News of Note
CRA applies the surrogatum principle (but only in the year of receipt) to tax RRSP proceeds received under an unclaimed-property procedure
Email this ContentThe estate of the deceased annuitant of an RRSP was fully settled without the executor (his surviving wife and the sole beneficiary) being aware of the RRSP. Later, the RRSP became unclaimed property and the Quebec Commission for dealing with unclaimed property instructed the RRSP issuer to liquidate the RRSP and remit the proceeds in cash to it. In a subsequent taxation year, the surviving spouse claimed and received the amount from the Commission as the sole estate beneficiary.
CRA found that the amount paid to the surviving spouse was to be included in her income under the surrogatum principle as being in lieu of a payment received under s. 146(8). A number of key related points were addressed:
- Although the benefit derived by the surviving spouse would normally have been excluded from her income on the basis that it was “included in computing the income of an annuitant” (i.e., her deceased husband) under s. 146(8.8), this in fact was not done (she did not know about the RRSP in preparing his terminal return) so that this exclusion did not apply (i.e., “included” is narrower than “includible”).
- Although the Commission (which effectively was her agent) had received the RRSP proceeds in an earlier taxation year, it was not to be included in her income until the subsequent year when she was ascertained and received the amount from the Commission, -on the basis of the “longstanding position … that the CRA must … rely on the facts as they exist at the end of the taxation year” – and the essential basis for income inclusion was not identified until the subsequent year.
- The surrogatum principle applied given that s. 146(8) would have applied but for the interposition of the Commission, and the amount received by her effectively was in lieu of that amount.
- Although she received the amount as the heir of an estate that had ceased to exist rather than as a designated beneficiary, this was not considered to be a barrier to the suggested treatment.
- The benefit to be recognized by her under s. 146(8) was to be grossed-up by the amount of fees that were deducted by the Commission and treated by the governing unclaimed property legislation as an obligation of her – and such fees were not deductible by her as they were not “incurred for the purpose of earning income.”
Neal Armstrong. Summaries of 13 August 2020 External T.I. 2019-0802891E5 F under s. 146(1) – benefit – (a), s. 146(8), s. 146(4)(c) and General Concepts – Payment and receipt.
St. Benedict Catholic Secondary School Trust - Tax Court of Canada finds that CCA claims could not be subsequently reversed to refresh losses
The taxpayer, over the course of its 1997 to 2003 taxation years, claimed capital cost allowance and generated non-capital losses. When CRA denied the carryforward of these losses to the taxpayer’s 2014 to 2016 taxation years (they had expired), the taxpayer claimed that it incurred a terminal loss in 2017 that could be carried back to those years. This terminal loss was computed by reversing a portion of CCA claims it had made in its 1997 through 2003 taxation years, and adding these amounts to the undepreciated capital cost of the property it had disposed of in 2017.
Hogan J found that this approach of subsequently changing CCA claims did not sit comfortably with the literal wording of the UCC definition (which refers to “the total depreciation allowed to the taxpayer… before that time”) and was “not the result that Parliament intended,” as to which he further stated:
Under the Appellant’s theory, a taxpayer could claim the maximum amount of all discretionary deductions that are calculated on a pool basis each year to maximize the amount of losses available for carry-forward. If the carry-over period expires, a taxpayer could unilaterally pick and choose which discretionary deductions would be adjusted downward to avoid the impact of this rule. … This result would be extremely difficult for the Canada Revenue Agency to audit. As a matter of effective tax administration of our self-assessment system, I have difficulty imagining that Parliament intended such a result.
Neal Armstrong. Summary of St. Benedict Catholic Secondary School Trust v. The Queen, 2020 TCC 109 under s. 13(21) - UCC – E.
Yorkwest Plumbing – Tax Court of Canada finds that difficulties in allocating costs between Years 1 and 2 could not be solved by deducting them in Year 3
In the course of its 2012 taxation year (a “year”), the taxpayer discovered that, as an indirect result of switching over to a new system for accounting for inventory at the beginning of its 2010 year, it had failed to deduct in that and the 2011 year, the $1.3M cost of inventory that it had acquired shortly before its 2010 year. Rather than attempting to allocate this cost to the sales of such goods made in its 2010 and 2011 years (which it considered to have been impracticable to do on an accurate basis), it simply deducted the full cost in its 2012 year.
In confirming the Minister’s denial of the full amount of this deduction, Spiro J stated:
[A]n unintentional understatement of the cost of goods sold in its 2010 and 2011 taxation years cannot be remedied by an intentional overstatement of the costs of goods sold in its 2012 taxation year. The cost of inventory is recognized in the taxation year in which it is sold… . In tax law, timing matters.
Neal Armstrong. Summary of Yorkwest Plumbing Supply Inc. v. The Queen, 2020 TCC 122 under s. 10(1).
CRA indicates that the central management and control of a TFSA trust is generally exercised in the office of the investment firm to which most of the trustee’s functions have been delegated
When asked where a self-directed TFSA was resident, CRA indicated that the trust would always be resident where its central management and control was factually exercised by the trustee – irrespective of the level of involvement of the TFSA holder in the decisions. However, CRA went on to indicate that where the administrative and investment functions of the plan had been largely delegated by its trustee, who was a trust company, to an investment firm, it would consider the central management and control of the trust to be exercised at the office where that firm carried out its delegated functions. Furthermore, if the TFSA carried on a taxable securities trading business, for purposes of determining the income of the trust that was allocable to a provincial permanent establishment of the trust, the:
TFSA trust will have a permanent establishment in a province if the TFSA trust carries on business in that province through an agent of the trustee who has a fixed place of business.
It went on to indicate that this would be the case in the situation described of substantial delegation of the trustee’s management and administrative functions to an investment firm.
