Income Tax Severed Letters - 2021-04-07

Principales Questions: What would be the safe income of the common shares under the two scenarios.

Position Adoptée: Will have to determine what portion of the safe income can reasonably be considered to contribute to the capital gain of the share on which the dividend is received.

Raisons: See below.

Principales Questions: In a situation where a housing unit is subject to a usufruct created by the will (governed by the laws of the province of Quebec) of a deceased taxpayer, the deceased’s surviving spouse is the usufructuary, the deceased’s child is the bare-owner and the surviving spouse ordinarily inhabits the housing unit while it is subject to the usufruct: (1) Whether the principal residence exemption could be claimed by the deemed trust established by virtue of subsection 248(3) (“deemed trust”) with respect to the capital gain realized as a result of the death of the surviving spouse (the usufructuary) or as a result of the sale of the housing unit, as the case may be? (2) Whether the condition set out in subparagraph 70(6)(b)(ii) could be met despite the fact that a term is provided to the usufruct under the terms of the will? (3) What would be the tax consequences resulting from the surrender, by the usufructuary, of his/her right in the usufruct? (4) What would be the tax consequences resulting from the death of the bare owner or from the assignment of his/her rights in favour of the usufructuary?

Position Adoptée: (1) Yes, subject to the other conditions of the definition of “principal residence” in section 54. (2) No. (3) General comments. (4) General comments.

Raisons: (1) The death of the usufructuary would cause the end of the usufruct and the termination of the deemed trust, which would imply the distribution of the housing unit to the bare owner. Upon the termination of the deemed trust, since the distribution of the property by the deemed trust, a trust referred to in subparagraph 104(4)(a)(i), would be made to a beneficiary other than the surviving spouse, subsection 107(4) would apply, such that subsection 107(2.1) would apply to the distribution of the property, which could result in a capital gain at the deemed trust’s level. Likewise, the sale of the residence could create a capital gain at the deemed trust’s level . The deemed trust, a personal trust, could claim the principal residence exemption under paragraph 40(2)(b), provided that the conditions for the property to qualify as a “principal residence” as defined in section 54 are all met. (2) In the situation where the will provides a term to the usufruct, this would result in a person other than the surviving spouse having the possibility to receive or obtain the use of any part of the income or capital of the trust in the spouse’s lifetime. As a result, the condition set out in subparagraph 70(6)(b)(ii) would not be met. (3) No proceeds of disposition would be deemed received for the purposes of subsection 106(2) when the usufructuary validly surrenders, without consideration and without directing in any manner who is entitled to benefit therefrom, his/her income interest in the deemed trust. The surrender would cause the termination of the deemed trust and the distribution of the property to the bare owner. Subsections 107(2.1) and (4) would apply to this distribution and it could be possible for the personal trust to claim the principal residence exemption under paragraph 40(2)(b), provided that the conditions for the property to qualify a “principal residence” as defined in section 54 are all met. (4) By effect of subsection 70(5) or paragraph 69(1)(b), as the case may be, the bare owner would be deemed to have received a consideration equal to the FMV of his/her capital interest in the deemed trust as a result of the deemed disposition at death or of the assignment of his/her right in favour of the usufructuary, as the case may be. Moreover, in the case of the assignment to the usufructurary, the assignment would cause the termination of the deemed trust such that the housing unit would be distributed to the usufructuary. This distribution would be subject to subsection 107(2).

Principal Issues: Whether a capital dividend election under subsection 83(2) can be made in respect of a dividend paid on a series of shares.

Position: Yes provided it is permitted under corporate law.

Reasons: Wording of the Act.

Principal Issues: Would the CRA accept the filing of a resolution of the directors and Form T2054 where the amount of the CDA dividend would be expressed in the form of a mathematical formula?

Position: No. Reg. 2101 states that, among others, the prescribed form (T2054) and a certified copy of the resolution of the administrators authorizing the election shall be filed to the Minister. The CRA expects that such resolution will specify the amount of the dividend subject to the election under subsection 83(2) which should be the same as the one shown on Form T2054.

Reasons: According to the Law.

Principal Issues: During a taxation year, a corporation can designate a portion of a dividend it pays to be an eligible dividend under subsection 89(14). Under certain circumstances, at the end of a taxation year, the balance of the GRIP may be less than the total amount of the designations made under subsection 89(14) during the year. In such situation, the corporation will have an excessive eligible dividend designation and will be subject to Part III.1 tax. To avoid such excess, would it be possible for a corporation to make a designation of an eligible dividend under subsection 89(14) that is equal to the lesser of the amount of the dividends paid and the balance of the GRIP at the end of the taxation year?

Position: No.

Reasons: When a corporation has paid taxable dividends during a year, subsection 185.2(1) requires that Schedule T2SCH55 Part III.1, Tax on Excessive Eligible Dividend Designations, be filed. A corporation will generally file Schedule T2SCH53 General Rate Income Pool (GRIP) Calculation to determine the balance of its GRIP at the end of the year. The corporation will have on hand all the information to make the election described in subsection 185.1(2) to avoid an excessive eligible dividend designation and the Part III.1 tax. As indicated on Schedule 55, it is possible for a corporation to make the election before the CRA would assess Part III.1 tax.

Principales Questions: Whether a deemed capital gain resulting from the application of paragraphs 55(2)(b) or 55(2)(c) could be considered to be a gain from the disposition of an active asset for purposes of subsection 125(5.1) and the definition of "adjusted aggregate investment income" provided in subsection 125(7).

Position Adoptée: Yes.

Raisons: See below.

Principal Issues: Can the owner of a qualifying property claim the lockdown support when its tenant, with which it does not deal at arm’s length, is subject to a lockdown under a public health order?

Position: Yes, provided the other requirements for claiming the CERS are met.

Reasons: Based on the draft legislative proposals released on February 24, 2021.