News of Note
The QSBC character of capital gains can be flowed out through a 2 levels of personal trusts
Email this Content2019-0818301I7 F (an August 13, 2020 internal technical interpretation) reversed 2016-0667361E5 and found that (with the proper designations at both levels under ss. 104(21) and (21.2),) taxable capital gains realized by a lower-tier personal trust from the disposition of qualified small business corporation (QSBC) shares could retain their character as such when distributed to personal trusts that were its beneficiaries which, in turn and in the same year, distributed those gains to their individual beneficiaries. Thus, such individuals could access the capital gains deduction.
The Rulings Directorate has now published an external technical interpretation repeating the same analysis, without any notable changes.
Neal Armstrong. Summary of 2 September 2020 External T.I. 2018-0738271E5 F under s. 104(21.2).
CRA adopts a cautiously-worded interpretation of what constitutes additional rent for purposes of the CERS definition of qualifying rent expense
The availability of the Canada emergency rent subsidy (“CERS”) turns, in part, on the application of the definition of a “qualifying rent expense,” whose definition includes:
amounts required to be paid under a net lease by the eligible entity either to the lessor or a third party, as … base rent …[or] regular instalments of operating expenses, such as insurance, utilities and common area maintenance expenses, customarily charged to the lessee under a net lease [emphasis added]
CRA interprets this definition as meaning, that “if a net lease requires a tenant to pay utilities as part of regular instalments of operating expenses customarily charged to the tenant, this payment is a qualifying rent expense” and “this could include payments for utilities made to a third party, such as an energy distributor, provided the other requirements in the definition are satisfied.” However, “where a lease states only that a tenant is responsible for a certain cost … this would generally not constitute a qualifying rent expense.”
For example, if the tenant under a net lease of premises in a shopping mall is required under the lease to pay its proportionate share of the HVAC, electricity, water, property taxes and insurance costs for the shopping centre, initially borne by the landlord, such tenant payments would qualify. However, “if the net lease stated that the tenants were responsible for their own electricity, the amount paid by Tenant for electricity would not be a qualifying rent expense, whether it is paid to Landlord or to a third party, such as an energy distributor.”
This interpretation seems to be drawing some sort of subtle, but largely unarticulated, distinction, between net leases that indicate that the tenant’s “own” expenses are its responsibility, and net leases that require particular expenses to be paid by the tenant directly to a third party. The definition seems to indicate that if the recurring item in question, for example, property taxes, is “customarily” charged as additional rent under a net lease, it will be included even if the net lease states that the tenant will be responsible for the direct payment of that item to the third party.
Neal Armstrong. Summary of 23 February 2021 External T.I. 2020-0873491E5 under s. 125.7(1) – qualifying rent expense.
Income Tax Severed Letters 3 March 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on split-up butterfly that avoids Pt IV tax circularity by a subsequent wind-up of the distributing corporation
CRA has provided rulings on a simple butterfly for the split-up of a CCPC distributing corporation (DC) with cash, and investment assets, between the respective newly-incorporated transferee corporations (the TCs) for three siblings and their respective family trusts. DC has ERDTOH and NERDTOH balances.
After the creation of cross-shareholdings between DC and the three TCs using the usual plumbing, and the redemption for notes of the prefs held by DC in each TC, the shares held by the TCs in DC are not redeemed, as this would result in Part IV tax circularity issues. Instead, the TCs close off their first taxation years and then, on the following day or so, the TC notes are distributed by DC to the respective TCs on a s. 88(2) winding up of DC.
DC is not to be dissolved until it has received and distributed, on a pro rata basis, the dividend refund.
The standard rulings included that the extinguishing of the notes by operation of law on their distribution to the debtors (the TCs) does not engage s. 80.
Neal Armstrong. Summary of 2020 Ruling 2018-0772291R3 F under s. 55(1) – distribution.
Goldman – Tax Court of Canada finds that s. 160(1) did not apply to a transfer to an individual qua trustee of a valid oral trust
The taxpayer was designated as the beneficiary of her mother’s RRSP, but was orally told by her mother that this was occurring on the condition that she was to use those proceeds to pay various bills and estate-related expenses and divide the remainder equally with her two sisters.
Graham J found that, on this basis, the taxpayer had received the net proceeds of the RRSP under a trust. This trust was a separate person from its trustee (the taxpayer), so that such transfer gave rise to a s. 160(1) liability only to that trust rather than to the taxpayer. CRA could have assessed the taxpayer regarding this s. 160(1) liability under s. 159(3) (the taxpayer had not applied for a s. 159(2) certificate before distributing the trust funds). However, CRA had failed to do so. Thus, before getting to the next point, she had no liability under s. 160(1).
That point was that there was an indirect transfer from her mother to her for s. 160(1) purposes respecting the transfer to her of her share of the residue of the trust and regarding her appropriation of other trust funds including the payment out of such funds of legal fees relating to this tax dispute. However, s. 160(1) did not apply to her charging executor’s fees and paying them out of the trust funds.
