News of Note
CRA expands its positions on spouse trusts in a new Folio
Email this ContentCRA has published a Folio that expands on various of the positions that it took in IT-305R4. Additional points made include:
- A mooted spouse trust is disqualified by the existence of a power to encroach on the capital or income for the benefit of persons other than the spouse or common-law partner, prior to their death – or by a discretion of the trustee to allocate the trust’s income or capital among members of the deceased taxpayer’s family during the life of such spouse/partner.
- Only the spouse/partner can have discretion respecting trust income distribution. In order for the spouse/partner to have a legal right to enforce payment of the income of the trust (as required under s. 70(6)(b)(i)), any discretion respecting distribution of trust income must be solely in that individual’s hands. However, retention of trust income at that individual’s direction does not disqualify the trust (although such income would still be included in the individual’s income under s. 104(24), absent a valid s. 104(13.1) election).
- The terms of the trust cannot permit the trustee to restrict the payment to the spouse or common-law partner of any portion of the trust’s income, nor may the individual’s income entitlement be limited to a certain percentage of the value of the trust property.
- The doctrine of constructive receipt is applied, for example, a payment of trust income in accordance with the will to a person other than the spouse or common-law partner, on condition of its use solely for the individual’s benefit, would not disqualify the spouse trust.
- The competent authority procedure under Art. XXIX B of the Canada-U.S. Treaty can potentially be accessed for US residents, who devised or bequeathed taxable Canadian property to a spousal trust, in order to access the s. 70(6) rollover.
Neal Armstrong. Summaries of Folio S6-F4-C1, “Testamentary Spouse or Common-law Partner Trusts,” 3 February 2022 under s. 70(6)(b), s. 70(6.2), s. 248(1) - Common-Law Partner, s. 248(9.1), s. 108(3), s. 70(8)(c), s.70(7), s. 70(6.1), Treaties – Income Tax Conventions - Art. 29 B and s. 104(13.4)(b.1).
Cliff – Federal Court of Appeal states that a director can resign by email or text
ITA s. 227.1(4) and ETA s. 323(5) indicate that a director cannot be assessed for unremitted corporate source deductions or GST more than two years after she ceased to be a director. Rennie JA stated:
Chriss does not require that all resignations must have a personal, physical signature to be effective. A director may resign via email or text, for example.
However, the only evidence of a purported written resignation in any form was a completed Form in the minute books for informing the Ontario Ministry of Consumer and Commercial Relations that the resignation had occurred (which may not have been sent to the Ministry). Rennie JA stated:
For a resignation to be effective, there must be evidence that the corporation received a written resignation confirming that the appellant has resigned. While Form 1 may reflect something that may have happened, it is not a substitute for a written resignation.
Accordingly, the taxpayer’s appeal was dismissed.
Neal Armstrong. Summary of Cliff v. Canada, 2022 FCA 16 under s. 227.1(4).
Partnerships cannot choose a 53-week fiscal period
Unlike a corporation, which under s. 249.1(1)(a) is allowed to choose a 53-week fiscal period, under s. 249.1(1)(d) a partnership cannot have a fiscal period lasting more than 12 months. Thus, for example, if a partnership (with corporate partners which are not professional corporations) is formed on December 29, 2021, it must close off its first fiscal year on December 31, 2021 (in which case it could incur penalties under s. 162(7.1) if it forgets to file a return for that three-day year) – or, alternatively, its first fiscal period end could be at some later date partway through 2022, and it could apply to CRA for advance permission to change the second fiscal period end to December 31, 2022.
Neal Armstrong. Summary of Lorenzo Bonanno, “Problems with Fiscal Period of Partnerships and Subsection 249.1(1),” Canadian Tax Focus (Canadian Tax Foundation), Vol. 12, No. 1, February 2022, p. 4 under s. 249.1(1)(d).
National Benefit Authority Corp. – Federal Court of Appeal finds that it lacked jurisdiction to hear an appeal of a Tax Court determination denying access to a non-lawyer
A corporation in the business of assisting individuals with claims for disability tax credits (DTCs) appealed a Tax Court decision finding that it (through one of its non-lawyer employees) could not be recognized as the representative of individuals in their Tax Court appeal of the CRA denial of their DTCs. It and the Crown agreed that the Federal Court of Appeal had jurisdiction pursuant to s. 27(1.2) of the Federal Courts Act to hear this appeal from a “final judgment” of the Tax Court. Woods JA disagreed, and instead found that this appeal was regarding an “interlocutory matter,” so that the Court of Appeal lacked jurisdiction. She stated (at para. 11):
The subject matter of the DTC appeals is the DTC appellants’ entitlement to DTCs. The motion did not determine this substantive right. It determined a collateral, procedural right.
Neal Armstrong. Summary of The National Benefit Authority Corporation v. Canada, 2022 FCA 17 under Federal Courts Act, s. 2(1) – “final judgment”.
