News of Note
GST/HST Severed Letters January 2021
Email this ContentThis morning's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their January 2021 release) is now available for your viewing.
Income Tax Severed Letters 30 June 2021
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Cristofaro – Quebec Court of Appeal applies Oceanspan to find that a non-resident with no sources of income in Quebec could not transfer a tax credit to a Quebec taxpayer
In 2003-0026827, CRA applied Oceanspan to find that a non-resident student who has no Canadian sources of income is precluded from transferring her unutilized tuition credits to her resident father under ITA s. 118.9 because:
an individual who is not resident in Canada and who has no Canadian source income would not be entitled to the tuition and education tax credits. The individual is not liable to pay tax in Canada, and therefore has no need to utilize the provisions permitting the tax credits.
Here, a similar approach was followed in finding that an Ontario-resident, who paid Quebec income taxes because a portion of his professional firm’s practice was in Quebec, could not be transferred a tuition credit (under the Quebec equivalent of s. 118.9) by his daughter studying in Scotland, who was resident in Ontario and had no Quebec sources of income. In addition to referring to Oceanspan as “particularly illuminating,” the Court quoted with approval the reasoning of Monaghan J in Marino (finding that U.S. tuition generated by a student while not a Canadian resident and without a source of income under s. 2(3) could not be carried forward to when he became a Canadian resident).
Neal Armstrong. Summary of Agence du revenu du Québec v. Cristofaro, 2021 QCCA 1025 under s. 118.9.
Magren Holdings - Tax Court of Canada finds that transitory acquisitions and redemptions of income fund units were shams
The appellants, were private companies controlled by a resident individual (Grenon), whose RRSP held 58% of the units of a publicly traded income fund (“FMO”). They engaged in a series of transactions that were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts (CDAs), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day.
In very general terms, significant elements of the series of transactions included:
- Grenon’s RRSP transferring its units of FMO to a newly-formed unit trust (“TOM”) -in exchange for units of TOM representing close to 100% of the issued and outstanding TOM units.
- The appellants acquiring such FMO units from TOM in consideration for issuing $161M in promissory notes.
- Various transaction being engaged in “beneath” FMO that resulted in capital gains being realized on the indirect transfer of subsidiary entities to a new unit trust (“New FIF”) that was intended to be the replacement public vehicle for FMO and those gains being allocated to, or otherwise realized by, FMO.
- The public transferring their units of FMO to New FIF in exchange for units of New FIF.
- After various steps to clean up the structure, FMO distributing essentially all its assets (being units of New FIF) to the appellants, and treating this as a distribution of the capital gains realized by it in 3 above. (These were the capital gain referred to above that were treated as CDA additions to be distributed.)
- The units of FMO being repurchased by FMO for nominal consideration. The appellants had full (FMV) cost for their FMO units when acquired in step 2, and the capital gains distributions did not reduce the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)((I). Accordingly, such repurchases resulted in the realization of largely offsetting capital losses (and, in light of the intervening distribution of the transitory increase to their CDAs, also resulted in negative CDAs.)
In finding that the appellants had not acquired the FMO units in step 2 above (which continued to be beneficially owned by the RRSP) and, therefore, did not realize a capital loss in step 6 above, Smith J stated:
Since it was intended … that the FMO units allegedly acquired from TOM on December 23, 2005 would be repurchased for cancellation on December 28, 2005 resulting in the alleged capital losses, I find as a fact that the Appellants had “absolutely no discretion” … as to the disposal of those units. The only role of the Appellants was to hold legal title to the units for a few days. …
[I]t cannot be said that the Appellants enjoyed “the three key attributes of ownership, namely, risk, use and possession” … .
In the course of going on to find that the acquisitions and repurchases also were shams, he stated, inter alia:
[I]t cannot be said that the alleged transaction by which FMO repurchased its units for cancellation resulted in ‘real’ capital losses. These were mere paper transactions ... allegedly supported by demand promissory notes that the Appellants would never be called upon to honour and that were issued and cancelled on December 28, 2005.
I agree with the Respondent, relying on Triad Gestco ... “that the Appellants did not enjoy a ‘real’ economic gain nor a real economic loss”.
He further found that because the s. 184(3) election to convert excess capital dividends into ordinary dividends
is intended to allow corporations “to correct their mistake and avoid the special tax provided under Part III” but it is not intended that the provision will apply where “the initial CDA was sham (sic), and those claiming the benefit of Part III are the authors of the sham”
such elections were invalid.
Finally, in finding, in the alternative, that GAAR would apply to deny the CDA additions, he stated:
It can be said that the “object, spirit and purpose” of the CDA regime is to ensure that it mirrors the tax treatment of capital gains for an individual and that the Minister can only seek to tax gains that give rise to ‘real’ economic gains. By the same token, only one half of the ‘real’ economic gains realized by a corporation can be added to the CDA.
