Income Tax Severed Letters - 2013-04-24

Principales Questions: Il existe des polices exonérées conjointes au dernier décès dont le coût d'assurance cesse au premier décès. Une telle police demeure ainsi en vigueur sans que des primes soient payables et la prestation est percevable au deuxième décès (soit celui du conjoint bénéficiaire de la fiducie). Aux fins du sous-alinéa 70(6)b)(ii) L.I.R., l'ARC peut-elle confirmer qu'une police contenant ce type d'avenant suspendant le paiement des primes tout au long de la détention fiduciaire en faveur du conjoint n'aurait pas pour effet en soi de la disqualifier en tant que fiducie au conjoint?

Position Adoptée: En présumant que la propriété du contrat d'assurance exonérée, suite au décès du testateur qui est le preneur et titulaire de la police, a été transférée légalement à cette fiducie et que cette dernière n'a pas (ou ses fiduciaires) à débourser aucune somme à même le revenu ou le capital de la fiducie afin de maintenir la police en vigueur et que nulle autre personne, autre que l'époux ou le conjoint de fait survivant, ne peut, avant le décès de l'époux ou du conjoint de fait, recevoir ou obtenir toute partie, s'il y a lieu, du revenu ou de la valeur de rachat de cette police, il nous apparaît que la condition du sous-alinéa 70(6)b)(ii) serait respectée.

Raisons: L'ARC est d'avis que l'obligation de financer une police d'assurance-vie à même le capital ou revenu d'une fiducie en serait une en vertu de laquelle une personne autre que l'époux ou le conjoint de fait survivant peut obtenir l'usage de toute partie du revenu ou du capital aux fins du sous-alinéa 70(6)b)(ii).

Principal Issues: Quel est le statut de l'examen par l'ARC concernant l'application possible de l'impôt de la partie XIII aux débentures convertibles?

Position: Aucune.

Reasons: Voir ci-dessous.

Principal Issues: In the course of an estate freeze, preferred shares are issued to a taxpayer in consideration for common shares. The redemption value of those shares would be equal to the fair market value of the common shares acquired by the corporation. The rights, privileges, conditions and restrictions of the preferred shares described in the articles of incorporation would contain a price adjustment clause. Pursuant to that price adjustment clause, the redemption value of the preferred shares would be adjusted to reflect the fair market value of the consideration if the amount considered to be the fair market value is changed. If the preferred shares are redeemed before an upward adjustment to the redemption value, the corporation would pay an additional amount to the taxpayer. What would be the tax treatment of such additional payment made by the corporation in favour of the taxpayer?

Position: In such a case, the CRA's position is that the additional payment made by the corporation in favour of the taxpayer, as a result of the price adjustment clause becoming operative, would be treated as a dividend. Such a dividend would have to be included in the shareholder's income in the year of receipt under subsection 84(3) of the Act.

Reasons: Previous position.

Principal Issues: Where Part XIII tax is withheld from interest payment made by Canadian-resident to non-arm's-length Singapore resident at non-treaty rate of 25% by virtue of Article XXI of Canada-Singapore Income Tax Convention (1980), whether refund of a portion of tax withheld will be made when the income is subsequently remitted to or received in Singapore and included in the computation of income for Singapore tax purposes.

Position: Under consideration.

Reasons: An excess Part XIII tax payment arises when the income is remitted to or received in Singapore and is required to be included in the computation of income under Singapore laws. The excess can only be refunded under subsection 227(6) if written application is made within two years after the end of calendar year in which the Part XIII tax was originally paid. However, we are currently considering whether Article XXI of Canada-Singapore Income Tax Convention provides implicit authority to override the time limitation in subsection 227(6).

Principal Issues: Will the CRA be willing to issue a certificate pursuant to s. 116 where the shares are not considered to be taxable Canadian property?

Position: Yes

Reasons: The CRA will assume the property to be taxable Canadian property and process the request for the certificate. The CRA will not be making a determination as to whether or not the property is taxable Canadian property at the time of the s. 116 request.

