News of Note
We have translated 5 more CRA Interpretations
Email this ContentWe have published 5 further translations of CRA interpretation released in October and September, 2009. Their descriptors and links appear below.
These are additions to our set of 1,331 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 ¼ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA agrees that it will not apply ss. 40(3.61) and (3.6), and 164(6), iteratively to eliminate a s. 164(6) loss carryback where the estate also realized a small capital gain
In the first taxation year of an estate, it realizes a capital loss of $1,000,000 on redeeming a portion of the common shares of a private company held by it, which it wishes to carry back under s. 164(6) to offset a portion of the capital gains realized in the deceased’s terminal return. However, in the same taxation year, the estate realizes $30,000 of capital gains on disposing of portfolio securities. Under an approach suggested by CRA in 2012, the $30,000 of capital gains would grind the capital loss available for purposes of the s. 164(6) election. The grind effected by the interaction of ss. 40(3.61) and (3.6) and the netting of the estate’s capital gains and capital losses in s. 164(6)(a), would continue to occur in an iterative manner, so that the estate’s $1 million capital loss would for s. 164(6) purposes would be reduced to nil.
CRA has withdrawn this earlier view, and now considers that the s. 164(6) election should be applied first to the amount of the capital loss determined without regard to the s. 40(3.4) or 40(3.6) stop-loss rules, and that such rules apply only to any capital loss of the estate that is not the subject of the s. 164(6) election. In the example, s. 164(6)(a) limits the elected amount to the net capital losses of $970,000, so that such elected amount is deemed to be a capital loss in the deceased’s terminal return which is preserved by the s. 40(3.61) relieving rule - whereas $30,000 of the estate’s capital loss remains in the estate so as to be subject to the s. 40(3.6) stop loss rule (such that the estate is taxed on $30,000 of capital gains).
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.5 under s. 40(3.61).
CRA notes that a capital gain’s geographic source for Canadian FTC purposes was re-sourced to Australia under the Treaty-source rule
A Canadian-resident individual is subject to Australian gains tax on the gain from selling the shares of a U.K. holding company holding an Australian real estate corporation. Under the Canadian domestic situs rules, the gain would have a U.K. source so that there would be no Canadian foreign tax credit for the Australian tax – but this is remedied by Art. 22(2) of the Canada-Australia Treaty (broadly similar, for example, to Art. 24(3) and 21(3) of the U.S. and U.K Treaties, respectively), which provides that income or gains of a Canadian resident which are taxed in Australia in accordance with Art. 13 of the Treaty are relevantly deemed to be sourced in Australia.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.4 under Treaties – Income Tax Conventions – Art. 24.
CRA indicates that only the taxable portion of a capital gain need be distributed for s. 104(21) purposes
CRA indicated that only the taxable portion (and not the non-taxable half) of a capital gain needs to be distributed by the trust in order for the s. 104(21) designation to be available.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.3 under s. 104(21).
CRA indicates that a capital loss in the tax year following the death of an alter ego trust’s settlor can eliminate interest on the terminal T3 return’s 104(4)(a) gain
The death of the settlor of an alter ego trust, or the death of the survivor of spouses for a joint spousal trust, on July 31 triggers (under s. 104(13.4)(a)) a year end and the commencement of a subsequent taxation year ending on December 31. The T3 returns for both taxation years are due on March 31 (by virtue of s. 104(13.4)(c)). The taxable capital gain reported in the return filed on that date for the 1st taxation year (filed on that date) shows a capital gain (that arose on the death under s. 104(4)(a)) equalling a capital loss that in fact was realized in the 2nd taxation year (the return for which is filed at the same time).
CRA indicated that the loss carryback requested on the form T3A filed with the 2nd return will not be processed concurrently with the T3 return for 1st taxation year, as the loss must first be recognized by CRA before it can be applied to the earlier taxation year – so that the initial notice of assessment for the 1st taxation year would not reflect the carryback, and would show interest owing where the computed balance of tax owing was not paid on or before March 31.
However, the loss carryback is applied on the balance-due day (March 31) for the 1st taxation year, and the net effect is that there is no Part I tax payable on that date. Accordingly, the interest which appeared on the initial assessment will be reversed on the notice of reassessment for that year.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.2 under s. 104(13.4)(c).
CRA confirms that its executor’s year policy is relevant only where the executor’s year extends beyond the GRE’s taxation year
After referring to the common-law concept of the executor’s year, IT-286R2, para. 6 states:
In spite of such common law rules, where the initial taxation year of a testamentary trust coincides with the executor's year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the Department will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24). However, if even one beneficiary of the trust objects to this treatment with respect to the executor's year, the income of the trust for that year, to the extent that it was not actually disbursed during that year, will be taxed in the hands of the trust. In any case where the trust has been wound-up and the final T-3 return is filed for a period which terminates before the end of the executor's year, the income of the trust (including taxable capital gains) earned for that period is considered to have been paid to the beneficiaries of the trust in the calendar year in which that period ends, except for any part of the trust's income that was disbursed by the trustee to persons other than beneficiaries pursuant to the deceased's will or the operation of law e.g., the will stipulated that debts are to be paid out of income.
