News of Note
CRA indicates that the "duties … of a temporary nature" condition in s. 6(6)(a)(i) is tested on a site-by-site basis
Email this ContentAfter being asked inter alia whether the "duties … of a temporary nature" condition in s. 6(6)(a)(i) is satisfied where an employee is assigned successively to two projects in the same region or city, CRA indicated “that the place where an employee performs work of a temporary nature (i.e., a special work site) is a particular place of work and not a general geographical area such as a city.” Thus, in the above examples, the second site in the same region or city would be tested separately as to whether the duties to be performed at that special work site were "of a temporary nature."
Neal Armstrong. Summary of 4 January 2022 External T.I. 2016-0644861E5 F under s. 6(6)(a)(i).
CRA indicates that settling QSBCS shares on a personal trust with related beneficiaries before a sale of those shares 6 months later would not cause QSBCS status to be lost
An individual who transferred all his long-term holding of the shares of a corporation which otherwise would have qualified as qualified small business corporation shares (QSBCS) to a personal trust whose only beneficiaries were his two children. Six months after that, the trust disposed of the shares to an unrelated third party.
CRA indicated that the mere fact that the trust had not been in existence for 24 months at the time of such disposition would not prevent the shares from qualifying as QSBCS. Furthermore, in order for the 24-month holding period requirement set out in para. (b) of the QSBCS definition to be met, the trust and the person from whom it acquired the shares (the individual) needed to be related under s. 110.6(14)(c)(ii) (which appeared to be the case since, at the time of the disposition, all of the beneficiaries of the trust were related to the individual).
Neal Armstrong. Summary of 28 March 2025 External T.I. 2016-0662951E5 F under s. 110.6(1) – QSBCS – (b).
CRA has issued a new Folio on the s. 80.4 rules
CRA has issued a new Folio on the rules for imputing interest on shareholder loans, contained principally in s. 80.4. Points made by it include:
- CRA lists factors that it considers relevant to determining whether a shareholder received a loan qua shareholder or qua employee (relevant inter alia to whether the imputed benefit is from employment).
- Once a loan becomes subject to the s. 80.4 rules, it remains subject to those provisions for all taxation years as long as any part of it remains unpaid even if, for example, the taxpayer ceases to be a shareholder
- Where a borrower did not include a loan in income because it was expected that the s. 15(2.6) exception would apply, and an interest benefit was included under s. 80.4(2) in the borrower's tax return for the year in which the loan was received, then if the loan in fact is not repaid within the s. 15(2.6) time period, the borrower should amend the tax return for that year to remove the deemed interest benefit amount from income and to include the loan amount in income.
- Where s. 80.4(2) results in a deemed interest benefit to a non-resident borrower, s. 80.5 applies to deem the amount of the benefit to be interest payable in respect of the year pursuant to a legal obligation to pay interest on the borrowed money for purposes of s. 20(1)(c). Accordingly, a deduction under s. 20(1)(c) may be claimed where the proceeds of the loan were used by the non-resident to earn income in Canada that is taxable under Part I.
Neal Armstrong. Summaries of Income Tax Folio S3-F1-C2 Deemed Interest Benefit on Shareholder Loans and Debts, April 10, 2025 under s. 80.4(2). s. 80.4(3)(a), s. 80.4(3)(b), s. 80.4(3)(c). s. 80.4(1) and s. 80.5.
Income Tax Severed Letters 23 April 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA issues a new Folio on the shareholder loan rules
CRA has issued a new Folio on the shareholder loan rules in s. 15(2) et seq. A few of the points covered include:
- Although a loan made for the purpose of refinancing an existing indebtedness that was previously incurred by an employee to acquire a dwelling will generally not meet the requirement under s. 15(2.4)(b) of having been made to enable or assist the acquisition of the dwelling, there is an exception for where the lender made a commitment to an individual on or before the individual's acquisition of the dwelling to provide permanent financing and in the interim, the individual used interim financing, such as construction financing, to construct or otherwise acquire the building.
