Income Tax Severed Letters - 2022-12-07

Conference

15 June 2022 STEP Roundtable Q. 1, 2021-0922021C6 - 104(21.2) Designation

Unedited CRA Tags
104(21), 104(21.2), 104(21.3), "eligible taxable capital gains" in subsection 108(1), "annual gains limit" and "cumulative gains limit" in subsection 110.6(1).
formula in s. 104(21.2) requires a pro rata allocation of the QSBC portion of trust capital gains to the beneficiaries to whom capital gains are allocated

Principal Issues: Can a designation of an amount under subsection 104(21.2) in respect of a beneficiary under a trust allow that beneficiary to take advantage of their lifetime capital gains exemption in a desired manner?

Position: No, the amount designated in subsection 104(21.2) will be equal to the particular beneficiary's proportionate share of all subsection 104(21) designations made by the trust in the particular year.

Reasons: The formulas in subsection 104(21.2) produce this result.

15 June 2022 STEP Roundtable Q. 2, 2022-0926761C6 - 104(4)(a)(ii.1) Election

Unedited CRA Tags
73(1); 73(1.01); 73(1.02); definition of “alter ego trust” in 248(1); 104(4)(a)(ii.1)
CRA will accept that an election is filed with a return even if the return is filed late

Principal Issues: 1. Will the CRA accept a late-filed subparagraph 104(4)(a)(ii.1) election? 2. Can the election be made by a spouse or common-law partner trust, or a joint spouse or joint common-law partner trust?

Position: 1. The CRA will only accept an election made under subparagraph 104(4)(a)(ii.1) if it is filed with the trust’s return of income for its first taxation year. 2. No.

Reasons: 1. Subparagraph 104(4)(a)(ii.1) is not a prescribed provision listed in section 600 of the Income Tax Regulations. 2. The election can only be made by an alter ego trust, the terms of which are described in clause 104(4)(a)(iv)(A).

15 June 2022 STEP Roundtable Q. 3, 2022-0924801C6 - Electing Contributor and Electing Trust

Unedited CRA Tags
94, 150(1), 220(3.2), 248(1)
election must be filed by filing-due date even if return itself is filed late
election can be filed with a late-filed return

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.

15 June 2022 STEP Roundtable Q. 4, 2022-0929911C6 - Death and Tax Payment over 10 Years

Unedited CRA Tags
159(5)
CRA does not have rigid guidelines as to what is “acceptable security”

Principal Issues: The tax payable by a deceased individual related to certain income and gains (rights and things per subsection 70(2) of the Income Tax Act, and deemed dispositions per subsections 70(5) and 70(5.2)) may be, pursuant to subsection 159(5), paid in 10 annual installments provided the taxpayer’s legal representative so elects and furnishes the Minister with security acceptable to the Minister. Can the CRA comment on what is acceptable security and what the recommended process should be to provide for such an arrangement?

Position: General comments provided.

Reasons: See response below.

15 June 2022 STEP Roundtable Q. 5, 2022-0928231C6 - Trust and Debt Forgiveness

Unedited CRA Tags
80
s. 80 may not apply where a trust distributes a debt, owing by a beneficiary, to the beneficiary

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.

15 June 2022 STEP Roundtable Q. 6, 2022-0928191C6 - Acquisition of control

Unedited CRA Tags
256(7)
rebuttable presumption that all the trustees of a trust form a control group
application of s. 256(7)(a)(i)(A) where trustee is replaced by related trustee

Principal Issues: Acquisition of control and change of trustee(s).

Position: See response below.

Reasons: Previous positions, in particular 2011-0401931C6.

15 June 2022 STEP Roundtable Q. 7, 2022-0928291C6 - paragraph 88(1)(d.3)

Unedited CRA Tags
88(1)(d.3)
alter ego trust could use s. 88(1)(d.3) for post-mortem bump if trust deed directed the post-mortem transfer of subsidiary’s shares to new parent
deemed disposition under s. 104(4)(a.4) is not itself sufficient to access s. 88(1)(d.3) regarding a subsidiary of the trust

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.

