News of Note
CRA would apply the partial change-of-use rules when a non-resident with a s. 216 rental triplex immigrates to Canada and moves into one of the units
Email this ContentShortly after immigrating to Canada, a non-resident individual, who had been renting out the three identical units in a Canadian triplex and reporting the net rental income (after CCA deductions) based on a s. 216 election, moved into one of the three units in the triplex for use as his principal residence. CRA treated this as a partial change of use (i.e., the triplex was one property, not three), so that recapture of depreciation and taxable capital gain could be realized on a proportionate (1/3) basis pursuant to ss. 13(7)(d)(ii) and 45(1)(c)(i). Thus, the property’s use by him as a s. 216 filer and then by him as a resident was integrated for purposes of applying those rules.
Neal Armstrong. Summary of 11 September 2017 External T.I. 2017-0706851E5 F under s. 45(1)(c)(i).
Vefghi Holding – Tax Court of Canada disagrees with the CRA position that connected-corp. status must be tested at the (trust year-end) effective date of a s. 104(19) designation
Partway through its calendar taxation year, a family trust received a dividend from a family corporation (Consultant Inc.), paid that dividend to a corporate beneficiary (Vefghi Corp., also with a calendar year end) and in its return for that taxation year, made a s. 104(19) designation. CRA applied its published position (e.g., in 2020-0845821C6 F) that, since the two corporations had ceased to be connected between the time of the dividend and the effective time of the s. 104(19) designation (the December 31 trust year end), the dividend was subject to Part IV tax. However, D’Arcy J stated:
I agree with the Respondent that the determination of the application of subsection 104(19) can only be made at the trust’s year-end. However, I do not agree that this results in the relevant point in time for determining whether corporations are connected being the trust’s year-end.
Instead, he found that, since s. 104(19) was silent as to when in Vefghi Corp.’s taxation year it received the dividend, it should be treated as having received the dividend on the same day as it in fact was received by the trust. Although the case was in the form of a Rule 58 query, this effectively signified that the dividend received by Vefghi Corp. was exempt from Part IV tax because Consultant Inc. was connected with it on that day.
A second situation presented to him was similar, except that a new taxation year of the corporate beneficiary started after the date of the payment of the dividend (on June 30, shortly preceding the dividend payer and beneficiary ceasing to be connected) and before the (December 31) effective date of the s. 104(19) designation by the trust, so that on no day in that taxation year of the corporate beneficiary was the dividend payer connected to it. It followed from the wording of s. 104(19) that the connected-corporation exemption from Part IV tax was not available.
Neal Armstrong. Summary of Vefghi Holding Corp. v. The King, 2023 TCC 135 under s. 104(19).
Income Tax Severed Letters 13 September 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The Federation of Law Societies of Canada is seeking a declaration that ss. 237.3 and 237.4 do not apply to lawyers
The Federation of Law Societies of Canada has filed a petition in the B.C. Supreme Court seeking inter alia declarations that ITA ss. 237.3 and 237.4 “are inconsistent with the Constitution of Canada, and of no force or effect, to the extent that those sections apply to legal professionals” and “that the term ‘advisor’ as it is used in sections 237.3 and 237.4 … be read down so as to exclude legal professionals.”
In its accompanying Press Release, the Federation stated:
Requiring legal counsel to report to a government agency on their clients’ activities causes an irreconcilable conflict with the legal and ethical duties lawyers and other legal professionals owe to their clients. Backed by penalties that include large fines and the possibility of imprisonment for noncompliance, the legislation forces legal counsel to choose between their own interests and those of their clients. This conflict undermines the duty of commitment to the client’s cause, a duty found … in the Federation’s [AML] 2015 case [2015 SCC 7] to be a principle of fundamental justice. As a result, the legislation violates section 7 of the Charter. The obligation for legal counsel to report confidential information to the CRA also violates the protection from unreasonable search and seizure in section 8 of the Charter.
… The Government of Canada has consented to a 30-day injunction suspending application of the provisions to members of the legal profession, pending a hearing on the Federation’s injunction application.
Neal Armstrong. Summary of Federation of Law Societies of Canada, “Federation challenges Income Tax Act provisions,” 12 September 2023 Press Release of the Federation under s. 237.4(4)(c).
