Income Tax Severed Letters - 2021-04-07


2020 Ruling 2020-0847041R3 - Payment of damages

Unedited CRA Tags
248(1) - definition of "retiring allowance" *

Principal Issues: What is the tax character of a payment of damages payable to a terminated employee resulting from a wrongful dismissal suit?

Position: The payment constitutes a retiring allowance.

Reasons: The payment is in respect of loss of employment and falls within paragraph (b) of the definition of retiring allowance in subsection 248(1).

2020 Ruling 2020-0869891R3 - Supplemental Ruling

Unedited CRA Tags
20(1)(c), 112, 245

Principal Issues: Changes to the facts and proposed transactions in advance income tax ruling

Position: The rulings in file 2019-081829 will continue to be valid

Reasons: The changes do not affect our conclusions

Technical Interpretation - External

4 February 2021 External T.I. 2020-0875231E5 F - Revenu d’emploi d’un Indien en travail à domicile

Unedited CRA Tags
an Indian who is now working at a home office on the reserve for COVID reasons has become exempt from the resulting employment earnings

Principales Questions: Est-ce que le revenu d’emploi d’un employé qui est un Indien au sens de la Loi sur les Indiens et qui travaille de son domicile situé dans une réserve en raison de la pandémie de COVID-19 est exonéré d’impôt? / Whether employment income earned by an employee who is an Indian under the Indian Act and who is working from on-reserve home offices as a result of the COVID-19 pandemic is exempt from tax.

Position Adoptée: Oui, pourvu que l’employé réside sur la réserve. / Yes, provided the employee lives on a reserve.

Raisons: Si les conditions d’emploi exigent que l’employé travaille pour une certaine période à un endroit spécifique, comme un bureau à domicile, cet endroit est considéré l’endroit où l’employé doit accomplir les tâches liées à son emploi pendant cette période. Généralement, si le bureau à domicile est situé dans une réserve, les tâches liées à l’emploi sont considérées comme étant accomplies dans une réserve. / If the terms of an employment require the employee to work for a certain period of time from a particular location, such as from a home office, this location is considered the location where the employee has to perform the duties of employment for this period of time. Generally, if the home office is located on a reserve, the employment duties are considered to be performed on a reserve.

15 December 2020 External T.I. 2020-0858761E5 - Lithium Production Project

Unedited CRA Tags
s. 66(15) definition of “principal business corporation;” s. 66.1(6) definition of “Canadian exploration expense;” s. 66.2(5) definition of “Canadian development expense;” s. 248(1) definitions of “mineral” and “mineral resource;” reg. 1219; Class 41 and 43.1.

Principal Issues: Can a taxpayer carrying on lithium exploration and development activities benefit from flow-through shares financing?

Reasons: The law.

2 December 2020 External T.I. 2020-0869481E5 - METC & Lump sums in lieu of coverage under a PHSP

Unedited CRA Tags
6(3)(b); 118.2(3)(b)

Principal Issues: Whether a lump sum amount received by a retiree in lieu of the continuation of medical and dental coverage under a PHSP will reduce amounts eligible for the medical expense tax credit.

Position: No

Reasons: Paragraph 118.2(3)(b) does not apply to limit the retiree’s ability to claim a medical expense tax credit, namely because the lump sum amount is not considered an advance reimbursement of medical expenses (see the CRA’s change in position effective 2012). This provision applies for the purpose of subsection 118.2(1), that is, to medical expenses “that were paid by the individual […].”

23 November 2020 External T.I. 2020-0869931E5 - TI – Tax Treatment of Loan Forgiveness under CEBA

Unedited CRA Tags
12(1)(x); 12(2.2); 80

Principal Issues: What is the tax treatment of forgiveable portion of a loan granted under the CEBA program?

Position: Generally, forgiveable portion is included in income under paragraph 12(1)(x) in the year of receipt, with an off-setting deduction available under paragraph 20(1)(hh) if the amount is repaid, in the year of repayment.

Reasons: The law. See OA to file no. 2020-086146.


7 October 2020 APFF Roundtable Q. 1, 2020-0852131C6 F - Meaning of reasonable error

Unedited CRA Tags
204.1(4), 207.06(1)
Words and Phrases
reasonable error
examples of what CRA has accepted as a “reasonable error” in making an RRSP or TFSA over-contribution

Principales Questions: What is the meaning of "reasonable error" for the purposes of subsections 204.1(4) and 207.06(1)?

Position Adoptée: Question of facts. General comments provided.

Raisons: Whether an error is reasonable can only be determined after a review of all the relevant facts and circumstances.

7 October 2020 APFF Roundtable Q. 2, 2020-0852141C6 F - APFF 2020 Roundtable Q2 - Request for Information

Unedited CRA Tags
152(7); 231.1; 231.2; 241
CRA may request personal bank statements when conducting indirect reviews

Principales Questions: 1. Can the CRA provide comments on its audit methods for individuals and shareholders, as well as when and for what reason bank and credit card statements are requested in the course of tax audits? 2.What procedures are in place for individuals to contest information requests in the context of indirect audits?