Neal Armstrong. Summaries of Magren Holdings Ltd. v. The Queen, 2021 TCC 42 under s. 185(3), s. 185(1), General Concepts – Ownership, General Concepts – Sham, s. 184(3) and s. 245(4).
We have translated over 1600 CRA Interpretations
We have published a further 10 translations of CRA interpretation released in November, 2007, as well as an interpretation released last week. Their descriptors and links appear below.
These are additions to our set of 1,602 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 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.
CRA indicates that a s. 104(27) designation cannot be made for a pension amount received after a trust ceased to be a GRE
CRA stated that where an estate receives a lump sum from a pension plan of the deceased beyond the 36-month period in which it could qualify as a graduated rate estate (“GRE”), CRA would have no discretion to extend the 36-month period.
If the executor is unable to distribute the income under s. 56(1)(a)(i) to the sole beneficiary before the end of the year of receipt, that income could be included in the sole beneficiary’s income under ss. 104(13) and (24) if the beneficiary was entitled to enforce payment of the lump-sum benefit. This income would be treated as property income rather than pension income in the beneficiary’s hands because the trust could only designate under s. 104(27) a pension benefit as pension income of its beneficiary if the benefit was received while it was still a GRE.
Neal Armstrong. Summaries of 15 June 2021 STEP Roundtable, Q.14 under s. 248(1) – GRE, s. 104(24) and s. 104(27).
CRA compares the consequences of making or not making a s. 104(4)(a)(ii.1) election
As noted by CRA, if an alter ego trust does not make the s. 104(4)(a)(ii.1) election, it will be subject to a deemed disposition under s. 104(4)(a) at the end of the day of the settlor’s death, and a deemed year-end on that day under s. 104(13.4)(a). Alternatively, if the election is not made, there is no roll-in of property into the trust (but instead a deemed disposition at fair market value); however, on the death of the settlor, the trust will not have a deemed disposition, nor will there be a deemed year end under s. 104(13.4)(a) and, instead, a deemed disposition would typically occur on the trust’s 21st anniversary.
Neal Armstrong. Summaries of 15 June 2021 STEP Roundtable, Q.13 under s. 104(13.4)(a) and s. 104(4)(a)(ii.1).
CRA confirms that a joint spousal (s. 73(1.01)(c)(iii)) trust can receive jointly or individually owned property from the spouses
CRA confirmed that it is possible for spouses (or common-law partners), both of them over 65, to jointly create a trust which meets the s. 73(1.01)(c)(iii) conditions with a contribution of property jointly-owned by them; and that it is possible for one or both of them to make subsequent contributions to the trust on a s. 73(1) rollover basis with property that is owned jointly by them, and other property that is owned individually.
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.12 under s. 73(1.01)(c)(iii).
CRA indicates that it cannot waive tax for an innocent TFSA overcontribution where the investments become worthless
A new resident of Canada contributed $18,000 to a new TFSA in 2021 due to a misunderstanding of the rules (his contribution room was only $6,000). The shares of the company in which the TFSA invested became worthless.
CRA indicated that the monthly 1% tax under s. 207.03 on the excess amount continues to apply for each month that the excess amount remains and that, as here, the excess TFSA amount cannot be withdrawn, the excess will not be fully eliminated until January 1, 2023 as a result of the new contribution limits for 2022 and 2023.
The potential waiver of tax under s. 207.06(1) requires, inter alia, that he withdraw an amount from his TFSA sufficient to eliminate both the excess TFSA amount and any associated income and capital gains. Again, the individual cannot meet this condition.
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.11 under s. 207.06(1).
CRA indicates that a dividend refund, from a redemption also generating an AOC, arises in the taxation year commencing with the AOC
ACo repurchased all the shares held by one of its 50% shareholders so that there was an acquisition of control (“AOC”) by the other shareholder and a consequential deemed dividend. Will the resulting dividend refund to ACo arise in its new taxation year commencing as a result of the AOC, and would the answer be affected by whether ACo elects under s. 256(9) for the AOC to occur at the time of its actual occurrence rather than at the beginning of the day?
CRA indicated that, either way, the dividend refund to ACo computed under s. 129(1)(a) would be for its new taxation year. CRA in its oral comments did not explain this answer, but it seems to make sense given that the AOC coincides with the event (the repurchase) generating the deemed dividend, and s. 249(4) deems the old taxation year to have ended immediately before the AOC (irrespective of which of the two times the AOC is considered to have occurred).
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.10 under s. 129(1)(a).