O'Brien – Tax Court of Canada declines to apply the ITA’s literal wording in order to avoid an absurdity
Although the family income for purposes of computing an individual’s entitlement to the Canada child benefit (CCB) is computed on a lagged basis, s. 122.62(5)(b) provides relief by stipulating that effective almost immediately after the death of the individual’s spouse, that family income is computed based only on the individual’s income for the relevant pre-death period, i.e., the income of the deceased spouse during that period is excluded.
Thus, when the taxpayer’s husband died, she rightfully expected that her family income for the relevant pre-death period would not include her husband’s income under the Ontario Disability Support Program (the ODSP payments). Unfortunately, s. 56(1)(u)(ii) deemed the ODSP payments to be the income of the higher-income spouse (herself) – so that on a literal reading of the combined effect of s. 122.62(5)(b) and s. 56(1)(u)(ii), her family income included not only her actual income but also the income attributed to her under s. 56(1)(u)(ii).
Russell J found that the Explanatory Notes suggested that this result was unintended and quoted from Villa Ste-Rose in stating:
Analogously [to that case], in the present case there is “a literal interpretation which may produce illogical or absurd results [and so] must be set aside”.
CRA was ordered to recompute her CCB on the basis of excluding the deemed s. 56(1)(u)(ii) income from her income.
Neal Armstrong. Summary of O'Brien v. The King, 2023 TCC 132 under s. 122.62(5)(b).
We have translated 6 more CRA interpretations
We have translated a CRA interpretation released last week and a further 5 CRA interpretations released during the period commencing in December of 2002. Their descriptors and links appear below.
These are additions to our set of 2,577 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 20 ¾ 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 |
|---|---|---|---|
| 2023-09-06 | 10 February 2022 External T.I. 2019-0819651E5 F - Pension from China | Treaties - Income Tax Conventions - Article 19 | pension from China paid to former civil servant now resident in Canada was not exempted under Art. 18 of the Canada-China Treaty |
| 2003-10-03 | 30 September 2003 External T.I. 2003-0035725 F - MONTANT RELATIF AUX ETUDES
Also released under document number 2003-00357250.
|
Income Tax Act - Section 118.6 - Subsection 118.6(1) - Qualifying Student - Paragraph (d) | meaning of post-secondary |
| Income Tax Act - Section 118.6 - Subsection 118.6(1) - Qualifying Student - Paragraph (a) | portion of month can be counted provided that 12 hours (including course practical work) expended in that portion | ||
| 2003-09-12 | 28 August 2009 Internal T.I. 2003-0029367 F - Paragraph 122.3
Also released under document number 2003-00293670.
|
Income Tax Act - Section 122.3 - Subsection 122.3(1) - Paragraph 122.3(1)(b) - Subparagraph 122.3(1)(b)(i) | contract can be concluded with a person related to the specified employer |
| 2002-12-20 | 7 January 2003 Internal T.I. 2002-0168347 F - RETRAITE OU PENSION ALIMENTAIRE | Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount | splitting of pension income for support purposes was alimony |
| Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) | equal share of pension income going to ex-spouse without declared element of support was received as pension income | ||
| 12 December 2002 External T.I. 2001-0100755 F - Impact of LCB on Dr and Part IV | Income Tax Act - Section 129 - Subsection 129(2) | general practice to net dividend refund against unpaid Part I tax | |
| Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) | connected dividend recipient is not required to pay s. 186(1)(b) tax if it can demonstrate by the return-filing deadline that such tax was eliminated through a loss carryback | ||
| Income Tax Act - Section 164 - Subsection 164(1) | where subsequent loss carryback eliminates the Part I tax and dividend refund (DR), the refund interest is calculated on the initial Part I tax amount even if the DR reversal is paid by set-off | ||
| Income Tax Act - Section 160.1 - Subsection 160.1(1) | interest payable under s. 160.1(1) on the reversed dividend refund where subsequent year’s loss is carried back to eliminate the Part I tax and RDTOH | ||
| 20 December 2002 External T.I. 2002-0164735 F - PRODUIT DE DISPOSITION ACHALANDAGE | Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital - Variable E | full potentially receivable amount must be recognized, notwithstanding subsequent possible downward adjustment | |
| Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | s. 12(1)(g) applicable to incremental pharmacy sales price for goodwill based on volume of prescriptions for post-sale years |
CRA rules on a transfer of losses to a Profitco with a different functional currency
CRA ruled on transactions for the transfer of losses by Lossco to Profitco (a Canadian sister) by using standard triangular transactions - through Lossco subscribing for interest-bearing debt of (its new subsidiary) Newco 2, which subscribes for cumulative preferred shares of its sister, Newco 1, which makes a non-interest-bearing loan to Lossco, which at year end funds the dividend obligation of Newco 1 through a capital contribution – with the transactions then being unwound and with Newco 2 then being sold to Profitco so that Profitco can access the Newco 2 losses through winding-it up pursuant to s. 88(1.1). Essentially the same transactions would be repeated (using further Newcos) in subsequent years until the Lossco losses were used up.
