News of Note
CRA jettisons the concept of safe income on hand and revises positions on computing safe income
Email this ContentIn a presentation regarding its forthcoming paper on s. 55(2) and safe income, CRA indicated that it is no longer applying the concept of safe income “on hand.” Thus, in CRA’s view, while the “fundamental question is still the same”, there should no longer be the two-stage inquiry dictated by the Federal Court of Appeal in Kruco, namely, that income of the corporation as modified by s. 55(5) is first computed, and then the amount of that income that is still “on hand” is determined by looking at cash outflows following the computation. Instead, there will now be a single-stage inquiry as to how much of the corporation’s income as so computed contributed to the gain on the shares.
Also, contrary to Kruco and CRA’s previous acceptance thereof, CRA now considers that phantom income does not contribute to a capital gain on shares.
Given the significant departure from well-established administrative positions and the pending detailed position paper, such pronouncements will presumably apply prospectively (as with previous changes in position regarding Kruco) to avoid negatively impacting taxpayers that relied on such positions in planning their affairs. One might add that, in light of the lack of significant changes in the wording of s. 55(2.1)(c) from that applied in Kruco, Kruco is likely still good law unless the Court of Appeal subsequently determines that it was “manifestly wrong” (see Chen).
Further CRA comments included:
- In a change from its previous position that all contingent liabilities and reserves reduce safe income. CRA now considers that contingent liabilities or reserves reduce safe income only if they reduce or have the potential to reduce the income of the corporation on their materialization, so that there is no immediate effect on safe income if they are capital in nature.
- Rather than refundable taxes only being included in income when received, CRA now considers that the portion of refundable taxes that will be reimbursed due to a payment of a dividend before the end of the taxation year will be considered to be a reduction of such taxes paid or accrued (so that the potential safe income is reduced only by the net amount).
- When a corporation realizes the accrued gain, on a property that it had acquired on a rollover basis in consideration for preferred shares, on disposing of that property, that gain is now considered to contribute to the gain on those preferred shares, so that such gain is to be included in the safe income of the preferred shares.
- In situations where Holdco wholly owns a distributing corporation (Opco) and assets of Opco are spun-out to a transferee corporation (Newco) that is also owned by Holdco, the general formula for the split of the direct safe income (DSI) between Holdco and Newco is as follows:
- DSI on the shares of Newco: DSI of Opco prior to reorganization X net cost amount of the assets transferred to Newco / total net cost amount of the assets of Opco prior to the reorganization
- DSI on the shares of Opco after the reorganization: DSI of Opco prior to the reorganization X net cost amount of the assets retained by Opco / total net cost amount of the assets of Opco prior to the reorganization
- In a one-wing split-up butterfly wherein a portion of the assets of a corporation (DC) owned by Holdco1 and Holdco2 is spun-off to Holdco2, there could be a resulting misalignment of basis (including safe income that could be capitalized), so that Holdco1 could simply sell the shares of DC without any negative implications and Holdco2 could sell the assets it received with an increased ACB. However, where the reorganization is a bona fide split-up between arm’s length persons, there is no requirement to allocate safe income based on the formula.
- CRA then provides detailed examples showing how safe income and ACB should be allocated where there is a transfer (or successive transfers) of property on a rollover basis between related corporations, so as to avoid a misalignment of basis including safe income that could be capitalized.
- For instance, CRA indicated that where there was a spin-off of ½ of the assets of Opco to Newco, entailing a transfer of ½ of the shares of Holdco’s shares of Opco to Newco, it might be necessary for less than ½ of the ACB of the shares of Holdco in Opco to be transferred to Newco.
Neal Armstrong. Summary of CRA Update on "S. 55(2) and Safe Income - Where Are We Now?" under s. 55(2.1)(c).
CRA finds that the suspended loss rules continued to apply when the transferee was amalgamated, then wound-up into the transferor
Aco disposed of its shares of Cco (the “Subject Shares”) at a loss to a wholly-owned subsidiary of Aco (Bco). On a triangular amalgamation of Bco and Cco, Aco became the sole shareholder of Amalco. S. 40(3.5)(c)(i) deemed Amalco to own the Subject Shares for as long as it was affiliated with the transferor (Aco). Amalco was then wound-up into Aco pursuant to s. 88(1).
CRA rejected Aco’s argument that on the winding-up, Amalco ceased to be affiliated with the transferor (Aco) so as to trigger the suspended loss pursuant to s. 40(3.4)(b)(i).
CRA indicated that by virtue of s. 87(2)(g.4), Aco was considered following the winding-up to be a continuation of Amalco, and to own the Subject Shares and, given that under s. 251.1(4)(a), a person is affiliated with itself, Aco as the transferor continued to be affiliated with the person (Aco as the continuation of Amalco) who was the deemed owner of the Subject Shares.
