News of Note
Moore – Tax Court of Canada vacates the penalty assessed on a careful Canadian for late-filing a T1135
Email this ContentThe taxpayer (Mr. Moore) realized approximately a year late that he should have filed a T1135 form to report some U.S. shares that now exceeded the $100,000 threshold, and promptly filed the T1135 with CRA.
In allowing Mr. Moore’s appeal of the $2,500 penalty imposed for the late-filing of the 2015 form, Boyle J indicated that even a careful and otherwise-compliant Canadian like Mr. Moore would find the disclosure in the CRA Guide as to T1135 reporting requirements to be opaque, noted the implicit presence of a due diligence defence, and stated:
I would ask the rhetorical question, “Is Mr. Moore’s disclosure to CRA on a voluntary basis of his failure to file a 2015 information return not the type of compliance effort CRA wants to encourage Canadians to follow?” …
I cannot imagine why in a case such as this the CRA would prefer to have Mr. Moore appeal to this Court, lose, and then go back to CRA’s Fairness Review program armed with my comments.
Neal Armstrong. Summary of Moore v. The Queen, 2019 TCC 141 under s. 162(7).
Income Tax Severed Letters 3 July 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA finds that ss. 6(1)(a) and 148(7) applied simultaneously to the transfer of a life insurance policy by an employer to an arm’s length employee
As a result of an arm’s length employee no longer being considered to be a key employee, her employer transfers its “key person” permanent life insurance policy on her life to her for nominal consideration. At the transfer time, the death benefit, cash surrender value (CSV) and adjusted cost basis (ACB) are $1 million, $50,000 and $20,000, respectively. The policy FMV equals its CSV.
CRA found that the employee would have a taxable s. 6(1)(a) benefit based on the $50,000 FMV of the policy, that the employer would realize a policy gain under s. 148(7)(a) of $30,000, being the CSV of $50,000, less the ACB of $20,000 and that the employee would be deemed under s. 148(7)(b) [rather than s. 52(1)] to have acquired the policy at a cost of $50,000.
Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 2, 2019-0799051C6 under s. 6(1)(a) and s. 148(7)(b).
Bakorp – Federal Court of Appeal finds that the only remedy for the failure of CRA to make a s. 152(4.3) adjustment was judicial review of that decision
Following the resolution of a tax dispute for taxation year 1, the taxpayer (Bakorp) requested that the Minister reduce the amount of a non-capital loss that it had carried forward to taxation year 2, and claimed the amount of that loss instead in its return that it filed for taxation year 3. The Minister denied the request and reassessed taxation year 3 to deny the claimed loss.
Webb JA found that in order for Bakorp to have tested its view - that the Minister should have made the requested adjustment to taxation year 2 - it should have sought judicial review of this decision. The Tax Court of Canada lacked jurisdiction to consider this decision of the Minister not to make the s. 152(4.3) adjustment.
Since Bakorp did not seek judicial review by the Federal Court of this decision, the non-capital losses claimed in taxation year 2 had not been adjusted, and per s. 111(3)(a), they could not be claimed again in taxation year 3.
Neal Armstrong. Summary of Bakorp Management Ltd. v. Canada, 2019 FCA 195 under s. 152(4.3).
Reference re Greenhouse Gas Pollution Pricing Act – Ontario Court of Appeal finds that the federal greenhouse gas (GHG) charges are valid under the POGG power
Strathy, CJO found that the fuel charge and excess emissions charges imposed under the Greenhouse Gas Pollution Pricing Act, Part 5 of the Budget Implementation Act, 2018, No. 1 are constitutionally valid on the basis of coming within the national concern branch of the federal peace, order and good government (POGG) power. After noting that “there is today a greater appreciation that environmental pollution can transcend national and international boundaries and it is no longer thought of as a purely local concern,” he stated:
Confining Canada’s jurisdiction to the establishment of minimum national standards to reduce GHG emissions does not result in a massive transfer of broad swaths of provincial jurisdiction to Canada, as Ontario claims.
