News of Note

The settlor of an alter ego trust contributes to the trust an interest in a limited partnership that generates business income. CRA indicated that although the partnership business income (or loss) allocated to the trust would not be attributed to the settlor (s. 75(2) does not attribute business income), the settlor of an alter ego trust must be entitled to receive all of the income of the trust that arises before the settlor’s death, so that the settlor would still end up having property income in his or her hands under ss. 104(13) and 108(5).

In response to a separate question regarding how s. 75(2) would apply where proceeds or income of property of the alter ego trust was reinvested, CRA indicated that, in light of the s. 248(5) substituted-property rule, the attribution would continue to apply if securities were repeatedly sold and reinvested in other securities, so that the income including taxable capital gains arising on the substituted property would continue to be attributed to the settlor under s. 75(2). However, any income or loss derived from the reinvestment of the earnings (the "second generation income") would not be attributed to the settlor. Thus, the income earned on the substituted-property securities is attributed pursuant to s. 75(2) as first generation income, but any income earned on that income will not be attributed.

However, again, the trust would need to make the second generation income earned by it payable to the beneficiary under s. 104(13), so that s. 108(5) will generally apply to the income thereby included in the settlor’s hands subject to recharacterization under a designation such as s. 104(19) or 104(21).

Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.5 under s. 75(2).

Many years ago, three Canadian-resident brothers pooled their savings and incorporated a corporation, whose only class of shares is owned equally by them and which owns three rental properties of equal value. The brothers live primarily on the dividend income on the shares and have never been active in the corporation, which instead is managed by an arm’s length property management company.

CRA indicated that, where the level of activity in the corporation was enough to constitute a business, and the other conditions in the excluded share definition were met, those shares would be excluded shares. Conversely, if it was determined that the corporation did not carry on a business, the excluded share exception would not apply – but s. (e)(i) of the excluded amount definition would apply to prevent the taxable dividend from being subject to TOSI.

The analysis would be similar following any split-up butterfly.

Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.4 under s.120.4(1) – excluded amount – s. (e)(i).

An employer pays a fixed per-kilometre allowance to its employees for their motor vehicle use in the course of employment – except that if the kilometres driven during a particular period exceed a cap, no allowance is paid for the excess kilometers. Is such allowance unreasonable by virtue of s. 6(1)(b)(x), which deems a motor vehicle allowance not to be reasonable

where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment [?]

CRA responded:

In general … the mere presence of a capping policy such as the one at issue here is not sufficient to conclude that an allowance paid to an employee is deemed not to be reasonable by virtue of paragraph 6(1)(b)(x). …

An allowance not being deemed to be unreasonable by s. 6(1)(b)(x) does not necessarily mean it is reasonable for purposes of s. 6(1)(b)(vii.1), which generally excludes a reasonable allowance for employment driving from inclusion under s. 6(1)(b). CRA went on to state:

The situation described in your request is unique in that it presents the possibility that an employee may, for a portion of the total distance travelled in the performance of employment duties, receive no allowance. In such a case, the allowance may not be high enough in relation to the expenses that the employee is expected to incur in a specific situation and thus may not be reasonable for the purposes of subparagraph 6(1)(b)(vii.1). If so, the allowance would be a taxable benefit that the employee would have to include in employment income under paragraph 6(1)(b).

It seems odd that a car allowance would be taxable because it is unreasonably low. Maybe you should advise your employer to increase your allowance to reduce tax risk.

Neal Armstrong. Summary of 5 March 2021 External T.I. 2017-0713041E5 F under s. 6(1)(b)(x).

The definition "specified corporate income" is used in the rule indicating that the portion of the income of a Canadian-controlled private corporation (say, Opco B) from an active business from the provision of services or property to a private corporation is not eligible for the small business deduction (SBD) if Opco B or one of its shareholders (or a person who does not deal at arm's length with the corporation or one of its shareholders) holds a direct or indirect interest in the private corporation, except to the extent that the private corporation assigns a portion of its own business limit to Opco B. However, s. (a)(i)(B)(I) of that definition indicates that such income is excluded from being specified corporate income for such SBD purposes if “it is not the case that all or substantially all of [Opco B]’s income for the year from an active business is from the provision of services or property to … persons (other than the private corporation) with which [Opco B] deals at arm's length.” Thus, services income from “the private corporation” does not count towards being good income for purposes of this substantially-all test even if the private corporation deals at arm’s length with Opco B.

What if Opco B derives all of its active business income from the provision of services to arm’s length third parties, except that it derives 20% of its services income from two private corporations with the degree of connectedness described above: 15% from Opco D, with which it deals at arm’s length; and 5% from Opco C with which it does not deal at arm’s length?

CRA indicated that the above exclusion for services income from “the private corporation” should be interpreted under s. 33(2) of the Interpretation Act (references to the singular included the plural) as applying to the services income from both private corporations (Opco D and C). CRA indicated that since “this means that at most only 80% of Opco B's income is derived from the supply of property or services to persons (other than the private corporations Opco C and Opco D) with which it deals at arm's length,” the safe harbour was not available, so that the income from both private corporations was bad income.

Neal Armstrong. Summary of 23 February 2021 External T.I. 2018-0769891E5 F under s. 125(7) - specified corporate income - s. (a)(i)(B)(I).