News of Note
CRA indicates that an HBP balance is not zeroed through a contribution to repay the balance until the applicable return designation is made
Email this ContentAs part of the rules for allowing an individual to participate in a home buyers’ plan (HBP) in more than one calendar year, individuals can have a fresh participation period in which they can make a further HBP withdrawal from their RRSP if they have contributed amounts to their RRSP that are designated to be non-deductible HBP repayments, so as to reduce their “HBP balance” to nil. In particular, in order for a withdrawal from their RRSP to qualify as a “regular eligible amount,” para. (i) of the definition thereof requires the individual’s HBP balance at the beginning of the withdrawal year be nil.
An individual, who had an HBP balance of $5,000 at the beginning of Year 1, contributed $5,000 to his RRSP on May 7 of that year to repay that HBP balance. On March 25 of Year 2, when filing his T1 return for Year 1, he designated (on Sched. 7 to the return) that contribution as an HBP repayment for Year 1.
CRA indicated that it was only on the return filing date when he made such designation that his HBP balance as at the beginning of Year 2 was reduced to nil, so that he was required to wait until that date before being again able to participate in the HBP.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.11 under s. 146.01(1) – HBP balance.
CRA confirms that the ACB increase under s. 53(1)(e)(vi) for a negative ACB gain does not occur until immediately after rather than at the partnership year end
2009-0349911E5 dealt with a limited partnership (“LP”) which, in February 2008, realized a capital gain, of which $100,000 was allocable to a limited partner, whose interest had an ACB at the beginning of the (calendar) 2008 fiscal period of LP of $10,000. $100,000 was withdrawn by the limited partner in March 2008, producing a negative ACB gain of $90,000. CRA indicated that this negative ACB gain was added back to that negative ACB, so as to increase it to nil “as at December 31, 2008”, and that the capital gain allocated to the limited partner increased the ACB of its interest to $100,000 on January 1, 2009.
When now asked about this, CRA effectively acknowledged that the quoted date of the ACB increase pursuant to s. 53(1)(e)(vi) was incorrect, and that “the addition of $90,000 under subparagraph 53(1)(e)(vi) should be made on January 1, 2009.” (Otherwise, there presumably would be circularity issues, since the negative ACB gain under s. 40(3.1) is triggered as at the fiscal period year end.)
Neal Armstrong. Summary of 5 August 2024 External T.I. 2024-1031811E5 under s. 53(1)(e)(vi).
CRA confirms that where both ss. 107(2) and 148(7) apply to a personal trust’s distribution of a life insurance policy in satisfaction of capital interest, s. 107(2) prevails over s. 148(7)
In 2023-0990531C6, CRA indicated that, where a life insurance policy is distributed by a personal trust in satisfaction of an income interest in the trust, there would be a disposition of that interest and of the policy at FMV, irrespective of which of s. 106(3) or 107(2) applied. CRA confirmed that this did not call into question its earlier positions in inter alia 2011-0391781E5 that where an interest in a life insurance policy held by a personal trust is distributed to a resident beneficiary in full or partial satisfaction of the beneficiary's capital interest, s. 107(2) (assuming its conditions were satisfied) would prevail over s. 148(7), so that s. 107(2) rollover treatment would apply.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.10 under s. 148(7).
Income Tax Severed Letters 13 November 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA notes that building a secondary unit to access the multigenerational home renovation credit caused that portion of the building to no longer be the taxpayer’s principal residence
CRA noted that the construction of a secondary unit within the taxpayer’s home so as to qualify for the multigenerational home renovation tax credit would thereby preclude the taxpayer from treating the whole home as his or her principal residence. It further indicated that subsequently selling the secondary unit to the qualifying-relation occupants would not generally result in loss of the credit.
Neal Armstrong. Summaries of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.9 under s. 122.92(1) – qualifying relation, s. 252(2)(g), s. 54 – principal residence, and s. 122.92(1) – eligible individual.
CRA announces that its administrative arrangement regarding ITC claims by orthodontic practices has been revoked
Davis Dentistry confirmed input tax credit (ITC) claims of a professional practice on the basis that a portion of its supplies to each orthodontic patient was of a zero-rated supply of the orthodontic appliance, and that only the balance of what was supplied was an exempt healthcare service.
Under CRA’s arrangement made in 1991 with the Canadian Dental Association, a dentist registrant could, for each reporting period in a fiscal year, use an estimate up to a maximum of 35% of the total consideration charged for orthodontic treatments to represent the consideration for the supply of orthodontic appliances, and claim ITCs on that basis – but then, at the end of the fiscal year, was required to perform a reconciliation based on the actual amounts charged for orthodontic appliances, and adjust the ITC claims for the year accordingly (keeping in mind that charges for cosmetic services also generated ITCs).
CRA has now announced that this arrangement is revoked effective for any fiscal year of a dentist (who had been relying on this arrangement) that begins on or after January 1, 2025.
