News of Note
CRA illustrates the resident portion rules for a s. 94 trust that inter alia has lent to a resident beneficiary or earns FAPI
Email this ContentRegarding where a loan is made by a non-resident trust (which has made a valid (resident portion) election under s. 94(3)(f)) to a Canadian resident beneficiary, CRA noted that s. 94(2)(g)(iv) provides that the loan to the beneficiary involves the acquisition by the trust of the debt which entails a deemed transfer by the debtor – so that, here, there is a deemed transfer of property from the beneficiary to the trust. Accordingly, under para. (a) of the “resident portion” definition, the amount of the loan owing by the beneficiary would be considered as a contribution by the beneficiary (viewed in this regard as a resident contributor) and would be included in the resident portion of the trust.
The repayment of the loan would be considered to be a contribution to the trust by the resident beneficiary so that the cash repayment proceeds would be added to the resident portion. Since the debt ceased to exist, it is expected that it would no longer be included in the resident portion.
49% of the shares of a non-resident corporation owned by a non-resident trust which has made a valid s. 94(3)(f) election were included in the resident portion but the trust held 100% of the shares in all. CRA noted that s. 94(3)(f)(viii) provides that the resident portion trust and the non-resident portion trust are a deemed to not deal with each other at arm’s length and s. 94(3)(a)(x) provides that a deemed resident trust is deemed to be resident in Canada throughout the particular tax year for purposes of determining whether a foreign affiliate is a controlled foreign affiliate (CFA) of the taxpayer. Accordingly, in light of s. (b)(ii) of the CFA definition (effectively deeming the resident portion trust to hold the shares of a non-arm’s length person) the corporation would constitute a CFA of the resident portion trust. Accordingly, its FAPI would be computed in the usual way based on its participating percentage (based on its 49% shareholding).
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.7 under s. 94(1) – resident portion.
GST/HST Severed Letters February 2023
This morning's release of 10 severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their February 2023 release) is now available for your viewing.
Income Tax Severed Letters 28 June 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that a Canadian registered charity beneficiary of a non-resident trust does not engage the s. 94 rules
CRA noted that, since the definition of a “resident beneficiary” in s. 94(1) excludes an “exempt person,” the inclusion in the potential beneficiaries of a non-resident trust of Canadian registered charities would not by itself cause the s. 94 rules to apply to that trust.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.6 under s. 94(1) – resident beneficiary.
CRA illustrates the operation of the recovery limit rules to a resident beneficiary of a s. 94(3) trust that has unpaid Canadian taxes
A factually non-resident, inter vivos, personal trust which has one resident beneficiary and no resident contributors was subject to s. 94 in its 2020 taxation year, in which it earned taxable income. However, no distribution of property occurred until a capital distribution of $100,000 was made to the resident beneficiary on December 30, 2022.
CRA illustrated the operation of the rule under s. 94(3)(d) for joint and several liability of the resident contributor for unpaid taxes of the trust for its 2020 taxation year, subject to limitation by the “recovery limit” provisions of ss. 94(7) and (8), by focusing on two dates: January 1, 2021 (i.e., just after completion of the trust’s 2020 taxation year); and December 31, 2022 (i.e., one day after the distribution). Of particular note was para. (a) of the recovery limit formula in s. 94(8), which totaled the various amounts which were, for example, paid to the particular person, here, the resident beneficiary.
The formula produced a nil result on January 1, 2021, and an amount of $100,000 on December 31, 2022. Accordingly, although on January 1, 2021, the resident beneficiary was jointly and severally liable for the taxes owing by the trust for its 2020 taxation year, CRA could not collect an amount from the resident beneficiary as of that date. It could, however, assess the resident beneficiary for an amount not exceeding $100,000 on December 31, 2022 given that the conditions in s. 94(7) were by assumption satisfied for the 2020 year – and this was so even if s. 94(3) had ceased to apply to the trust for its 2021 or 2022 taxation year.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.5 under s. 94(8).
CRA indicates that the expanded trust reporting requirements will extend to the reporting of contingent beneficiaries
Pursuant to Reg. 204.2(1)(a), a trustee of a trust is required to report information about each “beneficiary” of the trust, unless the trust is subject to one of the exceptions in s. 150(1.2) or an exception in s. 204.2(2) applies.
CRA was asked to comment on the meaning of “beneficiary” in the context of a query about the trust deed for a family trust providing that in the event that none of the parents and their issue survived, the trust assets went to extended family members. CRA indicated that, very generally, a beneficiary of a trust is a person, other than the protector, who has the right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person’s right to the income or capital of the trust is immediate, future, contingent, absolute or conditional on the exercise of the discretion of any person – so that, accordingly, a beneficiary in the ordinary sense would include a beneficiary whose interest is contingent.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.4 under Reg. 204.2(1).
We have translated 6 more CRA interpretations
We have translated a further 6 translations of CRA interpretations released in April of 2003. Their descriptors and links appear below.
