News of Note

CRA discusses the overlap between the EBP and pension plan concepts

It was unclear whether benefits received by the taxpayer (now a Canadian resident) from a “provident fund” (the “PF”), that had been established for the taxpayer by a non-resident employer should be included in income under s. 6(1)(g) as benefits from an employee benefit plan (“EBP”) or under s. 56(1)(a)(i) as benefits from a (foreign) pension plan. CRA noted:

  • “A foreign pension plan would generally fall within the EBP definition, but a foreign EBP does not necessarily fall within the meaning of a pension plan.”
  • If the PF is an EBP, the amounts received therefrom would be taxable under s. 6(1)(g), subject to exceptions including that in s. 6(1)(g)(iii) regarding pension benefits received out of the plan that are attributable to services rendered by a person while a non-resident in Canada – as to which there would be full taxability under s. 56(1)(a)(i) regardless of non-deductibility of contributions to the plan or a foreign tax exemption for the pension benefits.
  • Where the amount received out of the PF is a lump sum amount that is taxable under s. 56(1)(a)(i), a deduction may be permitted under s. 60(j) for a transfer to an RRSP or registered pension plan.

Neal Armstrong. Summary of 5 October 2020 External T.I. 2020-0852671E5 under s. 56(1)(a)(i).

We have translated 5 more CRA Interpretations

We have published a further 5 translations of CRA interpretation released in June 2009. Their descriptors and links appear below.

These are additions to our set of 1,368 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2009-06-12 27 May 2009 Internal T.I. 2009-0320311I7 F - CELI - Notion d'avantage Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) - Subparagraph (b)(ii) accretion in common shares issued to employee's TFSA on an estate freeze was an advantage
3 June 2009 External T.I. 2009-0319551E5 F - Déductibilité des dépenses Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit test for identifying a business source
2009-06-05 26 May 2009 External T.I. 2009-0316841E5 F - Convention de retraite, crédit d'impôt étranger Income Tax Act - Section 126 - Subsection 126(1) no foreign tax credit can be claimed for non-business income tax paid on income of RCA trust
Income Tax Act - Section 207.5 - Subsection 207.5(1) - Refundable Tax - Paragraph (b) usual Pt. I deductions, including under ss. 20(11) and (12), can apply to computing income under para. (b)
27 May 2009 Internal T.I. 2009-0310751I7 F - Usufruit d'un immeuble avant 1991 Income Tax Act - Section 248 - Subsection 248(3) re a usufruct created prior to 1991, the usufructuary was considered to continue as the beneficial owner
Income Tax Act - Section 54 - Principal Residence usufructuary under usufruct created prior to 1991 was beneficial owner on his death in 2007 for principal residence exemption purposes
22 May 2009 Internal T.I. 2009-0312791I7 F - Transfert de biens entre un rentier et son REÉR Income Tax Act - Section 146 - Subsection 146(1) - Premium purchase of RRRSP property at cost is viewed as premium to the extent of excess over FMV
Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) an RRSP trust’s annuitant does not deal at arm’s length under s. 251(1)(c) with the RRSP

CRA’s position that s. 104(19)-designated dividends are not received until the trust’s year end suggests planning possibilities

CRA’s position (e.g., in 2016-0647621E5 and 2013-0495801C6) is that a dividend designated under s. 104(19) by a trust to a beneficiary is not received by the beneficiary for most ITA purposes until the year end of the trust. This position, if correct, raises some planning possibilities:

  • Suppose that Opco, whose shares are held by a family trust, pays a $1 million dividend to the trust on January 15, 2020 and claims a dividend refund of $383,300 for its taxation year ended January 31, 2020. The dividend is not allocated by the trust to Bankco (a connected resident corporate beneficiary with a November 30 year-end) until the trust’s year-end of December 31, 2020, and is not reported by Bankco until its year ending November 30, 2021. If Opco’s dividend refund is received on June 30, 2020, 19 months pass before Bankco is required to pay its matching Pt. IV tax under s. 186(1)(b) – a tax deferral.
  • Suppose, instead, that on March 31, being a day that Opco and Bankco are not connected, a dividend is paid both by Opco to the trust, and by the trust to Bankco – but on September 30, a share ownership change results in Opco and Bankco now being connected, so that CRA’s position suggests that Pt. IV tax has been avoided.
  • Now suppose that Opco pays a dividend in excess of safe income on hand on January 15, 2020. Bankco need not report the resulting s. 55(2) deemed capital gain until its year ending November 30, 2021. In addition to deferral of the capital gains tax, a permanent tax saving might result through acquiring losses or other deductions in the meantime.

Neal Armstrong. Summary of David Carolin and Manu Kakkar, Estate Plans, Trusts, and Dividends: Is There a Gap Here? Tax for the Owner-Manager, Vol. 21, No. 1, January 2021, p. 1 under s. 104(19).

CRA indicates that a military pension from India was Treaty-exempt

CRA indicated that a military service pension and disability pension received by a Canadian resident from the Ministry of Defence of India would be exempted under Art. 18 of the Canada-India Treaty.

Neal Armstrong. Summary of 13 October 2020 External T.I. 2020-0860081E5 under Treaties – Income Tax Conventions - Art. 18.

