Income Tax Severed Letters - 2017-10-11

Conference

13 June 2017 STEP Roundtable Q. 1, 2017-0693461C6 - Specified corporate income

Unedited CRA Tags
125
CRA is not yet prepared to provide guidelines on when it will apply (b)

Principal Issues: Paragraph (b) of the definition of “specified corporate income”.

Position: General comments provided.

Reasons: See below.

13 June 2017 STEP Roundtable Q. 2, 2017-0693321C6 - GAAR and 21-year planning

Unedited CRA Tags
104(4); 104(5.8); 107(2); paragraph (g) of the definition of trust in 108(1)
GAAR generally applicable to using Canco to defer s. 104(4) deemed disposition only for lifetime of existing beneficiaries
abusived distribution of trust property to corporate beneficiary to defer gain for lifetimes of current beneficaries

Principal Issues: What are the income tax implications associated with the distribution of property from a discretionary trust to a Canadian resident corporation the shares of which are held by a new discretionary trust in order to avoid the 21-year deemed disposition in paragraph 104(4)(b)?

Position: CRA will typically apply GAAR in this situation.

Reasons: The transaction described circumvents the anti-avoidance rule in subsection 104(5.8) in a manner that frustrates the object, spirit and purpose of that provision, paragraph 104(4)(b) and the scheme of the Act as a whole.

13 June 2017 STEP Roundtable Q. 3, 2017-0693451C6 - Dual-resident estate and Article (IV)

double tax, not dual trust residence, generally will be addressed

Principal Issues: Dual-resident estate and Article (IV)

Position: Response provided by Competent Authority

13 June 2017 STEP Roundtable Q. 4, 2017-0695141C6 - U.S. grantor trust

Unedited CRA Tags
94(1); 94(3)(a), 94(3)(b); 94(16); 104(22), 104(22.1); 126(1), 126(7)
dual-resident individual who is subject to direct U.S. tax on income from a s. 94(3) trust can generate a FTC if the trust income is annually distributed or he elects under s. 94(16)
election of US-citizen/Cdn-resident beneficiary of grantor trust so as to generate FTC
income from factually U.S.-resident but s. 94(3) trust was U.S.-sourced

Principal Issues: In the situation provided, 1) Whether a resident contributor to a U.S grantor trust can claim the foreign tax credit in respect of the foreign taxes paid by the contributor where the income of the trust is designated pursuant to subsection 104(22). 2) Whether the contributor can claim the foreign tax credit where the contributor elects to have subsection 94(16) apply and the trust designates the income under paragraph 94(16)(c). 3) Whether the contributor can deduct an amount under subsection 20(11) in respect of the foreign taxes paid, where the trust designates the income under subsection 104(22), or the contributor elects to have subsection 94(16) apply. 4) Whether the contributor can deduct an amount under subsection 20(12) in respect of the foreign taxes paid, where the trust designates the income under subsection 104(22), or the contributor elects to have subsection 94(16) apply.

Position: 1) Yes; a designation under subsection 104(22) is not necessary to obtain this result. 2) Yes. 3) A deduction is available under subsection 20(11) where the trust distributes its income to Mr. X in the year. No deduction under subsection 20(11) is available where Mr. X elects to have subsection 94(16) apply. 4) A deduction under subsection 20(12) is available in both situations.

Reasons: 1) Paragraph 94(3)(a) does not refer to subsection 108(5); accordingly the amount paid or made payable by the U.S. trust is foreign source income to the beneficiary for purposes of section 126, without the subsection 104(22) designation. 2) Paragraph 94(16)(c) provides that the amount designated is foreign source income to the electing contributor for purposes of section 126. 3) Where income is distributed to Mr. X, see reasons in 1). Where the contributor elects to have subsection 94(16) apply, paragraph 94(16)(b) deems the amount determined in paragraph (a) to be from a source in Canada. The designation under paragraph 94(16)(c) applies for purposes of paragraphs 94(16)(c), (d) and section 126 only and does not extend to subsections 20(11) and (12). This option does not satisfy the condition in subsection 20(11) that the income is from a source outside Canada. 4) As the Canadian resident individual includes a distribution from the trust in their income under subsection 104(13), and subsection 108(5) deems the income to be income from a property that is an interest in the trust, the "in respect of" condition in subsection 20(12) is satisfied. The same result occurs where the individual includes an amount in income pursuant to subsection 94(16).

13 June 2017 STEP Roundtable Q. 5, 2017-0693391C6 - Allocation of safe income

Unedited CRA Tags
55(2)

Principal Issues: Any update on study?

Position: The study of this matter is not finalized at this time.

Reasons: See below.

13 June 2017 STEP Roundtable Q. 6, 2017-0693411C6 - GAAR on share redemption-55(3)(a)

Unedited CRA Tags
55(2), 55(3)(a)
using s. 55(3)(a) to create a high-basis redemption note is abusive even if that high basis is not used right away

Principal Issues: Whether cost amount needs to be "used" to trigger the application of GAAR.

Position: If there is a purpose to significantly increase cost amount, the CRA would seek to apply GAAR and the use is irrelevant.

Reasons: The scheme of new 55(2) is to address increase in cost amount that was not subject to tax, whether or not that cost amount has been used in the series.

