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CRA provides examples on the operation of the proposed split-income rules

Various points illustrated by examples prepared by CRA of the operation of the expanded split income proposals include:

  • There generally is no limitation under the rules on income-splitting with an over-24 inactive spouse with a significant shareholding in the business in question – for example, paying all the profits as a dividend to such spouse on a separate class of discretionary shares (Example 3B).
  • Nor is there any limitation under the expanded rules on Opco paying salary to a child or spouse (other than under the current rules including s. 67 (Example 5B).
  • There is a safe harbour for under-25 children who work an average of at least 20 hours per week in the business, but there is a more general exclusion for being actively engaged on a regular, continuous and substantial basis in the activities of the business in the taxation year or in any five prior taxation years. CRA does not consider this more general test to be satisfied where the child worked 600 hours in the four summer months (Example 5A), but considers it to be satisfied where the child is a major actor in a business that does not require a lot of hours per week (Example 9).
  • The definition of an excluded share refers inter alia to a test of less than 90% of the business income being from the provision of services. CRA references examples of shares in a portfolio-investment corporations (Example 8) and a rental-property corporation (Example 10) as being excluded shares.
  • CRA states that in determining whether a payment is a reasonable return, it “does not intend to generally substitute its judgment of what would be considered a reasonable amount unless there has not been a good faith attempt to determine a reasonable amount.” It gives, as an example, a spouse doing bookkeeping of less than 20 hours per week for the other spouse’s professional firm , who receives dividends that “while higher that the amount that was paid to the arm’s length bookkeeper,” nonetheless did not violate the quoted standard (Example 11).

Neal Armstrong. Summaries of CRA Guidance on the application of the split income rules for adults under s. 120.4(1) – split income – (c)(ii)(C), reasonable return, excluded shares, excluded business, split income, s. 120.4(1.1)(c).

CRA makes some favourable changes in finalizing its revised Circular on the VDP

Some points of departure in the final version of the Circular on the Voluntary Disclosure Program from the previous draft Circular:

  • The effective date is now March 1, 2018, meaning that to fit within the previous more-lenient program, the application, including the taxpayer’s name, must be received before that date. For those needing no-names comfort before proceeding, this means that the real effective date is earlier.
  • The “Limited program,” under which there is relief only from gross negligence penalties and prosecution, is now expressed to apply “where there is an element of intentional conduct on the part of the taxpayer or a closely related party” – whereas the draft Circular referred more vaguely to “major non-compliance.”
  • CRA however also states (perhaps somewhat in contradiction to the above):

Generally, applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.

  • CRA has added a statement (perhaps to demonstrate flexibility - see Stemijon/Elfe Juvenile) that “If [VDP] relief is denied ... relief of arrears interest and any penalties payable may be requested and considered in accordance with the taxpayer relief provisions as described in IC 07-1R1... .
  • CRA has deleted a statement that the VDP does not extend to transfer pricing adjustments or s. 247 penalties (although competent authority matters are now explicitly excluded), and now states:

Given the complexity of transfer pricing issues, applications relating to transfer pricing matters will be referred to the Transfer Pricing Review Committee for their consideration under subsection 220(3.1).

Neal Armstrong. Summary of 15 December 2017 Information Circular - IC00-1R6 - Voluntary Disclosures Program under s. 220(3.1).

407 ETR – Federal Court of Appeal affirms that Ontario government charges to the 407 Highway operator for OPP patrol services were for an HST-exempt supply of a “municipal service”

Webb JA affirmed the finding of D’Arcy J that charges of the Ontario government to the private operator of the 407 Highway for OPP patrol services were exempted from HST as a “municipal service.” He stated that the plain meaning of this expression referred to services of a type that “would normally be provided by a municipality” – and it did not matter that in this particular instance such services in fact were not provided by a municipal authority or by the province acting as a municipal authority.

Neal Armstrong. Summary of Canada v. 407 ETR Concession Co. Ltd. v. The Queen, 2017 FCA 220 under ETA Sched. V, Pt. VI, s. 21.

CRA confirms that unrestricted net capital loss deductibility under s. 111(2) applies only in the terminal year and the immediately preceding year

CRA has provided an intelligible translation of the convoluted language in s. 111(2):

[I]f, in the year of death, a taxpayer has a net capital loss or any unused net capital losses carried forward from prior years, the special rules in subsection 111(2) … allow the deduction of such losses (less the amount of any capital gains exemption claimed …) up to the amount of the taxpayer’s available income from all sources for the year of death and the immediately preceding year.

