Income Tax Severed Letters - 2024-09-04

Principal Issues: (1) Whether subsection 15(1) applies to include the excess amount of salary ("Overpayment") that a corporation ("Payor") paid to an individual employee ("Recipient") who is not dealing at arm's length with a shareholder of the Payor ("Shareholder") in computing the income of: A) the Recipient, and B) the Shareholder? (2) Whether subsection 15(1) will apply to include the amount of the Overpayment that the Payor paid to a shareholder-employee ("Shareholder Employee") who is not dealing at arm's length with the Shareholder in computing the income of: A) the Shareholder Employee, and B) the Shareholder.

Position: (1) Subsection 15(1) will not apply to include the amount of the Overpayment in computing the income of: A) the Recipient and B) the Shareholder. (2) Subsection 15(1) will not apply to include the amount of the Overpayment in computing the income of: A) the Shareholder Employee and B) the Shareholder.

Reasons: 1A) Assuming that the Recipient does not own shares in the capital stock of the Payor and does not qualify as a contemplated shareholder of the Payor, and that the Overpayment qualifies as a benefit for the purposes of subsection 15(1), the amount of the Overpayment will not be included in computing the income of the Recipient pursuant to subsection 15(1) because such a benefit is not conferred on the Recipient in his/her capacity of shareholder of the Payor; 1B) The rule provided in paragraph 15(1.4)c) will not apply to include the amount or value of the benefit in computing the Shareholder's income pursuant to subsection 15(1) because the amount of the Overpayment is included in computing the income from employment of the Recipient; 2A) The full amount of the salary that is received by the Shareholder Employee will be included in computing his/her income from employment pursuant to section 5. If the Overpayment qualifies as a benefit conferred on the Shareholder Employee in his/her capacity of shareholder of the Payor, the amount of the Overpayment will also have to be included in computing his/her income pursuant to subsection 15(1) ("Shareholder Benefit"). However, subsection 248(28) will apply to prevent the amount of the Overpayment from being included twice in computing the income of the Shareholder Employee such that subsection 15(1) would not apply to tax the amount of the Overpayment as a Shareholder Benefit; 2B) The rule provided in paragraph 15(1.4)c) will not apply to include the amount or value of that benefit in computing the Shareholder's income pursuant to subsection 15(1) because the amount of the Overpayment is included in computing the income from employment of the Shareholder Employee.

Principal Issues: Has the CRA modified its administrative position on whether the replacement of an executor, trustee or administrator of an estate as a consequence of death or inability to act may result in an acquisition of control?

Position: No.

Reasons: See below.

Principal Issues: The application of proposed subparagraphs 84.1(2.31)(f)(ii) and 84.1(2.32)(g)(ii) to certain scenarios presented.

Position: See below.

Reasons: See below.

Principal Issues: In a situation where a Bare Trust is a trust described in paragraph 150(1.2)(b), would subparagraph 150(1.1)(b)(ii), in itself, require that the Bare Trust file a T3 return for a year in which property held by the Bare Trust is disposed of?

Position: No.

Reasons: See below.

Principal Issues: Can CRA provide an update on any recent trust or estate issues that may be of interest to the STEP audience?

Position: Discussed the views of the Tax Court in its unreported decision in the case of Maurice Kissel Family Trust and His Majesty the King.

Reasons: See below.

Principal Issues: In a situation where a non-resident relative makes a gift in kind of a rental property situated in a foreign country to a Canadian resident individual, what would be the cost amount of the property, and what amount would be included in the undepreciated capital cost in respect of the building? Is the answer different if the property were inherited by the Canadian resident individual on the non-resident relative’s death?

Position: See details in the response.

Reasons: Consistent with previous positions.

Principal Issues: Does the release of Form T3 INNS3 mean that the CRA plans to discontinue the administrative practice of not charging interest and penalties where a trust does not make instalment payments as required under section 156.

Position: No.

Reasons: Consistent with current administrative practice, the CRA will continue to not charge interest and penalties where a trust does not make sufficient instalment payments. If there is any change to this administrative practice in the future, information will be made available.