News of Note
CRA indicates that there are no barriers to a non-resident estate qualifying as a GRE
Email this ContentThe U.S.-resident estate of a U.S.-resident individual who died holding real estate in Canada and did not have a social insurance number (“SIN”) will realize a gain on the disposition of the property. CRA indicated that the definition of graduated rate estate (GRE) does not require an estate to be resident in Canada, and that the requirement in para. (c) of the GRE definition to provide the SIN of the deceased, or “such other information as is acceptable” can be satisfied by the estate providing a temporary or individual tax number.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.10 under s. 248(1) - graduated rate estate – para. (c).
Lin – Federal Court rejects a CRA request for an information-request compliance order because it was unclear which entities were covered
Three individuals whom CRA suspected of not disclosing offshore assets received letters requesting the filing of T1135s and requesting information, which CRA considered to be within its powers to request information under s. 231.1(1). In dismissing the Crown’s application for a compliance order under s. 231.7, Boswell J noted:
[T]he Letters are addressed to both the individuals and their connected entities. The entities are not specified, and it is not clear who is being audited - the individual Respondents or unnamed entities.
The Court must be satisfied that the person against whom a compliance order is sought is one who was required under section 231.1 or 231.2 to provide the access, assistance, information or document sought by the Minister. Because it is not at all clear whether the Letter was directed to the Respondents individually or their connected entities, the first requirement of section 231.7 … for obtaining a compliance order has not been satisfied … .
Neal Armstrong. Summary of Canada (National Revenue) v. Lin, 2019 FC 646 under s. 231.7(1).
CRA indicates that a non-resident estate that becomes resident can then become a GRE
An estate initially was not resident in Canada but 18 months later (on January 1, 2018), it became resident in Canada due to the appointment of a new trustee – thereby resulting in a new taxation year starting at that time under s. 128.1(1)(a)(i). Could it designate itself as the graduated rate estate (“GRE”) of the deceased (non-resident) individual when filing its first tax return (for 2018)?
CRA indicated that the requirement in para. (d) of the GRE definition - that the estate designate itself as the GRE of the deceased individual in its Part I return for its first taxation year ending after 2015 – could be satisfied here because the estate was not required to file a Canadian return for any year before 2018 – thus it could make the required designation in its 2018 return. (The 36-month test for being a GRE also was satisfied.)
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.9 under s. 248(1) - graduated rate estate – para. (d).
CRA indicates that WIP under contingency fee arrangements may be required to be recognized before realized
In FAQ #5 on a CRA web page, CRA stated that in the case of professionals’ contingency fee arrangements, e.g., for personal injury lawyers, “no amount is receivable by the professional until the right to collect the amount is established” and that “for purposes of determining the value of the professional’s work in progress at the end of the year, no amount would normally be recognized.” However, 2017-0709101E5 F (and similarly in 2018-0743031E5) added a statement that “however, it has been brought to our attention that, in certain situations, it is possible, at the end of the year, to establish an amount that can reasonably be expected to be received after the end of the taxation year in respect of [the] work,” in which event, that higher amount will be used in valuing the WIP.
This qualifier was essentially also included in a discussion of professionals’ WIP at the STEP Roundtable, without any further elaboration on when the “certain circumstances” being referenced might arise.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.8 under s. 10(4)(a).
Income Tax Severed Letters 12 June 2019
This morning's release of 10 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Smith – Federal Court of Appeal finds that a free parking pass was a taxable benefit notwithstanding business benefits to the employer
A flight attendant for Jazz Aviation LP received a taxable s. 6(1)(a) benefit when his employer provided him with a parking pass at the Calgary airport, notwithstanding that it would have been difficult for him to commute by other means and the airline’s belief that providing a parking pass to flight attendants enhanced their reliability and flexibility. Laskin JA stated:
[I]t is … determinative that Jazz Aviation did not require its flight attendants to commute to work by car, but was content to preserve the personal nature of employees’ commuting choices. This fact demonstrates that the cost of parking at the airport was a consequence of Mr. Smith’s personal choices and not bound up in his employment duties or in the nature of his work as a flight attendant. … [Consistently with Schroter, it] was “an ordinary, every day expense.”
Neal Armstrong. Summary of Smith v. Canada, 2019 FCA 173 under s. 6(1)(a).
CRA accepts that royalty income from a music composing business is active business income
Gagliese Productions found that a company which earned royalties from the daily activities of its sole shareholder and employee in writing and producing music for TV episodes was earning income from an active business rather than from a specified investment business. CRA, in accepting this decision, noted that the company’s income from the music tracks aired in reruns of television episodes was incident to, and pertained to, its active business.
CRA does not consider this decision to be portable to a CCPC engaged in a mortgage-lending or real estate rental business.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.7 under s. 125(7) – specified investment business.
CRA indicates that a subsequent bequest of Opco shares from the active mother converts a previous bequest of shares from the inactive father into good shares for TOSI purposes
Mr. A (who had a passive role in Opco’s business) predeceased Mrs. A (who had been actively involved for more than five years), and their surviving children (who were inactive) received a bequest of some shares of Opco directly from Mr. A, and then some from Mrs. A.
S. 120.4(1.1)(b)(ii) initially would not be satisfied for the shares they received from Mr. A, so that the dividend income thereon would be subject to the tax on split income (TOSI). However, once they had received the bequest from Mrs. A, any dividends received on any of their Opco shares (from the taxation year in which they inherited Mrs. A’s shares onward) would not be subject to TOSI, including the shares previously bequested by Mr. A.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.6(b) under s. 120.4(1.1)(b)(ii).
CRA indicates that successive legatees can rely on the same activity-level of the original testator under s. 120.4(1.1)(b)(ii)
S. 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).