Income Tax Severed Letters - 2022-06-15

Ruling

2021 Ruling 2021-0880641R3 F - Changes to existing monetization arrangements

Unedited CRA Tags
80.6
Summary Under
Tax Topics - Income Tax Act - Section 80.6 - Subsection 80.6(1)
substituting the index used in a monetization arrangement did not de-grandfather it from the synthetic disposition rules
Summary Under
Tax Topics - General Concepts - Transitional Provisions and Policies
agreement novation likely would lose grandfathering

Principal Issues: Whether a change of benchmark index in monetization arrangements entered into in XXXXXXXXXX would trigger the application of section 80.6.

Position: No.

Reasons: See below.

Technical Interpretation - External

30 March 2022 External T.I. 2017-0737181E5 F - Right to receive income from a trust

Unedited CRA Tags
73(1), 73(1.01)
Summary Under
Tax Topics - Income Tax Act - Section 73 - Subsection 73(1.01) - Paragraph 73(1.01)(c) - Subparagraph 73(1.01)(c)(ii)
clause suspending the right to income on bankruptcy would not satisfy s. 73(1.01)(c)(ii)

Principales Questions: Whether a trust with one beneficiary meets the conditions of subparagraph 73(1.01)(c)(ii) and is entitled to the rollover under subsection 73(1) where the trust indenture temporary suspends the right of the sole beneficiary to receive payment from the trust in case of bankruptcy?

Position Adoptée: No.

Raisons: The phrase "entitled to receive all of the income of the trust" in subparagraph 73(1.01)(c)(ii) means to have the legal right to enforce payment of that income. In order for a trust’s sole beneficiary to have the legal right to enforce payment of the income of the trust, any discretion in respect of the distribution of all or part of the income of the trust must be solely in the hands of the beneficiary. Where a trust indenture suspends the right to receive income from the trust during the bankruptcy of the sole beneficiary, the beneficiary does not have the legal right to enforce payment during that period of time. Therefore, the transfer from the individual to the trust would not qualify as qualifying transfer and would not benefit from the rollover treatment set out in 73(1).

Conference

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 1, 2021-0899661C6 - Application of paragraph 20(1)(bb)

Unedited CRA Tags
Paragraph 20(1)(bb)
Summary Under
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb)
licensed securities dealers satisfy the principal business test and reasonable management fees paid to them are deductible

Principal Issues: 1) How does the CRA interpret the term “commission” in paragraph 20(1)(bb) and what factors are to be considered in determining whether a payment made to a broker is a “commission”? 2) Whether the technical interpretation 9017855 “deductibility of fees paid to stockbrokers” still represents the CRA’s position? 3) Whether the principal business of a person or partnership carrying on a financial services business who provides insurance, investment and lending services relates to, among other things, the provision of services in respect of the administration or management of shares or securities of the taxpayer even if these investment service activities is less than 50% of the person or partnership’s total business? 4) Whether the principal business of an investment broker, for the purposes of paragraph 20(1)(bb) consists in providing advice with respect to the advisability of purchasing or selling a specific share or security of the given the significant changes in the financial industry over the past decades.

Position: 1) The term “commission” in paragraph 20(1)(bb) generally refers to an amount calculated on a percentage basis. 2) No. In the circumstances where the fees paid by a client allow him to make a fixed amount of stock purchases or sales, these fees would be fully deductible by virtue of paragraph 20(1)(bb), provided such fees are reasonable and paid for services in respect of the administration or management of shares or securities of the taxpayer. 3) The term “includes” in clause 20(1)(bb)(i)(B) means that the principal business of a person should be determined by also considering the other activities of that person. It is assumed that a person having a permit issued by the Canadian securities regulators will generally satisfy the “principal business” condition. 4) It is reasonable to assume that the principal activity of a person who holds a broker licence is to advise as to the advisability of purchasing or selling shares or securities or to offer administration or management services.

Reasons: 1), 2) According to the case law. 3) Wording of paragraph 20(1)(bb) 4) Question of fact.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 3, 2021-0896031C6 F - Règles sur les pertes apparentes

Unedited CRA Tags
40(2)g)(i), 40(2)g)(iv)(B), 54, 251.1(1)
Summary Under
Tax Topics - Income Tax Act - Section 54 - Superficial Loss
application of superficial loss rule to reacquisition of identical shares by spousal RRSP on the 30th day
Summary Under
Tax Topics - Statutory Interpretation - Interpretation Act - Section 27 - Subsection 27(5)
counting 30 day period starting with disposition

Principales Questions: Est-ce qu’une perte est une perte apparente réputée nulle en vertu du sous-alinéa 40(2)g)(i) dans deux situations données? / Whether a loss is a superfical loss deemed to be nil under subparagrapg 40(2)(g)(i) in two given situations.