These are additions to our set of 2,508 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 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 |
|---|---|---|---|
| 2003-04-18 | 10 April 2003 Internal T.I. 2002-0177767 F - INDEMNITE RECUE PAR UN ARTISTE
Also released under document number 2002-01777670.
|
Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (f) | damages for infringement of an artist’s moral rights could be proceeds of disposition of a capital property |
| Income Tax Act - Section 248 - Subsection 248(1) - Property | the moral rights of an artist were property | ||
| 17 April 2003 Internal T.I. 2003-0006407 F - PRET SANS INTERET DEDUCTIBILITY INTERETS
Also released under document number 2003-00064070.
|
Income Tax Act - Section 20.1 - Subsection 20.1(1) | s. 20.1(1)(b)(iv) can apply to money borrowed for an interest-free loan that was a source under the exceptional circumstances test | |
| 2003-04-11 | 9 April 2003 External T.I. 2003-0008735 F - DONATION XXXXXXXXXX
Also released under document number 2003-00087350.
|
Income Tax Act - Section 248 - Subsection 248(31) | guidelines in ITTN No. 26 followed |
| 4 April 2003 External T.I. 2002-0171635 F - PERTE APPARENTE
Also released under document number 2002-01716350.
|
Income Tax Act - Section 54 - Superficial Loss | purchase within 30 days by daughter of share vendor did not engage the superficial loss rules | |
| Income Tax Act - Section 40 - Subsection 40(3.3) | purchase within 30 days by daughter of share vendor’s controlling shareholder did not engage the superficial loss rules | ||
| Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(a) | father and daughter not affiliated | ||
| Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(b) | corporation and daughter of its controlling shareholder not affiliated | ||
| 4 April 2003 External T.I. 2002-0176305 F - DON PAR TESTAMENT
Also released under document number 2002-01763050.
|
Income Tax Act - Section 118.1 - Subsection 118.1(5) | gift can be made by will to a foundation formed after testator’s death | |
| 3 April 2003 External T.I. 2003-0006945 F - XXXXXXXXXX
Also released under document number 2003-00069450.
|
Other Legislation/Constitution - Federal - Indian Act - Section 87 | Guideline 2 satisfied notwithstanding that Indian with reserve home needs to stay off the reserve for temporary work assignment |
RBC – English Court of Appeal finds that an oil and gas royalty is not income from immovable property under the Canada-U.K. Treaty where the recipient never had any interest in the oil field
A Canadian corporation (“Sulpetro”), which had rights to direct and receive the proceeds from a licence its U.K. subsidiary (“SUKL”) held in an offshore U.K. oil and gas field, sold its rights (and shares of the subsidiary) to a U.K. purchaser for consideration that included a royalty that became payable, based on production from the field, when the market price of oil exceeded US$20 per barrel. The taxpayer (RBC) received an assignment of this royalty from the receiver for Sulpetro following default by Sulpetro on a secured loan made by RBC in the course of its Canadian banking business.
The principal issue was whether HMRC was permitted by Art. 6 of the Canada-U.K. Treaty to impose tax on the royalty payments received by RBC and, in particular, whether they fell within the portion of the definition of “immovable property” in Art. 6(2) (the “fifth limb”) that referred to "rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources". Before allowing RBC’s appeal, Falk LJ stated that “the better interpretation of the fifth limb is that it is confined to rights to payments held by a person who has some form of continuing interest in the land in question to which the rights can be attributed.” In this regard, she stated:
[C]learer words would be needed to establish that a right of a personal nature, held by a person who has no link to the physical land in question, and comprising a chose in action owed by a person who might also have no link to the State in which the land is situated, falls within Article 6(1).
She concluded:
… RBC does not hold, and indeed has never held, an interest in the Buchan field. It cannot therefore be taxed under the fifth limb.
Neal Armstrong. Summaries of Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs [2023] EWCA Civ 695 under Treaties – Income Tax Conventions – Art. 6, Art. 12.
CRA indicates that holding a gold or silver bar or coin, or a dividend receivable, would taint a trust otherwise exempted under s. 150(1.2)(b) from reporting requirements
Pursuant to s. 150(1.2)(b), the exception from trust reporting requirements under s. 150(1.1) - that may be available to individuals with no Part I tax payable or relevant dispositions - can apply to a trust for a particular tax year where the trust holds assets restricted to listed types of property including “money,” or listed shares, with an FMV not exceeding $50,000 throughout the year. CRA indicated that a trust holding a gold or silver bar or coin, or with a dividend receivable, would not satisfy the types-of-property test.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.3 under s. 150(1.2)(b).
CRA intimates that it generally will process capital losses that a deceased missed claiming if now claimed within the s. 152(4.2) 10-year period
In the context of the executors discovering that the deceased had not claimed an allowable capital loss in a taxation year that was before the normal reassessment period, CRA indicated that, provided that a request to it to amend the return for the particular taxation year was made by the day that was 10 calendar years after the end of that year, CRA generally would provide relief pursuant to s. 152(4.2) where it was satisfied that the request for adjustment would have been processed if it had been made within the normal reassessment period.
If the loss was realized before rather than within this 10-year period, the loss thus could not be used to reduce Part I tax on a smaller taxable capital gain realized in that same year, even though such taxable capital gain would have the effect of reducing the net capital loss that could otherwise be carried forward from that year. However, that (reduced) net capital loss could be claimed to reduce a taxable capital gain realized in, say, 2015 under a request made pursuant to s. 152(4.2) in 2023.
Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.2 under s. 152(4.2).