News of Note
CRA finds that a qualifying withdrawal from an FHSA can fund the purchase of a co-ownership interest in a qualifying home
Various conditions in the “qualifying withdrawal” definition in the FHSA rules refer to acquiring a qualifying home. CRA found that this requirement can be satisfied by acquiring a co-ownership interest in the home, notwithstanding the absence of a specific deeming rule like s. 146.01(2)(a) providing that the acquisition of a qualifying home includes the acquisition by a taxpayer "jointly with one or more other persons." CRA stated that “[i]t seems clear that the legislator did not wish to exclude individuals who wish to purchase a qualifying home jointly with one or more persons, even if only for spousal couples.”
Neal Armstrong. Summary of 3 November 2023 APFF Financial Strategies Roundtable, Q.3 under s. 146.6(1) - “qualifying withdrawal”.
CRA indicates that a home is not acquired for FHSA purposes until it become habitable
Regarding an individual (Mr. X) who signed an agreement with a contractor to build a single-family home on his land and then made his FHSA withdrawal before the targeted date for the house becoming habitable, CRA referred to the requirement in para. (a) of the “qualifying withdrawal” definition that Mr. X have begun, or intended not later than one year after his “acquisition” of the qualifying home, to use it as his principal place of residence, and stated:
[T]he CRA considers that the home is generally acquired by the individual when it becomes habitable.
In other words, the time period for the use test does not start running until the property is habitable.
In the scenario where Mr. X instead will construct the home himself, but has written agreements with trades such as a plumber and electrician to accomplish this, CRA referred to the requirement in para. (c) of the “qualifying withdrawal” definition that Mr. X have entered into an agreement prior to the withdrawal time for the acquisition or construction of the qualifying home before October 1 of the following calendar year. CRA indicated that this requirement could be satisfied by his agreements with the trades, provided that those agreements showed “that sufficiently significant work was undertaken to complete the construction of the qualifying home before October 1 of the calendar year following [the withdrawal].”
Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.2 under s. 146.6(1) - “qualifying withdrawal” - (a), (c).
CRA finds that a recent change of a home from rental to principal-residence use cannot ground an FHSA withdrawal
An individual purchased a single-family home in 2020 for rental to a third party, in May 2023 opened and contributed $8,000 to an FHSA and then, after the tenant vacated, and moved into the home as his principal place of residence on November 1, 2023, so that there was a deemed disposition and reacquisition of the property pursuant to s. 45(1)(a) on that date.
Regarding the requirement in para. (d) of the “qualifying withdrawal” definition in s. 146.6(1) that “the individual did not acquire the qualifying home more than 30 days before the particular time” of the withdrawal, CRA indicated that the deemed disposition and acquisition rule in s. 45(1) applied only for the purposes of the capital gains subdivision and not s. 146.6. Accordingly, the individual would be considered to have acquired the home more than 30 days previously even if he withdrew from his FHSA immediately after the deemed change in use, so that the “qualifying withdrawal” definition would not be satisfied.
Neal Armstrong. Summary of 3 November 2023 APFF Financial Strategies Roundtable, Q.1 under s. 146.6(1) - “qualifying withdrawal” - (d).
CRA seems to acknowledge that it lacks discretion to not apply the provisions of the ITA as judicially interpreted
Regarding whether, following Collins, CRA considers, with the exception of provisions explicitly conferring discretion, that it has no discretion regarding the application of the Act, it stated:
In Collins, the Supreme Court of Canada recognized that the Minister and the Minister’s agents "are required to follow [the Act] absolutely, just as taxpayers are also required to obey it as it stands". It follows that where the CRA assesses a taxpayer, it is required to do so in accordance with the facts and the law. In this context, we agree with the conclusions of the Supreme Court of Canada that, when it makes an assessment, the CRA is bound to apply the directive set out by Parliament in the Income Tax Act, as interpreted by a court of law, provided that interpretation has not been found to be incorrect by a higher court.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.15 under s. 152(1).
CRA confirms that it will entertain applications for late s. 56.4(7)(g) (letter) elections
The applicable CRA webpage indicates that, since no prescribed form has been published, the transferor and transferee must submit a letter (containing specified information) signed by each of them in order to make the joint election pursuant to s. 56.4(7)(g) regarding the avoidance of the application of s. 68.
CRA indicated that it does not expect to publish the prescribed form in the near future.
Regarding the situation where the parties had agreed to make the election without knowing that they were required to send in the election letter, CRA indicated that, given that s. 56.4(7)(g) was one of the provisions prescribed in Reg. 600, application could be made to extend the prescribed time for filing the election – and that this discretionary power would be exercised in light of its guidelines in IC 07-1.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.14 under s. 56.4(7)(g).
