News of Note
Louie – Federal Court of Appeal finds that advantages generated in Year 1 from swap transactions continued to produce indirect advantages thereafter
Email this ContentFrom May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed TFSA and her taxable trading account at a discount brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The transfers were made near the close of trading for the day, and at the high trading price for the day if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that those FMV increases were “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
The taxpayer’s appeal of 2009 was dismissed. In allowing the Crown’s appeal of 2010 and 2012, Dawson JA stated:
… [T]he use of the phrase “directly or indirectly” evidences Parliament’s intent “to capture any and all methods through which a transaction could increase” the fair market value of a TFSA.
[T]he Tax Court’s concern about “when or how far into the future an advantage … will be considered as attributable to” abusive transactions did not justify a restrictive interpretation of the definition of advantage.
… [W]hile the increase in value in the TFSA in 2010 and 2012 was directly attributable to the performance of the shares held in the TFSA each year, it was indirectly attributable to the swap transactions which increased the number of shares held in the TFSA and their value.
Neal Armstrong. Summary of Louie v. Canada, 2019 FCA 255 under s. 207.01(1) – advantage – s. (b)(i).
CRA repeats that it generally denies a s. 113(1) deduction where Canco has failed to prepare surplus accounts – which failure also will preclude a late-filed Reg. 5901(2)(b) election
The 2019 IFA Conference (2019-0798761C6) dealt with the situation where Canco does not prepare detailed calculations of its various surplus and underlying tax balances in respect of a wholly-owned subsidiary (FA) from which it received a dividend, and claims a full s. 113(1) deduction for that dividend (without knowing how much is a deduction under s. 113(1)(a) rather than, say, s. 113(1)(d).)
CRA indicated that if a complete surplus computation is not provided to it, its current general practice is to deny the s. 113(1) deduction. CRA also indicated that where Canco wishes to late-file an election under Regs. 5901(2.1) and (2.2) in order for the dividend to be completely sheltered by the s. 113 deduction (e.g., if it later discovered that it had hybrid or taxable surplus), such a request for a late election generally would not be granted - because relying on surplus balances unsubstantiated by a detailed computation would generally not meet the condition in Reg. 5901(2.1)(b) of having demonstrated making reasonable efforts before the filing-due date.
CRA essentially repeated these positions at the October 11, 2019 APFF Roundtable, which suggests that it is quite serious about them.
Neal Armstrong. Secondary summaries of 11 October 2019 APFF Roundtable, Q.8 under s. 230(1) and Reg. 5901(2)(b).
Summaries of 2019-0798761C6 under s. 113(1)(a) and s. 5901(2.2).
CRA applies IT-126R2 re the timing of addition of the wound-up subsidiary’s CDA
In IT-126R2, the CRA states that it considers that where the formal dissolution of a corporation is not complete but there is substantial evidence that the corporation will be dissolved within a short period of time, for the purpose of ss. 88(1) and (2) the corporation is considered to have been wound up. CRA confirmed that this position as to when the subsidiary had been “wound up” also applied as to when the capital dividend account of the subsidiary was to be added to that of the parent.
The limited facts provided were insufficient to determine whether indeed this time was before the time of the filing of articles of dissolution for the subsidiary.
By the way, translations of all the CRA responses provided at the (regular) APFF 2019 Roundtable are now available on our Roundtable pages. Translations of the written answers for the APFF 2019 Financial Strategies and Instruments Roundtable were published by us a week ago.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.6 under s. 87(2)(z.1).
CRA indicates that s. 60(o)(i) generates professional fee deductibility from the moment that CRA informs that there is an audit
CRA considers that “subparagraph 60(o)(i) applies to [accord deductibility to] fees or professional fees incurred as part of an audit from the time that the taxpayer was informed that the taxpayer was subject to an audit or new examination respecting the taxpayer’s tax return” as well as to “the professional fees or expenses incurred to mount a challenge before the Administrative Tribunal of Québec following a decision rendered by Retraite Québec concerning the tax credit granting an allowance to families” – but that “professional fees or expenses incurred to make a claim for interest and penalty relief [are] not deductible.”
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.5 under s. 60(o)(i).
CRA discusses how to report the principal residence exemption when the residence had been expanded from 1 to 2 duplex units
After an individual acquired a duplex in January 2011, he used the two units for renting to a third party and as his personal residence, respectively. In July 2019 he ceased to rent out the first unit, and appropriated it to his residence. He made a s. 45(3) election respecting his change of use under s. 45(1)(c) from rental to personal use, so that he was deemed to have not disposed of the rental unit. (Prior to the 2019 Budget changes, this election would not have been possible because, in the view of CRA, changing the use of only one unit in a duplex represents only a partial change of use of a single property.)
