Income Tax Severed Letters - 2021-08-25


15 June 2021 STEP Roundtable Q. 1, 2021-0892681C6 - Trust Residency and Departure Tax

Unedited CRA Tags
128.1(4); 220(4.5)-(4.54)
CRA generally requires LCs to secure exit tax

Principal Issues: When an inter vivos personal trust does not have sufficient liquidity to pay its departure tax and seeks a deferral by providing security, from an administrative perspective, is there a difference between a trust and an individual? Would the CRA consider a secured line of credit that it can draw on as adequate security?

Position: In general there is no difference. The CRA would not normally consider a line of credit to be adequate security.

Reasons: See below.

15 June 2021 STEP Roundtable Q. 2, 2021-0882201C6 - Definition of Arm's Length Transfer

Unedited CRA Tags
a loan made, on arm’s length terms to a trust, that is motivated partly by who the beneficiaries are, is not an arm’s length transfer
loan on arm's length terms by resident father to NR trust for his resident children caused the trust to be a s. 94(3)(a) trust

Principal Issues: Interpretation of paragraph (a) of the definition of “arm's length transfer” in subsection 94(1). In the example provided, would Father’s loan to the trust be an arm’s length transfer?

Position: Question of fact; however, very likely no.

Reasons: See below

15 June 2021 STEP Roundtable Q. 3, 2021-0883151C6 - Reasonable Return on Note

Unedited CRA Tags
120.4(1), 120.4(1)(f)(ii), 120.4(1)(g)(ii),
the reasonable return TOSI exclusion can apply to interest-bearing promissory notes issued in satisfaction of family trust distributions
interest-bearing promissory note distributed to passive beneficiary regarding a related business would be includible under para. (d) subject to reasonable return exclusion

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.

15 June 2021 STEP Roundtable Q. 4, 2021-0883141C6 - TOSI on Dividends

Unedited CRA Tags
a passive real estate company would not generate TOSI to its equal significant shareholders
excluded share, or excluded amount - (e)(i), exclusion would apply re dividend income from equally–owned real estate rental company

Principal Issues: Is TOSI applicable on dividends derived solely from rental income

Position: Question of Fact

Reasons: If the activity of the corporation constitutes a "business", excluded share exception applies. If not, there may not be a "related business"

15 June 2021 STEP Roundtable Q. 5, 2021-0883001C6 - Income Attribution from AET

Unedited CRA Tags
75(2), 96(1), 248(5)
"second generation income" is not subject to s. 75(2) attribution
application of s. 82(2) where s. 75(2) applies to dividend income allocated by a partnership
substituted property rule does not apply to "second generation income"

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

Position: General comments provided.

Reasons: See below.

15 June 2021 STEP Roundtable Q. 6, 2021-0883021C6 - Vested Indefeasibly

Unedited CRA Tags
104(4)(b), 108(1), 107.4(4), 106(2)(a), 104(13)
meaning of vested indefeasibly/ no particular T3 disclosure is required where all the interests in a trust have vested indefeasibly
Words and Phrases
vested indefeasibly
s. 107.4(4) establishes floor for FMV proceeds under s. 70(5) of a trust capital interest that has vested indefeasibly

Principal Issues: 1. For paragraph (g) of the definition of “trust” in subsection 108(1), what are the conditions for all interests in a trust to vest indefeasibly? 2. How is this disclosed on the trust’s T3 return? 3. What are the tax implications when a beneficiary resident in Canada holds an interest which has vested indefeasibly, and the beneficiary dies?

Position: 1. Question of fact and law, general guidance provided in 2018-0744111C6. 2. The T3 Return does not explicitly request this information. 3. The capital interest is deemed to have been disposed on death for an amount that is not less than the beneficiary’s pro-rata share of the fair market value of the total net assets of the trust.

Reasons: See below.

15 June 2021 STEP Roundtable Q. 7, 2021-0879021C6 - Subsection 107(2)

Unedited CRA Tags
107(2); 248(25); 248(1); 107.4(3)
a trust with children beneficiaries could not roll-out property under s. 107(2) to a trust for the benefit of those children
2nd trust whose beneficiaries were named beneficiaries of 1st trust was not itself a beneficiary
Words and Phrases

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.