Neal Armstrong. Summary of 4 October 2023 Internal T.I. 2020-0837811I7 F under s. 40(3.5)(c)(i).
CRA indicates that an RSU award as signing bonus or inducement to move, or as an award for a current performance accomplishment. might not engage the SDA rules
2020-0864831I7 found that full-value restricted share units (“RSUs”) granted early in the calendar taxation year of the employer (the “Grant Year”) were considered to be in respect of services in the previous year, so that such award came within the salary deferral arrangement (SDA) definition, and would not be excluded under para. (k) of the SDA definition if the RSUs were settled in the third year after the Grant Year, i.e., more than three years after the end of the year in which the services had been rendered. In further commenting on this position, CRA now stated:
In tandem with our general and longstanding presumption that a grant of full-value RSUs are in respect of the grantee’s past services, the relatively short passage of time between Canco’s fiscal year end and the Grant Date increased the likelihood that the grant of RSUs would be in respect of past services rendered by the grantee in the year prior to the Grant Year.
However, CRA acknowledged that, notwithstanding this presumption, a grant of full-value RSUs could be considered to be solely in respect of services rendered after the grant date (i.e., only for future services), giving as potential examples, a signing bonus, and a bonus for a current employee agreeing to an overseas assignment.
CRA also indicated that even a grant of full-value RSUs relating to past services might not engage the SDA rules, for example, potentially a grant made in recognition of a performance accomplishment (such as a large sale) that occurred earlier in the Grant Year.
Neal Armstrong. Summary of 7 March 2022 External T.I. 2021-0895571E5 under s. 248(1) – SDA and SDA, para. (k).
CRA indicates that deemed interest on an FX-denominated stripped coupon should be translated on a daily basis
What exchange rate should be used under s. 261 where a taxpayer holds a stripped coupon denominated in a foreign currency on which interest is deemed under Reg. 7000(2)(b) to accrue throughout the year (if the taxpayer, e.g., a corporation, is described in s. 12(3)) or throughout the year up to the anniversary date in that year (if the taxpayer, generally, an individual, is described in s. 12(4))?
CRA noted that such interest accrues on a daily basis and appeared to indicate that the interest accruing on each such day is to be translated at the relevant spot rate for that day. One suspects that most accountants will continue to use average exchange rates.
Neal Armstrong. Summary of 3 November 2023 APFF Financial Strategies Roundtable, Q.10 under s. 261(2)(b).
Income Tax Severed Letters 29 November 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that income distributions from RDSPs and TFSAs are “other income” under the Canada-US Convention, but that RRSP/ RRIF payments are “pensions” under Art. XVIII
CRA indicating that the reduced rate of 15% under Art. XXII:2 of the Canada-U.S. Convention may be applied to amounts distributed to U.S. residents from TFSAs, RDSPs and RESPs that were constituted as trusts (where such payments would have been income if the recipient had been resident) since such payments were not dealt with in any other Article of the Convention, and thus qualified as "other income."
In contrast, CRA indicated that Art. XXII:2 was not relevant to amounts paid out of RRSPs and RRIFs given that such amounts, including lump sum payments, constituted “pensions” as defined in Art. XVIII, i.e., they were payments "under a superannuation, pension or other retirement arrangement" and, thus, were not “other income” under Art. XXII. However, for such “pensions” to be eligible for the reduced withholding under Art. XVIII:2 of 15%, they also were required to qualify as "periodic pension payments" which, by virtue of the definition of that term in s. 5 of the Income Tax Conventions Interpretation Act, excluded inter alia a payment made from an RRSP before its maturity.
Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.9 under Treaties – Income Tax Conventions, Art. 18, Art. 22.
Federation of Law Societies – B.C. Supreme Court prohibits the application of ss. 237.3 and 237.4, pending the determination of their constitutional scope, to legal advisors
In the underlying constitutional challenge, the Federation sought a declaration that ss. 237.3 and 237.4 were of no force or effect to the extent they applied to legal professionals, in their role as such, based on the reporting requirements in those sections contravening ss. 7 and 8 of the Charter. On this application for an interim injunction, the Federation sought to exempt legal professionals from the operation of ss. 237.3 and 237.4 until the constitutional challenge was determined on the merits.
Before agreeing to grant the injunction, Warren J found that she was:
satisfied that the Federation has established at least two types of irreparable harm that would result if the injunction sought is not granted:
• if confidential or privileged information is disclosed as a result of legislation that is ultimately found to be unconstitutional, individual clients will be irreparably harmed by the loss of professional secrecy, which cannot be undone, and the prospect of that occurring will have a chilling effect on the ability of individual clients to consult with their lawyers fully and freely pending a final determination of the constitutional challenge; and
• the potential for the unconstitutional reporting of confidential and privileged information, and the conflicts of interest between lawyers and their clients that will arise as a result of potentially unconstitutional legislation, would irrevocably damage the solicitor-client relationship and harm the public interest by undermining the public’s confidence in an independent bar.