Position Adoptée: General comments provided.

7 October 2020 APFF Roundtable Q. 3, 2020-0852151C6 F - Safe income

Unedited CRA Tags
55(2), 55(2.1)(c)
repayment of loan, that had funded a dividend creating a safe income deficit, out of subsequent earnings reduced SIOH

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.

7 October 2020 APFF Roundtable Q. 4, 2020-0852161C6 F - Election

Unedited CRA Tags
CRA will not follow the ARQ in allowing a s. 164(6) loss carryback claim on a terminal return before the GRE’s T3 return is assessed

Principales Questions: In order to reduce the delays in refunding capital losses subject to an election under subsection 164(6), would the CRA allow the legal representative of a deceased taxpayer to claim a capital loss subject to a 164(6) election in the deceased’s final return without filing an amended return?

Position Adoptée: According to paragraph 164(6)(e), the legal representative of a deceased taxpayer shall file an amended final return to give effect to the subsection 164(6) election. Although there is nothing in the Income Tax Act that preclude an amended final T1 return to be filed before the estate T3 return is filed, the CRA administrative policy is that the estate T3 return must be assessed before the reassessment giving effect to a subsection 164(6) election be processed. Administrative relief in this regard would require further consideration and consultation with various areas in the CRA. In any cases, it would be highly unusual for the CRA to allow the application of a loss before the source return has been assessed.

Raisons: The law and current administrative procedures.

7 October 2020 APFF Roundtable Q. 5, 2020-0852171C6 F - Usufruct of a principal residence

Unedited CRA Tags
40(2), 54 « principal residence », 70(5), (6), 107 (2), (2.1), (4), 150(1), 248(3)
a deemed s. 248(3) testamentary usufruct trust might access the principal residence exemption on the spousal usufructuary’s death or on her surrendering her interest
application of s. 107(4) to termination of deemed s. 248(3)(a) spousal trust
s. 70(6)(b)(ii) not satisfied where residence of deceased passes to a usufruct for his surviving spouse for a fixed term of years
application of s. 248(3) to usufruct created by will and terminated by death of usufructuary or surrender by her, or assignment or death by bare owner

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).

7 October 2020 APFF Roundtable Q. 6, 2020-0852181C6 F - Par. 5(2)(b) of the Employment Insurance Act

Unedited CRA Tags
5(2)(b) Employment Insurance Act
CRA now applies a “proportionate attribution approach” in applying the s. 5(2)(b) test of “control … of … voting shares”

Principal Issues: Whether Rulings' position taken at the 2009 APFF Conference is still valid considering the FCA decision in Canada (National Revenue) v. Equipment Boifor Inc., 2019 CAF 69.

Position: No.

Reasons: See below.

7 October 2020 APFF Roundtable Q. 7, 2020-0852191C6 F - Capital dividend and series of shares

Unedited CRA Tags
83(2), 248(6)
capital dividends can be paid on one series and not the other
s. 83(2.1) “should be considered” where one of the main purposes of a reorganization is to stream capital dividends

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.

7 October 2020 APFF Roundtable Q. 8, 2020-0852201C6 F - Acheminement du CDC / CDA Streaming

Unedited CRA Tags
s. 83(2.1) does not generally apply to the streaming of capital dividends to one of the original shareholders

Principales Questions: Est-ce que l'ARC considère que le paragraphe 83(2.1) pourrait trouver application dans deux scénarios impliquant le reclassement du capital-actions d’une société privée suivi du paiement d'un dividende en capital à certains actionnaires de la société?

Position Adoptée: Scénario 1: Improbable; Scénario 2: Improbable

Raisons: Scénario 1 : Il ne peut être établi que CCO et DCO ont principalement acquis leurs actions ordinaires de catégorie A de ACO afin de recevoir un dividende en capital. À cet égard, il nous apparaît déterminant que les statuts de ACO prévoient qu’un dividende en capital peut être versé aux actionnaires d’une seule de ses catégories d’actions. Scénario 2 :

7 October 2020 APFF Roundtable Q. 9, 2020-0852211C6 - Capital dividend

Unedited CRA Tags
83(2), 89(1), 2101
a s. 83(2) dividend election cannot be made on a formula amount

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.

7 October 2020 APFF Roundtable Q. 10, 2020-0852221C6 F - Interest-free loan to a related foreign company

Unedited CRA Tags
17 and 247
s. 247 would apply to an interest-free loan made by a Canadian individual to a non-arm’s length non-resident corporation
s. 17 generally does not apply to loans made by individuals, but s. 247 can apply

Principal Issues: Would a transfer pricing adjustment be made under subsection 247(2) in respect of an interest-free loan made by an individual to a foreign corporation with whom the individual does not deal at arm’s length?

