News of Note
CRA confirms that T1142 reporting requirements can arise once a foreign estate has been fully administered
Email this ContentS. 233.6(1) provides that foreign reporting (on Form T1142) is not required for a distribution from a foreign trust where the distribution is from an estate that arose as a consequence of the death of an individual.
CRA confirmed its position that once the estate has been administered, the Canadian beneficiary of any ongoing non-resident testamentary trust is required to file a T1142 in any year where a distribution is received from a trust, or where a Canadian beneficiary becomes indebted to the trust. Generally, an estate is considered to be fully administered when the assets in the estate have been distributed and, if applicable, a clearance certificate is requested.
Neal Armstrong. Summary 20 June 2023 STEP Roundtable, Q.17 under s. 233.6(1).
CRA indicates that a damages annuity to a child for a parent’s death would generally need to be under a structured settlement to be exempt
Ss. 81(1)(g.1) and (g.2) generally provide that income earned from any property acquired by or on behalf of a person, for damages in respect of physical or mental injury to that person, is exempt in computing their income until the end of the year in which that person turns 21.
Regarding damages received on behalf of a child of parents killed in an accident, CRA indicated that where the amount received was not awarded as damages in respect of mental injury suffered by the child, ss. 81(1)(g.1) and (g.2) would not apply and the investment income would be taxable. Where an annuity contract was purchased by a taxpayer or taxpayer’s representative with the proceeds of a lump-sum award received for damages for personal injury or death, the income component of the annuity could only be exempted under ss. 81(1)(g.1) and (g.2) on the same basis.
The lump-sum award could also be organized as a structured settlement, which would entail the casualty insurer being the owner of an annuity contract and reporting the interest element inherent in the annuity contract in its income. Provided the conditions in IT-365R2, para. 5 were met, the payments received by the claimant would be non-taxable.
Neal Armstrong. Summary 20 June 2023 STEP Roundtable, Q.16 under s. 81(1)(g.1).
CRA has officially released the 2022 CTF Roundtable
For convenience of reference, here is a table of the CRA Roundtable items from the November 29, 2022 CTF Annual Conference together with links to our summaries of these items (mostly prepared almost eight months ago) and brief descriptors.
Income Tax Severed Letters 19 July 2023
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The expanded reportable transaction rules should not impose reporting obligations on lawyers who negotiate contractual protection for a conventional fee
The revised reportable transaction rules in s. 237.3 raise the familiar issue of “lines” demarcating problematic and non-problematic transactions in fact being blurry. Suppose that a lawyer assisted in negotiating and drafting terms providing for contractual protection as contemplated by the contractual protection hallmark in s. 237.3(1) – reportable transaction – (c), and charged a fee based on hours of work, is the lawyer obligated to report on the basis that this “is a fee … in respect of any … transaction … that is in respect of contractual protection,” as set out in s. s. 237.3(2)(c)(ii)?
The broadest interpretation of s. 237.3(2)(c)(ii), that the adviser is required to report in these circumstances, “seems absurd and runs counter to the 2023 explanatory notes’ clearly expressed intention that the rules do not impose an undue compliance burden.”
It would be inappropriate to give the phrase “in respect of” its widest possible meaning (which Nowegijick described as “words of the widest possible scope”) and, instead, a narrower interpretation of s. 237.3(2)(c)(ii), according with the context and purpose of the reportable transaction rules, is required.
The 2012 Explanatory Notes, which clarify that Parliament intended advisers only to have a reporting obligation in respect of contractual protection hallmark where the adviser was providing the contractual protection, suggest that if a party to a transaction receives contractual protection, the adviser should have a reporting obligation only where the adviser receives a fee for providing the contractual protection.
Neal Armstrong. Summary of Jack Silverson, Matias Milet, Christopher Anderson and Andrew Spiro, “Canada’s Reportable Transaction Rules: A Measured Approach to Adviser Reporting,” Tax Notes International, Vol. 111, No. 29, July 15, 2023 under s. 237.3(2)(c)(ii).
Marine Atlantic – Tax Court of Canada finds that a registrant is not required to expand the information already in its possession in using an ITC allocation method
The appellant (MAI), which operated a ferry service between Newfoundland and Nova Scotia, allocated all its inputs between the taxable and exempt supplies made by it (nearly all of which were made on the vessels) by measuring the areas on its ferries used exclusively in making taxable supplies (including the provisions of passenger cabins, and restaurant and dining facilities) and those used exclusively in making exempt supplies (the general seating areas and vehicle passenger decks) to determine relative percentages for those two categories of use, and then treating those percentages as also being applicable to the use of the common areas on the ferries (including corridors, walkways, stairways, public washrooms, the exterior deck, crew cabins, the engine room and navigation facilities), and to the terminal and corporate office areas and the use of fuel.
In accepting MAI’s methodology, D’Arcy J stated:
A GST registrant is entitled to use any method that is fair and reasonable provided that it complies with the provisions of the GST Act. The CRA cannot simply substitute its method for that of the GST registrant. …
[A] GST registrant should be entitled to determine its input tax credits on the basis of information in its possession without having to resort to hiring expensive third parties, such as valuators or, as I will discuss, engineers to measure spaces on its ships or experts to try to determine what percentage of fuel is consumed to propel a ship and what percentage is consumed to produce electricity, heat or hot water. …
He also noted that the taxpayer’s method appeared to be better than the output-based method used by it in earlier reporting periods and accepted by CRA.
