Income Tax Severed Letters - 2022-12-07

Principal Issues: a) Can the election described in the definition of electing contributor in subsection 94(1) be late-filed? b) Can the election described in the definition of electing trust in subsection 94(1) be late-filed?

Position: a) No. b) No.

Reasons: See below.

Principal Issues: Whether an in specie capital or income distribution by a personal trust will give rise to a forgiven amount for the purposes of section 80 in the described situation.

Position: Generally no.

Reasons: Based on the CRA’s long-standing position on debt settlement in various factual situations relevant to this issue.

Principal Issues: Whether document 2009-0350491R3 represents the CRA's current views on the application of paragraph 88(1)(d.3); 2) Whether the deemed reacquisition, pursuant to subsection 104(4), of shares of the capital stock of a corporation wholly-owned by an alter ego trust on the death of the settlor results in an acquisition of control of the corporation in circumstances described in paragraph 88(1)(d,3).

Position: 1. Yes - document 2009-0350491R3 represents the current views of the CRA; 2. No.

Reasons: 1. No change in CRA’s position; 2. See below.

Principal Issues: 1. Does subsection 43.1(1) apply when a parent disposes of a remainder interest in real property to a trust under which the parent's child is the beneficiary and the parent retains a life estate in the property? 2. What happens if the parent gifts the life estate in the property to the trust prior to their death? 3. What happens if the life estate held by the parent is terminated by his or her death?

Position: 1. Yes. 2. Paragraph 69(1)(b) and (c) will apply. 3. Paragraph 43.1(2)(a) and (b) apply to the termination.

Reasons: 1. Where a remainder interest in real property is disposed of to a trust by a parent who retains a life estate in the property, paragraph 43.1(1)(a) and (b) will apply to the disposition. Since the child of the parent is the beneficiary under the trust, pursuant to paragraph 251(1)(b), the parent and the trust are deemed not to deal with each other at arm's length. Accordingly, subparagraph 69(1)(b)(i) will apply to the disposition of the remainder interest if the parent receives no POD or POD less than FMV. If the remainder interest is disposed of by way of gift, subparagraph 69(1)(b)(ii) and paragraph 69(1)(c) will apply. 2. If parent disposes of the life estate to the Trust for no proceeds or for proceeds less than FMV, subparagraph 69(1)(b)(i) will apply to the disposition. If the parent disposes of the life estate by way of inter vivos gift to the trust, subparagraph 69(1)(b)(ii) and paragraph 69(1)(c) will apply to the disposition.
3. If the parent passes away prior to the sale of the property and the life estate to which subsection 43.1(1) applied is terminated, paragraph 43.1(2)(a) applies to the termination. Since the parent does not deal with the trust at arm's length, the ACB of the property held by the trust would be increased in accordance with paragraph 43.1(2)(b).

Principal Issues: a) Once a joint spousal or common-law partner trust is created jointly by spouses or common-law partners using jointly-owned property, can further contributions be made by the spouses or common-law partners at any time, in any form?
b) How is income computed in respect of the contributed property? Assume Spouse A and Spouse B contribute portfolios X and Y respectively. Assume both Spouse A and Spouse B are discretionary capital beneficiaries such that subsection 75(2) applies to both of them.

Position: a) Once a joint spousal or common-law partner trust is created, contributions are not limited only to the initial settlement of the trust or to only jointly-owned property.
b) In the situation described in the example, any income or loss from the investments in portfolio X or from property substituted for the investments in portfolio X, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio X or of property substituted for the investments in portfolio X, will be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Spouse A, while Spouse A is resident in Canada.
Similarly, any income or loss from the investments in portfolio Y or from property substituted for the investments in portfolio Y, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio Y or of property substituted for the investments in portfolio Y, shall, while Spouse B is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of Spouse B.

Reasons: See below.

Principal Issues: 1. In amending the deceased’s final T1 return for a subsection 164(6) election, is the filing of a T1 Adjustment Request sufficient? 2. When a subsection 164(6) election is filed and the loss application results in a refund, when does interest begin to accrue on the refund?

Position: 1. No. 2. Interest on the refund arising as a consequence of subsection 164(6) election begins 30 days after the latest of: (a) the first day immediately following the subsequent taxation year, (b) the day on which the return of income for that subsequent taxation year was filed, and (c) the day on which the amended return was filed under paragraph 164(6)(e).

Reasons: 1. Paragraph 164(6)(e) requires the legal representative to file an amended return of income. 2. Paragraphs 164(5)(d), (i), (j) and (k) apply for the purpose of the interest refund rules in subsection 164(3) and deem the overpayment to have arisen on the day that is 30 days after the latest of these three days.

Principal Issues: What is an habitual abode of an individual as referenced in Canadian tax treaties and what factors does the CRA review to make a determination?

Position: It is the place an individual normally lives during the relevant period of time. Various factors are considered, including frequency of stays and lifestyle in the country.

Reasons: Plain meaning of words, as well as various TCC and FCA positions and OECD Model Convention Commentary.

Principal Issues: Whether a deduction under paragraph 110(1)(d) is available in circumstances where paragraph 7(1)(e) applies?

Position: Yes

Reasons: 2017 amendments.