Although it was unnecessary to address any other bases for finding the charges to be intra vires, he briefly noted (at para. 148);
I agree with Ontario that, given its pith and substance, the Act does not fall under the federal taxation power enumerated in s. 91(3). As noted, the Act falls under the national concern branch of the POGG power.
Neal Armstrong. Summary of Reference re Greenhouse Gas Pollution Pricing Act, 2019 ONCA 544 under Constitution Act, 1867, s. 91.
CRA does not provide any accommodations for the technical impossibility of demonstrating that a life insurance policy issued abroad is exempt
Annual income accrual is required on life insurance policies that are not exempt policies. It is unlikely that testing for compliance with Reg. 306(1) will be routinely performed by the insurer for policies issued outside of Canada where the policyholder is resident in, or immigrates to, Canada. Where the policy is not issued in Canadian currency, there could be failure under the exempt test simply as a result of FX fluctuations. What is such a Canadian taxpayer to do?
CRA responded:
Given that the information to determine the exempt status of a particular life insurance policy is only available in the accounts of the insurer, the onus is on the policyholder to establish that the policy qualifies as an exempt policy.
Summary of 14 May 2019 CLHIA Roundtable Q. 6, 2019-0799101C6 under Reg. 306(1).
CRA indicates that required top-up payments to satisfy the minimum-amount IPP rules do not qualify for income-splitting
The 2011 budget introduced measures for individual pension plans (“IPPs”) that generally parallel the “minimum amount”-based income withdrawal rules for RRIFs, so that minimal withdrawals are required from an IPP if the plan member has attained 71.
CRA considers that any additional payment that an IPP is required to make in a year to comply with the IPP minimum amount rules is not eligible to be split with a spouse/common-law partner under the s. 60.03 income-splitting rules. The definition of “pension income” for such purposes references a “life annuity,” and such top-up payments would not qualify as being part of an annuity, i.e., a series of periodic payments.
Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 14, 2019-0799191C6 under s. 118(7) – pension income – (a)(i).
CRA considers that a TFSA cannot hold a non-commutable life annuity
Life annuities providing benefits that are purely contingent on the life’s continuing survival generally are not commutable. CRA considers that in the absence of commutability, the life annuity contract will not satisfy s. 146.2(2)(e) and, therefore, cannot be registered as a TFSA. In addition, it is not a qualified investment for a trusteed TFSA.
Subsection 146.2(2) provides that a “qualifying [TFSA] arrangement” must:
(e) … provide that, at the direction of the holder, the issuer shall transfer all or any part of the property held in connection with the arrangement (or an amount equal to its value) to another TFSA of the holder;
CRA apparently is reading into this wording a requirement that the arrangement represent transferable property.
Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 7, 2019-0799121C6 under s. 146.2(2)(e).
6 more translated CRA interpretations are available
We have published a further 6 translations of CRA interpretations released in December 2011. Their descriptors and links appear below.
These are additions to our set of 897 full-text translations of French-language 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. You are currently in the “open” week for July.
Collins Family Trust – B.C. Supreme Court follows Pallen even though it was “undermined” by Fairmont
Giaschi J granted an application for rescission of transactions “which concerned an almost identical set of facts” to those in Pallen (i.e., transactions which used s. 75(2) for alleged surplus-stripping, and which did not work in light of Sommerer). He stated:
I agree ... that ... Fairmont and Jean Coutu have seriously undermined Pallen. However, Pallen has not been expressly overruled and I am bound to follow it. In my view, it is for the British Columbia Court of Appeal to determine whether Pallen remains good law in light of the legal developments since it was rendered.
Respecting arguments that Satoma had established that these transactions entailed aggressive tax avoidance, he stated:
[T]he evidence before me establishes that the purpose was to shield assets from creditors and to do so in a manner that did not attract tax liability, with both aspects having equal importance.
Neal Armstrong. Summary of Collins Family Trust v Canada (Attorney General), 2019 BCSC 1030 under General Concepts – Rectification.