Neal Armstrong. Summaries of Marine Atlantic Inc. v. The King, 2023 TCC 95 under ETA s. 141.01(5) and ETA s. 335(5).
We have translated 6 more CRA interpretations
We have translated a further 6 translations of CRA interpretations released in April and March of 2003. Their descriptors and links appear below.
These are additions to our set of 2,527 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 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 |
|---|---|---|---|
| 2003-04-04 | 24 February 2003 Internal T.I. 2002-0165537 F - Le détachement d'employés et l'article XV
Also released under document number 2002-01655370.
|
Treaties - Income Tax Conventions - Article 15 | exemption in Art. 15 of US Treaty unavailable where Canadian employee seconded to US affiliate, which reimburses for his payroll |
| 24 March 2003 Internal T.I. 2002-0177587 F - XXXXXXXXXX EN CONSIGNATION PERTE
Also released under document number 2002-01775870.
|
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs | business commences when a significant activity is initiated that is part of an income-generating process | |
| Income Tax Act - Section 9 - Timing | loss when inventory disappears is deducted when the loss is discovered | ||
| 11 March 2003 Internal T.I. 2003-0000087 F - Projet agricole au sens de 122.3(1)b)(i)(B)
Also released under document number 2003-00000870.
|
Income Tax Act - Section 248 - Subsection 248(1) - Farming | woodlot management can be farming | |
| 18 February 2003 Internal T.I. 2003-0182997 F - Calcul du revenu net étranger à 126(1)b)(i)
Also released under document number 2003-01829970.
|
Income Tax Act - Section 126 - Subsection 126(9) - Paragraph 126(9)(a) | qualifying income not reduced by s. 110(1)(d) deduction | |
| 2003-03-28 | 26 March 2003 External T.I. 2003-0008645 F - Non-Arm's Length Sale of Shares | Income Tax Act - Section 84.1 - Subsection 84.1(1) | no presumption that a transaction between companies owned by couple and nephew, respectively, is not arm’s length |
| Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | family relationship (e.g., uncle/nephew) are more likely to give rise to NAL transaction | ||
| 24 March 2003 External T.I. 2002-0165265 F - REMBOURSEMENT DE PRIMES | Income Tax Act - Section 146 - Subsection 146(8.1) | election cannot be made with surviving spouse if bequest of RRSP is to surviving adult child |
Agences Kyoto – Court of Quebcc finds that a written contract or resolutions were unnecessary for the deductibility of inter-company management fees
Regarding the denial by the ARQ of the deduction of management fees paid by the taxpayer (AK) to its wholly-owning parent (GAK), Richard JCQ stated:
Despite the absence of a written contract, resolution or other documentation, [an AK/GAK director] convinced the Court that numerous acts of management were performed by GAK for the benefit of AK, notably in the negotiation of financing, acquisition opportunities, the determination of rents and the payment of life insurance policies for its directors, of which GAK is the beneficiary.
Neal Armstrong. Summary of Agences Kyoto ltée v. Agence du revenu du Québec, 2023 QCCQ 2921 under s. 18(1)(a) – income -producing purpose.
Larouche – Court of Quebec determines the relative business use represented by a home office using the home’s gross rather than net area
In deducting his home office expenses, the taxpayer determined the portion of his home that was used in his business of providing electrical engineering services, which he calculated by dividing the square-foot area of the three rooms that he used in that business by the net square footage of his home, which was the area of the two floors as measured by the exterior dimensions, minus the areas taken up by the walls and minus the area of common areas (stairwells and hallways). In instead accepting the ARQ method, which divided the area of the three rooms by the gross floor area, Brunelle JCQ stated (at para. 35, TaxInterpretations translation):
[A] person's home is first and foremost the individual’s dwelling and "the privileged place of his or her private life". Admittedly, a person may choose to work at home and reserve a certain amount of space for this purpose, but the fact remains that corridors, stairwells and other indoor areas for locomotion are essential to the personal use of the premises.
Neal Armstrong. Summary of Larouche v. Agence du revenu du Québec, 2023 QCCQ 3350 under s. 18(12).
Morin – Court of Quebec finds that management fees paid to a related company that performed its functions through the agency of the fee payer were non-deductible
A pharmacist (“Morin”), who previously had operated six pharmacies as proprietorships, agreed with her management company (“377”) that she would incur various of the expenses of the pharmacies as they related to services provided by technicians and support staff, as contrasted to professional staff, as agent for 377 and that the gross profits from the pharmacies would be split on a 30/70 basis between 377 and her. 377 sent quarterly invoices to Morin and issued credit notes for its computed share of the expenses.
Tremblay JCQ confirmed the ARQ position that the $2.5 million in management fees charged by 377 to Morin for the years at issue under the above arrangement were completely non-deductible as they were not incurred for an income-producing purpose. Morin was performing exactly the same functions as before, and the sole effect of the arrangement was to reduce her income by the fee amounts. Tremblay JCQ stated):
… Ms. Morin had no expectation of receiving any income from the management fees she paid to 377. …
It seems obvious that a reasonable businesswoman, considering only her commercial interests, would not have committed herself to such an expense.
However, the ARQ reassessments to deny her deductions, which were made beyond the normal reassessment period, were statute-barred, given that the general plan had been proposed by Morin’s tax advisors and she “could reasonably expect that the structure proposed to her could produce the legal and tax effects envisaged by her professionals.”
Neal Armstrong. Summaries of Morin v. Agence du revenu du Québec, 2023 QCCQ 2406 under ITA s. 18(1)(a) – income-producing purpose, and s. 152(4)(a)(i).