News of Note
Income Tax Severed Letters 22 December 2021
Email this ContentThis morning's release of three severed letter from the Income Tax Rulings Directorate is now available for your viewing.
Wenikajtys Estate – Tax Court of Canada notes that the 36-month GRE rule is anomalous where the estate was precluded from receiving pension income within the 36 months
The estate of an individual who died in January 2014 was entitled to receive a lump sum from a municipal pension plan. However, later in 2014, a Quebec Act required that 20% of such amount be held back until it was determined whether the pension plan members should bear the costs of a reorganization of the pension plans for Quebec municipal employees. In June 2018, it was determined that such costs would not be borne by them, and the 20% holdback was released to the estate.
After finding that the estate could not benefit from graduated rates on this last payment of income because it no longer satisfied the 36-month test in the definition of a graduated rate estate, Boyle J went on to note that if the estate applied for a remission order, then hopefully the Minister would agree with the executor and with him “that the application of the 36-month rule in this case seems to lead to an unfair and unreasonable result, and that the public interest that led to the adoption of that rule does not apply in this case” so that remission could be recommended.
Neal Armstrong. Summary of Wenikajtys (Succession) v. The Queen, 2021 CCI 93 under s. 248(1) - graduated rate estate – (a).
Godcharles – Quebec Court of Appeal applies s. 68 to reallocate between a retirement home’s business operations sold by one vendor and the home sold by the other vendors
A group of unrelated individuals were the co-owners of a seniors’ residence, which was leased by them to the corporate operator of the residence (“9118”), whose shares they owned in the same proportions as the residence. In order to access the capital gains exemption on a sale of the residence business to an arm’s-length purchaser (“SECA”), all the individuals, other than the one with the largest (35%) interest (NG), sold their shares of the operator to a holding company of NG for a sale price stated to be the (unspecified) FMV of the shares. Two days later, the residence and the operating business were sold by the individuals and 9118 to SECA for a purchase price that was not allocated between the residence sold by the individuals and the operating assets (essentially, the goodwill) sold by 9118. However, when the vendors filed their returns, they treated all of the asset appreciation that had occurred as relating to the goodwill.
Morissette, JCA affirmed the finding below that the sale of the shares of 9118 by the other individuals to NG’s holding company (9084) was a transaction between persons not dealing with each other at arms’ length, given the dominant role of NG in establishing the terms of the transaction. However, he agreed with the taxpayers that this had no significance, given that the Quebec equivalent of s. 69(1)(b) only addressed situations where shares or other property was sold at less, rather than more, than its FMV.
What mattered instead was the finding below that a substantial portion of the proceeds should be reallocated to the sale of the real estate (the residence) under TA s. 421(a) (equivalent to ITA s. 68(a)), with resulting recapture of depreciation and (non-exempted) capital gains to the individuals. Although there were two vendors (9118 selling the goodwill, and the co-owners selling the residence), s. 421(a) nonetheless could apply, as “its precise conditions are met” in this situation.
The Court of Quebec had accepted the valuation of the real property (which had reached full occupancy three years’ previously) by the ARQ valuator using the cost method (i.e., the costs of construction, plus a promoter’s notional profit of 5%, plus net GST/QST of 9.495%, minus depreciation of 4% and plus the land appreciation since purchase), with there being a consequential reduction in the residual amount to be allocated to the goodwill.
Neal Armstrong. Summaries of Godcharles v. Agence du revenu du Québec, 2021 QCCA 1843 under s. 68(a), s. 69(1)(b)(i), s. 251(1)(c) and General Concepts – FMV – real estate.
We have published 10 more translations of CRA interpretations
We have published a further 10 translations of CRA interpretation released in February and January, 2006. Their descriptors and links appear below.
These are additions to our set of 1,859 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 15 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA indicates that the CERS cannot be claimed for an occupied residence, even where the claimant is not the occupant
CRA confirmed that a residence, occupied as such by an individual unrelated to an eligible entity but used by an eligible entity in its business, does not qualify as a qualifying property for purposes of the Canada emergency rent subsidy (“CERS”) rules given the exclusion for a self-contained domestic establishment, i.e. it does not matter that the eligible entity (or a person not dealing at arm’s length with the eligible entity) is not the one occupying the property as a residence.
Neal Armstrong. Summary of 23 November 2021 External T.I. 2021-0881361E5 under s. 125.7(1) - qualifying property.
CRA discusses the potential credit for gifts by will to a US charity
Will a bequest made by will to a U.S. organization qualify for a charitable donation credit on the individual’s final return? CRA summarized the rules under s. 118.1(5.1)(b) and para. (c) of the charitable gift–definition generally permitting a graduated rate estate (GRE) of the individual to carry back the gift amount (for the donation to a charity of property received by it on the individual’s death) to the terminal return of the individual.