Neal Armstrong. Summary of Federation of Law Societies of Canada v. Canada (Attorney General), 2023 BCSC 2068 under s. 237.3(2)(c).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during August and July of 2002. Their descriptors and links appear below.
These are additions to our set of 2,648 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 21 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2002-08-30 | 13 August 2002 External T.I. 2002-0143255 F - Par. 70(6)(b) | Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(b) | retained income treated as capital for s. 70(6)(b) purposes in subsequent years/ direct payment of spouse’s expenses with express or implied consent is permissible |
| 20 August 2002 External T.I. 2002-0145225 F - Contingent Right to Acquire Shares | Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) | s. 251(5)(b) not applied iteratively, where shareholders have a pro rata right to acquire another’s shares, and a contingent right to acquire those shares not taken up in the 1st round | |
| 17 September 2002 Internal T.I. 2002-0149147 F - SERVICES MEDICAUX-TEMOIGNAGE | Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(a) | physician’s court testimony was not medical services | |
| 2002-08-02 | 12 August 2002 External T.I. 2002-0150095 F - Capital Dividend Account | Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) | surrogatum principle not applied to damages received from insurance company for alleged default in paying life insurance proceeds |
| 16 August 2002 Internal T.I. 2002-0156577 F - ASSURANCE - INVALIDITE - PARITE | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) | previous contributions could be deducted from subsequent equalization adjustment received | |
| 2002-07-19 | 14 August 2002 External T.I. 2001-0116385 F - PARTAGE DE COMMISSIONS | Income Tax Act - Section 56 - Subsection 56(2) | a reasonable portion of mutual fund commissions received by a firm should be allocated to its representative who made the sales |
CRA accommodates the full flow-through of a pension benefit received by the estate to the surviving spouse for s. 60(j) purposes by the estate issuing her a note
Sylvie, who was the surviving spouse and sole heir of Paul elected not to receive a joint and survivor pension under the registered pension plan in which Paul had been a member. In the calendar year following Paul’s death but within the first taxation year of the graduated rate estate, the RPP administrator paid the estate a lump sum of $350,000 less source deductions of $130,000, for a net amount of $220,000. The estate, in turn, paid Sylvie $220,000, plus an additional $130,000 out of other liquid assets of the estate or, alternatively, issued her a demand note for $130,000.
Regarding the potential for s. 104(27) to deem the full $350,000 to be an eligible amount for purposes of s. 60(j), so that Sylvie generally would be entitled to make a timely contribution of that amount to her RRSP, CRA noted:
- This principally required that the entire pension benefit received by Paul's estate have been included in computing Sylvie's income pursuant to s. 104(13), which required that such benefit from Paul's estate have become payable to Sylvie in the same estate year as that of the estate’s receipt of the pension benefit.
- Since Sylvie was Paul’s sole heir, the full pension benefit included in the estate’s income, i.e., $350,000, could be considered payable to her in that year, subject to s. 104(24).
- S. 104(24) would be satisfied if the full $350,000 was paid to her in cash, and also would be satisfied through the estate issuing the demand note “to the extent that the issuance of the note was permitted by the will and … the demand note was unconditional.”
Neal Armstrong. Summary of 3 November 2023 APFF Financial Strategies Roundtable, Q.8 under s. 104(27).
CRA indicates that the additional T3 reporting requirements apply to trusts that were not exempted from filing T3 returns under the old rules and are not within ss. 150(1.2)(a) to (o)
For taxation years ending on or after December 31, 2023, Reg. 204.2(1) will require a trust to provide specified information regarding its trustees and beneficiaries on its T3 return provided that it is not a trust coming within one of the exceptions described in ITA ss. 150(1.2)(a) to (o) (e.g., under para. (a), a trust which on December 31 of the year in question had been in existence for less than three months). However, the preamble to s. 150(1.2) I.T.A., creating an expanded requirement to file T3 returns for taxation years ending on or after December 31, 2023, provides that s. 150(1.2) can only apply to a resident trust that is an express trust, or for civil law purposes, a trust other than a trust that is established by law or by judgment. Must a trust that does not come within the preamble to s. 150(1.2) (for example, a Quebec trust that is established by law or by judgment), but that is not described in any of ss. 150(1.2)(a) to (o), provide the additional information set out in Reg. 204.2(1)?
CRA indicated that such a (non-preamble) trust must provide such additional information provided that it was otherwise required to file a return under s. 150(1) under the old rules (e.g., a trust with tax payable for the year).
Neal Armstrong. Summary of 3 November 2023 APFF Financial Strategies Roundtable, Q.7 under Reg. 204.2(1).