News of Note
Finance releases pre-comfort letter on largely overriding s. 104(13.4)(b) and permitting limited backdating of post-mortem donations
Email this ContentThe new s.104(13.4)(b) rule dealing with spousal trusts (and similar trusts such as alter ego trusts) deems the trust’s income for the year ending with the lifetime beneficiary’s death (including from deemed proceeds at death) to have been distributed to the lifetime beneficiary rather than to be retained as trust income. This can result in the associated income tax liability being borne by the wrong beneficiaries, and in the stranding of donation credits for post-mortem donations made by the trust (which no longer has any income to use the credits).
In response to these concerns, Finance has indicated that it is generally amenable to providing that s. 104(13.4)(b) no longer applies except, in limited circumstances, where the spousal (or other) trust, and the lifetime beneficiary’s estate, jointly elect into s. 104(13.4)(b) applying. To deal with the donation credit "stranding" issue, Finance is amenable to allowing the trust to backdate donations made by it in the calendar year of the death to the trust taxation year that was deemed by s. 104(13.4)(a) to end with the death.
However, Finance will think about "whether additional amendments may be necessary to give effect to the…policy objectives" of avoiding "unintended tax benefits."
Neal Armstrong. Summary of 16 November 2015 Letter of Brian Ernewein to Joint Committee, CALU and STEP Canada respecting s. 104(13.4) under s. 104(13.4)(b).
CRA will continue its favourable policy for allocation of charitable gifts between spouses after 2015
Notwithstanding some amendments to the charitable gift rules, CRA is continuing its administrative practice for spouses (or common law spouses) to allocate their charitable gifts between them in whatever manner they consider to be most advantageous.
Neal Armstrong. Summary of 30 September 2015 T.I. 2015-0590501E5 F under s. 118.1(1) – total charitable gifts.
CRA confirms that a graduated rate estate can have up to four taxation years
If the executors of an estate adopt a year end that results in an initial short taxation year (say, September 30, 2016, being six months after the death), then the estate generally would be deemed by s. 249(4.1) to have a further short taxation year, namely, its 4th taxation commencing on November 1, 2018 and ending on March 31, 2019, being 36 months after the death. Thereafter, the estate would not enjoy graduated rates and would be required to use a December 31 year end.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 1, 2015-0572131C6 under s. 249(4.1).
CRA indicates that a graduated rate estate can include a testamentary trust
In its oral presentation at the 19 June 2015 STEP Roundtable, CRA indicated that a deceased has only one estate for income tax purposes including under the rules applicable to graduated rate estates, even if there are multiple wills with different executors or worldwide assets. In its published version, CRA now has added a statement that:
The composition of the graduated rate estate for tax purposes will often depend on how the decedent wanted his/her assets to be administered as dictated by will. Where, for example, a will deals immediately with separating property to be held in a distinct testamentary trust apart from other assets of the estate, there can still only be one graduated rate estate allowed for tax purposes for the 36 month period (or earlier if administration is complete) following death.
…Question 8 of the 2012 STEP Roundtable [stated]:
...[T]he estate of the deceased and other trusts funded out of the residue of the estate will generally be testamentary trusts. Traditionally, the CRA has not attributed any tax consequences to the transition from estate administration to trust administration and generally has viewed the trusts created out of the residue as arising on death.
Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 2, 2015-0572091C6 under s. 248(1) – graduated rate estate.
Cartier House Care Centre – Tax Court of Canada finds that the GST incidental supply rule did not apply where the allocation of consideration among the components was apparent
Paris J rejected CRA arguments that an independent contractor, who provided personal care services to a B.C. for-profit residential care home, including assistance with bathing, dressing, grooming, feeding, and incontinence management, was not thereby providing a (GST-exempt) "homemaker service," which was defined to mean "a household or personal service, such as cleaning, laundering, meal preparation and child care, that is rendered to an individual who, due to age, infirmity or disability, requires assistance." He applied the principle in National Bank of Greece v. Katsikonouris, [1990] 2 SCR 1029 that "the use of specific examples after a general term in legislation [here, "personal service"] does not restrict the meaning of the general term to cases similar to the specific examples."
In addition to the services (described above) of its "care aides," the contractor also provided "activity aides" (who focused on social activities for the residents, and whose time represented 5.4% of the total), and invoiced for the services of both aide types on the same invoice (showing the hours for each) and at the same hourly rate. In rejecting a submission that the incidental supply rule in ETA s. 138 effectively assimilated the otherwise-taxable activity aide services to the single supply of personal care "homemaker" services, Paris J stated that, as the hours for each service were evident on the invoice, "the consideration for each category of worker would be determinable and separate amounts" (so that there was no "single consideration") and that:
…[T]he activity aide services were not incidental to the care aide services. …[E]ach kind of service was independent of the other and had value as a separate supply.
This reasoning suggests that the incidental supply rule does not apply on an asset sale transaction where the purchase price is allocated between the component realty and personalty.