- Regarding the requirement for bona fide repayment arrangements in s. 15(2.4)(f), at the time the loan is made, the arrangements for repayment must be such that it is possible to determine, with some certainty, the period within which the loan will be repaid.
- However, when trade debts are not paid according to the creditor's normal payment terms but they are settled within 12 months of being incurred, bona fide arrangements are considered to have been made at the time the debt arose for purposes of s. 15(2.3).
- CRA has carried forward most or all of its positions regarding the s. 15(2.6) rule including regarding when there is series of loans or other transactions and repayments, for instance that:
- repayments are applied on a first-in, first-out basis (i.e., to the oldest loan first) when a shareholder has more than one loan outstanding at the time of repayment, unless the facts clearly indicate otherwise;
- repayments can be made by applying dividend, salary, or bonus payments against an outstanding loan; and
- a repayment may be considered to have been made as part of a series of loans or other transactions and repayments where the proceeds of a new loan are used to repay an existing shareholder loan.
- CRA has also carried forward its generous policies on the deferred timing for the recognition of a Part XIII remittance obligation on a benefit subject to such tax under s. 214(3)(a).
- Furthermore, if a PLOI election is available in respect of a loan but has not yet been filed, the CRA will assess Part XIII withholding tax only after the time period described in s. 15(2.6) has elapsed.
- In a situation where a loan amount that is owed by a non-resident borrower has been assigned by the original lender to a new lender and the borrower subsequently repays the loan to the new lender, the borrower may still be entitled to a refund of the Part XIII tax previously assessed.
Neal Armstrong. Summaries of Income Tax Folio S3-F1-C1, Shareholder Loans and Debts, April 10, 2025 under s. 15(2), s. 15(2.17), s. 15(2.3), s. 15(2.4)(b), s. 15(2.4)(c), s. 15(2.4)(a), s. 15(2.4)(f), s. 15(2.4)(e), s. 15(2.6), s. 20(1)(j) and s. 214(3)(a).
Additional difficulties can arise in making a VDP disclosure on behalf of a deceased taxpayer
Additional challenges often arise where a voluntary disclosure is made by an executor in respect of a deceased taxpayer:
- In light of the requirement to make payment of the unpaid taxes with submission of the disclosure package, the estate funds might be in an offshore account, payments from which would trigger international reporting to CRA (thereby alerting it prematurely, i.e., before submission of the package).
- Making a voluntary disclosure generally will result in the estate owing more tax, which could increase potential liability to the executor under s. 159 or 160.
- The executor may often lack information regarding the extent of the non-disclosure by the deceased, for example, how long an offshore account was held or how much income was generated therefrom, thereby creating a risk that CRA may not consider that its requirement for reasonable efforts to estimate income for the voluntary disclosure has been satisfied.
- The executor may not be aware of the reasons why the deceased had not fully complied with the applicable tax obligations and, therefore, may not be in a position to demonstrate that the disclosure should be accepted under the more favourable general program.
- IC00-1R6 states that enforcement action taken against a taxpayer will also invalidate the voluntariness of disclosure by related taxpayers, including those related through trust-specific relationships. Accordingly, in a situation where voluntary disclosure by an estate is also required, for example, where an undisclosed offshore account was not identified until a number of years after the death, a non-compliance letter issued by CRA to the estate (or the deceased) will invalidate the pending voluntary disclosure by the deceased (or the estate).
Neal Armstrong. Summary of Dean Blachford and Ella Sui, “Filing a Voluntary Disclosure for a Deceased Taxpayer,” Tax for the Owner-Manager, Vol. 25, No. 2, April 2025, p. 14 under s. 220(3.1).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in September of 2000. Their descriptors and links appear below.
These are additions to our set of 3,174 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 24 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
It may be possible to effect an estate freeze on a TC as part of a series entailing a butterfly split-up
There are some contrasts in the ability to carry out an estate freeze following a spin-off in intended reliance on the s. 55(3)(a) exception, and following a butterfly spin-off. Here is one example.