CRA acknowledges that where a contested notice of assessment is subject to a stay, it generally must apply to the bankruptcy court for lifting the stay
The Girardi decision (2014 QCCA 1922) stated, in connection with the Bankruptcy and Insolvency Act ("B.I.A."):
[I]f the CRA files a claim with the trustee, it may follow it up with a notice of assessment. However, since this notice of assessment constitutes a procedure for the collection of a provable claim, it will not have the legal effects conferred on it by the ITA, unless the CRA obtains the authorization of the court. In other words, if the CRA wishes the ITA's procedure for contesting a notice of assessment to apply, particularly as regards the time limit for contesting it, it must apply to the court and obtain the court's consent, in accordance with section 69.4 of the BIA.
CRA indicated that Girard does not call into question the validity under the ITA of an assessment, and instead deals with the procedures to be followed under the BIA when the CRA's proof of claim is contested by the trustee in bankruptcy. Accordingly, CRA will not seek court authorization where the trustee does not contest its proof of claim - or where the debtor (in a proposal) or the trustee (in a bankruptcy) does not intend to object to the assessment. Conversely:
In the event that a trustee contests the CRA's proof of claim, the legal effects of the notice of assessment, including the procedure for contesting the assessment and the time limits associated with it, are suspended until the CRA obtains the lifting of the suspension of proceedings under section 69.4 B.I.A., pursuant to the Girard decision.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.13 under BIA, s. 69(4).
Slightham – Ontario Superior Court of Justice agrees to rectify family trust deeds to reflect the drafting contemplated in the original tax plan
In order that s. 75(2) would not apply to the corporate beneficiary (Holdco) of two family trusts, the tax plan contemplated that Holdco would be prohibited under the trust deeds from receiving any income or capital derived from itself. However, due to a drafting error, a reference to the underlying Opco held by the trusts was mistakenly added as one of the parties from which Holdco could not receive income or capital.
This mistake was discovered when CRA denied the s. 104(6) deduction for dividends from Opco distributed by the trusts to Holdco, on the grounds that such distributions were prohibited by the trust deeds. CRA refused to accept that the trust deeds could be amended pursuant to their amendment provisions to correct this error nunc pro tunc.
After noting that the evidence clearly supported the above nature of the drafting mistake, Osborne J allowed the trusts’ application to amend the declarations of trust to delete the references to Opco, stating:
[T]he parties are not changing their antecedent agreement. Rather, they are seeking the assistance of equity to change the written instrument that did not at the time it was executed, and does not now, properly and accurately reflect the agreement of the parties that has remained unchanged throughout.
Neal Armstrong. Summary of Slightham et al. v. AGC, 2023 ONSC 6193 under General Concepts – Rectification.
CRA discusses the documentation of a loss from the collapse of a crypto exchange
After the taxpayer for a number of months had been trading on a daily basis in cryptocurrencies through an account held at a major cryptocurrency exchange platform, the platform went into bankruptcy on the discovery of fraud. All documentation relating to the daily transactions was on the platform, and the taxpayer no longer has access to that information.
CRA provided a detailed list of documents that the taxpayer in these circumstances might be able to obtain in order to support the taxpayer’s claimed loss.
Neal Armstrong. Summary of 2 November 2023 APFF Roundtable, Q.12 under General Concepts – Evidence.
Income Tax Severed Letters 15 November 2023
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Bank of America – Federal Court finds that it was fair and reasonable for CRA to deny relief from a mistake attributed to outsourcing all of a tax department
BANA outsourced all its Canadian tax department in 2018 to EY. The last tax employee, shortly before her departure in July 2018, told BANA and EY that BANA’s adjusted tax credit amounts (ATCAs) had never exceeded $500,000 in any two consecutive fiscal years, so that it was not expected to be a qualifying institution (QI). Starting in June 2019, BANA discovered that this was incorrect, and in June and December of the following year, it filed late applications pursuant to ETA s. 141.02(19)(b)(ii) to be permitted to use a method for computing its input tax credits (ITCs) for its four most recent fiscal years that would result in ITCs that exceeded the minimum otherwise applicable under s. 141.02(8)(d) of 12% of its GST on its residual inputs.
In denying the applications, the CRA delegate recognized BANA and EY as highly sophisticated entities and considered that a high degree of care and diligence was to be expected, and that this had not been demonstrated in their merely accepting a statement from a departing employee that was inconsistent with BANA’s completed tax filings.
In dismissing the BANA appeal, Elliott J found this decision to be fair and reasonable. In this regard she noted inter alia that she could not agree that the delegate’s “emphasis on due diligence was misplaced” and indicated that the downsizing and outsourcing of the BANA tax department “were not extenuating circumstances beyond their control”.
Neal Armstrong. Summary of Bank of America, National Association v. Attorney General of Canada 2023 FC 1496 under ETA s. 141.02(19)(b)(ii).