Ifi – Federal Court finds that CRA unreasonably refused to cancel tax under s. 207.06(1) on the basis of a “repeated” mistake that in fact was new

In 2009, the taxpayer (Ms. Ifi) made a small over-contribution to her TFSA regarding which CRA assessed her a small amount of over-contribution tax. For quite a number of years thereafter, she made further contributions (including a substantial one for 2014) which would not have been over-contributions but for her having become a non-resident. She discovered the error herself in 2018, whereupon she promptly closed out the TFSA.

Pallotta J found that essentially the sole stated basis of CRA for denying waiver of the over-contribution tax “was that Ms. Ifi repeated a previous mistake after being warned by the CRA.” In granting Ms. Ifi’s application for judicial review on the basis that this decision “was unreasonable, as it lacked the requisite transparency, intelligibility and justification,” she stated:

The Delegate failed to recognize that Ms. Ifi’s excess contribution in 2009 and her subsequent excess contributions resulted from different errors. Ms. Ifi did not repeat a previous mistake—the one the CRA warned her about—when she made an excess contribution in 2014. The excess contribution in 2014 … was tied to Ms. Ifi’s status as a non-resident.

Neal Armstrong. Summary of Ifi v. Attorney General of Canada, 2020 FC 1150 under s. 207.06(1).

CRA indicates that CEWS amounts must generally be included in income under s. 9 or 12(1)(x) by the end of the CEWS periods in question even if not claimed until much later

S. 125.7(3) essentially feeds into s. 12(1)(x) by deeming “CEWS” wage subsidies to be government assistance received immediately before the end of the period (of approximately one month) in question. Notwithstanding that, CRA considers it to be quite possible that the assistance will be income under s. 9 rather than s. 12(1)(x). As for the timing of that income inclusion (under either s. 9 or 12(1)(x),) CRA indicated that the CEWS amounts must be included in the taxation year in which the periods fall even if the claims are not made (and received) until after the tax return has been filed for that taxation year. (This will require an amendment to the originally-filed return to be made.)

The one exception to this is illustrated by the example of a June 30, 2020 taxation year of the eligible entity, where the end of period 4 falls on July 4, 2020 (i.e., a few days after the taxation year end). In that case, if s. 12(1)(x) rather than s. 9 is considered to govern, there is a deemed receipt of government assistance on that date, so that the s. 12(1)(x) inclusion will fall into the subsequent taxation year.

Neal Armstrong. Summary of 6 November 2020 Internal T.I. 2020-0865661I7 under s. 125.7(3).

Income Tax Severed Letters 13 January 2021

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

CRA confirms that bonuses generally can be prorated weekly for CEWS claim purposes, and now is getting its CEWS Registry running

The CEWS (wage subsidy) is generally computed on a weekly basis. In a November 23, 2020 revision to its CEWS Q&A webpage, CRA has confirmed that, in the case of a year end bonus “it would generally be reasonable to consider that the annual bonus was earned [evenly] throughout the fiscal period to which it relates” (both regarding the current and comparison period).

More complex allocation issues may apply to commissions. CRA states:

For example, if a car salesperson, who is remunerated by commission when a car is sold as provided in the employment contract, sells two cars in a given week in a claim period, it could be reasonable to consider that those commissions are paid “in respect of the week” in which those two sales occurred.

However, “wages in lieu of termination notice are not considered to have been paid in respect of a week, and therefore are not eligible for the wage subsidy.”

Last, but probably not least, CRA now has its “CEWS Registry” page working somewhat, i.e., particular corporations can be searched but “The ‘View full list of employers’ functionality is temporarily unavailable.” The Registry page states that "To protect the privacy of individuals, only corporations will be disclosed," and employees are told: “If you have reason to believe a CEWS applicant is misusing the subsidy, you can report suspicious activities to the CRA by submitting a lead to the Leads Program.”

Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 21 December 2020 under s. 125.7(4)(b), 125.7(1) – baseline remuneration, eligible remuneration, s. 125.7(4)(d) and s. 241(3.5).

London Clubs – UK Supreme Court finds that gaming profits from bets staked did not include chips and vouchers distributed free of charge for promotional reasons

It was held that non-negotiable chips and free bet vouchers provided free of charge by casino operators to selected gamblers to encourage them to gamble were not to be included in computing the casinos’ “bankers’ profit” from bets “staked” and, thus, were excluded from gaming duties. Although this finding is not relevant for HST purposes given that ETA s. 187(1) has effectively been overridden by s. 7(7) of the Games of Chance (GST/HST) Regulations, the decision includes an extensive description of the different attributes of such chips and vouchers. This may shed light on the sort of thing described in s. 7(7) regarding “a right to play or participate in a game of chance given away free of charge by the distributor [e.g., the casino operator].”

Neal Armstrong. Summary of Commissioners for Her Majesty’s Revenue and Customs (Appellant) v London Clubs Management Ltd (Respondent) [2020] UKSC 49 under Games of Chance (GST/HST) Regulations, s. 7(7)A-A3(ii).

CRA rules that a registered charity running an Ontario school was eligible for PSB rebates at the enhanced “school authority” rates

A registered charity that that operated an Ontario elementary or secondary school was ruled to be entitled to the 68% federal rebate and 93% Ontario rebate regarding non-creditable HST paid by it on its acquisitions of property or services for consumption, use, or supply in the activities engaged in by it in the course of operating the school given inter alia that the definition of “selected public service body” includes a school authority that is established and operated otherwise than for profit. The non-creditable HST on its other purchases generated rebates at the federal 50% and provincial 82% rate.

Neal Armstrong. Summary of 25 May 2020 GST/HST Ruling 125678r under ETA s. 259(3).