News of Note

The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada on December 17, 2001 as a result of the replacement of its sole trustee by a Barbados corporate trustee. The taxpayer noted that an inter vivos by virtue of s. 249(1) generally had a calendar taxation year and argued that “year” in s. 94(1)(c)(i) referred to the 2001 calendar year, so that, by virtue of becoming a deemed resident trust under s. 94(1) on December 17. 2001, the taxpayer was deemed to have been resident in Canada for Part I purposes from the time of its formation in 2001 (i.e., both before and after the emigration time) – hence, s. 128.1(4) had no application and the trust avoided capital gains tax on shares held by it with an accrued gain. (This argument would have been more difficult under current s. 94(3)(a), which refers to the trust’s “particular taxation year.”)

In rejecting this submission and in finding that the trust realized gain on the shares pursuant to s. 128.1(4)(b), Gagnon J noted that the two provisions could be readily read as giving priority in this regard to s. 128.1(4), and that he could not see “any indication that Parliament's objective was to allow trusts such as the Trust to leave Canada without incurring the special emigration tax triggered by subsection 128.1(4).”

The trust subsequently made two substantial capital distributions to the taxpayer (the second of which effectively terminated the trust). Gagnon J confirmed the Crown’s position that the taxpayer had not given consideration to the trust for either distribution (e.g., in exchange for part or full satisfaction of his capital interest in the trust) so that he was liable under s. 160(1) for the trust’s unpaid departure tax. In this regard, Gagnon J first noted:

[I]f one party is enriched and the other impoverished by the same amount, it will be possible to conclude that the party who became richer did not offer equivalent consideration … .

In finding that that was the situation here, he indicated that:

• “the trustee's distributions had no impact on the rights of a beneficiary of the Trust who had or had not received a distribution;” and
• although the taxpayer “had a right under the Trust to be considered by the trustee for any distribution on the same basis as the other beneficiaries … there is no reason to believe that anyone would have paid even a very small amount for [this right].”

In also rejecting the taxpayer’s submission that the deeming by s. 107(2) of proceeds for the distributed property equal to its cost amount constituted the receipt by the trust of consideration for s. 160(1)(e) purposes, Gagnon J indicated inter alia that:

• the concept of “transfer” in s. 160 should not be muddied by tax deeming provisions,
• that the opposite view implied, for instance, that in the quintessential case of a parent gifting property to a child, s. 160 would not apply because the parent received deemed FMV proceeds under s. 69(1)(b) and,
• in any event, the deemed proceeds arising under s. 107(2) were not deemed to be paid by the beneficiary.

This case suggests that the CRA view -- that a trust, which distributes property to a non-resident in satisfaction of a capital interest in the trust which is taxable Canadian property, will be liable under s. 116(5) absent withholding or obtaining a s. 116 certificate (see, e.g., 2011-0399501E5) – may be incorrect where the trust is a discretionary trust.

Neal Armstrong. Summaries of Barwicz v. The King, 2024 CCI 93 under s. 128.1(4)(b), s. 160(1)(e) and General Concepts – FMV – Other.

Three corporate taxpayers, which are resident in three countries with which Canada has treaties, use employees residing in those respective countries to provide online (e.g., by phone or video) services to patients in the same time zone. The taxpayers have now started providing the same services to patients in the same time zone as a Canadian province (“western patients”) but will not provide services to any patients located in Canada.

In order to accommodate employees who do not wish to work on night shifts in providing services to western patients, the taxpayers will permit (and financially assist) them to rent short-term accommodation (they will stay no more than 183 days) in such province, so that they can use their home office there to provide the services to western patients using computers provided by their employer. The taxpayers will continue to maintain their servers outside Canada and will have no access rights to such home offices.

CRA ruled that the taxpayers will be considered to be carrying on business in Canada while such employees are providing such services, but that they will not be considered to be carrying on business in Canada through a permanent establishment, as defined in Article 5 or V of the applicable treaty, solely as a consequence of such services being so provided.

Neal Armstrong. Summary of 2024 Ruling 2023-0984281R3 under Treaties – Income Tax Conventions – Art. 5.

A prescribed annuity contract (PAC) generally provides a more beneficial tax treatment to the annuitant than other types of annuities, which are subject to the accrual rules in s. 12.2(1). One of the requirements to be a PAC under Reg. 304(1)(c) is the requirement in Reg. 304(1)(c)(iii)(A) that the “holder” of the annuity contract be an individual (other than a trust) or a listed type of trust, i.e., an alter ego trust, joint spousal or common-law partner trust, post-1971 spousal or common-law partner trust, or qualified disability trust.

CRA rejected a suggestion that a PAC could be held in a non-listed trust in reliance on Reg. 304(3)(a), which deems the annuitant under an annuity contract to be the holder of the contract where the contract is held by another person in trust for the annuitant (defined in Reg. 304(4) as a person who is entitled to receive annuity payments under the contract) – so that (it was suggested) the holding of the mooted PAC by a non-listed trust could be deemed to be its holding by an individual beneficiary of the trust.

CRA indicated that Reg. 304(3)(a) could, for instance, permit a parent to hold an annuity contract for the parent’s child until the attainment of a specific age, so that Reg. 304(3)(a) would deem the child to be the holder of the contract, such that there thus would be an individual holder who satisfied Reg. 304(1)(c)(iii)(A). CRA concluded that “the expression ‘in trust’ in paragraph 304(3)(a) … is more akin to a nominee [arrangement]” and is not meant to accommodate non-listed trusts.

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 7, 2024-1005821C6 under Reg. 304(1)(c)(iii)(A).

We have translated an interpretation released last week and a further 6 CRA interpretations released in October of 2001. Their descriptors and links appear below.

These are additions to our set of 2,886 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 22 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).