This position (which CRA stated also generally applied to RRSP, RRIF, RESP and RDSP trusts) is of interest to investment trusts whose trustee has delegated most of its functions to an investment or fund manager, although it may be significant only for trusts whose trustee is a trust company that does not in fact exercise a major oversight role (cf. Discovery Trust, where a trust company trustee “worked”).
Neal Armstrong. Summaries of 28 September 2020 External T.I. 2019-0800551E5 under s. 2(1) and Reg. 2600(2).
CRA confirms that “land” generally includes buildings and other improvements
Reg. 1102(2) effectively excludes subjacent land from buildings and other depreciable property, and s. 18(3) defines land for s. 18(2) purposes to exclude buildings and other improvements. S. 70(5.2) provides for the deemed disposition on death for fair market value proceeds of inter alia "land" inventory.
CRA confirmed that for the purposes of the Act, and in the absence of a specific provision to the contrary such as s. 18(3), “a building or other structure affixed to land would generally be considered as part of the land,” so that “for the purposes of subsection 70(5.2) … ‘land’ includes not only vacant land, but also land on which other real property such as houses or condos are erected.”
Neal Armstrong. Summary of 22 June 2020 External T.I. 2017-0728051E5 F under s. 70(5.2). See also 2016-0651791C6 F.
Income Tax Severed Letters 4 November 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Westcoast – Tax Court of Canada finds that an employer was not entitled to ITCs for the GST/HST on reimbursed employee health care services
Westcoast reimbursed (through Manulife as its agent) employees who had incurred various health care services – including some which were GST/HST-taxable, namely, acupuncture, massage therapy, naturopathy and homeopathy services. Sommerfeldt J found that the employees were the recipients of these taxable services notwithstanding that there generally was no written contract with the care provider and in some instances, the health care provider was paid directly by Westcoast (through Manulife). Accordingly, it was necessary for Westcoast to be deemed by ETA s. 175 to have itself acquired these services in order to potentially claim an input tax credit for the associated GST/HST.
In this regard, s. 175(1)(b) relevantly required that the employees have consumed or used the services “in relation to activities of [Westcoast]”. In finding that this test was not satisfied, so that there were no ITCs, Sommerfeldt J stated:
I have difficulty in comprehending how an employee of Westcoast could be said, while receiving acupuncture, massage therapy, naturopathy or homeopathy services, to be consuming or using the particular service in the course of his or her employment activities, as distinct from an activity that was personal in nature.
Neal Armstrong. Summaries of Westcoast Energy Inc. v. The Queen, 2020 TCC 116 under ETA s. 175(1)(b), s. 123(1) – recipient and s. 170(1)(b)(ii).
CRA expects a spinner corporation to ensure that sufficient tax basis in its shares is transferred to the shares of a spinco that also is receiving safe-income rich spin assets
In Q.1 of last week’s CTF Roundtable, CRA indicated that it considered a transaction in which there was a spin-off of a subsidiary holding an asset (Subco 2) with a disproportionately high ACB to be abusive, given that the Parentco could subsequently bump the ACB of its assets by winding-up the Spinco under s. 88(1). In Q.3, CRA carried this approach of ferreting out potential basis “misalignments” to a further extreme based on the insight that safe income can be capitalized to become ACB, so that a spin-off of an asset with disproportionately high safe income could also result in such a future misalignment.
CRA provided an example of Holdco having previously acquired Opco for $300, at a time that one of the subsidiaries of Opco (Subco 2, whose shares had a nil ACB) had direct safe income of $200 – and, since then, Subco 2 generated an additional $150 of safe income, for a total of $350. However, this resulted in only $150 of indirect safe income of $150 on Holdco’s shares of Opco, as the $200 of preacquisition safe income was reflected in the ACB to Holdco of the Opco shares.
There is now a s. 55(3)(a) spin-off of Subco 2 to Newco, and to that end, Holdco transfers 1/2 the shares of Opco, having an ACB of $150 and an FMV of $500, to Newco. The spin-off occurs on a rollover basis, so that the direct safe income of $350 in the Subco 2 shares is transferred over to Newco on a consolidated basis, and the indirect safe income of $150 on the Opco shares is transferred over to the Newco shares.
However, CRA indicated that this results in a duplication of ACB - because if the safe income were capitalized after the reorganization and Newco were wound-up, there would be a resulting aggregate ACB of $500 in the shares of Opco and Subco 2 (i.e., the $150 remaining in the shares of Opco after the spin-off, plus capitalizing the direct safe income of $350), which exceeds the normative maximum of $450 (i.e., Holdco’s initial ACB of the Opco shares of $300, plus the post-acquisition safe income of $150). In CRA’s view, this $50 ACB increase is unacceptable, and the solution would be to proceed with a reorganization that results in an alignment of the basis.
Such alignment would be achieved if, instead of transferring Opco shares to Newco with an ACB of $150, Opco shares having an ACB of at least $200 were transferred.
These comments appear to indicate that CRA considers that a spin-off transaction should be preceded by a computation not only of inside and outside basis, but also of direct and indirect safe income – and if these computations show a potential ”misalignment” that could favour the taxpayer after taking into account any potential safe income capitalization transactions, CRA expects there to be preliminary transactions to ensure that there is an appropriate bump in the ACB of the shares of the spinner corporation that are transferred to the spinco.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.3 under s. 55(2.1)(c).
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in December and November, 2009. Their descriptors and links appear below.
These are additions to our set of 1,308 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for November.
CRA affirms that a s. 86 reorg normally requires the filing of articles of amendment
CRA affirmed its longstanding position that in order for there to be a reorganization of capital as required under s. 86(1), there should normally be an amendment to the corporation’s articles.
Neal Armstrong. Summary of 27 October 2020 CTF Roundtable, Q.14 under s. 86(1).