Suppose that Dad and Son, who are the 50-50 shareholders of Opco, effect a split-up reorganization in favour of Dadco and Sonco. However, as part of the same series, Son freezes Sonco in favour of Son Trust but retains control of Sonco. If even one of the beneficiaries of the trust was not related to Son (e.g., a nephew or cousin), Son Trust would be deemed pursuant to s. 55(5)(e)(ii) and (iii) not to be related to Sonco, so that the freeze would result in an increase in interest described in s. 55(3)(a)(ii) or (v), i.e., the s. 55(3)(a) exemption would not be available.
Suppose instead that the 50-50 shareholders of DC are Brother and Sister who, by virtue of s. 55(5)(e)(i), are deemed to be unrelated, and that they effect a split-up butterfly in favour of their respective TCs. In this context, s. 55(3.1)(b)(i) relevantly provides that, except in specific carve-out situations, any person who disposes of property within the butterfly series must be related to the acquirer of the property. Furthermore, s. 55(3.1)(b)(i)(C) establishes a continuity rule requiring that where property is disposed of within the butterfly series in succession (i.e., where there is a disposition of property, substituted property, or of any further substituted property in a continuous sequence), the final acquirer in that chain must be related to the original vendor at the start of the succession.
If the TC of Brother effects an estate freeze in favour of a trust, it would appear that s. 55(3.1)(b) would not apply because the trust would subscribe for shares rather than receiving them in substitution for other shares—and that this could be the case even if some of the beneficiaries of the trust were not related persons.
Neal Armstrong. Summaries of David Carolin and Manu Kakkar. “Freezes and Butterflies: Who Said Freezes are Easy?”, Tax for the Owner-Manager,” Vol. 25, No. 2, April 2025, p. 9 under s. 55(3)(a)(ii) and s. 55(3.1)(b)(1)(C).
RRSPs are utilizing Reg. 4900(1)(i)(ii) to facilitate real estate investments by their annuitants
The following arrangement is now being marketed as a structure for RRSP funds to be invested in real estate:
- Pubco, whose shares listed on a designated stock exchange in Canada, subscribes for voting preferred shares of a Canadian private corporation (Realtyco) so that it is controlled by Pubco.
- The RRSPs of various investors subscribe for interest-bearing debentures of Realtyco, with Realtyco using such funds to acquire real estate.
- Such investors subscribe for the common shares of Realtyco outside of their RRSPs.
Under Reg. 4900(1)(i)(ii), debentures issued by a corporation controlled by a corporation whose shares are listed on a designated stock exchange in Canada are qualified investments for most registered plans including RRSPs.
If Pubco ceases to control Realtyco, or its shares are delisted, the debentures will become non-qualified investments.
Neal Armstrong. Summary of Chris Lang and Keaton Buchberger, “The RRSP Trap: A Cautionary Illustration of the Risk of Non-Conventional Investment Structures,” Tax for the Owner-Manager, Vol. 25, No. 2, April 2025, p. 7 under Reg. 4900(1)(i)(ii).
CRA finds that a s. 132.2 exchange of MFC shares for MFT units precluded a s. 88(1)(d) bump of the MFT units
Parent acquired all the shares of another taxable Canadian corporation (the Subsidiary), whose only property was a share of a mutual fund corporation (MFC) with a low ACB.
One month later, the Subsidiary exchanged its MFC share on a rollover basis pursuant to a s. 132(2) qualifying exchange for two units of a mutual fund trust (MFT) to which all the MFC assets were transferred. One month later, there was a short-form amalgamation of Subsidiary with Parent described in s. 87(11).
In finding that the s. 88(1)(d) bump was not available respecting the MFT units because the Subsidiary did not satisfy the requirement in the s. 88(1)(c) midamble that it have held, without interruption, those units between the acquisition of control of the Subsidiary and the distribution of the units on the amalgamation, CRA noted that there was no continuity rule deeming the MFT to be a continuation of the MFC after the qualifying exchange, nor was there any rule deeming the MFT units to be the same property as the MFC share held prior to the qualifying exchange.
Neal Armstrong. Summary of 4 March 2025 External T.I. 2024-1009691E5 F under s. 88(1)(c).