News of Note
CRA confirms that where a private corporation has immaculately-conceived shares of two series, capital dividends can be paid on only one series
Email this ContentCRA confirmed that since s. 248(6) requires a series of shares to be treated as a separate class, a capital dividend could be paid by a private corporation to the holders of only one of the series of shares of a class. Before asking about this, the questioner had commented that the payment of capital dividends only to taxable shareholders of a private company and not to its tax-exempt shareholders, can also be avoided by redemption transactions targeted to the taxable shareholders. CRA, in its response, added:
[I]f it were the case that certain reorganizations or conversions of shares carried out through a transaction, or as part of a series of transactions, one of the main purposes of which is to enable shareholders to receive capital dividends, then the application of subsection 83(2.1) should be considered.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 7, 2020-0852191C6 F under s. 83(2).
CRA is now applying a “proportionate attribution approach” in applying the EIA s. 5(2)(b) test of “control … of … voting shares”
S. 5(2)(b) of the Employment Insurance Act provides that “Insurable employment does not include … the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation.” Équipements Boifor, 2019 CAF 69 concluded that two shareholders did not have insurable employment by virtue of s. 5(2)(b) given that they controlled more than 40% of Boifor's shares, taking into account those individuals’ shares held indirectly through a holding corporation, even though the shares were held on a 50-50 basis and no one individually held control of the holding corporation.
In stating that it accepted Boifor, so that its previous position was reversed, CRA addressed the example of two 50-50 (or 51-49) shareholders of a Holdco wholly owning their employer (Opco), and stated:
In light of the FCA's decision, the CRA must now consider the proportionate attribution approach in similar situations to determine whether the employment of a person who controls more than 40% of the voting shares of the employing corporation is insurable. …
… The proportionate attribution approach leads to the conclusion that the two shareholders each control more than 40% of Opco's voting shares (50% of 100%) for the purposes of EIA paragraph 5(2)(b). …
… [W]here the shareholders held 51% and 49% of the voting shares of Holdco … their employment [also] would not be insurable because they had effective control of 51% and 49% of the voting shares of Opco … .
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 6, 2020-0852181C6 F under EIA s. 5(2)(b).
CRA finds that a deemed s. 248(3) testamentary usufruct trust might access the principal residence exemption on the spousal usufructuary’s death or on her surrendering her interest
A housing unit is subject to a usufruct created by the Quebec will of Mr. X, with Mr. X’s surviving spouse (Ms. X) being the usufructuary, and their child being the bare owner. Ms. X ordinarily inhabits the housing unit.
The creation of the usufruct would create a deemed (testamentary) trust under s. 248(3), which would qualify as a spousal trust for purposes of a s. 70(6) rollover to such trust of the residence assuming that, under the terms of the will, no person other than Ms. X would be entitled during her lifetime to receive or otherwise obtain the use of any part of the income or capital of the trust.
CRA indicated that the death of the usufructuary (Ms. X) would terminate the usufruct and the deemed trust, which would imply the distribution of the housing unit to the bare owner. Upon the termination of the deemed trust, since the distribution of the property by the deemed trust (referred to in s. 104(4)(a)(i)), would be made to a beneficiary other than the surviving spouse, s. 107(4) would apply to the distribution, so that s. 107(2.1) would result in realization of a capital gain by the deemed trust. However, as Ms. X would be beneficially interested in the deemed trust under s. 248(3)(d), she could be considered a specified beneficiary as defined in s. (c.1)(ii) of the "principal residence" definition to the extent that she ordinarily inhabited the residence during the years the deemed trust owned it by virtue of s. 248(3) – thereby allowing the deemed trust to designate the residence as its principal residence, provided that all the other conditions of the "principal residence" definition were satisfied.
Regarding what would be the consequences of Ms. X surrendering her usufruct, CRA noted that such surrender would terminate the deemed trust and result in the distribution of the deemed trust’s property to the bare owner. Ss. 107(2.1) and (4) would apply to this distribution. However, again, the deemed trust could claim the principal residence exemption provided the usual conditions were satisfied.
