition of, public company shares would not be subject to TOSI. The portion of a trust distribution attributable to interest that is not derived, directly or indirectly, from a related business in respect of a specified individual would not be subject to TOSI. If it is established that a portion of Trust’s distribution is attributable interest that is derived, directly or indirectly, from a related business in respect of Spouse, the distribution would be deemed to be an excluded amount in respect of Spouse under subparagraph 120.4(1.1)(c)(ii).

Raisons: According to the law.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 4, 2018-0765811C6 F - Tax on Split Income

Unedited CRA Tags
120.4(1), 120.4(1.1)
no TOSI on net rental income of spousal trust on properties managed by son if excluded amounts
exclusion where rental portfolio of spousal trust was a directly-conducted business of deceased husband

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.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 5, 2018-0761561C6 F - Question 5 – Rachat de parts en cas d’invalidité

Unedited CRA Tags
55(2), 55(2.1)

Principales Questions: Whether subsection 55(2) would apply to an extraordinary dividend paid in the context of a permanent disability insurance payment received by the corporation.

Position Adoptée: General response.

Raisons: See below.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 7, 2018-0761511C6 F - Rollover to spousal trust on death

Unedited CRA Tags
70(6)(b)(ii)
tainting effect of the payment by a spousal trust of premiums on its policy on the lives of the children

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.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 8, 2018-0761541C6 F - HBP withdrawals straddling two calendar years

Unedited CRA Tags
146.01(2)d)
factors considering in extending period for making backdated withdrawals

Principales Questions: Information requested regarding ministerial discretion which may be exercised to allow HBP withdrawals straddling two calendar years when subsequent withdrawals are made after January of the second year.

Position Adoptée: General comments.

Raisons: Ministerial discretion is exercised on a case-by-case basis, after a review of all the facts and circumstances surrounding each specific situation.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 10, 2018-0761551C6 F - Attribution rules and promissory note

Unedited CRA Tags
74.5(2)
accrued interest cannot be “paid” for s. 74.7 purposes by issuing a promissory note
promissory note could not be issued as payment in context of income attribution rules

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.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 11, 2018-0761571C6 F - Missing info on disposition of principal residence

Unedited CRA Tags
54 [principal residence], 220(3.1), (3.2), (3.21) and (3.5) of the Act; 2301 of the Regulations
CRA is only waiving penalties for late-filed principal residence dispositions for 2017 and 2016 returns

Principal Issues: 1) Whether, following the change in the CRA's administrative policy concerning the reporting of a disposition of a principal residence, a taxpayer who omitted to report such a disposition in its 2016 income tax return must amend its tax return in order to report the disposition? 2) If such an amendment to the tax return is made, whether, in the different scenarios provided, the CRA will apply the penalty for late-filed elections under subsection 220(3.5), given the CRA’s comments on its website providing that the penalty would only be applied in the "most excessive cases"?

Position: 1) Yes. 2) Question of fact.

Reasons: 1) According to the new CRA administrative policy provided on the CRA’s website and press release dated October 3, 2016. 2) Ministerial discretion is exercised on a case-by-case basis, after a review of all facts and circumstances surrounding each specific situation.

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 12, 2018-0761581C6 F - Foreign Tax Credits related to mutual funds

Unedited CRA Tags
126 ITA
CRA is no longer requesting country-by-country breakdowns of income derived from mutual funds in its FTC audits

Principales Questions: Whether CRA will continue to ask taxpayers who have invested in a mutual fund and claimed foreign tax credits to provide information related to the breakdown for each country of the foreign non-business income and non-business income tax paid related to a T3 issued by the mutual fund.

Position Adoptée: Generally, no breakdown would be necessary but an amended T3 should be filed in case of inconsistencies between the T3 and the foreign tax credit claimed.

Raisons: Administrative position.

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