CRA went on to discuss the gift limit in para. (a) of the definition of “total gifts” in ss. 118.1(1) and the limited relief provided for gifts to US organizations under Art. XXI(7) of the Canada-U.S. Convention. In particular, it noted that the amount of relief available in this regard is restricted to the income of the resident for that year from U.S. sources, except where the gift is to a college or university at which the resident or a member of the resident's family is or was enrolled. CRA also states that it “accepts that any organization that is exempt under section 501(c)(3) of the U.S. Internal Revenue Code will qualify for the purposes of paragraph 7 of Article XXI of the Treaty.”
Neal Armstrong. Summary of 25 August 2021 External T.I. 2020-0866131E5 under s. 118.1(1) – charitable gift – para. (c) and Treaties - Art. 21.
CRA now indicates that it will only provide transitional administrative relief regarding the GST/HST “digital economy” measures where there is voluntary disclosure
Although CRA misleadingly refers to the 2021 Budget as having introduced, effective July 1, 2021, “GST/HST measures that related to the digital economy,” those measures are broader than that – essentially any non-resident making most types of supplies of services (other than financial services) or intangible personal property to Canadian recipients who are not registered must itself register for GST/HST purposes once it exceeds a de minimis threshold. In Excise and GST/HST News - No. 109, June 28, 2021, CRA stated:
Where the affected businesses and platform operators show that they have taken reasonable measures to comply but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these measures during a 12-month transition period, starting July 1, 2021.
CRA has now substantially narrowed this relief, stating:
Before the CRA exercises its discretion in the administration of the new measures, an affected business or platform operator must first make a submission to the CRA requesting forbearance and obtain the CRA’s written approval that such discretion will be exercised. Submissions may be made to the CRA after July 1, 2021, until further notice.
Neal Armstrong. Summary of Excise and GST/HST News - No. 110 under the heading “Digital economy”, 8 December 2021 under ETA s. 211.12(2).
CRA accepts that commercial businesses can make GST-exempt arranging-for supplies of insurance as a sideline “incidental” activity
CRA refers to an “incidental seller” as “a person who assists the insurer in the issuance of insurance but whose principal business is normally carried on outside the insurance industry (such as retailers, automotive dealers, banks, travel agents)” and notes that an “incidental seller’s service supplied to the insurer would typically include promoting the insurance, assisting the incidental seller’s customer in understanding and obtaining the insurance from the insurer, and collecting the premium from the customer and sending it to the insurer.”
After referring to the Applewood Holdings and Zomaron, CRA stated:
The CRA will apply principles from these decisions to an incidental seller’s supply of services of arranging for the supply of insurance to an insurer.
Where the essential character of the service for which an incidental seller earns its fees is the sale of insurance on behalf of the insurer to the customer, it will generally be considered an exempt supply of a financial service. In such circumstances, the supply by the incidental seller is arranging for the issuance of a financial instrument (such as, an insurance policy).
This is less grudging than the statement in Excise and GST/HST News - No. 109 that:
The CRA will only apply the Zomaron decision to supplies made by an ISO/MSP if the same fact situation exists.
Neal Armstrong. Summary of Excise and GST/HST News - No. 110 under the heading “Incidental sellers of insurance”, 8 December 2021 under ETA s. 123(1) – financial service – para. (l).
Income Tax Severed Letters 15 December 2021
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
6610048 Canada – Federal Court of Appeal confirms that a quick exit from a development project at a gain was on income account
The taxpayer acquired an assembly of lots between 2006 and 2008 for development as a mixed use (commercial and residential) project close to a proposed train station that would link the site (in the downtown of the City of Masouche) by train to Montreal. The Court found no reversible error in the Tax Court judgment confirming that gains (realized mostly in 2009) from various dispositions of the lots, before construction had commenced, were on income account. LeBlanc JA stated:
[T]he TCC scrupulously followed the approach … required of it under Safeway. In particular, it concluded from the evidence before it that the appellant's sole motivation at the time of the acquisition of the land in question was clearly to resell it at a profit, noting in this regard that the appellant had never intended to carry out the development project desired by the City of Mascouche. …
[T]he lands in question … were located in close proximity to the future train station … [and] the City of Mascouche had undertaken, in order to facilitate the implementation of the development project on the axis of such station, to modify its urban plan and by-laws, to achieve, before the end of 2007, free circulation on the land and to complete certain infrastructure work. All of this, in the opinion of the TCC, made it objectively foreseeable that the value of the land would increase significantly and rapidly.
Finally, the principals had a real estate development background and the project entailed significant risks (which the taxpayer reduced by exiting early at a gain.)
This case may solidify the reputation of Safeway as being the leading case in the area.
Neal Armstrong. Summary of 6610048 Canada Inc. v. The Queen, 2021 CAF 229 under s. 9 – capital gain v. profit – real estate.