Position Adoptée: Généralement, le sous-alinéa 40(2)g)(i) ne trouve pas application lorsque les deux conditions énoncées aux alinéas a) et b) à la définition de « perte apparente » prévue à l’article 54 ne sont pas remplies. / Generally, subparagrapg 40(2)(g)(i) does not apply where the two conditions set out in paragraphes (a) and (b) of the definition of « superficial loss » in section 54 are not met.

Raisons: Libellé de la Loi / Wording of the Act.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 4, 2021-0895991C6 F - Déduction pour don de bienfaisance corporatif

Unedited CRA Tags
110.1(1), 123.4(1), 123.4(2), 129(4)
Summary Under
Tax Topics - Income Tax Act - Section 123.4 - Subsection 123.4(1) - Full Rate Taxable Income - Paragraph (b)
no charitable deduction can reduce aggregate investment income

Principales Questions: Pour les fins de la déduction d’impôt générale prévue au paragraphe 123.4(2), est-ce que l’ARC permet de prendre en compte le gain en capital imposable réalisé par une société dans une situation donnée? / Does the CRA allow the taxable capital gain realized by a corporation in a particular situation to be taken into account for purposes of the general tax deduction under subsection 123.4(2)?

Position Adoptée: Non. / No.

Raisons: Libellé de la Loi. / Wording of the Act.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 5, 2021-0903871C6 F - HBP - Breakdown of marriage or common-law partners

Unedited CRA Tags
146.01(1), 146.01(2), 146.01(2.1), 248(1)
Summary Under
Tax Topics - Income Tax Act - Section 146.01 - Subsection 146.01(1) - Regular Eligible Amount - Paragraph (f)
individual could make an HBP withdrawal after she started living separate and apart (but still in same house) from her common-law partner
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Common-Law Partner
former common-law partners can live separate and apart in the same house, and cessation of their status is effective the first day
Summary Under
Tax Topics - Income Tax Act - Section 146.01 - Subsection 146.01(2.1) - Paragraph 146.01(2.1)(a)
when two spouses separate in the same co-owned house, one can make an HBP withdrawal to purchase the co-ownership interest of her spouse

Principales Questions: 1) Can a taxpayer, who inhabited a house wholly owned by their spouse or common-law partner but who now lives separate and apart due to a breakdown of their marriage or common-law partnership, benefit from the RRSP Home Buyers' Plan (HBP) despite living under the same roof? 2) Whether the position would be different if the taxpayer co-owned the home?

Position Adoptée: 1) Generally yes, provided the other HBP conditions are met. 2) No.

Raisons: 1) In the case of a marriage, subsection 146.01(2.1) provides relief from the first-time homebuyer condition. In the case of a common-law partnership, the taxpayer would not be considered to have a common-law partner in applying the first-time homebuyer condition. 2) In the case of either a marriage or common-law partnership, subsection 146.01(2.1) provides relief from the first-time homebuyer condition.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 6, 2021-0896061C6 F - Prolonged Administration of an Estate

Unedited CRA Tags
104(18)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18)
s. 104(18) can apply where an executor has discretion to defer the payment of income for the benefit of minor beneficiaries over an extended period
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1)
extended administration clause created an extended trust
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6)
s. 104(18) overrode the s. 104(6) requirement to make income payable in the year

Principales Questions: Le paragraphe 104(18) peut-il s'appliquer dans une situation donnée de liquidation successorale prolongée? / Whether subsection 104(18) can apply to a given situation of prolonged estate liquidation?

Position Adoptée: Possiblement. Question de fait. / Possibly. Question of fact.

Raisons: La question de savoir si un testament donné a pour effet de prolonger la liquidation de la succession est une question de fait et de droit. Si la liquidation de la succession est prolongée, le paragraphe 104(18) pourrait s'appliquer en autant que toutes ses conditions soient respectées. / The question of whether a given will has the effect of prolonging the liquidation of the estate is a question of fact and law. In a situation where the liquidation of an estate is prolonged, subsection 104(18) could apply provided all its condition are met.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 7, 2021-0899681C6 F - Stock option, Short sale and Identical property

Unedited CRA Tags
7(1.31)
Summary Under
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.31)
s. 7(1.31) applies to sale of shares acquired on exercise to cover short, but not to the sale of the shorted shares
Summary Under
Tax Topics - Income Tax Act - Section 39 - Subsection 39(4)
s. 39(4) election can apply to both the dispositions occurring in connection with short sale transactions

Principales Questions: Le paragraphe 7(1.31) et, par conséquent, le paragraphe 47(3), pourraient-ils s'appliquer dans la situation où un employé qui a vendu à découvert un titre détenu en tant qu’immobilisation exerce une option d’achat sur un titre identique et couvre sa position à découvert à l’intérieur d’un délai de 30 jours suivant la vente à découvert? / Could subsection 7(1.31) and, consequently, subsection 47(3) apply in a situation where an employee who sold short a security held as capital property exercise a stock option on an identical security and cover his/her position within 30 days after the short sale?

