News of Note
Connolly – Tax Court indicates that there may be no authority for a Notice of Confirmation to pass on subsequent taxation years
Email this ContentBefore going on to grant the taxpayer’s claim for a disability tax credit for her 2014 taxation year (but not the three earlier years), Jorré DJ noted that the Minister in her Notice of Confirmation had indicated that the taxpayer was eligible for the DTC for her 2015 and later years even though the Notice of Confirmation was dated before her filing-due date for her 2015 year, and stated obiter:
[I]t would be surprising if on a proper interpretation the relevant statutory provisions gave the Minister the power to make a determination with respect to future eligibility. However, I can see nothing that would prevent the Minister from determining that the person was eligible in certain past years and informing the person that the Minister’s present intention was to assume that the person would continue to be eligible for certain future years.
Neal Armstrong. Summary of Connolly v. The Queen, 2019 TCC 160 under s. 118.3(1)(b).
CRA clarifies that for TOSI excluded-share purposes, a services business can generate revenue from both goods sold and services performed from the same customer on the same job
CRA has provided fresh examples of the calculation of the 90% services test in (a)(i) of the "excluded share" definition in the tax on split income (TOSI) rules. To mention two of the six examples:
- Where a corporate cleaning business “separately” sells cleaning supplies to some of its customers, but also consumes cleaning supplies in performing its cleaning services, revenues from the former will be respected as not belonging to services revenue, whereas the latter will be included in the services revenue even if charges therefor are separately identified in its invoices.
- A corporation, that constructs and repairs decks, charges for its materials and labour for each job. Its services revenue is determined by backing out its charges for materials from its total revenues.
Neal Armstrong. Summary of Tax on split income – Excluded shares (CRA webpage), 10 July 2019 under s. 120.4(1) – excluded shares – (a)(i).
CRA indicates that a dissolved corporation can be a “participating employer” in an RPP
Where more than one employer participates in a registered pension plan, s. 147.2(2)(a)(vi) requires that the assets and actuarial liabilities be apportioned in a reasonable manner among the participating employers in respect of their employees and former employees. CRA considers that for this purpose and other uses of the concept of a participating employer, an employer is considered to be a participating employer even if it has been dissolved or otherwise ceased to exist. Thus, in the example of the application of s. 147.2(2)(a)(vi), RPP assets and liabilities continue to be apportioned to the dissolved employer.
Neal Armstrong. Summary of 26 June 2019 Internal T.I. 2019-0791761I7 under s. 147.2(2)(a)(vi) and Statutory Interpretation – Interpretation Act, s. 33(3).
Gekas – Federal Court finds that CRA’s denial of relief from penalty tax on TFSA over-contributions relating to errors of the financial institution was unreasonable
S. 207.06(1) indicates that the Minister may waive the tax on an excess TFSA contribution where “the individual establishes to the satisfaction of the Minister that the liability arose as a consequence of a reasonable error” and the excess (together with any income thereon) is distributed “without delay.” The individual made two excess contributions of $10,000 each to his TFSA in 2016 due to his financial institution garbling instructions that he had given. Immediately on finding out about these over-contributions (when he was assessed by CRA), he withdrew those excess amounts.
Boswell J remitted the matter for redetermination by a fresh CRA delegate, stating:
[T]he Delegate’s decision is unreasonable because it did not fully assess the extent to which the excess contributions resulted from the mistakes of persons other than the Applicant.
Neal Armstrong. Summary of Gekas v. Canada (Attorney General), 2019 FC 1031 under s. 207.06(1).
CRA indicates that no TOSI tax applied to a dividend received from the surviving step-mother’s company
Mr. A bequeathed all the common shares of Opco to his surviving spouse, Ms. B, who was actively engaged on a regular, continuous and substantial basis in its business. Opco paid a dividend on the discretionary dividend shares held by Son A, who was the son of Mr. A, but not of Ms. B.
CRA noted that following the death of Mr. A, Son A no longer qualified as Ms. B's child under s. 252(1)(c) . Since she was now unrelated, Ms. B was not a "source individual" in respect of the specified individual (Son A). This, in turn, meant that Opco's business did not constitute a "related business" in respect of Son A , so that Son A could benefit from the "excluded amount" exclusion in s. 120.4(1)(e)(i): no TOSI.
Neal Armstrong. Summary of 11 June 2019 External T.I. 2019-0795291E5 F under s. 120.4(1) – related business.
Income Tax Severed Letters 7 August 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Prairielane – Tax Court of Canada finds that a “main reason” for a stacked partnership structure was tax deferral rather than generating SBD tax savings
MacPhee J found that the main tax reason for implementing a stacked partnership structure for holding interests in a farm equipment dealership (prior to the introduction of s. 34.2 to cut off this type of planning) was to defer the recognition of corporate tax rather than to access the small business deduction. He also noted that one of the two taxpayers (PLH) had taxable capital in excess of $15 million, so that at most it could only have generated a SBD for one year before its high taxable capital caught up with it under the applicable lagged calculation, and stated:
PLH would not have as a main reason for the creation of the new corporate structure access to the SBD for one year as the cost of creating the newly created structures, as well as the ongoing costs, far exceeded the SBD obtained in 2011.
Neal Armstrong. Summary of Prairielane Holdings Ltd. v. The Queen, 2019 TCC 157 under s. 256(2.1).
CRA applies s. 75(2) to the 1st generation but not 2nd generation income of a non-qualified purported TFSA trust
A trust lost its status as a TFSA because it borrowed money, but continued to exist for a number of subsequent years because it continued to be administered as though it were a TFSA. What was its treatment during that period?
By ceasing to be a qualifying TFSA, the trust ceased to be excluded from the application of s. 75(2) by s. 75(3)(a). Accordingly, s. 75(2) applied to attribute the income of the trust to the individual, subject to one point. That point was that:
Subsection 75(2) does not apply to income earned by a trust from the re-investment of income that was previously subject to attribution (i.e., second generation income), as this income is not earned on property contributed to the trust by a person (or substituted property). Thus, any second generation income earned by the former TFSA trust after deregistration will generally be taxable to the trust to the extent that it is not paid or payable to the beneficiary of the trust.
Neal Armstrong. Summary of 17 July 2019 Internal T.I. 2017-0718021I7 under s. 75(2).
CRA rules on pipeline transaction that includes partial use of s. 164(6) and of the s. 88(1)(d) bump
CRA ruled on a hybrid pipeline transaction in which the two holding companies that were held by the deceased first purchase for cancellation a portion of their participating shares that are now held by the estate in order to generate a deemed dividend to clear out their RDTOH and CDA accounts - with the estate electing under s. 164(6) to treat the resulting capital loss as a capital loss of the deceased. The estate then proceeds with a conventional pipeline transaction in which it transfers its remaining shares of the holding companies to Newco and, after the requisite waiting period, the holding companies are amalgamated with Newco or are wound up into it (in either case, referred to as “Amalco”), and with the notes thereafter being gradually paid off by Amalco.
On the winding-up or amalgamation, preferred shares held by one of the holding corporations in a corporation (whose participating shares are held by a family trust) are to be bumped under s. 88(1)(d) (although there are no rulings on this aspect). The proposed transactions conclude with a s. 88(2) winding up of the Amalco.
Neal Armstrong. Summary of 2019 Ruling 2019-0793281R3 F under s. 84(2).
9 more translated CRA interpretations are available
We have published 2 translations of CRA interpretations released last week, and a further 7 translations of CRA interpretations released in November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.
These are additions to our set of 927 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.