News of Note
CRA indicates that successive legatees can rely on the same activity-level of the original testator under s. 120.4(1.1)(b)(ii)
Email this ContentS. 120.4(1.1)(b)(ii) indicates inter alia that, for purposes of the (tax on split income) “excluded business" definition, where a legatee acquired property as a bequest (or under an intestacy) from a person who was actively engaged in the activities of a business throughout the five taxation years preceding the death, then the legatee is also deemed to have been actively engaged in the business throughout those five years. CRA indicated that this rule can apply iteratively to successive bequests.
For example, Opco shares, which were bequeathed by Mrs. A (who had been actively engaged for over five years in the Opco business) to Mr. A (who was passive) passed, in turn, on his death to his children. The factually passive children can also rely on s. 120.4(1.1)(b)(ii) in order to get the benefit of Mrs. A’s activity in the Opco business, so that any dividends arising on any of the shares of Opco owned by the children, for any taxation year starting with the year in which they inherited the Opco shares, would not be subject to the tax on split income.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.6(a) under s. 120.4(1.1)(b)(ii).
CRA provides an example of the flow-through of the s. 120.4(1.1)(c) excluded amount exclusion through a trust
CRA provided an example of the application of the s. 120.4(1.1)(c)(ii) excluded share exception (re an amount received by a specified individual if it would have been an excluded amount to a spouse or common-law partner of that individual had it been included in the spouse/partner’s income for their last taxation year before death).
A, the deceased spouse of the specified individual, owned excluded shares of Canco (carrying on a related business) throughout A’s last taxation year before A’s death. The specified individual is a beneficiary of a Canadian-resident trust, which acquired Canco shares during A’s lifetime. The trust now receives a dividend from Canco and distributes it to the specified individual. The exclusion in s. 120.4(1.1)(c)(ii) will apply if the dividend would have been an excluded amount of A had it been included in computing A’s income for A’s last taxation year before death.
CRA considered that, given that A owned the Canco shares throughout A’s last taxation year before death and they satisfied the requirements for excluded share status during that period, the dividend should be deemed to be an excluded amount in respect of the specified individual under s. 120.4(1.1)(c)(ii).
CRA also indicated that a similar analysis would apply in respect of the application of s. 120.4(1.1)(c)(i), where the spouse or common-law partner was 65 years or older in the year.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.5 under s. 120.4(1.1)(c)(ii).
CRA indicates that an excluded amount can exceed arm’s length remuneration for the services rendered
The spouse of a professional works over 20 hours per week as a part-time receptionist in the professional practice of her spouse's corporation (XCo). She does not receive a “market” salary for her services of $18,000, and instead receives an annual dividend of $150,000 on her non-voting preferred shares of XCo.
CRA indicated that since she satisfies the 20 hours per week test in s. 120.4(1.1)(a), her dividend income would be an excluded amount because it is derived from an excluded business – so that it would not be subject to the tax on split income.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.4 under s. 120.4(1.1)(a).
CRA indicates that a husband and wife each contributing 5 hours per week to a corporate business could have an excluded business
A business is carried on through a corporation owned by husband and wife, who each contribute 5 hours per week of time to the business. This did not exceed the 20 hours per week safe harbour in s. 120.4(1.1)(a). CRA noted that this was similar to Example 9 of CRA’s split-income guidelines, and stated that they both could be considered to be actively engaged in the business – but indicated that this was a question of fact.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.3 under s. 120.4(1) – excluded business.
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in January 2012 and December 2011. Their descriptors and links appear below.
These are additions to our set of 879 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/2 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA indicates that payments made to registered charity beneficiaries of a trust can be charitable gifts if the payments made are in the discretion of the trustees
The residual beneficiaries of an alter ego trust are a class of registered charities as determined by the trustees, the trustees make payments over the next 3 years following the settlor’s death to various of those charities, and at the end of the 3 years, the remaining capital is required to be distributed to registered charities. CRA indicated that the payments made during the 3 years likely qualified as gifts, as they were made at the discretion of the trustees – in which case, a donation tax credit could be claimed. However, as there appeared to be no discretion as to whether the amounts were to be paid to charities at the end of the 3 years, those distributions would not qualify as gifts.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.2 under s. 118.1(1) – total charitable gifts.
CRA further confirms that a qualifying s. 94(2)(t) sale of Canadian shares effects an immediate change in trust residency
We have published the questions that were posed to CRA at the 7 June 2019 STEP CRA Roundtable, together with abbreviated summaries of the CRA oral responses.