Position Adoptée: Possiblement. Cependant, la règle du coût moyen prévue au paragraphe 47(1) pourrait néanmoins s’appliquer à la vente à découvert. / Possibly. However, the averaging rule in subsection 47(1) could still apply to the short sale.

Raisons: Lors d'une vente à découvert il y a deux dispositions aux fins fiscales pour le vendeur à découvert. La première disposition survient lors de la vente à découvert et le titre vendu n’est pas un titre acquis aux termes d’une convention d'achat d'actions. Cependant, le paragraphe 7(1.31) pourrait s'appliquer à la deuxième disposition, soit celle qui survient lors de la remise à l’emprunteur du titre identique acquis aux termes d’une convention d’achat d’actions. / A short sale transaction includes two dispositions for tax purposes for the short seller. The first disposition occurs when the short sale is entered into and the security sold at that time is not a security acquired under a stock option agreement. However, subsection 7(1.31) could apply to the second disposition, which occurs when an identical security acquired under a stock option agreement is returned to the lender.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 8, 2021-0899701C6 F - Post-mortem planning - Pipeline

Summary Under
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2)
a pipeline transaction can use an existing corporation rather than a Newco
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1)
pipeline transaction can be structured to access hard ACB

Principal Issues: Whether an existing corporation (“Existing Corporation”) whose shares are wholly or partly owned by the beneficiaries of the deceased’s estate (“Beneficiaries”) or owned by persons other than the Beneficiaries can be used to implement a pipeline transaction (“Pipeline”).

Position: Subject to the possible application of section 84.1 and subsection 245(2), the deceased’s estate (“Estate”) can implement a Pipeline using an Existing Corporation whose shares are owned, in whole or in part, by the Beneficiaries or by persons other than the Beneficiaries.

Reasons: Although the Estate’s transfer of the Target shares to the Existing Corporation does not appear to engage the application of subsection 84(2), section 84.1 and subsection 245(2) may nevertheless apply, among other provisions, to the Pipeline after a review of all the facts and circumstances surrounding each specific situation.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 9, 2021-0903501C6 F - RRSP overcontribution and RRIF withdrawal

Unedited CRA Tags
204.1(2.1), 204.2(1.1), (1.2)
Summary Under
Tax Topics - Income Tax Act - Section 204.2 - Subsection 204.2(1.2) - J
an RRSP or RRIF withdrawal has an immediate impact on tax on the cumulative excess
Words and Phrases
life income fund locked-in retirement account

Principales Questions: 1) Whether the cumulative excess amount of an individual in respect of RRSPs is reduced by an amount received in the year by the individual out a RRIF of which the individual is the annuitant?
2) Whether the answer would be the same if the amount were received out of a life income fund (“LIF”) or a locked-in retirement account (“LIRA”)?

Position Adoptée: 1) Yes, to the extent the individual does not claim a deduction under paragraph 60(l). The amount of the withdrawal is to be included in computing the individual’s income.
2) Yes.

Raisons: 1) and 2) The Act and prior positions. A LIF and a LIRA are, for the purposes of Act, treated respectively as a RRIF and a RRSP.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 10, 2021-0896101C6 F - Death of seg. fund policyholder - income allocatio

Unedited CRA Tags
70(2), 104(6), (13), (24), 138(12), 138.1, 148
Summary Under
Tax Topics - Income Tax Act - Section 138.1 - Subsection 138.1(1) - Paragraph 138.1(1)(f)
accrued income under a segregated fund is not deemed by s. 138.1(1)(f) to be a right or thing
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24)
deeming of an amount to be payable for s. 104(24) purposes does not create a legal entitlement to it

Principales Questions: Where, under the terms of a segregated fund policy, the insurer allocates a segregated fund's income based on the concept of time-weighted units and the policyholder dies in the year, would the income allocated to the deceased policyholder for the year of death (in respect of the segregated fund’s income for the period up to the date of death of the policyholder) be treated as a right or thing under subsection 70(2)?

Position Adoptée: No. Rather, the income is to be included in computing the deceased policyholder’s income for the year of death.

Raisons: It is our understanding that where income of a segregated fund is allocated to a policyholder under a segregated fund policy, the policyholder does not obtain a right to an actual distribution out of the segregated fund. As the policyholder to whom a segregated fund income is allocated has no corresponding right to receive an amount as a result of the allocation, it cannot be said that such a policyholder had a right or thing at the time of death with respect to such income.

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 11, 2021-0896021C6 - APFF Q.11 - T1135 and situs of cryptocurrencies

Unedited CRA Tags
233.3
Summary Under
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(1) - Specified Foreign Property - Paragraph (a)
CRA is currently reviewing whether and when cryptocurrencies may not be foreign property

Principal Issues: Whether the CRA would consider taking a position that the situs of cryptocurrencies follows the tax residency of the holder for Canadian reporting purposes.

Position: No position adopted.

Reasons: Issue currently under review by the CRA.