News of Note
CRA confirms that the CSV of a life insurance policy could reasonably be fully allocated on the death of a common shareholder to the holder of a tracking share
Email this ContentThe taxpayer wants the proceeds of the universal life insurance policy on his life paid on his death to his adult child, rather than to his spouse, who is the one under his will to inherit his common shares of the private corporation (the “Corporation”) that will be the policyholder and beneficiary.
To this end, the Corporation issues for $1 a special non-voting share (the “insurance share") to the child that is non-participating except for an entitlement to a dividend (to be declared only after the taxpayer’s death) equaling the policy death benefit payable under the policy. The share also is retractable by the holder before the taxpayer's death, for the policy’s cash surrender value (“CSV”), but with payment deferred until the Corporation’s receipt of the death benefit, and is retractable by the holder (and redeemable by the Corporation) after the Corporation’s death for any excess of the death benefit over the dividend declared.
S. 70(5.3) indicates that, for purposes inter alia of s. 70(5), the fair market value of a share of the deceased shall be determined as if the fair market value (immediately before the death) of a policy on the deceased’s life was its cash surrender value (“CSV”).
CRA confirmed that, regarding the narrow issue of the FMV of the common shares immediately before the death of the taxpayer, given that the insurance share was retractable by the holder immediately before the death for the CSV, it would not be unreasonable to allocate the policy CSV to the insurance shares – so that the value of the common shares would not take the policy CSV into account.
Neal Armstrong. Summary of 19 May 2021 CLHIA Roundtable Q. 4, 2021-0884291C6 under s. 70(5.3).
Income Tax Severed Letters 14 July 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a separated common-law couple can do a s. 55(3)(a) spin-off from their jointly owned Opco within the first 90 days of their separation
A common-law couple, on the 85th day after they started living separate and apart due to a relationship breakdown, carried out a split-up of the business corporation jointly owned by them (i.e., a spin-off of half the business to a Newco owned by one of them) in reliance on the s. 55(3)(a) exception from s. 55(2). After the 90th day, they were no longer deemed under the s. 248(1) “common-law partner” definition to be common-law partners and, thus, ceased to be related.
CRA indicated that this did not retroactively cause them to not be related for purposes of applying the tests in ss. 55(3)(a)(i) to (v) to the split-up reorganization of a few days earlier.
Neal Armstrong. Summary of 29 March 2021 External T.I. 2020-0839571E5 under s. 55(3.01)(a).
CRA indicates that a s. 149(1)(n) corp. must construct rather than purchase its low-rental housing projects
S. 149(1)(n) exempts the income of a
limited-dividend housing company (within the meaning of … section 2 of the National Housing Act), all or substantially all of the business of which is the construction, holding or management of low-rental housing projects.
It might seem obvious that “or” means “or,” so that a low-rental housing project that was purchased rather than constructed, could qualify. However, CRA noted that the s. 2 definition of limited-dividend housing company referred to “a company incorporated to construct, hold and manage a ‘low-rental housing project’” and whose articles limited its dividend rate to 5% or less. Thus, a company that purchased rather than constructed the project would not qualify.
CRA also noted that it would appear that a project could qualify as a “low-rental housing project” (also defined in the National Housing Act) if the company rented the project units to a registered charity which, in turn, sublet the units to low-income families - although it would want to consult with the CMHC before concluding on this issue.
Neal Armstrong. Summary of 22 February 2021 External T.I. 2020-0848221E5 under s. 149(1)(n).
Bill C-208 has botched drafting, and will be substantially re-written
Bill C-208 generally provides that an individual selling qualified small business shares or shares of a family farm or fishing corporation to a corporation controlled by the individual’s children or grandchildren who are at least 18 years of age will benefit from capital gains treatment rather than receive a s. 84.1 deemed dividend provided that such purchaser does not dispose of those shares for at least 60 months.
Given that the children or grandchildren are only required to control (rather than have a substantial equity stake in) the purchaser, this lends itself to “high-octane surplus strips” in which individual owners of a small business corporation can use the capital gains exemption to extract cash from the business, while still retaining virtually all of the equity and upside in the business.
Other anomalies include:
- The purported numerical formula limitation on the s. 110.6(2) or (2.1) capital gains deduction (based inter alia on the level of the corporation’s taxable capital employed in Canada) in s. 84.1(2.3)(b) is "meaningless" and has no application because it is stated to apply only for the purposes of s. 84.1(2)(e).
- Furthermore, the math in the formula is wrong – even if it were effective, it would only eliminate the deduction at taxable capital levels of $510 million, not $15 million.
- There is nothing preventing the children or grandchildren from selling their shares of the purchaser within 60 months, or the subject corporation from selling its business.
The June 30, 2021 Finance press release (made one day after the passage of Bill C-208) effectively indicated that, sometime later this year, the Bill C-208 relief will be retroactively repealed and yet-to-be-determined new provisions will take effect on January 1, 2022. Allan Lanthier sets out in some detail what might be approximately expected in the new legislation.
Neal Armstrong. Summary of Allan Lanthier, “Tax relief for family business transfers: A legislative fiasco” – Part I, Canadian Accountant, 8 July 2021 and Part II, Canadian Accountant, 9 July 2021 under s. 84.1(2)(e).