Neal Armstrong. Summaries of Cartier House Care Centre Ltd. v. The Queen, 2015 TCC 278, under Sched. V, Pt. II, s. 1 – home care service, Sched. V, Pt. II, s. 13, s. 138, Public Service Body Rebate (GST/HST) Regulations, s. 2 – government funding, Statutory Interpretation – Interpretation/Definition Provisions and Statutory Interpretation – Noscitur a Sociis.
Joint Committee further comments on new s. 55(2) rules
The Joint Committee has made further submissions on the proposed revised s. 55(2) rules in which it sets out its fundamental concerns and requests inter alia a more targeted purpose test.
Mariano – Tax Court of Canada finds that transactions comprising a gifting tax shelter were shams
The taxpayers were participants in leveraged donation transactions, which were intended to result in a step-up of the adjusted cost base of courseware licences (e.g., on how to use Microsoft products) under ss. 69(1)(c) and 107(2) to their purported fair market value (with a view to avoiding s. 248(35), which generally limits gift amounts to ACB) before the licences were donated by them to a registered charity ("CCA").
In particular, a Bahamian corporation ("Phoenix") acquired various courseware licenses at a modest cost, and gifted most of them to a Canadian–resident Trust. Ostensibly, the licences then were distributed to the taxpayers as capital beneficiaries of the Trust, with the taxpayers then donating them to CCA. The participants also made cash donations to a second registered charity ("Millennium"), which redonated 80% of those amounts to CCA. The taxpayers knew that their cheques to Millennium would not be cashed until they were accepted as capital beneficiaries of the Trust and, thus, would receive the licences. The taxpayers were issued charitable receipts for three or more times their cash outlay (and perhaps 800 times the cost to Phoenix of the licences).
Pizzitelli J found that the taxpayers lacked "donative intent" as they had no intention to impoverish themselves, so that there were no "gifts" for that reason alone. Furthermore, the gifts were also invalid given that the licences which supposedly were donated had not yet been allocated to the taxpayers at the time they executed their Deeds of Gift (with the Schedule describing the gifted licences not yet attached). Their appointment as capital beneficiaries of the trust and the determinations to distribute the licences to them out of the trust property also were invalid as all this was handled by a promoter-related employee even though the trustee was not authorized in the trust deed to delegate these functions.
Notwithstanding that a capital beneficiary essentially was defined as an individual who had contributed to a registered charity in the year and had applied to be a capital beneficiary of the Trust, Pizzitelli J interpreted the class of beneficiaries as being all Canadians (or others) who had contributed in the year to registered charities, which then rendered the Trust invalid for uncertainty of objects.
The transactions for reasons grounded in the above findings were shams, with Pizzitelli J noting that it was not necessary for the taxpayers themselves to have been involved in the requisite deceit for the sham finding to stick.
The fair market value of the licences was their modest initial cost.
Neal Armstrong. Summaries of Mariano v. The Queen, 2015 TCC 244, under s. 118.1 - total charitable gifts, general concepts - sham, general concepts - fair market value, s. 104(1), and s. 107(2).
Barejo Holdings – Tax Court of Canada takes an expansive view of what is “debt”
An offshore fund, in which the taxpayer had an interest, invested in instruments (styled as "Notes") of non-resident subsidiaries of Canadian banks. Each Note did not bear interest and provided for a payment on maturity that reflected the performance of a matching actively-managed portfolio of assets held by an affiliate of the obligor.
Boyle J found that the Notes were debt for ITA purposes notwithstanding that the offshore fund could have no idea what it would receive on maturity (including any accelerated maturity) until that day arrived, as in his view it was sufficient that there be a liquidated amount only on such maturity. This has the effect of eliminating most of the distinction between debt and various derivatives which also satisfy his basic criteria for what is debt: an amount is advanced or "credited" to acquire the investment; a liquidated amount is payable when it matures (which could be a nil amount); and there is interest (albeit of nil). In fact, he stated that "the concepts of debt and derivatives are not mutually exclusive."
Neal Armstrong. Summaries of Barejo Holdings ULC v. The Queen, 2015 TCC 274, under s. 12(11) – investment contract and Interpretation Act, s. 8.1.
Income Tax Severed Letters 11 November 2015
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
ACSIS HER (Electronic Health Record) Inc. – Tax Court of Canada finds that modifying an existing software communications package qualified as SR&ED
Campbell J found that modifying a software package, that could have been applied in an advanced country for a nation-wide health information system, so that it could handle the inferior infrastructure in Belize (giving rise to major connectivity issues), qualified as SR&ED, given inter alia that the taxpayer had no reasonable expectation of success with the project unless new knowledge could be developed.
Neal Armstrong. Summary of ACSIS EHR (Electronic Health Record) Inc. v. The Queen, 2015 TCC 263, under s. 248(1) – SR&ED.