In another variation, if the usufruct for Ms. X (following Mr. X's death) was for specific term of years, there thus would be a potential for someone other than the surviving spouse to receive or obtain the use of part of the income or capital of the deemed trust during the lifetime of the spouse (Ms. X), so that the condition in s. 70(6)(b)(ii) would not be met, and there would be no spousal rollover on Mr. X’s death.
Finally, what if the bare owner (the child) assigned her bare ownership interest in the residence to her mother, the usufructuary (Ms X), or predeceased her mother? CRA indicated that, pursuant to s. 70(5) or 69(1)(b), the bare owner would be deemed to have received the FMV of the capital interest in the deemed trust on its deemed disposition on the death, or on its assignment to the usufructuary, respectively. Moreover, the assignment to the usufructuary would cause the deemed trust’s termination, so that the housing unit would be distributed to the usufructuary on a rollover basis pursuant to s. 107(2).
Neal Armstrong. Summaries of 7 October 2020 APFF Roundtable Q. 5, 2020-0852171C6 F under s. 54 - principal residence – (c.1), s. 107(4), s. 70(6)(b)(ii) and s. 248(3).
CRA will not follow the ARQ in allowing a s. 164(6) loss carryback claim on a terminal return before the GRE’s T3 return is assessed
At the 2019 APFF Provincial Roundtable, Revenu Québec indicated that it is possible to claim the capital loss, realized by a graduated rate estate in its first taxation year and that is subject to the Quebec equivalent of the s. 164(6) carryback election, directly on the deceased's final TP-1 return, where the capital loss is already known at the time the two tax returns are filed.
CRA, for the time being at least, is not budging. It stated:
While there is no provision in the Income Tax Act that prevents the taxpayer's amended T1 Final Return (including the election under paragraphs 164(6)(c) and 164(6)(d)) from being filed before the T3 Return is filed, it is the CRA's administrative practice to assess the T3 Return before the reassessment giving effect to the election can be processed. That practice ensures that the loss claimed and any resulting reduction in tax payable or refund is substantiated.
Relaxing CRA's procedures and any administrative policy in that regard would require a thorough review … . That said, it would be highly unusual for the CRA to allow a loss to be applied to a tax return before the return giving rise to the loss has been assessed.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 4, 2020-0852161C6 F under s. 164(6).
CRA finds that a loan, that had funded a dividend creating a safe income deficit, reduced SIOH when repaid out of safe income earnings
In 2015, Opco, which had safe income of nil but an intangible asset worth $100,000, borrowed $100,000 to pay a dividend on its common shares to its sole shareholder (Mr. X). A Holdco ("Holdco Y") for an arm’s length (Mr. Y) then subscribed a nominal amount for common shares to become a 50% shareholder.
In 2018, after Opco had generated aggregate safe income of $200,000, Mr. X transferred his 50% shareholding to his wholly-owned Holdco ("Holdco X") on a s. 85(1) rollover basis at the shares’ nominal ACB. The $100,000 loan was repaid out of the $200,000 of retained earnings. The FMV of all the shares of Opco (which continued to hold the intangible worth $100,000) was $200,000.
CRA indicated that the safe income attributable to Mr. X’s 50% shareholding was effectively transferred to Holdco X on the s. 85(1) rollover. Regarding the safe income attributable to the shares at the conclusion of these transactions, it indicated that, since the loan was “was repaid out of the corporation's earned or realized income … that income cannot be viewed as contributing to the unrealized gain on the common shares of the capital stock of Opco” – so that the relevant safe income attributable to the 50% shareholding in Opco of each of the two Holdcos was $100,000 - $50,0000, or $50,000.
CRA did not discuss whether this same $100,000 reduction to the safe income of the two shareholdings for the $100,000 loan (or, looked at another way, for the $100,000 negative safe income resulting from the $100,000 dividend) would have also applied prior to the loan repayment.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 3, 2020-0852151C6 F under s. 55(2.1)(c).
CRA provides examples of what it has accepted as a “reasonable error” in making an RRSP or TFSA over-contribution
One of the requirements for the waiver under s. 204.1(4) or 207.06(1) of the penalty tax for an excess contribution to an RRSP or TFSA, respectively, is that the Minister be satisfied that the excess “arose as a consequence of reasonable error.” When asked about its interpretation of “reasonable error,” CRA first stated that “[f]or the error to be reasonable, it must … be considered by an impartial person to be more likely to occur rather than less likely to occur based on the circumstances of the taxpayer.” (This sounds rather like replacing “reasonable error” by “likely error.”)