Position: Yes, if all the conditions of application of subsection 247(2) are met.

Reasons: The interest-free loan is entered into between persons not dealing at arm's length.

7 October 2020 APFF Roundtable Q. 11, 2020-0852231C6 F - Designation under subsection 89(14)

Unedited CRA Tags
89(1), 89(14), 89(14.1), 185.1
an eligible dividend designation must state a dollar amount, and GRIP variances are addressable under s. 185.1(2)
dividend designation cannot state it is the GRIP, if less

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.

7 October 2020 APFF Roundtable Q. 12, 2020-0852241C6 F - CRA role in the interprovincial arbitration process

Unedited CRA Tags
Regulation 400
a taxpayer can make representations at the first level of the process for resolving inter-provincial income allocation issues

Principales Questions: (1) Is there an interprovincial arbitration process to avoid double taxation regarding the allocation of income earned in a province by a corporation? (2) Can a taxpayer express his arguments and position during the arbitration process? (3) Do provinces have to comply with an agreement reached during the arbitration process?

Position Adoptée: (1) Yes, an arbitration process to avoid double taxation regarding the allocation of income earned in a province by a corporation is provided in the Memorandum of Understanding For the Avoidance of Double Taxation of Corporations (the “MOU”). Parties receiving a proposed adjustment have six months from the day of receipt of a proposal to present their position to each affected party. If an agreement has not been reached, the file will be subject to the following resolution process: First level: Where a party replies to a proposal, the proposing party may concur or make a counterproposal within three months of receiving the reply, and where a counterproposal is made, all affected parties will have an additional three months to reply. Second level: If, after having the opportunity to submit their points of view, the parties have not agreed on an adjustment proposal, the issue is then submitted to the appointed representatives of each affected party who will attempt to settle the dispute. Third level: Where these appointed representatives have not agreed on a proposed adjustment, the file will be referred to the Allocation Review Committee. Fourth level: Where an agreement is not reached at the third level, the affected parties, after agreeing to a common set of facts, will refer the matter to the Assistant Commissioner and Assistant Deputy Ministers involved. (2) Yes, a taxpayer can express his arguments and position at the first level of the resolution process. (3) Each province involved in the resolution process is represented in each of the four levels. Where an agreement is reached, each affected province must comply with the agreement.

Raisons: Application of the MOU.

7 October 2020 APFF Roundtable Q. 13, 2020-0852251C6 F - Small Business Deduction

Unedited CRA Tags
125(7), 125(5.1), 55(2)
s. 55(2) gain from a share can qualify as a gain from an active asset for AAII purposes
s. 55(2) gain from active-asset shares do not grind business limit

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.

7 October 2020 APFF Roundtable Q. 14, 2020-0852261C6 F - Section 128 E.T.A.

Unedited CRA Tags
128 E.T.A.
a USA stripped away voting control of a parent over its wholly-owned subs so that it was not closely related to them for ETA purposes

Principal Issues: According to the situation described below, whether the corporations are closely related to each other.

Position: No.

Reasons: Application of the E.T.A. and previous position.

23 March 2021 TEI Roundtable, 2021-0884121C6 - CERS - Lockdown support for property owner

Unedited CRA Tags

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.

23 March 2021 TEI Roundtable, 2021-0879631C6 - CERS - Net Leases, Qualifying Revenue & Deadlines

Unedited CRA Tags

PRINCIPAL ISSUES: 1- Various questions on the eligibility of utilities expenses for the CERS

2- Does an eligible entity have to compute its qualifying revenue using the same approaches and elections for both the CEWS and the CERS for a particular qualifying period?

3- What are the deadlines to file an application for the CEWS and the CERS?

POSITION: 1- Amounts that are required to be paid under the net lease by the tenant as a regular instalment of an operating expense, such as utilities, may be a qualifying rent expense.

2- Yes

3- Starting with qualifying period 6 of the CEWS, no later than 180 days after the end of the qualifying period.

REASONS: 1- Wording of the Act

2- Wording of the Act

3- Wording of the Act

Technical Interpretation - Internal

27 August 2020 Internal T.I. 2016-0675801I7 F - Prestations de maternité complémentaires

Unedited CRA Tags
5, 6(1), 145(1); 153
Quebec supplementary maternity benefits subsidized childcare centres are taxable, but may not be subject to EI deductions

Principales Questions: Quel est le traitement fiscal des prestations de maternité complémentaires dans une situation donnée? / What is the tax treatment of payments from a maternity leave plan in a given situation?

Position Adoptée: Les prestations de maternité complémentaires sont incluses à la case 14 du feuillet T4. / Payments from maternity leave plan are included in box 14 on the T4 slip.

Raisons: Positions antérieures. / Previous positions.