News of Note
CRA rules that s. 75(2) does not apply to trust fund where the income therefrom but not the capital can be distributed to the settlor, and no encroachment decision occurs during his lifetime
Email this ContentCRA ruled that s. 75(2) did not apply to property settled on a trust where during the settlor’s lifetime, no capital distributions could be made and income could only be distributed to the settlor or the settlor’s spouse. Only following the settlor’s death could the (numerous) trustees determine to distribute income and capital to the second-generation beneficiaries.
CRA also opined that s. 104(4) would not apply to the new trust 21 years later on the basis of a trust deed provision providing for the vesting (but not necessarily pay-out) of all trust interests before then.
Neal Armstrong. Summary of 2015 Ruling 2015-0610391R3 under s. 75(2).
CRA accepts a loss shift through a lump sum irrevocable prepayment of contingent future royalties
In order that the non-capital losses of Lossco would not expire, an affiliated licensee of a licence to manufacture and sell a product made a purported prepayment of the royalties (which were calculated as a function of sales), but with the prepaid royalty being non-refundable. CRA found that this payment likely was not a royalty (given its non-contingent nature) and that the full amount was business income to Lossco either under s. 12(1)(a) (on the basis, applying Ellis Vision, that it “could be considered as an amount paid in advance for the use of chattels,” or under s. 9.
It was not necessary for CRA to “resolve the issue of which of these two provisions prevails because [Lossco] does not wish to benefit from a deduction under paragraph 20(1)(m).” If the s. 20(1)(m) reserve weres relevant, it would have been necessary for CRA to engage with the finding in Doteasy that the s. 20(1)(m) reserve is available for an amount even if it is included under s. 9 rather than s. 12(1)(a), so long as it is described in s. 12(1)(a).
Neal Armstrong. Summary of 12 December 2014 Internal T.I. 2014-0524751I7 Tr under s. 9 - timing.
Pomerleau – Tax Court of Canada finds that GAAR applied to converting soft ACB (generated from crystallizing the capital gains deduction) into pseudo-hard ACB under s. 53(1)(f.2) for use in extracting surplus
An individual taxpayer engaged in a surplus-stripping transaction similar to transactions in a ruling which CRA had resiled from following Descarries. He held shares of a holding company whose adjusted cost base reflected the step-up of predecessor shares’ ACB in capital gains crystallization transactions by him and other family members. Such additional “soft” ACB would have been ignored under s. 84.1 if those shares had been transferred to a personal holding company in exchange for the issuance of shares with a purported paid-up capital equal to the transferred shares’ soft ACB.
Instead, he retracted his own soft ACB shares (as well as soft ACB shares that had been gifted to him by family members), which resulted in a capital loss under s. 40(3.6) that was added to the ACB of his common shares of the corporation under s. 53(1)(f.2). This s. 53(1)(f.2) bump was not caught by s. 84.1(2), so that he could transfer the bumped common shares to a personal holding company, taking back high PUC shares which he promptly redeemed.
Favreau J agreed with CRA that this conversion of soft ACB into hard ACB, in order to receive a tax-free return of capital, contravened GAAR, stating:
This series of transactions permitted the appellant, on the redemption of the Class G shares of [his new holding company], to extract as a tax-free return of capital, $994,628 derived from the surplus of his corporation by virtue of utilizing his capital gains deduction and that of his mother and sister. …
Neal Armstrong. Summary of Pomerlau v. The Queen, 2016 CCI 228 under s. 84.1(2)(a.1).
Francoeur – Cour du Québec finds that a somewhat quick flip by a builder was eligible for the principal residence exemption
Aubé, JCQ found that an entrepreneur who had followed a pattern of building and selling residences, realized a capital gain eligible for the principal residence exemption where he built a home to the exacting requirements of his spouse, and then sold it at a gain somewhat over three years after having purchased the vacant lot. She stated:
The financial situation motivated the sale of the property. Mr. R. F. stated that… his lines of credit had reached their limit. …
Although Mr. RF works in the construction industry, this does not deprive him of the right to acquire and sell his principal residence if circumstances make it unavoidable or desirable, even if the transactions occur over a relatively short period of time.
Neal Armstrong. Summary of Francoeur v. Agence du revenu du Québec, 2016 QCCQ 11906 under s. 9 – capital gain v. profit – real estate.
The replacement property rollover for voluntary dispositions of ECP has not been replaced
The rollover in s. 14(6) for the acquisition of replacement eligible capital property following a voluntary disposition of ECP (e.g., of farm quota) is not being replaced. The somewhat equivalent provisions of ss. 13(4) and 44(1) only apply to former business properties, i.e., real property.
The ITA historically has accommodated farmers, so that this may not be a targeted result.
Neal Armstrong. Summary of 4 November 2016 External T.I. 2016-0666901E5 - New Class 14.1 and replacement property rules under s. 13(4).
On December 6, the Supreme Court of Canada will review whether Google is carrying on business in Canada
In Equustec v. Google, the B.C. Court of Appeal found that Google was carrying on business in B.C. even though it did not have servers, offices, or resident employees there. Although this finding related to whether the B.C. courts had the jurisdiction to entertain a suit against Google rather than to a taxation issue, the decision of the Supreme Court of Canada in this case (which will be heard by it on December 6) will interest Canadian tax advisors and CRA.
Neal Armstrong. Summary of Susan McKilligan, "Carrying Business in Canada," International Tax, CCH Wolters Kluwer, No. 90, October 2016, p. 13 under s. 2(3)(b).
Evoy Estate – Tax Court of Canada finds that a s. 104(2) trust-consolidation designation requires that the respective trusts’ future income cannot accrue to different beneficiaries
S. 104(2) provides that CRA may designate that multiple trusts be treated as one trust where inter alia they each are “conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary or group or class of beneficiaries.” Paris J found that this condition was not satisfied where three testamentary trusts had the same income beneficiary (the surviving wife) during her lifetime, but thereafter the income of each trust was to go to one of the three children of the testator (or their respective children).
Paris J stated that the quoted test “contemplate[s] a consideration of the right to receive the income of the trust over the entire lifetime of the trust rather than for each taxation year,” whereas here, after the death of the wife, the income of each trust went to a separate family rather than “ultimately accruing to the same group or class of beneficiaries.”
Neal Armstrong. Summary of Evoy Estate v. The Queen, 2016 TCC 263 under s. 104(2).
CRA indicates that it generally is looking only to the investment dealer or mutual fund manager to report mutual fund unit redemptions on T5008s
CRA has announced that where mutual fund units (or shares) are held in nominee for with an IIROC dealer or through a mutual fund dealer, after redemption of the units (or shares) only the dealer or fund manager, as the case may be, and not the mutual fund, is expected to issue T5008 slips to the redeemed investor. As worded, this policy also appears to apply to other “investment funds,” e.g., mortgage investment corps.
Neal Armstrong. Summary of 8 November 2016 External T.I. 2016-0673361E5 under Reg. 230(3).
Shreedhar – Tax Court of Canada finds that a taxpayer can appeal a nil assessment of tax if it includes some interest
Boyle J found that the doctrine that a taxpayer cannot appeal a nil assessment does not apply to a notice of assessment which assesses nil tax but also includes interest (in this case, $2.10).
Neal Armstrong. Summary of Shreedhar v. The Queen, 2016 TCC 254 under s. 169(1).
Income Tax Severed Letters 23 November 2016
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.