News of Note
CRA indicates that the transfer of DSU rights to a corporation would cause the plan to cease to qualify, perhaps retroactively
Email this ContentCRA indicated that the rights of an employee under a deferred share unit plan described in Reg. 6801(d) (a "DSU Plan") were not capital property given that an “employee's rights under a DSU Plan generate income from an office or employment” and thus could not be transferred on an s. 85(1) rollover basis to a personal holding company.
In finding that the plan would not qualify for the para. (l) exclusion from the salary deferral arrangement definition after such a transfer, so that the FMV of the DSUs would be included in computing the employee's income in the year of the transfer (to the extent that such value had not already been included), CRA stated:
A transfer to another person would contravene the preamble to paragraph 6801(d), which requires that the agreement be between the corporation and the employee and that it be that employee who may receive amounts under the arrangement. Furthermore … the transfer of the employee's rights in the DSU Plan could indirectly allow the individual to access the value of the individual's rights before one of the times specifically identified in paragraph 6801(d)(i) … which would also contravene the requirements of paragraph 6801(d).
However:
[T]he presence of a transfer that would be at the discretion of the employee and the employer could demonstrate that the parties never intended to meet the criteria required for the plan to qualify as a DSU plan. In such circumstances, the agreement or arrangement would qualify as an SDA from the time of its creation, resulting in the retroactive application of the SDA rules.
Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.6 under s. 248(1) – SDA and s. 85(1.1).
CRA indicates that s. 98(2) generally prevails over s. 148(7)
Regarding the situation where a partnership held, was the beneficiary of, and paid the premiums for 10 years on, three policies on the lives of each of the three individuals who were its partners and then, pursuant to the partnership agreement, transferred the applicable policy to one of the partners on such withdrawal of “Individual C” from the partnership, CRA indicated:
[W]here the conditions of subsection 98(2) are satisfied, we are generally of the view that subsection 98(2) would override subsection 148(7) so that the partnership's proceeds of disposition of the life insurance policy would be the FMV of the policy.
Suppose that Individual C then donates the policy two years later to a registered charity. CRA indicated that the period of holding of the policy by the partnership would not count for purposes of the rule in s. 248(35), that the FMV of a gifted life insurance policy is deemed to be the lesser of its adjusted cost basis and actual FMV if the holding period by the donor is less than three (or, in some circumstances, 10) years.
Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.5 under s. 148(7) and s. 248(35).
Horvath Estate – Alberta Court of King’s Bench declines to canvas the constitutional issue of whether ITA s. 159 is paramount over the Alberta Estate Administration Act
The personal representatives of an insolvent estate proposed to distribute its remaining assets pro rata to all the unsecured creditors as required by the terms of s. 27 of the Estate Administration Act (Alberta). CRA argued that ITA s. 159 created a priority of payment for its claims. In rejecting this position, Leonard J found that this raised the question as to whether s. 159 was paramount over the provincial statute, which was an issue she could not consider since notice of this constitutional question had not been given to the Province of Alberta.
However, she accepted CRA’s alternative submission that the Crown’s debt takes priority over other creditors of equal degree by virtue of the common law prerogative of the Crown to be paid first among claims of equal degree, noting that “there is nothing in the Estate Administration Act that limits the Crown prerogative.”
Neal Armstrong. Summary of Horvath Estate (Re), 2023 ABKB 643 under ITA s. 159(2).
CRA finds that a company with no non-portfolio property can satisfy the 4 REIT tests
A REIT wished to know whether shares of a U.S. subsidiary, which did not hold any non-portfolio property, qualified as “real or immovable property” for REIT-test purposes. This required that the subsidiary itself satisfy the four numerical REIT tests in paras. (a) to (d) of the REIT definition.
Would the subsidiary satisfy the para. (a) non-portfolio property test? CRA responded:
The condition set out in paragraph (a) of the definition of REIT requires that at each time in the taxation year the total fair market value at that time of all non-portfolio properties that are qualified REIT properties held by the trust is at least 90% of the total fair market value at that time of all non-portfolio properties held by the trust.
In our view, the fact that a particular entity does not hold any non-portfolio property does not preclude the entity from satisfying the condition set out in paragraph (a) of the REIT definition.
Also of interest is 2014-0547491R3, finding that the 75% and 90% revenue tests in para. (b) and (c) of the REIT definition can be satisfied with nil revenue.
Neal Armstrong. Summary of 13 January 2022 External T.I. 2020-0845011E5 under s. 122.1(1) – real estate investment trust – (a).
We have translated 6 more CRA interpretations
We have translated 6 further CRA interpretations released during September and August of 2002. Their descriptors and links appear below.
These are additions to our set of 2,642 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 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Income Tax Severed Letters 22 November 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA treats a trust distribution of a life insurance policy to a beneficiary as being made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied
Suppose that a private corporation (Aco) distributes a life insurance policy of which it was the holder and beneficiary and with an adjusted cost basis (ACB), cash surrender value (CSV) and FMV of $50, $150 and $250, respectively as a dividend in kind to a discretionary family trust shareholder, and that such trust then distributes the policy as an income distribution under ss. 104(6), (13) and (19) to a corporate beneficiary (Xco).
CRA considers that a dividend-in-kind of a life insurance policy by a corporation (Aco) to its shareholder is made for no consideration for purposes of s. 148(7)(a)(ii)(B), so that on the dividend-in-kind, the policy was deemed to be disposed of for the greatest of its ACB, CSV and the (nil) consideration received, or $150. However, where a trust transfers the policy to its beneficiary, the beneficiary (Xco) is regarded as giving consideration for the transfer that is all or any part of the beneficiary's income or capital interest, as applicable. Here, it would be reasonable to consider that such consideration had an FMV of $250.
If s. 106(3) rather than s. 148(7) was regarded as applying to the distribution, s. 106(3) also would generate deemed FMV proceeds. Thus, it made no difference which of s. 106(3) and s. 148(7) prevailed over the other.
Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.4 under s. 148(7) and s. 107(2).
Skatteforvaltningen v. Solo Capital – UK Supreme Court confirms that the revenue rule does not apply to fictitious tax refund claims made by a non-taxpayer
The Danish Customs and Tax Divisions (“SKAT”) sued in an English civil court to recover £1.44 billion which it had paid based on allegedly fraudulent claims for refunds of Danish dividend withholding tax – SKAT alleged that most of the appellants (“Solo Capital”) had fraudulently misrepresented that they, as shareholders of Danish companies, had been subject to withholding at a rate in excess of the Treaty-reduced rate on dividends when, in fact, they never had held any shares in any of the relevant Danish companies.
Lord Lloyd-Jones rejected the submission of Solo Capital that SKAT’s claim was precluded by the revenue rule, namely, that the courts of one country will not directly or indirectly enforce the revenue laws of another country. He stated (at para. 38):
[SKAT] has been paid all the tax to which it was entitled by the genuine shareholders in the Danish companies. The substance of the claim is not to recover tax but to recover payments made by [SKAT] which were induced by fraud and to which the recipients were not entitled on any basis. It is a claim by a victim of fraud for reimbursement of the sums of which it has been defrauded.
Neal Armstrong. Summary of Skatteforvaltningen (the Danish Customs and Tax Administration) v Solo Capital Partners LLP & Ors [2023] UKSC 40 under Statutory Interpretation – Revenue Rule.
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).