News of Note
CRA considers that general insurance agents may not claim a s. 32(1) commission reserve re future claims adjusting services
Email this ContentS. 32(1) permits an insurance agent or broker to deduct a reserve from unearned commissions otherwise included in income under s. 12(1)(a) respecting insurance contracts (other than life insurance contracts) equal to the lesser of a pro rata portion of the commission based on remaining term of the contracts and the amount which otherwise would have been computed under s. 20(1)(m).
CRA considers that the s. 20(1)(m) branch of the reserve "must be [for] an amount described in paragraph 12(1)(a)…that relates to a binding obligation to provide specific types of client support services after the end of the year," so that "services that might be required in relation to claims under the policies (for example, claims adjusting) would not be eligible since they normally would be contingent amounts…[under] paragraph 18(1)(e)." On a global basis, this future rendering of claims-related services might be reasonably anticipated and quantifiable, but would be highly contingent for any particular policy. CRA did not discuss any argument that s. 33(2) of the Interpretation Act (singular includes plural) accommodates such a global approach.
Neal Armstrong. Summary of 20 August 2015 T.I. 2015-0588871E5 under s. 32(1)(b).
CRA rejects CAE and considers that conversion of house inventory to personal use does not give rise to business income then or on subsequent sale
C.A.E. has not changed CRA’s view that the s. 45(1) deemed disposition rules do not apply where a home builder, who initially held a property as inventory, commences to use it a personal use property (PUP), and that "the treatment of any gain on the ultimate sale of the particular PUP would not give rise to a gain or loss on income account."
Neal Armstrong. Summary of 25 September 2015 T.I. 2015-0596921E5 under s. 45(1)(a).
CRA appears to accept that a s. 20(1)(m) reserve can be claimed for an amount included under s. 9 rather than 12(1)(a)
A distributor receives a payment from the manufacturer in consideration for a somewhat diffuse obligation to participate in stipulated marketing activities over the following eight years. Is there an immediate income inclusion, or can it recognize the income over eight years?
CRA indicated that if the amount was received "free of conditions or restrictions respecting its use from the commencement of the contract," it would be included in income under s. 9, and if instead the "acts and obligations which the distributor corporation had to accomplish after the end of the taxation year were sufficiently significant to reach a conclusion that the sum was not earned in that year," then it "could" be included in income under s. 12(1)(a). CRA then stated:
[A]n amount included in the computation of income [under s. 9] by virtue of the realization principle could also come within paragraph 12(1)(a). In such a case and subject to subsection 20(7), the distributor corporation could have the right to deduct a reasonable amount as a reserve if the situation was described in one of subparagraphs 20(1)(m)(i) to (iv).
This indication that an income inclusion under s. 9 might also be regarded as occurring under s 12(1)(a) (in which case a reserve would be available for related future services to be rendered) appears to be an implicit rejection of Burrard Yarrows (suggesting that if income was included under s. 9, no s. 20(1)(m) reserve was available) and an implicit acceptance of Doteasy and Ellis Vision (taking the opposite approach).
Neal Armstrong. Q.9 of 9 October 2015 APFF Roundtable under APFF Roundtable.
CRA does not require 3rd party commitment letters for loss transfer rulings
When asked whether, in a loss consolidation transaction, it matters whether the lossco has a source of funds to cover dividend payments other than the interest income paid by the profitco, CRA responded that in upstream shareholding situations, it will "generally ask for a representation that the issuer of the shares will have other assets from which the dividends will be funded" – and when asked whether it requires a commitment letter issued by a third party to confirm that the proposed transactions are commercially plausible, it responded:
[T]ypically the CRA will request a representation relating to borrowing capacity. In some cases, such as situations where the amount of the debt is substantial, CRA may request a signed letter from a director or other documentation.
Neal Armstrong. Summary of 19 August 2015 T.I. 2015-0589611E5 under s. 111(1)(a).
CRA accepts MSH, so that unclaimed divided refunds do not generate s. 186(1)(b) tax to the dividend recipient
CRA accepts MSH (which in turn, was effectively approved in the Federal Court of Appeal in 1057513 Ontario Inc.) and has reversed 2012-0436181E5, in now considering that a dividend refund which is not claimed on a timely basis does not reduce the refundable dividend tax on hand of the payor corporation. Among other things, this means that the dividend recipient will not be subject to Part IV tax under s. 186(1)(b) (based on the dividend refund calculated for the payor) if the dividend refund is not received by the dividend payor.