Principal Issues: Application of Article X(6) with respect to profits earned through a partnership that is a resident of the United States for the purposes of the Canada-United States Tax Convention.

Position: If the partnership would be eligible to claim benefits under Article X(6), the member can claim those benefits in computing branch tax liability on the member's share of the partnership income included in the member's taxable income earned in Canada. Alternatively, if the member can otherwise claim benefits under Article X(6), those benefits would apply to its share of the partnership's profits earned through a Canadian permanent establishment.

Reasons: The partnership is a company and a resident of the United States under the Canada-United States Tax Convention. Consistent with previous approach to providing treaty benefits in respect of income earned or received by partnerships that are residents of the United States under the Canada-United States Tax Convention.

Principal Issues: (i) Where a CCPC pays an eligible dividend across a single class of shares owned 50/50 by a Canadian resident individual and a Canadian resident CCPC, both of whom are not related, can the CRA confirm that there is no reduction in the payer CCPC's GRIP in respect of an eligible dividend for the portion of the dividend that subsection 55(2) applies to, where the dividend exceeds the safe income attributable to the shares owned by the recipient CCPC? (ii) If the recipient CCPC does not file a designation pursuant to paragraph 55(5)(f), can the CRA confirm that there is no reduction of the payer CCPC's GRIP in respect of the 50% portion of the dividend paid to the recipient CCPC? (iii) If the recipient CCPC files a designation pursuant to paragraph 55(5)(f) whereby it is deemed to have received two separate dividends, one in the amount of the safe income attributable to the shares on which the dividend was paid, and the other for the balance of the payment, can the CRA confirm that there is a reduction of the payer CCPC's GRIP equal to the aggregate of the full amount of the eligible dividend received by the individual shareholder and the portion of the dividend received by the recipient CCPC that was subject to an election pursuant to paragraph 55(5)(f) and equal to the safe income attributable to the shares on which the dividend was paid?

Position: No. In all cases there would be a reduction of the payer CCPC's GRIP at the end of the taxation year following the year in which the corporation would have paid an eligible dividend, equal to the full amount of the eligible dividend declared pursuant to subsection 89(14), in accordance with subparagraph (a)(i) of element "G" of the definition of GRIP in subsection 89(1).

Reasons: In accordance with the provisions of the ITA.

Principal Issues: 1) Whether the Canada Revenue Agency ("CRA") would comment on the anti-avoidance provisions of the Income Tax Act ("Act") which could apply in the context of a particular series of transactions designed to implement a post-mortem estate planning pipeline strategy? 2) Whether the CRA would comment on any expected amendments to the Act in respect of the implementation of pipeline strategies?

Position: 1) Comments provided. 2) Amendments to the Act are not within the discretion of the CRA. Matters involving a change to the law and / or tax policy are within the responsibility of the Department of Finance.

Reasons: In accordance with the provisions of the Act and our previous positions.

Principal Issues: Impact on the CRA published position in relation to the factors it considers indicative for purposes of establishing residency of a trust in light of the 2012 SCC decision in St. Michael Trust Corp.

Position: Residence of a trust is a question of fact to be determined according to the circumstances of each case - the SCC decision affirmed the CRA view that the residence of the trustee does not always determine the residence of the trust.

Reasons: Comments as previously published by the Directorate at the Prairie conference and the BC conference

Principal Issues: The CTF has asked how CRA would administer subsection 164(6) where a circularity issue arises in applying subsection 40(3.61).

Position: We recognize that the circularity issue exists on a technical reading of 40(3.6), 40(3.61) and 164(6). CRA will review on a case-by-case basis.

Reasons: To date, we have never had an actual case referred to our directorate.

Principal Issues: Is it required that the 25% test and the 50% test used in the definition of taxable Canadian property that is applicable to shares of a corporation listed on a designated stock exchange, be satisfied at the same time in order for shares of a corporation to be considered to be taxable Canadian property?

Position: Yes

Reasons: The legislation establishes that both the 25% test and the 50% test must be met at a particular point in time during the 60-month period.