Neal Armstrong. Summaries of Goldman v. The Queen, 2021 TCC 13 under s. 160(1), s. 104(2), s. 159(3) and Rule 49(1).
We have translated 9 more CRA Interpretations
We have published a further 9 translations of CRA interpretation released in February and January, 2009. Their descriptors and links appear below.
These are additions to our set of 1,409 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 12 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for March.
Villa Ste-Rose – Federal Court of Appeal finds that interest and penalties on a late-filed GST return should be computed after netting rebate claims against the gross GST payable
A company that was not registered for GST purposes was required to self-assess itself under ETA s. 191(3) for GST on the fair market value of an assisted-living facility constructed on its behalf. It filed the required return in this regard 9 months’ late. With that return, it also included rebate claims which were higher than the s. 191(3) tax. CRA accepted the GST payable and rebate amounts, but assessed interest and penalties under ss. 280 and 280.1, calculated on the gross GST amount, which it effectively treated as having been owing for the full 9-month period.
D’Auray J below had considered this approach to be unfair and anomalous, since if the company had instead lain in the grass and been assessed by CRA for the unreported GST, CRA would have been required under s. 296(2.1) to allow the (more than) offsetting unclaimed rebate amounts, so that no interest or late-filing penalties could have been assessed. Leblanc JA agreed, stating:
[I]t would be incongruous, to say the least, if provisions purporting to assist a taxpayer caused more harm to a well-meaning taxpayer than to a less well-meaning one … . This cannot be the result that Parliament intended … .
Accordingly, he found that the "amount" referred to in ss. 280 and 280.1 on which the interest or late-filing penalty was to be calculated “can only represent, in circumstances such as these, the amount of tax actually owed by the taxpayer” (i.e., the tax as reduced by the taxpayer’s rebate entitlement). He confirmed the reversal by D’Auray J of the interest and penalty assessment.
Neal Armstrong. Summaries of Canada v. Villa Ste-Rose Inc., 2021 CAF 35 under ETA s. 280(1), s. 228(6), s. 256.2(3) and Statutory Interpretation – Resolution of Ambiguity.
Ouellette – Court of Quebec finds that the quick (re)building and sale of three successive residences was eligible for the principal residence exemption
A couple (one of them, a carpenter), who successively substantially renovated or built, and sold, three homes, with the sales occurring over a four-year period, realized capital gains eligible for the principal residence exemption on such sales, rather than fully taxable business profits. Lachapelle JCQ accepted that each sale had occurred for personal reasons rather than as build-and-sell adventures in the nature of trade:
- The first residence was sold as a result of the increasing noise and congestion attributable to a nearby quarry and campsite
- They sold the second residence (designed by them) because they determined that it was too small to host family members
- They sold the third residence because they wanted to move closer to the family of one of them in Montreal.
Neal Armstrong. Summary of Ouellette v. Agence du revenu du Québec, 2020 QCCQ 8765 under s. 9 – capital gain v. profit – real estate.
CRA states that a DSLP cannot be used as a pre-retirement vehicle
One of the requirements for qualification as a deferred salary leave plan (“DSLP”), contained in Reg. 6801(a)(v), is that the employee be required to return to regular employment after the DSLP leave of absence for a period of not less than the leave period. CRA confirmed that this condition would be violated if a plan was initiated for the employee to go on paid leave between the end of the DSLP leave period and the scheduled commencement of the employee’s retirement. Furthermore, the employer would be required to wind up the DSLP on a taxable basis to the employees, generally within 60 days of becoming aware that the DSLP rules would not be met.
Neal Armstrong. Summary of 8 December 2020 External T.I. 2020-0869961E5 under Reg. 6801(a)(v).
CRA makes a further COVID-related extension of the period for carrying forward unused HCSA credits
In 2020-0846751E5, CRA noted that health care spending accounts (“HCSA”) that comply with IT-529 generally provide that the HCSA can permit the carry-forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months, so as to not disqualify the HCSA from the exemption in s. 6(1)(a)(i) for private health services plans (“PHSPs”). CRA further announced in 2020-0846751E5:
In these extraordinary [COVID] circumstances, a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15 and December 31, 2020, could temporarily permit the carry forward of those unused credits for a … period of up to six months [which] would generally … not, in and of itself, disqualify the HCSA from being a PHSP. [emphasis added]
In generally extending these periods, CRA now stated:
In light of the severity of the second wave of the COVID-19 pandemic, the CRA will allow a HCSA that qualifies as a PHSP and which has unused credits expiring between March 15, 2020 and March 16, 2021, to temporarily carry forward those unused credits for a period of up to 12 months. … However, since a HCSA must involve a reasonable element of risk to qualify as a PHSP, it is our view that any further extension of the temporary carry-forward period beyond 12 months, would likely disqualify the HCSA from being a PHSP. [emphasis added]
Neal Armstrong. Summary of 26 January 2021 External T.I. 2020-0857841E5 under s. 248(1) - private health services plan.