Neal Armstrong. Q.8 of 9 October 2015 APFF Roundtable.
Castro - Federal Court of Appeal finds that an inflated charitable receipt was not a s. 248(32) “advantage” – but the wrong amount invalidated it
Various individuals made cash contributions to a registered charity on the basis that the charity would issue charitable receipts to them for 10 times the amount of their contributions.
Scott JA agreed with Woods J below that the inflated charitable receipts did not constitute a benefit (so as to vitiate the cash amount of the contributions as "gifts" on general principles), and similarly found that the the inflated receipts were not "advantages" so as to invalidate the contributions under s. 248(30)(a). However, he denied a charitable credit for the cash contributions on the basis that the inflated amounts shown on the receipts rendered the receipts invalid.
He did not decide, on the Crown’s further argument that the taxpayers lacked donative intent, on procedural grounds.
Neal Armstrong. Summaries of Castro v. The Queen, 2015 FCA 225, rev'g sub nom. David v. The Queen, 2014 DTC 1111 [at 3236], 2014 TCC 117, under s. 118.1(1) – total charitable gift, s. 248(32), Reg. 3501(6), and Interpretation Act, s. 32.
CRA finds that a terminal-return capital gains exemption claimed on bequested shares grinds their ACB for s. 84.1 purposes to the family beneficiaries
The capital gains deduction was claimed in the terminal return of an individual (X) for shares which were bequeathed to his son, and the son then transferred these shares to his holding company. The principal issue, respecting whether s. 84.1(2)(a.1)(ii) applied to grind the ACB of his shares (by the amount of this claim) for purposes of the application of s. 84.1 to the share transfer to the holding company, turned on this question: was a deduction under s. 110.6 claimed respecting a previous disposition of the shares by an individual with whom the son did not deal at arm’s length?
In responding affirmatively, CRA stated that "the relation between the parties is to be evaluated at the moment giving rise to the application of section 110.6." Since the disposition giving rise to the capital gain for which the deduction was claimed was deemed by s. 70(5)(a) to have occurred immediately before X’s death (when X obviously was not dealing at arm’s length with his son), the s. 110.6(2.1) claim ground the shares’ ACB for s. 84.1 purposes.
Neal Armstrong. Q.7 of 9 October 2015 APFF Roundtable under APFF Roundtable.
CRA provides ample grandfathering in changing its position for recognizing recapture from erroneous CCA claims
If, as a result of the erroneous inclusion of acquired property (e.g., property which was not acquired for an income-producing purpose) in a class of depreciable property, the bogus CCA claims thereon cause the UCC of the class, on a proper determination, to have become a negative amount, CRA now considers that the negative balance for the class will be recognized as recapture of depreciation in the first year following the acquisition which is not statute-barred. This is a change of position from IT-478R2, para. 14, which stated that a negative balance arising in a statute-barred year "will not be added into the taxpayer's income for that year or a subsequent year."
This new position will be reflected in an imminent Folio, but "will apply on a prospective basis to property acquired or transactions entered into after December 31, 2015."
Neal Armstrong. Summary of 29 July 2015 Memo 2015-0575921I7 under s. 13(1) and s. 13(21) - undepreciated capital cost - E.
Lanesborough REIT is issuing units in satisfaction of a dry income distribution
Lanesborough REIT used all of the net cash proceeds from the sale of a property to pay down debt. Although it has some operating losses, it nonetheless needs to make a special distribution in order to distribute its resulting taxable income. It will do this by making a special distribution to its unitholders on December 31, payable in treasury units, with the number of outstanding units then immediately consolidated to the same number as before. It appears to be contemplated that a s. 104(21) designation will be made in order to flow out capital gains treatment to the unitholders, so that the special distribution will be twice the taxable income to be distributed.
Neal Armstrong. Summary of Lanesborough REIT Press Release under Spin-Offs & Distributions – Taxable dividends-in-kind – MFT dry income distributions.
Income Tax Severed Letters 4 November 2015
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.