In response to a taxpayer who, like Oliver Twist, wanted MORE, the Directorate stated:

Parliament intended for this concession to apply only in the year of death and the immediately preceding year. Accordingly, if there is a balance of unused net capital losses remaining after applying the unused net capital losses against all sources of income in the year of death and immediately preceding year … such unused net capital losses are not transformed into a non-capital loss that can be carried back to another taxation year other than as described above.

Neal Armstrong. Summary of 21 November 2017 External T.I. 2017-0690651E5 under s. 111(2).

The U.S. (s. 871(m)) characterization, as a dividend, of a principal or derivative payment by a Canadian issuer to a Canadian investor, is irrelevant to T5 reporting

CRA has confirmed that the fact that payments made under a note or derivative by a Canadian issuer to a Canadian investor are treated under Code s. 871(m) as dividend equivalent payments that are subject to U.S. withholding tax should not affect how the same payments are characterized for purposes of T5 reporting by the Canadian issuer.

Neal Armstrong. Summary of 24 October 2017 External T.I. 2016-0653441E5 under Reg. 201(1)(a).

CRA indicates that the qualifying costs of medically-assisted dying can potentially qualify for the METC

CRA indicated that the qualifying costs of medically-assisted dying where there is compliance with the detailed procedures set out in the Criminal Code and provincial rules would qualify for the medical expense tax credit. By implication, the costs of going abroad for the procedure might not qualify.

Neal Armstrong. Summary of 21 November 2017 CTF Annual Conference CRA Roundtable (Official Response), Q.16 under s. 118.2(2)(a).

CRA rules that the s. 80 rules prevailed in a CCAA compromise over the contingent amount (s. 143.4) rules

Under a CCAA Plan, unpaid interest of a corporation that had accrued in the current and prior years would be forgiven. Once the Plan was approved, s. 143.4(4) would require there to be an accounting at the end of the year of the Plan implementation for an income inclusion equal to the prior years’ forgiven interest. Furthermore, there would be a denial of current years’ interest under s. 143.4(2). However, CRA found that, given that s. 80 applied in the same year, and in light of the rule of statutory construction according prevalence to the more specific provision and the rule against double-taxation in s. 248(28), ss. 143.4(2) and (4) would not also apply.

Neal Armstrong. Summary of 2016 Ruling 2016-0661071R3 under s. 143.4(4).

Income Tax Severed Letters 13 December 2017

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

CRA states that the existence of a Quebec joint venture will be determined under common law principles

After listing general guidelines that might assist in distinguishing joint ventures and partnerships in the common law provinces, CRA stated:

The joint venture relationship is not recognized in Quebec civil law. Nevertheless, Quebec civil law does not prohibit the formation of a joint venture. Therefore, where an arrangement in Quebec is, according to the common law guidelines outlined above, a joint venture and not a partnership, it will generally be regarded as a joint venture for GST/HST purposes.

This is more accommodative to recognizing a joint venture in Quebec than what was stated in P-171R (which referred to Quebec joint ventures being recognized "in very restricted circumstances.")

CRA also indicated that “a registered social worker who is in good standing with their provincial regulatory body [and] is hired by a hospice to give a presentation to its personal support workers on providing assistance to palliative care patients in coping with their illnesses” would not be considered to be making a qualifying health care supply as this does not represent direct care services. This is reminiscent of CRA’s first-order supply doctrine (e.g., in 8394 and Memorandum 8.3).

Neal Armstrong. Summaries of Excise and GST/HST News No. 103, December 2017 under ETA s. 273(1) and Sched. V, Pt II, s. 1 - qualifying health care supply.

Masa Sushi – Tax Court of Canada finds that a corporation can only be represented in a General Procedure action by counsel (no CPAs or officers)

Rule 30(2) of the Tax Court of Canada Rules (General Procedure) provides that:

Where a party to a proceeding is not an individual, that party shall be represented by counsel except with leave of the Court and on any conditions that it may determine.

Graham J found that this rule would be ultra vires (as being beyond the scope of what was contemplated by s. 17.1(1) of the Tax Court Act), if it were interpreted as permitting a corporation, with the Court’s leave, to be represented by a non-lawyer (in this case, a CPA). Accordingly, he found that Rule 30(2) should be “read down” to provide that a corporation may only be represented by counsel.

He also indicated that the concept of a corporation appearing “in person” was nonsensical, stating:

A human can be physically present in court. A corporation, being a creation of law with no physical substance, cannot.

Accordingly, corporations cannot appear in Court through an officer. Again, representation by counsel is required.

Neal Armstrong. Summary of Masa Sushi Japanese Restaurant Inc. v. The Queen, 2017 TCC 239 under Rule 30(2).