If a non-resident trust is "tainted" as a resident trust under s. 94(2)(g) by being issued shares by a resident corporation, it potentially can re-acquire non-residency status under s. 94(2)(t) if it makes a qualifying sale of the shares. When this occurs, it changes its status immediately, so that it is non-resident for the stub period beginning with the sale, is resident for the stub period before the sale, and has a potential deemed disposition of its property under the emigration rule (s. 128.1(4)) as a result of the status change.
2013-0509111E5 confirmed the above results. However, 2018-0781041I7 essentially amended 2013-0509111E5 by expunging a confusing paragraph that suggested that for certain purposes the trust remained a deemed resident until year end. In response to Q.1 posed at the STEP Roundtable, CRA noted that the comments in that paragraph considered what would happen hypothetically “in the absence of s. 94(5),” and that such conclusions were not applicable to the actual state of the law. Thus, the sale triggers the change back to non-resident status for all relevant purposes.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.1 under s. 94(2)(t).
PCI Géomatics – Court of Quebec applies McLarty to find that a loan which was repayable only out of increasing revenues was not a forgivable loan
The ARQ assessed on that basis that a non-interest-bearing loan received by a satellite–imaging company (PCI) from Industry Canada was a “forgivable loan,” so that its amount reduced the SR&ED pools of PCI for investment tax credit purposes. PCI was required each year to repay an amount equal to 1/15 of the amount advanced multiplied by an adjustment factor which was: 0 if annual growth in revenues was negative; 1 if such growth was positive but not exceeding 3%; and ranged up to 1.5 for higher growth rates. Thus, there was no explicit requirement to repay the loan if revenues declined.
In finding that the loan was not a forgivable loan, Dortélus JCQ noted that PCI was required to provide loan security and was subject to various restrictive covenants, and then stated:
The fact that there existed a certain uncertainty as to the frequency of repayment of the loan which … depended on fluctuations in the PCI revenues does not suffice to qualify the amounts advanced as government aid.
…PCI justifiably submitted that the position adopted by the ARQ, that [it] was a forgivable loan given that the required repayments were a function of the growth in future revenues (so that the obligation to repay depended on the occurrence of an uncertain and future event), was a position which was relied upon in the dissent and rejected by the majority in McLarty.
Neal Armstrong. Summary of PCI Géomatics Entreprises Inc. v. Agence du revenu du Québec, 2019 QCCQ 2688 under s. 127(9) – government assistance.
Rasmussen – Tax Court of Canada finds that Australian pension plan payments were fully taxable in Canada even though previous contributions had been non-deductible
An Australian police officer made non-deductible contributions to a “QSuper" government pension plan and then, when he became disabled, started receiving periodic “pension” amounts, a portion of which was non-taxable for Australian tax purposes. However, he then promptly immigrated to Canada and became a Canadian resident.
In finding that the pension amounts were fully taxable in Canada, Favreau J stated:
[T]he amounts received by the Appellant from the QSuper were superannuation or pension benefits and that they had to be included in his income in accordance with subparagraph 56(1)(a)(i) of the Act regardless that he was unable to deduct the contributions to the QSuper when he made them.
Neal Armstrong. Summary of Rasmussen v. The Queen, 2019 TCC 124 under s. 56(1)(a)(i).
Glatt – Federal Court orders CRA to pay interest on a refund where CRA thought there was no statutory authority for interest
Following his assessment for a s. 163.2 penalty, the taxpayer paid $1M to CRA so as to offset interest which would be borne by him if the assessment were upheld. After the assessment was vacated pursuant to a consent judgment, CRA issued a Notice of Reassessment showing the cancellation of the penalty and a refund of the $1M but denying any refund interest on the basis that s. 164(3) requires a taxation year to be specified in order for interest to be paid – and a s. 163.2 penalty is not calculated by reference to any particular taxation years.
A significant difficulty with this CRA position was that the Notice of Reassessment in fact, in its upper right-hand corner, stated “Tax year 2012.” Diner J found that this was not an administrative error that was corrected by s. 152(8). The Crown further argued that s. 164(3) also lacked traction on the basis the Notice was improperly described as a “Reassessment” rather than as a “notice of refund” or “refund receipt.”
It is unclear whether the taxpayer would have succeeded if CRA had not made the “mistake” of referring to 2012 in the Reassessment, given that Diner J also indicated that denying interest on the refund was inconsistent with Grenon.
He took the unusual step of ordering CRA to pay the interest, rather than remitting the matter back to CRA for further consideration.
Neal Armstrong. Summary of Glatt v. Canada (National Revenue), 2019 FC 738 under s. 164(3).