Income Tax Severed Letters - 2013-11-13

Principal Issues: Where the death of an individual occurs in the year he acquired flow-through shares, whether a deduction for the CEE or CDE renounced by the resource corporation or an investment tax credit for flow-through mining expenditures will be available on the final return of the deceased.

Position: A corporation may only renounce its CEE and CDE incurred in favour of the individual who acquired the flow-through shares. A renunciation in favour of an individual cannot be made effective after the death of that individual. The renunciation is in respect of the expenses that are incurred on or before the effective date of the renunciation. Therefore, the deceased person may have the right to deduct CEE or CDE in his final tax return or to claim an investment tax credit depending on the circumstances (the effective date of the renunciation, for example). However, the estate of the individual or the beneficiaries of the estate will not benefit from any renunciation with respect to shares acquired by the deceased.

Reasons: The renunciation has to be made in favour of the person who acquires the flow-through shares. Upon death, the person ceases to exist and the corporation cannot renounce in favour of a person who ceases to exist. Wording of the Act and previous position.

Principal Issues: How does the CRA apply the tie breaker rules provided by the Canada-U.S. Tax Convention in the context of a (1) double statutory residency of a trust and (2) a double residency of a trust under section 94 of the Act?

Position: (1) The double statutory residency of a trust will generally be settled by the competent authorities on a case-by-case basis, pursuant to the subsection IV(4) of the Canada-U.S. Tax Convention. In order to establish the residency of a trust, the Canadian Competent Authority may consider, among others, the settlor and beneficiaries' residency, the location of the trust's assets, the reason why the trust has been settled in a particular country, etc.

(2) The CRA considers that a deemed resident trust under section 94 is resident of Canada for the Tax Conventions' purposes and such rule is established in the new section 4.3 of the Income Tax Conventions Interpretation Act. In a case of a double taxation, a foreign tax credit calculated under the provisions of paragraph 94(3)(b) and section 126 will be available to the trust.

Reasons: Application of the Act, the Canada-U.S. Tax Convention, the Income Tax Conventions Interpretation Act and previous interpretations.

Principal Issues: Whether a corporation that is a beneficiary of an employee trust can deduct an amount pursuant to subsection 112(1) with respect to a dividend received by an employee trust that is paid to the corporation.

Position: No.

Reasons: If the trust is an employee trust, as defined in subsection 248(1), no amount will be added to its income pursuant to subsection 104(13). In the particular circumstances, the amount received by the corporation will not be added to its income pursuant to 104(14) or to section 105. Therefore, subsection 104(19) will not apply and the amount received by the employee trust and paid to the corporation will not be deemed to be a dividend received by the corporation for the purposes of subsection 112(1).

Principal Issues: In the context of a sale of the shares of the capital stock of a corporation, whether subsection 256(9) could allow the vendor and purchaser of the shares (with a specific clause in their contract) to have an acquisition of control of the corporation at a particular time that is different than the point in time at which the purchaser acquires ownership of the shares of the capital stock of the corporation under the contract.

Position: No.

Reasons: Subsection 256(9) does not allow the parties (with a specific clause in their contract) to have an acquisition of control at a particular time that is different than the point in time at which the purchaser acquires ownership of the shares of the corporation.