News of Note
CRA will accommodate brief screw-ups resulting in a technical breach of the prohibition against TFSA or RRSP borrowings
Email this ContentVarious types of glitches can cause a TFSA, RRSP etc. to go into overdraft (so that technically the brokerage is lending money to the plan in breach of the prohibition against borrowing) until the problem is remedied a day or so later. CRA states that it will not act on “an overdraft in a TFSA [etc.] if it:
- is temporary in nature and covered without undue delay;
- arises as a result of (i) a mismatch of cash flow due to differences in standard settlement cycles for securities, (ii) a reasonable error, or (iii) an unintended infrequent event; and
- does not have the character of leveraged investing.”
However, CRA will not accommodate a breach which results from a cashless exercise procedure in which the broker advances funds to the plan to exercise warrants and repays itself out of the sale proceeds of the acquired shares.
De-registration of an individual’s TFSA for breach of the borrowing requirement would cause a permanent loss of TFSA savings room for the individual.
Neal Armstrong. Summaries of 22 October 2015 Memo 2013-0486491I7 under s. 146.2(2)(f) and s. 207.10(1) – unused TFSA contribution room.
Income Tax Severed Letters 23 December 2015
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA will not accommodate a trust which merely distributes all it can
Where a trust distributes all of its share of the accounting profits of a partnership but its share of the taxable income of the partnership is higher, it will be subject to trust-level taxation on the excess.
Neal Armstrong. Summary and translation of 2015-0595851C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable, Q. 6.
CRA generally accepts that loss of a s. 107(2) rollover can be avoided, where a trust owes debt to a capital beneficiary, by refinancing the debt with a bank
CRA considers (e.g., 2013-0488061E5) that the s. 107(2) rollover does not apply to the property of a personal trust which is distributed to a capital beneficiary to pay a debt owing to the beneficiary. In order to avoid this result in the case of a real property subject to a mortgage owing to the capital beneficiary, the trust can pay off the mortgage with a fresh mortgage financing from a bank, and then distribute the encumbered property to the beneficiary.
Neal Armstrong. Summary and translation of 2015-0593091C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable Q. 8.
The surplus recasting rule in Reg. 5907(2.02) can extend to non-rollover reorganizations
Reg. 5907(2.02) recasts exempt earnings a taxable earnings if they were generated in an avoidance transaction disposition to a non-arm’s length person or partnership. although the main target may have been be intercompany excluded-property transfers, the rule might also encompass a dividend in kind paid by an FA, a non-QLAD (qualifying liquidation and dissolution) liquidation; an FA-to-FA liquidation or merger that is not structured as a rollover - and it also might apply to an asset-packaging rule described in Reg. 5907(2.01) in circumstances where surplus maximization was a strong motivator. Moreover, Finance's technical notes suggest the dubious proposition that it could apply to exempt earnings generated from a deemed disposition of active business assets under the fresh start rules.
Neal Armstrong. Summary of Paul Barnicke, Melanie Huynh, "Exempt Earnings Anti-Avoidance," Canadian Tax Highlights, (Canadian Tax Foundation), Vol. 23, No. 12, December 2015, p. 5 under Reg. 5907(2.02).
CRA considers that NYSE stock trades should be translated at the noon exchange rate on the settlement date
As CRA considers that shares sold on a stock exchange are disposed of on the settlement rather than trade date, it considers that the U.S. dollar proceeds received on a sale on a U.S. exchange should be translated into Canadian dollars using the noon exchange rate for the settlement date.
Neal Armstrong. Summary and translation of 2015-0588981C6 under 9 October 2015 APFF Financial Strategies and Instruments Roundtable Q. 5.
CRA is studying whether the $2,500 penalty for late T1135 filings applies automatically
Where there has been a voluntary disclosure for failure of the taxpayer to file T1135s for the past, say, 15 years, the current practice of CRA is to assess the $2,500 per-year penalty for the first five years as being before the 10-year period for which CRA is permitted to waive penalties or interest under s. 220(3.1). However, the proposition that “the late-filing penalty of $2,500 under subsection 162(7) applies automatically… is currently under study.”
Neal Armstrong Summary and translation of 2015-0588971C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable Q. 4, 2015-0588971C6 F.
CRA confirms that the s. 70(6) rollover can apply to residuary (in addition to specific) bequests
In Bueti, the court appeared to state obiter (and without reference being made to s. 248(8)(a)) that a property in the residue of an estate is vested in the executors following death rather than in any residuary beneficiary.
In the course of responding to a ridiculous question as to whether the s. 70(6) rollover for a transfer of property to a spousal trust can apply where the estate distributes a “replacement property” to the spousal trust rather than property held by the deceased on death (no, it cannot), CRA stated that s. 70(6) (which inter alia requires that the subject property vest indefeasibly in the spousal trust) “could apply to a specific property in the residue of the estate.”
Neal Armstrong. Summary and translation of 2015-0596611C6 F under 9 October 2015 APFF Financial Strategies and Instruments Roundtable, Q. 9.
CRA finds that there is no source disappearance where an interest-free advance made to a wholly-owned corporation (and funded with borrowed money) is forgiven
The sole shareholder of a CCPC uses borrowed funds to make an interest-free advance to the CCPC, and the CCPC then makes a proposal under the BIA, which is accepted by the creditors and entails the shareholder advance being cancelled. CRA considered that “the actual use of borrowed money, following the debt cancellation, continues to be for the purpose of investing in the shares of the corporation,” so that if “there is a reasonable expectation of deriving dividends,” the interest payable by the shareholder would continue to be deductible under general s. 20(1)(c)(i) principles without the need to resort to the s. 20.1(1) rule for source extinctions.
Neal Armstrong. Summary and translation of 2015-0588951C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 3.
CRA considers that shares acquired on stock option exercise must be disposed of in one transaction to avoid basis averaging
The s. 7(1.31) rule is intended to avoid basis averaging under s. 47 when executives exercise stock options and then immediately sell the acquired shares – so that they will not realize a capital gain even if they also held low-basis shares of the same company. This rule does not work if the executive, immediately after exercise, disposes of the acquired shares in two tranches, e.g., she donates some of them to a charity and transfers the balance to her personal holding company. The second disposition is tainted (i.e., the safe harbour in s. 7(1.31) is not available) because there was an intervening disposition of identical shares (i.e., the first disposition) following the exercise.
It is not clear whether feeding the acquired stock into the market over the course of a trading day but with settlement occurring in three days’ time essentially independent of the precise trading times, would be problematic.
Neal Armstrong. Summary and translation of 2015-0595841C6 F under 9 October 2015 APFF Roundtable on Financial Strategies and Instruments, Q. 2.