15 June 2022 STEP Roundtable Q. 8, 2022-0928251C6 - TOSI and multiple businesses

Unedited CRA Tags
120.4
splitting long hours between many companies may oust s. 120.4(1.1)(a)
individual’s contributions to a business are considered substantial if they are integral to its success

Principal Issues: Whether taxable dividends received by a husband and wife would be subject to TOSI where the husband and wife work on a full-time basis for various companies each of which has its own business and full-time staff, but less than 20 hours a week for any particular company?

Position: General comments provided.

Reasons: According to the law and previous positions.

15 June 2022 STEP Roundtable Q. 9, 2022-0929391C6 - Section 43.1 - Life Estate

Unedited CRA Tags
43.1(1), 43.1(2), 69(1)(b), 69(1)(c), 251(1)(b), 251(2)(a)
application of s. 43.1 where a remainder realty interest is transferred to personal trust and there is a subsequent life interest surrender

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).

15 June 2022 STEP Roundtable Q. 10, 2022-0929361C6 - Taxation Year-end of a GRE

Unedited CRA Tags
249(1), 249(5)
GRE's taxation year ends when it is wound up

Principal Issues: When does the taxation year of a graduated rate estate end when it ceases to exist?

Position: The final taxation year of a graduated rate estate will end when the period of accounts end for that same taxation year.

Reasons: The law allows a graduated rate estate to have a taxation year-end other than a calendar year, including in the year of wind-up.

15 June 2022 STEP Roundtable Q. 11, 2022-0929331C6 - Joint Spousal or Common-law Partner Trust

Unedited CRA Tags
73(1), 75(2)
once a joint spousal etc. trust is established, the s. 73(1) rollover applies to non-jointly contributed property of a spouse
s. 75(2) does not apply to 2nd-generation income

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.

15 June 2022 STEP Roundtable Q. 12, 2022-0929321C6 - Sale to Alter Ego Trust

Unedited CRA Tags
73(1), 73(1.01), 73(1.02)
the s. 73(1) rollover can apply to a sale for cash proceeds at a gain over ACB

Principal Issues: 1) In a situation where the settlor of an alter ego trust transfers property to the Trust for consideration, without electing out of the subsection 73(1) rollover, does CRA agree that the Transferred Property will be deemed to have been disposed of by the settlor for proceeds equal to their adjusted cost base to the settlor (absent an election to the contrary) even though the settlor received payment? 2) If the settlor later gifts the cash, say to an adult child, does this alter the answer?

Position: 1)Yes. 2) likely no.

Reasons: See below.

15 June 2022 STEP Roundtable Q. 13, 2022-0929381C6 - 164(6) – Amending Deceased’s Final T1 Return

Unedited CRA Tags
164(3)(d); 164(5)(d),(i),(j) and (k); 164(6)
s. 164(6) amendment must be made through filing an amended return, not a T1 Adjustment Request
commencement of refund interest where loss transferred from GRE to terminal return

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.

15 June 2022 STEP Roundtable Q. 14, 2022-0930221C6 - Info on new T3 EFILE process

Principal Issues: Can the Canada Revenue Agency (CRA) provide us with additional information about their new service which allows users to file a T3 return via EFILE?

Position: General comments provided.

Reasons: See response.

15 June 2022 STEP Roundtable Q. 15, 2022-0927531C6 - Meaning of Habitual Abode in Canadian Tax Treaties

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.

15 June 2022 STEP Roundtable Q. 16, 2022-0927601C6 - Foreign Entity Classification of a Foundation

the classification of civil law foundation is determined on a case-by-case basis

Principal Issues: Does CRA have a view on how a foundation created under the laws of a foreign country where civil law applies would be considered under the Income Tax Act?

Position: See below.

Reasons: The CRA would consider the classification of a foreign entity in the context of an advance income tax ruling.

15 June 2022 STEP Roundtable Q. 17, 2022-0929511C6 - Deceased Taxpayer and Stock Options

Unedited CRA Tags
7
s. 110(1)(d) deduction can now apply to stock option benefits realized on death

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.

15 June 2022 STEP Roundtable Q. 18, 2022-0924791C6 - McNeeley et al v. The Queen

Unedited CRA Tags
6(1)(g); 107.1(b)(i); 107(2); 107(2.001); 107(2.1); 108(1); 248(1) and Reg 4800.1
trust providing for distributions of employer shares on a fully discretionary basis is not governed by s. 7

Principal Issues: Can CRA provide comments on the McNeeley decision.

Position: Comments provided.

Reasons: See below.