13 June 2017 STEP Roundtable Q. 7, 2017-0693421C6 - 55(2) and pipeline planning

Unedited CRA Tags
55(2)
S. 55(2) does not apply to an estate pipeline transaction

Principal Issues: 1. Does 55(2) apply to redemption of shares obtained from deceased with full ACB? 2. Does GAAR apply? 3. Is there safe income?

Position: 1. No, 2. No, 3. No.

Reasons: 1. Result and purpose tests not met. 2. There is no purpose of increasing cost or reducing FMV. 3. Shares have no accrued gain.

13 June 2017 STEP Roundtable Q. 8, 2017-0693381C6 - Single-member disregarded U.S. LLC

Unedited CRA Tags
Articles IV, XXIV, XXVI and XXIX of the Canada-U.S. Tax Convention
no relief under Art. 26(1) of US Treaty re LLC with U.S.-source income and single Canadian-resident member
single member LLC with dual resident member could elect to be C-Corp and S-Corp, and then consider applying for relief under Art. 29(5)
20(12) deduction where LLC with U.S.-source income and single Canadian-resident member - or FTC if U.S. sources of income

Principal Issues: Whether the Canada-US Tax Convention (“Convention”) provides relief from double taxation in circumstances where a Canadian resident is the sole member of a disregarded U.S. LLC carrying on business in the U.S. with its mind and management residing in Canada?

Position: No, the Convention does not contain a mechanism to allow the U.S. income tax imposed on the member of the LLC to be credited against the income tax payable in Canada by the LLC.

Reasons: Article XXIV of the Convention provides that a deduction from income tax payable in Canada for U.S. income tax paid is subject to the provisions of the Income Tax Act.

13 June 2017 STEP Roundtable Q. 9, 2017-0697901C6 - S-corporation agreements

Unedited CRA Tags
Paragraph 5 of Article XXIX of the Canada-U.S. Tax Convention
Cdn competent authority agreement with S-Corp. extends to income of a qualified subchapter S Corp. subsidiary thereof

Principal Issues: Whether a qualified subchapter S Corporation subsidiary (QSSS) must enter into a separate Competent Authority Agreement under paragraph 5 of Article XXIX of the Canada-U.S. Tax Convention in a situation where the parent United States S Corporation has already entered into such an agreement.

Position: No.

Reasons: The income of the parent United States S Corporation as computed under the Internal Revenue Code and which is deemed to be FAPI pursuant to a “Paragraph 5 Article XXIX Competent Authority Agreement” includes the income of the QSSS.

13 June 2017 STEP Roundtable Q. 10, 2017-0693351C6 - 104(6), (13), (24) and ITTN 11

Unedited CRA Tags
104(6), 104(13), 104(24)
a discretionary family trust may be unable to establish that expenses reimbursed by it were for the children’s benefit
payments by discretionary turst of alleged children's expenses must clearly be for their benefit

Principal Issues: Is the position in ITTN 11 regarding payments made by a trust for the benefit of a minor beneficiary still valid?

Position: Perhaps not.

Reasons: The Directorate intends to review the administrative position in ITTN 11 to determine whether it is still valid and may update it as appropriate.

13 June 2017 STEP Roundtable Q. 11, 2017-0693331C6 - Substituted property of estate

Unedited CRA Tags
70(6)
s. 86 reorg before shares are transferred by the executors to a spousal trust will taint the s. 70(6) rollover

Principal Issues: Where property held by an estate is converted or substituted while the estate is being administered, does subsection 70(6) apply to the property held by the deceased at death?

Position: Question of fact.

Reasons: For subsection 70(6) to apply, the particular property held by the deceased must be transferred or distributed, and vest indefeasibly in the spousal trust within 36 months of the taxpayer’s death. It is a question of fact when the property is transferred or distributed to and vests indefeasibly in a testamentary spousal trust.

13 June 2017 STEP Roundtable Q. 12, 2017-0693371C6 - 75(2) and T3 Reporting

Unedited CRA Tags
75(2); 104(6); 150; 221 and Reg 204(1)
trustee of s. 75(2) trust to issue T3 slip to contributor

Principal Issues: Is the stated reporting method in the T3 Guide in respect of amounts attributed pursuant to subsection 75(2) correct?

Position: Yes.

Reasons: Consistent with the law.

13 June 2017 STEP Roundtable Q. 13, 2017-0693341C6 - TFSA Audit Project

Unedited CRA Tags
146.2(6)
general principles apply for determining whether TFSA trading is a business

Principal Issues: Status of TFSA audit project

Position: Provided update and referred to S3-F10-C1 for guidance on whether securities trading in a TFSA constitutes carrying on a business.

13 June 2017 STEP Roundtable Q. 14, 2017-0697371C6 - Dedicated Telephone Service

Principal Issues: Update on the CRA's dedicated phone line for tax professionals.

Position: The CRA’s Income Tax Rulings Directorate is introducing a new dedicated telephone service (DTS) for income tax service providers by July of 2017. The DTS will assist people in the business of preparing income tax returns by providing access to experienced CRA staff who can help with more complex technical issues.

Reasons: Introduction of the DTS will provide those in the business of preparing income tax returns greater access to CRA information to the benefit of the many clients they serve.

13 June 2017 STEP Roundtable Q. 15, 2017-0698971C6 - Registration of Tax Preparers

Principal Issues: Status of the Registration of Tax Preparers Program

Position: Response provided by SMED.