Dentists will now be expected to claim ITCs throughout the year based on their actual eligibility to do so without making estimates, i.e., on the basis of the extent that the input was acquired for consumption or use in the course of their commercial activities.
Neal Armstrong. Summary of GST/HST Notice 339, “Input Tax Credits Related to Dental Practices,” October 2024 under ETA Sched. VI, Pt. II, s. 11.1.
CRA explains the 8% adjustment to the FTC deduction under the NERDTOH computation for foreign investment income
Although the general tendency of the NERDTOH definition is to add to the NERDTOH of a CCPC an amount equal to 30 2/3% of its aggregate investment income, in the case of foreign investment income (FII), the refundable tax addition is reduced by the excess of the amount of the foreign tax credit deduction under s. 126(1) for the year minus 8% of the year’s FII.
CRA explained that this 8% rate represents the difference between a deemed tax rate of 38 2/3% on the CCPC's FII (i.e., the sum of the 28% federal corporate tax rate applicable to the CCPC's AII and the 10 2/3% rate applicable to such income under s. 123.3) and the refundable amount thereof of 30 2/3%.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.8 under s.129(4) – NERDTOH – (a)(i).
We have translated 7 more CRA severed letters
We have translated a ruling released by CRA last week and a further 6 CRA interpretations released in May of 2001. Their descriptors and links appear below.
These are additions to our set of 2,999 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 23 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Auer – Supreme Court of Canada finds that the validity of Regulations is to be determined under the Vavilov reasonableness test
Various Canadian decisions have reviewed whether the scope of regulations or other subordinate legislation was consistent with the governing tax legislation and, if not, whether it should be struck out or read narrowly to bring the subordinate legislation back into scope. See Weyerhaeuser, Société des alcools, Mark Anthony, B.C. Ferry, Irving Oil and McNeeley.
In Auer, the appellant asked the court to determine that the Governor in Council (“GIC”) had not acted within the scope of the authority delegated to it under the Divorce Act (Canada) in establishing the Federal Child Support Guidelines, SOR/97‑175. Côté J found that the validity of subordinate legislation (here, such Guidelines) was to be determined in accordance with the Vavilov test of reasonableness, so that “the issue of whether the regulations is a reasonable decision depends on whether the regulations are justifiably (or reasonably) within the scope of the authority delegated by the enabling legislation.” However, she further found:
[F]or subordinate legislation to be found ultra vires on the basis that it is inconsistent with the purpose of the enabling statute, it no longer needs to be “irrelevant”, “extraneous” or “completely unrelated” to that statutory purpose. Continuing to maintain this threshold from Katz Group [2013 SCC 64] would be inconsistent with the robust reasonableness review detailed in Vavilov and would undermine Vavilov’s promise of simplicity, predictability and coherence.
Nonetheless, the following principles from Katz Group continue to inform a Vavilov reasonableness review of the vires of subordinate legislation:
(1) [S]ubordinate legislation must be consistent both with specific provisions of the enabling statute and with its overriding purpose or object; (2) subordinate legislation benefits from a presumption of validity; (3) the challenged subordinate legislation and the enabling statute should be interpreted using a broad and purposive approach to statutory interpretation; and (4) a vires review does not involve assessing the policy merits of the subordinate legislation to determine whether it is necessary, wise, or effective in practice.
Here, the Guidelines were intra vires the GIC, as they fell within a reasonable interpretation of the scope of the GIC’s authority under s. 26.1 of the Divorce Act. Accordingly, the appellant’s challenge to the Guidelines failed.
Neal Armstrong. Summary of Auer v. Auer, 2024 SCC 36 under Statutory Interpretation – Regulations/ Statutory Delegation.
CRA confirms that a deceased’s FHSA can be rolled into the surviving spouse’s FHSA, RRSP or RRIF even if the proceeds go first to the estate (albeit, subject to s. 153(1)(v)(i) withholding)
CRA confirmed that if amounts from a deceased holder's FHSA are deposited into the estate's account and then subsequently transferred by it directly to the surviving spouse's FHSA, RRSP or RRIF, s.146.6(15)(a) will deem that indirect transfer to be a direct tax-free transfer from the deceased’s FHSA to such spousal plan, to the extent that it is so designated jointly by the legal representative and the surviving spouse and the usual conditions in s. 146.4(7) otherwise relating to a direct transfer are satisfied.
However, CRA indicated that, if because of the withholding tax under s. 153(1)(v)(i) that would be imposed on the amount paid from the deceased’s FHSA to the estate, the estate did not have sufficient cash to pay the gross proceeds of that FHSA directly to the surviving spouse's FHSA, RRSP or RRIF, the tax free transfer amount would be required to be reduced accordingly.
If the proceeds from the deceased’s FHSA were distributed by the estate to the surviving spouse rather than directly to that individual’s FHSA, RRSP or RRIF, the surviving spouse would not be able to then make the tax-free transfer to such plan.
Neal Armstrong. Summary of 10 October 2024 APFF Financial Strategies & Instruments Roundtable, Q.7 under s.146.6(15)(a).