15 June 2021 STEP Roundtable Q. 8, 2021-0887411C6 - ITRD - Remissions

90 business day (or longer) ruling services standard, and graduated remission of fees where target not met

Principal Issues: How will the Income Tax Rulings Directorate determine remissions, as described in section 7 of the Service Fees Act, for rulings and pre-ruling consultations.

Position: Remissions will apply to rulings and pre-ruling consultations received by the Directorate after April 1, 2021. Information on calculating remissions is described in Appendix H of IC 70-6R11 Advance Income Tax Rulings and Technical Interpretations

15 June 2021 STEP Roundtable Q. 9, 2021-0883161C6 - Safe Income

Unedited CRA Tags
55(1), (2.1) and (5)
scope of what is a non-deductible expense for safe income purposes

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.

15 June 2021 STEP Roundtable Q. 10, 2021-0883191C6 - Acquisition of control

Unedited CRA Tags
84(3), 129(1)(a), 249(4)(a), 251.2(2), 256(9)
a dividend refund, from a redemption also generating an AOC, arises in the taxation year commencing with the AOC
“immediately before” timing in s. 249(4) means that a share redemption effecting an AOC generates a resulting dividend refund in the taxation year commencing with the AOC

Principal Issues: As discussed in the scenario below, where a corporation acquires its own shares at a particular time on a day, which share acquisition results in an acquisition of control (AOC) of the corporation, when is the AOC of the corporation?

Position: The AOC of the corporation occurs at the time when the corporation acquires its own shares, such that the subsection 84(3) deemed dividend that arises on the corporation's acquisition of its own shares, is considered to be paid by the corporation in the new taxation year, and the dividend refund to the corporation, with respect to the subsection 84(3) deemed dividend, is for the new taxation year.

Reasons: See below.

15 June 2021 STEP Roundtable Q. 11, 2021-0883221C6 - excess TFSA amount

Unedited CRA Tags
207.01(1)"excess TFSA amount", 207.02, 207.06(1)
CRA cannot waive tax for an innocent TFSA overcontribution where the investments become worthless
excess can only be eliminated through future contribution room where investments become worthless

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.

15 June 2021 STEP Roundtable Q. 12, 2021-0885671C6 - Property owned jointly

Unedited CRA Tags
73(1), 73(1.01), 73(1.02), 104(4)
a s. 73(1.01)(c)(iii) trust can receive jointly or individually owned property from the spouses

Principal Issues: Is it possible for spouses to jointly create a trust which meets the conditions set out in subparagraph 73(1.01)(c)(iii) of the Act with a contribution of property jointly-owned by the spouses? Further, is it possible for one or both spouses to make subsequent contributions to the trust on a tax-deferred basis with property that is owned jointly by the spouses, and other property that is owned individually? Assume that both spouses have attained 65 years of age and are resident in Canada at all relevant times. Additionally, would paragraph 104(4)(a) apply in this particular situation?

Position: Yes. Yes. Yes.

Reasons: See below.

15 June 2021 STEP Roundtable Q. 13, 2021-0883051C6 - Paragraph 104(13.4)(a)

Unedited CRA Tags
104(4); 104(13.4)
no deemed year end under s. 104(13.4)(a) on settlor’s death if trust has elected under s. 104(4)(a)(ii.1)

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).

15 June 2021 STEP Roundtable Q. 14, 2021-0883041C6 - Extending the GRE 36-month period

Unedited CRA Tags
248(1); 56(1)(a)(i); 104(6); 104(13); 104(24)
no CRA discretion to extend the 36 month period
pension benefit not distributed to beneficiary might nonetheless be payable in the year
s. 104(27) designation could not be made for a pension amount received after a trust ceased to be a GRE

Principal Issues: Can the Minister extend an estate’s graduated rate estate 36-month period when the estate receives a lump-sum pension benefit after the 36-month period has ended and the late payment is beyond the executor's control?

Position: No. However, where in the taxation year of the estate, an amount of the estate's income has become payable to a beneficiary of the estate, that amount will be included in the income of the beneficiary pursuant to subsection 104(13) of the Act. The estate may take a corresponding deduction pursuant to subsection 104(6).

Reasons: Wording of the Act

15 June 2021 STEP Roundtable Q. 15, 2021-0888731C6 - Online T3 Registration

immediate on-line registration is available to most trusts

Principal Issues: Can the CRA provide an update regarding the new online application process for a trust account number?

Position: General comments provided

Reasons: See below