CRA elaborated on this position in the context of a graduated rate estate, indicating that:
- This position only applies “where the only reason that an amount of income is not payable to the beneficiaries is that it was earned in the initial 12 months of the estate” and does not apply where the income is not considered by CRA to be payable to the beneficiaries under the terms of the will.
- However, regarding the terms of the will, CRA is prepared to accept that, where the will does not specify which assets the bequests are to be paid from, “the residue of the Estate can include income” so that the income of the estate can be considered to be payable to the beneficiaries for ss. 104(6) and (23) deduction purposes.
- The quoted position allowing income in the executor’s year to be considered as payable to the beneficiaries only if they all so agree applies only where the estate has not been wound up in the executor’s year such that the estate administration continues beyond the first year (otherwise, the income would in fact have been payable in that year).
- The latter point regarding the estate having been wound up “in” the executor’s year, also applies where the end of the estate’s taxation year coincides with end of the executor’s year.
CRA did not say anything about its policy not applying in Quebec.
Neal Armstrong. Summaries of 26 November 2020 STEP Roundtable, Q.1 under s. 104(23) and s. 104(13.3).
1089391 Ontario – Tax Court of Canada denies relief where the taxpayer mistakenly applied for the new housing, rather than new rental property, HST rebate
The taxpayer, a private company, was credited with the new housing rebate, which was assigned by it to the vendor, on its purchase of a new residential condominium unit, notwithstanding that it purchased the unit only for rental purposes. CRA disallowed the new housing rebate and the principal of the taxpayer (the surviving widow of a murder that occurred after the purchase) did not become aware of the need to instead file a new rental property rebate claim until after the filing deadline (when the vendor belatedly informed her that the new housing rebate had been disallowed and sought to recover the amount that had been credited to the taxpayer on the purchase). In confirming CRA’s denial of the taxpayer’s late rental rebate application, Sommerfeldt J found that:
- he lacked jurisdiction to extend the filing deadline for the rental rebate application, as this was a discretion accorded instead to the Minister under ETA s. 281(1);
- the taxpayer could not use the offset mechanism under s. 296(2.1) or the s. 296(3.1) rebate mechanism because it had been assessed to deny the rebate under s. 297(1) rather than being assessed for net tax under s. 296(1); and.
- he could only suggest that this was an appropriate situation for a remission order.
Neal Armstrong. Summaries of 1089391 Ontario Inc. v. The Queen, 2020 TCC 129 under ETA s. 281(1), s. 296(2.1) and s. 296(3.1).
Eyckelhoff – Tax Court of Canada recognizes that a taxpayer-funded disability policy can give rise to exempt receipts
The taxpayer, a Canadian resident, received periodic payments from a Netherlands insurance company (“Aegon”) which she submitted were exempt disability insurance payments, rather than pension payments (which Canada was entitled to include in her income under s. 56(1)(a)(i), consistently with Art. 18 of the Canada-Netherlands Treaty).
Wong J first stated that “where a person pays 100 percent of their disability insurance premiums, both the court and the Minister have treated the resulting benefits as not taxable [citing Béliveau],” but then went on to find that exemption on this basis had not been established by the taxpayer, given that there was insufficient evidence that the Aegon plan was a disability insurance plan or that the taxpayer had paid 100% of the premiums.
Neal Armstrong. Summary of Eyckelhoff v. The Queen, 2020 TCC 130 under s. 56(1)(a)(i).
CRA finds that the purchase and rental of furniture in a furnished apartment is assimilated to the apartment rental activity
S. 149(1)(o.2)(ii)(A)(II) permits a s. 149(1)(o.2) (pension-group) corporation to invest its funds in “a partnership that limits its activities to acquiring, holding, maintaining, improving, leasing or managing capital property that is real property or an interest in real property … owned by the partnership”. CRA indicated that this test would not be breached by virtue of the partnership renting furnished suites in a students’ residence assuming that the furniture was such as “is ordinarily and customarily found in rental apartment units for students.” CRA stated:
[T]he Limited Partnership’s proposed acquisition and ownership of the Furniture for the purpose of furnishing the rental units in the Residence would not be a distinct activity that is separate from its activity of leasing real property.
Presumably the same approach applies to the investment/real estate undertaking test in s. 132(6)(b). (See also 2018-0784701E5 - renting furnished apartments gave rise exclusively to rents.)
Neal Armstrong. Summary of 15 September 2020 External T.I. 2020-0854471E5 under s. 149(1)(o.2)(ii)(A).
Income Tax Severed Letters 25 November 2020
This morning's release of one severed letter from the Income Tax Rulings Directorate is now available for your viewing.