It then indicated that ignorance of the contribution requirements generally will not be the basis for a waiver, but that “CRA may consider it appropriate to waive tax arising from a third-party error, depending on the circumstances.”
CRA then gave the following examples of instances where CRA has accepted that there was reasonable error:
- The taxpayer's notice of (re)assessment) indicated an RRSP deduction limit of $0, where in fact the limit was a negative amount, so that the taxpayer may have mistakenly believed that the taxpayer was entitled to the $2,000 allowance …;
- The taxpayer, through no personal fault, had over-contributed due to inaccurate information provided on the RRSP deduction limit statement [or by] the CRA…;
- The taxpayer's RRSP deduction limit had been reduced retroactively, due to events such as the late submission of a pension adjustment or amended pension adjustment, or the late submission of an exempt past service pension adjustment or T215 slip … for exempt past service pension adjustments;
- The taxpayer, a TFSA holder, had made multiple contributions to and withdrawals from his TFSA with the objective of maintaining a TFSA account balance below the contribution limit.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 1, 2020-0852131C6 F under s. 204.1(4).
Income Tax Severed Letters 7 April 2021
This morning's release of 23 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA effectively indicates that a construction manager for an apartment building JV cannot be the JV operator for GST/HST purposes
Where a person is the operator of a joint venture for the construction of a multiple-unit residential complex by virtue of having managerial or operational control of the JV and does not have an interest in the real property on which the MURC is situated, CRA indicated that such operator cannot account for the GST/HST tax on the deemed self-supply under ETA s. 191(3) (on substantial completion and first tenant occupancy), and claim the new rental housing (s. 256.2(3)) rebate. Its reasoning:
Based on the … the operator … not hav[ing] an interest in the real property on which the MURC is situated, the operator does not meet the conditions set out in paragraph (a) of the definition of “builder.” The CRA will not administratively accept that a person is a builder of a MURC for GST/HST purposes where the person does not meet the conditions set out in the definition of “builder.”
This effectively indicates that a purported appointment of a construction manager (with no real estate ownership interest) as the operator of a JV for the construction of an apartment building or other MURC is illusory. It would appear that, in CRA's eyes, the manager would not be able to claim input tax credits for the costs incurred by it in the construction process, as the ensuing taxable supply under s. 191(3) that would otherwise enable such ITC claims would not, in CRA’s eyes, be deemed to be made by it.
Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.8 under ETA s. 273(1).
CRA confirms that the s. 110(1)(d.01) gift deduction is unavailable against a s. 7(1)(e) stock option benefit
S. 110(1)(d.01) provides for an additional ½ deduction (so as to result in a nil taxable income inclusion) where the s. 110(1)(d) deduction was available for a s. 7(1)(a) stock option benefit and there is a timely gift of the optioned security to a qualified donee. CRA confirmed that this deduction is not available to reduce a s. 7(1)(e) benefit realized on death notwithstanding a donation of the shares following death by, for example, the estate to a qualified done.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 6, 2020-0851631C6 F under s. 110(1)(d.01).
CRA finds that an exempt contribution to a deceased TRFA holder’s surviving spouse could be made indirectly via a spousal trust
The TFSA rules contemplate that the surviving spouse of a deceased TFSA holder can make an “exempt contribution” of the payment to him or her of the TFSA proceeds (the “survivor payment”) to the survivor’s own TFSA within the “rollover period” (ending on December 31 of the year following the holder’s death). One of the requirements for an exempt contribution is that the survivor payment have been made to the survivor during the rollover period “as a consequence of the individual’s death, directly or indirectly out of or under [the holder’s TFSA].”
CRA found that a bequest of TFSA proceeds to a spousal trust which, in turn, distributed the TFSA proceeds in accordance with the deceased’s will to the surviving spouse would qualify as an indirect transfer as a consequence of death, so that this requirement was satisfied. This turned on s. 248(8)(a), which deems a transfer to be as a consequence of death if it occurs as a consequence of the terms of the will, and of the breadth of “directly or indirectly.”
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 5, 2020-0851601C6 F under s. 207.01(1) – exempt contribution – (b).