Income Tax Severed Letters - 2022-06-08

Principal Issues: 1) Whether a specified individual would be able to rely on the “reasonable return” exception in subparagraph (g)(ii) of the definition of “excluded amount” in subsection 120.4(1) in the described scenarios. 2) Whether interest earned on a loan granted by a child under 18 year old to his mother is “split income” pursuant to the definition in subsection 120.4(1) in the described scenarios. 3) Whether an unreasonable salary paid by a company to a “specified individual” in respect of the “related business” pursuant to subsection 120.4(1) is “split income” pursuant to the definition in subsection 120.4(1).

Position: 1) Question of fact that can only be determined after a review of all the facts and circumstances applicable to a particular situation. 2) No, subject to GAAR. 3) No. However, other provisions may apply.

Reasons: 1) 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. 2) Interest earned by a “specified individual” on a loan made to an individual is not “split income” pursuant to subsection 120.4(1). However, GAAR may be considered depending on the purpose and the use of the proceeds of the loan by the mother. 3) Salary income is not “split income” pursuant to subsection 120.4(1). However, depending on the facts and circumstances of each specific situation, other provisions of the Act may apply.

Principales Questions: Quelle est la position de l’ARC quant à l’application de la RGAÉ pour une situation donnée? / What is the CRA’s position on the application of the GAAR in a given situation?

Position Adoptée: Aucune. / None.

Raisons: Question de fait. / Question of fact.

Principal Issues: 1) Whether the additional tax from a previous taxation year can be deducted from the tax on split income (TOSI) pursuant to subsection 120.2(1) ITA. 2) Whether Form T691 remained unchanged after June 25, 2013 with respect to the calculation of the additional taxes paid for minimum tax carryover purposes. 3) Whether the additional tax determined under subsection 120.2(3) for minimum tax carryover purposes should include the TOSI by subtracting it from the individual’s tax payable under Part I of the ITA as suggested by line 113 of Form T691.

Position: 1) No. 2) The form has not been modified since the amendment of subsection 120.2(3) ITA on June 26, 2013 with respect to its part 7 which deals with the calculation of the additional taxes paid for minimum tax carryover. 3) The additional tax determined under subsection 120.2(3) ITA for minimum tax carryover purposes should not include the TOSI by subtracting it from the individual’s tax payable under Part I of the ITA contrary to what is currently suggested by line 113 of Form T691.

Reasons: 1) Language of subsection 120.2(1) ITA. 2) Form T691 will be amended for taxation years 2021 and following to reflect the current wording of paragraph 120.2(3)b) of the ITA and will published at the beginning of 2022. 3) Paragraph 120.2(3)b) was amended in 2013, for the year 2000 and subsequent taxation years, to ensure that the additional tax does not include the TOSI under section 120.4. The CRA will correct the application of subsections 120.2(1) and (3) ITA, but will not issue new notices of assessment for taxation years prior to 2021 modifying the related amount of tax payable for those years.

Principal Issues: Whether the cost recovery method as described in IT-426R (Archived) Shares Sold Subject to an Earnout Agreement would be applicable to a limited partnership in the situation as described below?

Position: No.

Reasons: Conditions in par. 2 of IT-426R(Archived) not satisfied. Conditions not designed for limited partners of a limited partnership in a situation as described below.

Principal Issues: In the context of a sale of shares, the sellers may agree in advance that elections under subsections 185.1(3) and 184(3) shall be made in the event of, respectively, an excessive eligible dividend designation or an excessive capital dividend election. a) Whether the CRA accepts this consent in advance with respect to the elections under subsections 185.1(3) and 184(3) without the shareholders’ involvement at the time the election is made. b) Whether the CRA requires the issuance of T5 slips where an election under subsection 184(3) is made? Whether the CRA requires the issuance of amended T5 slips where an election under subsection 185.1(2) is made?

Position: a) Yes, b) Generally no, but see response below for information requirements.

Reasons: Wording of the Act.

Principales Questions: Est-ce que la « JVM de toute contrepartie reçue par le donataire reconnu pour la disposition du TNA » au paragraphe 118.1(13) se limite à la notion de « produit de disposition » prévue à l’article 54? / Is the "FMV of any consideration received by the donee for the disposition" in subsection 118.1(13) limited to the notion of "proceeds of disposition" in section 54?

Position Adoptée: Non / No.

Raisons: La notion de "contrepartie" est plus large. / The notion of "consideration" is broader.

Principales Questions: 1. Can the CRA provide an update of its policy regarding the disclosure of a nominee relationship? 2. In a context of the sale of a taxable Canadian property, should a non-resident person acting as a nominee for a resident of Canada obtain a certificate pursuant to section 116? 3. Does the CRA recommend disclosing a nominee relationship by sending Form TP-1079.PN that is filed with the Quebec Revenue Agency?

Position Adoptée: 1. The CRA is still of the view that counter letters should be disclosed in a timely manner. 2. No. 3. No.

Raisons: 1. Case law and CRA’s long standing position. 2. Since the seller is a resident of Canada, section 116 does not apply. 3. The obligations of any taxpayer under the Act are based on the true rights and obligations of a taxpayer and include any tax implications arising from the counter letter. The documents and information filed with the CRA must reflect such rights and obligations of the taxpayer, including the counter letter.

Principal Issues: An individual (“Father”) is the only person actively engaged on a regular, continuous and substantial basis in the activities of the business of a corporation (“Opco”). The business of Opco is an excluded business for Father. Further to an estate freeze implemented in a previous year, a discretionary family trust (“Trust”) holds non-voting participating shares of Opco and Father holds preferred and voting shares of Opco. The beneficiaries of Trust are the wife of Father (“Mother”) and their only child (“Child”) aged 20. On December 30, 2021, Father dies. Situation A: Pursuant to the will of Father, a testamentary trust (“Trust C”) for the benefit of Child is set-up and 50% of the preferred shares owned by Father at the time of his death are transferred to Trust C for the benefit of Child. According to the will of Father, Trust C should pay $30,000 of income to Child annually and should be dissolved in the year Child reaches 36 years of age. If the amount of dividend paid by Opco to Trust C in a year is less than $30,000, Trust C may cause the redemption of a number of preferred shares sufficient to attain the amount of $30,000. On the redemption, Trust C will realize a deemed dividend under subsection 84(3) and the amount of deemed dividend will be allocated to Child. When Child attains the age of 36, the shares of Opco will be transferred to him and he will then ask for the redemption of the preferred shares and realize a deemed dividend in the amount of $100,000. Situation B: Pursuant to the trust indenture of Trust, Father has a power of appointment. Father exercised this power in his will and from the date of his death to the date of dissolution of Trust, Trust should pay $30,000 of income to Child annually and in the year Child reaches the age of 36, Trust will be dissolved and the capital of Trust will be transferred to Child. If Trust did not receive dividends of $30,000 from Opco in a year, Trust may cause the redemption of a number of preferred shares sufficient to attain the amount of $30,000. On the redemption, Trust will realize a deemed dividend under subsection 84(3) and the deemed dividend will be allocated to Child.

Position: Situation A: Yes. Situation B: No.

Reasons: Situation A: The rule is applicable, since Trust C acquired the Opco shares as a consequence of the death of Father for the benefit of Child. Situation: B The rule is not applicable for the years during which Trust owns the Opco shares, since Trust acquired the Opco shares before the death of Father. The rule will be applicable after the liquidation of Trust and the acquisition of the Opco shares by Child, since Child will acquire the shares as a consequence of the death of Father by virtue of the application of the power of appointment in the Father's will.