Income Tax Severed Letters - 2022-06-29

Conference

3 May 2022 CALU Roundtable Q. 2, 2022-0928701C6 - Mandatory Disclosure Rules

Summary Under
Tax Topics - Income Tax Act - Section 237.3 - Subsection 237.3(2) - Paragraph 237.2(3)(c)
factors relevant to reporting obligation
Summary Under
Tax Topics - Income Tax Act - Section 237.3 - Subsection 237.3(1) - Reportable Transaction - Paragraph (a)
factors regarding whether a fee is described in para. (a)

Principal Issues: Whether the sale of a standard commercial financial product, which unbeknownst to the sales person is subsequently combined with other tax strategies within a series of transactions that includes an avoidance transaction that is a “reportable transaction” as defined in subsection 237.3(1) of the Act, results in a reporting requirement for the sales person pursuant to subsection 237.3(2) of the Act.

Position: Question of fact.

Reasons: Would require all of the facts and circumstances to answer the question definitively.

3 May 2022 CALU Roundtable Q. 3, 2022-0928721C6 - Recent Changes to Section 84.1

Unedited CRA Tags
84.1(2)(e), 84.1(2.3)
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2.3) - Paragraph 84.1(2.3)(a)
disposition is “by reason of death” if a causal link/ if s. 84.1(2.3)(a) applies, s. 84.1 inapplicable if the transaction with the purchaser is not within s. 84.1
Words and Phrases
by reason of death
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2.3) - Paragraph 84.1(2.3)(b)
purported s. 84.1(2.3)(b) numerical limitation is meaningless and of no effect
Summary Under
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(2.3) - Paragraph 84.1(2.3)(c)
documentary requirements are mandatory

Principal Issues: Application of amendments to section 84.1 by Bill C-208.

Position: See below.

Reasons: See below.

3 May 2022 CALU Roundtable Q. 4, 2022-0928801C6 - ELHT and Key Employee Rules

Unedited CRA Tags
144.1(2)(f), 144.1(2)(e)(ii), 144.1(2)(e)(i)
Summary Under
Tax Topics - Income Tax Act - Section 144.1 - Subsection 144.1(2) - Paragraph 144.1(2)(f)
s. 144.1(2)(f) does not apply to s. 144.1(2)(e)(ii)

Principal Issues: Whether the condition in paragraph 144.1(2)(f) applies only to a class of beneficiaries described in subparagraph 144.1(2)(e)(i).

Position: Yes.

Reasons: See below.

3 May 2022 CALU Roundtable Q. 5, 2022-0928831C6 - Policy Loan Repayment

Unedited CRA Tags
3, 4, 56(1)(j), 60(s), 111(8), 148(1), 148(9)
Summary Under
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(s)
excess s. 60(s) amount cannot be recognized in other years
Summary Under
Tax Topics - Income Tax Act - Section 111 - Subsection 111(8) - Non-Capital Loss - A
excess s. 60 deductions do not generate non-capital losses

Principal Issues: Where a taxpayer repays a policy loan and is entitled to a deduction in accordance with paragraph 60(s) of the Act that exceeds the taxpayer's income for the year, can such excess amount be deducted by the taxpayer in any other taxation year?

Position: The excess amount cannot be deducted by the taxpayer in any other taxation year.

Reasons: Scheme of the Act.

3 May 2022 CALU Roundtable Q. 6, 2022-0928841C6 - Segregated Fund beneficiary Designation

Unedited CRA Tags
138(12)
Summary Under
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)
s. 15(1) might apply where a corporation pays the premiums on a segregated fund insurance policy under which its shareholder or spouse is the beneficiary

Principal Issues: Does a shareholder or other benefit arise on making a revocable segregated fund beneficiary designation?

Position: Question of fact.

Reasons: Long-standing positions.

3 May 2022 CALU Roundtable Q. 7, 2022-0928851C6 - Life insurance shares

Unedited CRA Tags
15(1), 56(2), 246(1)

Principal Issues: Whether an arrangement involving life insurance shares could result in the application of the shareholder benefit rules in subsection 15(1) or the application of the benefit provisions in subsections 56(2) or 246(1).

Position: General comments provided.

Reasons: The determination of whether these provisions apply to a particular arrangement is a question of fact that can only be ascertained on a case-by-case basis following a review of all the facts and circumstances of the arrangement.

3 May 2022 CALU Roundtable Q. 8, 2022-0928871C6 - Employee benefits and Life Insurance

Unedited CRA Tags
148(7)
Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)
a life insurance policy’s sale to an employee for less than FMV could produce a s. 6(1)(a) benefit even where the employer’s payment of premiums had been taxable

Principal Issues: Does the transfer of a life insurance policy from a corporation to an individual result in an employee/shareholder benefit?

Position: Either of subsections 6(1) or 15(1) of the Act may apply to include in the income of the individual, as the case may be, the amount by which the fair market value of the policy exceeds any actual consideration paid by the individual for the policy.

Reasons: Longstanding positions.

3 May 2022 CALU Roundtable Q. 9, 2022-0928891C6 - Subsection 104(6)

Unedited CRA Tags
104(6); 104(13); 104(24); 95(1); 84(1); 84(2); 84(3)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6)
a trust cannot get a deduction for distributing phantom income if the trust deed lacks a phantom income clause
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24)
payment of distribution does not deem it to have been payable in the year

Principal Issues: Question 1: Whether a deemed dividend by virtue of subsection 84(2) or (3) can be deducted by the trust where the cash received on the winding-up of the corporation or the redemption of the shares is paid by the trust to the capital beneficiaries in the year the redemption or winding up occurs.
Question 2: What powers must be contained in a trust agreement to allow the trustees to pay cash to income beneficiaries equal to phantom income in the form of a subsection 84(1) deemed dividend or FAPI and have the income allocated to the income beneficiaries.

Position: Question 1: Question of fact based on the terms of the trust agreement and the relevant trust law.
Question 2: Where an amount included in the taxable income of a trust is not recognized as income or capital for trust law purposes (referred to as “phantom income”), the terms of the trust must specifically permit an amount equivalent to the phantom income to be paid or payable or, alternatively, provide the trustees with the discretion to pay out or make payable amounts that are defined as income under the Act in order for the phantom income to become payable to any beneficiary.

Reasons: See below.

3 May 2022 CALU Roundtable Q. 10, 2022-0928901C6 - 2022 CALU – Q10 – Private Health Services Plan

Unedited CRA Tags
6(1)(a), 248(1) “private health services plan”
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Private Health Services Plan
a health spending account for a single shareholder/employee likely does not qualify as a PHSP
Summary Under
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i)
single shareholder/employee HSA does not qualify

Principal Issues: Whether a health spending account established for a sole employee-shareholder can qualify as a private health services plan.

Position: No.

Reasons: Plan is not in the nature of insurance.

3 May 2022 CALU Roundtable Q. 11, 2022-0928911C6 - Segregated Funds - S 160

Unedited CRA Tags
160(1)
Summary Under
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1)
question of fact whether s. 160 applies to a death payment made out of a segregated fund

Principal Issues: Can the CRA confirm its assessing practices under section 160 of the Act in relation to beneficiary designations under segregated fund policies?

Position: General comments provided.

Reasons: Given the unique financial products, and various legislation governing them, the application of section 160 of the Act is decided on a case-by-case basis.