Income Tax Severed Letters - 2021-08-25

Principal Issues: Whether the beneficiary of a trust would be able to rely on the “reasonable return” exception in either subparagraph (f)(ii) or (g)(ii) of the definition of “excluded amount” in subsection 120.4(1) if the interest rate on an outstanding promissory note is equivalent to an interest rate that would have been charged between parties dealing at arm’s length with each other.

Position: Question of fact and law that can only be determined after a review of all the facts and circumstances applicable to a particular situation.

Reasons: The CRA does not intend to generally substitute its judgement of what would be considered a reasonable amount where taxpayers have made a good faith attempt to do so based on the reasonableness factors.

Principal Issues: Application of 75(2) in three independent scenarios.

Position: General comments provided.

Reasons: See below.

Principal Issues: Whether subsection 107(2) applies on the transfer of property from an original trust to a newly created trust with the same beneficiaries as the original trust. The transfer is made in accordance with the terms of the trust. However, the new trust is not an identifiable beneficiary of the original trust and the creation of a new trust as a beneficiary of the original trust is not contemplated by the trust agreement of the original trust.

Position: Subsection 107(2) will not apply as the new trust is not a beneficiary for the purposes of applying subsection 107(2). The application of paragraph (f) of the definition of disposition in subsection 248(1) or subsection 107.4(3) can be considered.

Reasons: See analysis below.

Principal Issues: What non-deductible expenses will reduce the safe income that can reasonably be considered to contribute to the capital gain on a share

Position: A general description of non-deductible expenses that the CRA considers will reduce the safe income that can reasonably be considered to contribute to the capital gain on a share is provided.

Reasons: For the purposes of paragraph 55(2.1)(c) safe income is adjusted to take into account only the portion of safe income that can reasonably be considered to contribute to the capital gain on a share.

Principal Issues: 1. How can a taxpayer reduce an excess TFSA amount where the value of all of the taxpayer's TFSAs are zero? 2. Will the Minister consider waiving or cancelling the 1% tax under subsection 207.06(1)?

Position: 1. Only new TFSA contribution room that becomes available to the taxpayer in future years will serve to reduce the excess TFSA amount. 2. No.

Reasons: 1. The taxpayer is unable to withdraw any amounts from their TFSAs therefore the taxpayer would be unable to reduce the excess TFSA amount in this manner. 2. The taxpayer is unable to withdraw any amounts from their TFSAs so the conditions of subsection 207.06(1) would not be met and the Minister would have no ability to waive or cancel the tax.

Principal Issues: Whether the deemed taxation year end which occurs on the death of the primary beneficiary pursuant to paragraph 104(13.4)(a) would apply to an alter ego trust that has elected under subparagraph 104(4)(a)(ii.1) to not have that subparagraph apply.

Position: Where the election in subparagraph 104(4)(a)(ii.1) is made, paragraph 104(13.4)(a) will not apply to deem a taxation year to end on the day of death of the settlor of the alter ego trust.

Reasons: By electing to have subparagraph 104(4)(a)(ii.1) not apply to the trust, paragraph 104(4)(a) also would not apply to the trust. Accordingly, there is no relevant day of death for purposes of the preamble of subsection 104(13.4).