We have translated 10 more CRA interpretations
We have published a further 10 translations of CRA interpretation released in September, 2007. Their descriptors and links appear below.
These are additions to our set of 1,622 full-text translations of French-language severed letters (mostly, Roundtable items and Technical Interpretations) of the Income Tax Rulings Directorate, which covers all of the last 13 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
Centre de traitement de la biomasse – Quebec Court of Appeal finds that a taxpayer made sales of partially processed waste when it paid other processors to complete its processing
A processor of organic sludge was paid by suppliers in the agri-food industry for taking over the sludge, which it then treated and transformed, using electricity, into residual fertilizer material. It in turn paid companies (the "Receivers") to acquire the materials, which they recovered for composting, agricultural land application or as an energy source. It profited by paying significantly less to the Receivers than it received from its sludge suppliers.
Whether it was denied input tax refunds under the Quebec Sales Tax Act for the QST on its electricity purchases turned on whether it used the electricity “to produce movable property … intended for sale” within the meaning of s. 17(aa) of the Quebec Retail Sales Tax Act (“RSTA”) The Court of Quebec had followed C.R.I. Environnement in finding that this exemption did not apply. C.R.I. Environnement on similar facts had found that the goods were not intended for “sale” because Article 1708 of the Civil Code of Quebec defined a sale as “a contract by which a person, the seller, transfers ownership of property to another person, the buyer, for a price in money which the latter obligates himself to pay,” whereas there, there was no monetary consideration received from the persons to whom the goods (the waste) were transferred.
In reversing the decision below, and finding that the exemption applied (so that the ITRs were not denied), Marcotte JCA noted that “sale” was broadly defined in s. 2(9) of the RSTA to include “any other contract whereby, for a price or other consideration, a person delivers or binds himself to deliver, to another, movable property.” After quoting Waddams, The law of contracts, as to the meaning of “consideration” under the common law, she stated:
In this case, by transferring its environmental obligations to the Receivers, the Appellant relieved itself of various environmental obligations or liabilities. In my view, this relief conferred a benefit on the Appellant and … constituted valuable consideration that may be characterized as "any other consideration" within the meaning of section 2(9) of the RSTA.
Neal Armstrong. Summary of Centre de traitement de la biomasse de la Montérégie inc. v. Agence du revenu du Québec, 2021 QCCA 1068 under ETA s. 123(1) – consideration.
Libicz – Federal Court suggests that a clear representation made by CRA officials within the scope of their authority as to an administrative process they will follow is binding
Not surprisingly, Elliott J found that CRA was not bound to follow a procedure in its Collections Manual that, by the time it actually implemented the action that the taxpayers complained about (merely withdrawing a certificate of taxes owing that CRA had filed under ETA s. 316 rather than permanently canceling it), had been amended by a subsequently-issued internal directive. Of particular interest is the way in which she rejected an argument of the taxpayers that “there was a legitimate expectation that CRA would follow their own policies and procedures as set out in the 2015 Manual.” She stated:
A legitimate expectation arises when a government official makes “clear, unambiguous and unqualified” representations within the scope of their authority to an individual about an administrative process that the government will follow: … Mavi, 2011 SCC 30 … .
Such representations will be considered sufficiently precise for purposes of the doctrine of legitimate expectations if, had they been made in the context of a private law contract, they would be sufficiently certain to be capable of enforcement: Mavi at para 69.
However, in applying this principle, she stated:
I agree with CRA that an internal policy that was rescinded at the time that the certificates were filed is not a representation that is sufficiently precise to constitute a binding contractual obligation. As such, a legitimate expectation did not arise.
Neal Armstrong. Summary of Libicz v Attorney General of Canada, 2021 FC 693 under ETA s. 316(2).
GST/HST Severed Letters February 2021
This morning's release of five severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their February 2021 release) is now available for your viewing.
Wall – Federal Court of Appeal confirms that three successive sales of newly-constructed homes over a period of under 5 years were made in the course of a business or adventures
The taxpayer purchased three homes in Vancouver in succession between 2004 and 2009, demolished each one, constructed a new house and sold it less than two years after the purchase date. His position was that he had not sold in the course of a business or an adventure in the nature of trade, but had instead constructed each home for the purpose of personal occupancy, so that his sales were exempt under Sched. V, Pt. I, s. 2 rather than being taxable supplies for GST purposes made as a builder.
In dismissing the appeal, Webb JA noted:
[W]ith the guidance of the Supreme Court of Canada [in MacDonald], Mr. Wall’s “ex-post facto testimony regarding his intentions cannot overwhelm the manifestations of a different purpose objectively ascertainable from the record”. …
Evidence contradicting the taxpayer’s arguments included:
- Each house was listed for sale before the occupancy permit was obtained.
- His incurring more debt with each successive purchase contradicted his testimony that he sold to eliminate debt.
- The maximum period that he could have occupied each property before its sale (even assuming he moved in before obtaining the occupancy permit) was a matter of months rather than years.
Neal Armstrong. Summaries of Wall v The Queen, 2021 FCA 132 under ETA s. 123(1) – builder - (f), s. 191(5) and Sched. V, Pt. I, s. 3.