Income Tax Severed Letters 2 February 2022
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Wyrstiuk – Tax Court of Canada finds that failure to recognize that a termination payment was not earned income gave rise to RRSP over-contribution tax
A lump sum of $165,000 received by the taxpayer in 2014 as a negotiated payment for the termination of his employment was found, in light of Atkins, to constitute a retiring allowance rather than income from employment. This meant that the sum was not added to his earned income for 2014, so that a contribution of $24.270 made in February 2015 to his RRSP gave rise to an over-contribution.
Jorré DJ recomputed and reduced the amount of the s. 204.1(2.1) tax assessed by CRA, so that the case serves as a numerical illustration (and verbal explanation) of how to compute the over-contribution tax.
Neal Armstrong. Summary of Wyrstiuk v. The Queen, 2022 TCC 10 under s. 204.2(1.1).
CRA indicates that the 2021 T3 returns will not require the additional Reg. 204.2 beneficial ownership disclosure
Draft s. 150(1.2), as supplemented by Reg. 204.2, requires, effective for the 2021 and subsequent taxation years, that most trusts provide additional beneficial ownership information with their returns. In an update to its webpage on these rules, CRA stated:
The legislation to support this proposed measure is pending. The CRA will administer the new reporting and filing requirements once there is supporting legislation that receives Royal Assent. The CRA will continue to administer the existing rules for trusts, under enacted legislation. The proposed beneficial ownership reporting requirements will not be part of the published 2021 T3 income tax return.
Neal Armstrong. Summary of Reporting Requirements for Trusts (CRA Webpage), 14 January 2022 under s. 150(1.2).
Activity of a group entity in Quebec may require extensive public disclosure of the structure of a closely-held corporate group
Ss. 2.1, 21.1 and 21.3 of the Canada Business Corporations Act, and various provisions of the Quebec Legal Publicity Act (“QLPA”), require private corporations to record individuals with significant control over the corporation (“ISCs”) under the CBCA, and individuals who are the ultimate beneficiaries (“UBs”) under the QLPA. S. 21.3(2) of the CBCA provides that CRA and various other investigative authorities are authorized to gain access to these registers. Most of the other provinces have enacted or are introducing similar measures.
The QLPA, which currently is scheduled to come into force by October 2022, provides for a public register listing UBs that is to be freely accessible, and searchable by names of corporations, ultimate beneficiaries, directors, and principal officers. It essentially applies to any corporation incorporated in Quebec - or anywhere else in the world but with activity in Quebec so as to be required to register extra-provincially.
Both ISCs and UBs essentially encompass individuals with at least 25% of the votes or fair market value of the subject corporation arising from its shares, so long as they are registered holders or beneficial owners (or, under the CBCA rules, have direct or indirect control or direction) of such shares, or have de facto control of the corporation. However, while the CBCA rules look only at direct ownership, the QLPA provisions specifically recognize both direct and indirect holders of shares, so that they look up through tiered structures.
The resulting breadth of the required public disclosure will make become a significant factor in some structurings, including careful consideration of which entities will have activity in Quebec.
There are substantial uncertainties as to how both the CBCA and QLPA rules will apply to trusts.
Neal Armstrong. Summary of Daniel Frajman, “Update on Beneficial Ownership Transparency under the CBCA, Ontario, and Quebec Models,” Tax Topics, No. 2602 (Wolters Kluwer), 18 January 2022, p. 1 under CBCA, s. 2.1.
We have translated 9 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 8 translations of CRA interpretation released in August and July, 2005. Their descriptors and links appear below.
These are additions to our set of 1,907 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 16 ½ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for February.
Desjardins – Quebec Court of Appeal finds that the due diligence defence is not available for errors of law
When the taxpayers, which were property-casualty insurers, received premiums from a customer before the policy took effect, they remitted the insurance premium tax received by them on such collection on the basis of the month in which the policy came into effect rather than the earlier month of receipt. The relevant QSTA provisions, which were broadly similar in this regard to ETA ss. 225(1) – A(a), 228(2) and 222(1), required that a person receiving payment of a policy premium collect the tax thereon as agent for the Minister and remit such tax to the Minister. The Court found that these provisions clearly triggered an obligation to remit the tax collected when it was received rather than the later time when the policies took effect.
In going on to confirm the imposition of penalties on the taxpayers pursuant to the Tax Administration Act (generally calculated as 15% of the amounts they had remitted one month late), the Court stated:
The defence of due diligence allows for the avoidance of administrative penalties imposed by a statute where an error of fact is made in good faith, but not where there is an error of law. …
… To allow the taxpayer to escape the consequences of failing to meet its obligations by proposing a different interpretation of the legislative provisions would open a loophole that is difficult to reconcile with [the self-assessment] principle.
Neal Armstrong. Summaries of Agence du revenu du Québec v. Assurances générales Desjardins Inc., 2022 QCCA 57 under ETA s. 225(1) – A(a) and ITA s. 227(8)(a).