He then will dispose of the duplex in December 2022.
CRA indicated that notwithstanding that it considered the duplex to be a single property, the principal residence designation on the 2022 disposition should be made on two designation forms – one respecting the smaller unit that had been used as a residence up to the expansion date, and the second for the expanded unit.
As to the making of the s. 45(3) election, CRA stated:
Where an election under subsection 45(3) is made, the taxpayer must inform the CRA by enclosing a duly signed letter to that effect with the taxpayer’s return for the year in which the taxpayer actually disposed of the property, or earlier if the CRA issues a formal demand for that election. In that letter, the taxpayer should provide all relevant information related to the change of use.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.3 under s. 54 – principal residence exemption - (c) and s. 43(1).
CRA applies the s. 20(1)-preamble source rule, and finds that the principal residence exemption applied to a lease termination payment
A tenant had been annually renewing a lease of a personal-use condo since the time the condo was first leased in July 2013. The condo was sold in February 2019. In order to be able to move in right away, the new owner paid $15,000 to the tenant for early termination of the lease. S. 20(1)(z) provides for deductibility of the amount specified notwithstanding s. 18(1)(a). Did this mean that the $15,000 was deductible in computing the new owner’s income under s. 20(1)(z) notwithstanding that the new owner paid this amount respecting a personal-use asset?
CRA noted that s. 20(1)(z) was not stated to apply notwithstanding the income-source rule in the preamble to s. 20(1). Thus, “the amount to be deducted must be applicable wholly or in part to income from a business or property,” which an examination of the facts might not demonstrate to be the case.
CRA also considered it likely that the tenant continued to have a (single) residential leasehold interest throughout the period since July 2013, so that the $15,000 qualified for the principal residence exemption, i.e., it was consideration for the disposition of the leasehold interest (used as a principal residence) that the tenant had acquired in 2013 and held since then.
Neal Armstrong. Summaries of 11 October 2019 APFF Roundtable, Q.2 under s. 20(1)(z) and s. 40(2)(b).
CRA finds that a transfer of a TFSA to the surviving spouse because of their daughter’s renunciation occurred as a consequence of the deceased’s death
Although an individual made a specific bequest under his will of his TFSA to his adult daughter, she executed a written renunciation of the bequest (that CRA went on to find was deemed by s. 248(9) to result in a “disclaimer” or a “release or surrender” for purposes of s. 248(8)(b),) so that following the TFSA's liquidation by the executor, the proceeds were instead transferred by the executor to the widow of the deceased – who then promptly contributed such proceeds to her own TFSA.
CRA found that, in light of 248(8)(b), such transfer to the widow as a result of the disclaimer qualified as a transfer of this TFSA to her “as a consequence” of his death. Thus, her contribution to her TFSA could qualify as an “exempt contribution” under the s. 207.01(1) definition of that term.
Neal Armstrong. Summary of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 207.01(1) – exempt contribution – (b).
Income Tax Severed Letters 16 October 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA reverses its position that s. 84.1(1)(b) dividends do not generate dividend refunds
In 2002-0128955, CRA indicated that a deemed dividend under s. 84.1(1)(b) would not generate a dividend refund (DR). CRA has now stated:
[W]e have come to the conclusion that the position described in the Interpretation no longer represents the position of the CRA. In particular, according a DR to a corporation deemed to have paid a dividend by virtue of paragraph 84.1(1)(b) provides in our view a result that is more compatible with the integration principle enshrined in the Income Tax Act.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.1 under s. 129(1).
CRA notes that an exempt contribution to a TFSA can only be made as of right no more than 30 days before the survivor payment was received from an estate
What happens if the surviving spouse (Ms. Y) of an individual (Mr. X), who bequested his TFSA to her, made a contribution to her TFSA in the amount of Mr. X’s TFSA before the executors liquidated the TFSA and distributed that amount to her?
After indicating that the “exempt contribution” definition in s. 207 did not “require that the survivor payment be received before the contribution is paid,” CRA noted that the definition requires that the contribution be designated on a Form RC240 within 30 days after the day on which the contribution is made (or at any later time that is acceptable to the Minister) – which meant that Ms. Y’s contribution could only so qualify, if made more than 30 days after the survivor payment was received from the estate, if CRA exercised its discretion to extend the 30-day period.
Neal Armstrong. Summary of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 207.01(1) – exempt contribution – (c).