Profitco had made a functional currency election. The rulings included a ruling as to the application of s. 261(16)(a) to the wind-up of Newco into Profitco, including regarding Newco 2 being deemed to have elected Profitco’s tax reporting currency for its second short taxation year (of less than one day ending with its dissolution) and regarding the non-application of the avoidance rule in s. 261(18) and the stop-loss rule in s. 262(21).
The ruling letter also included a representation that proposed s. 18.2(4) will not apply to limit the deductibility of the interest on the interest-bearing debt used in the triangular transactions as Lossco and Newco 2 were eligible group corporations in respect of one another and will elect to treat the interest payment under such debt as excluded interest.
Neal Armstrong. Summary of 2023 Ruling 2022-0949841R3 under s. 111(1)(a).
CRA indicates that the immediate expensing income limit under Reg. 1100(0.1)(c) is determined at the partnership rather than partner level
In general terms, the immediate expensing incentive in Reg. 1100(0.1) allows for the immediate expensing of up to $1.5 million (the “immediate expensing limit”) of the costs of various classes of depreciable property (being designated immediate expensing property, or “DIEP”) that has become available for use, acquired by an eligible persons or partnerships (EPOPs) (being resident individuals, CCPCs or partnerships with them as the only members). However, by virtue of Reg. 1100(0.1)(c), an EPOP that is an individual or partner may not claim immediate expensing CCA in excess of the EPOP’s income (computed before CCA) from the business or property in which the relevant DIEP is used for the taxation year.
Regarding the application of this Reg. 1100(0.1)(c) limitation, CRA confirmed that:
- For purposes of this limitation, the income of the EPOP earned from the business or property in which the relevant DIEP is used includes recapture of depreciation or terminal loss that relates to that same source of income.
- The immediate expensing CCA is deducted prior to regular CCA and consequently, although Reg. 1100(0.1)(c) effectively prevents an EPOP that is an individual or partnership from using the immediate expensing deduction to create or increase a loss, following their immediate expensing claim and subject to any other restrictions such as the rental and leasing property restriction rules in Regs. 1100(11) and (15), an individual or partner may use regular CCA on any remaining UCC balances to create or increase a loss.
- Given that CCA is claimed in computing income at the partnership level, the immediate expensing income limit under Reg. 1100(0.1)(c) is also determined at the partnership level, rather than taking into account additional expenses incurred at the partner level.
Neal Armstrong. Summary of 24 March 2023 External T.I. 2023-0960171E5 under Reg. 1100(0.1)(c).
9127-6287 Québec – Court of Quebec prorates the s. 18(3.1) equivalent between the construction of golf course buildings and work on the golf course
The taxpayer, during the taxation years at issue, suspended the operation of its golf course to backfill two artificial lakes in its driving range and to replace its clubhouse and garage – as well as to partially construct (but never complete) a mini-golf course. The ARQ denied the various expenses incurred during such taxation years, such as insurance, interest, licence and consulting fees, property taxes, and utilities, on the basis of applying the Quebec equivalent of ITA s. 18(3.1).
Bourgeois JCQ found that the wording of the s. 18(3.1) equivalent “cannot apply to work done on the driving range, golf course maintenance or the various tasks involved in building a mini-golf course,” since the costs thereof did not relate to the types of land referred to in the provision, e.g., contiguous land, such as a “yard” or “garden,” necessary for the use of the buildings.
He then exercised his “judicial power” to find that that the denial under the provision applied only to 50% of the above expenses incurred during the building-construction period, so that the balance of the expenses were allowed.
Neal Armstrong. Summaries of 9127-6287 Québec Inc. v. Agence du revenu du Québec, 2023 QCCQ 4688 under s. 18(3.1) and s. 3(a) – business source.
Income Tax Severed Letters 6 September 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.