News of Note
CRA references a checklist for determining indefeasible vesting
Email this ContentFor purposes of the 21-year deemed disposition rule, a trust does not include a trust "all interests in which … have vested indefeasibly". In commenting on the “vested indefeasibly” concept, CRA indicated:
- although IT-449R dealt with this concept in the s. 70(9) rollover context, its comments were equally applicable to the trust definition
- the Boger Estate definition was accepted as authoritative
- the 2006 article of Catherine Brown lays out a good checklist of the questions to ask in making the determination
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.9 under s. 108(1) – trust – (g).
CRA dismisses a judicial comment that s. 70(5) is inapplicable to non-residents
In the course of dealing with a secondary issue, McKenzie stated that s. 70(5) does not apply to a non-resident person. This statement was per incuriam.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.8 under s. 70(5).
CRA indicates that a corporation with only property income does not accord excluded share status
CRA confirmed that where a corporation has no business income because it derives income from property (e.g., rental income that is property income), its shares cannot qualify as excluded shares. In particular, where both the business and service income are nil, it will not be considered to satisfy the requirement that less than 90% of its business income is from the provision of services.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.7 under s. 120.4(1) – excluded shares.
CRA indicates that holding company shares do not qualify as excluded shares for TOSI purposes
CRA indicated that the definition of excluded shares should generally not include the shares of a Holdco, because all or substantially all of its income would be derived from a related business with respect to the individual. Thus, any income or taxable capital gains from the disposition of such shares will not be an excluded amount and will be split income of the individual subject to the tax on split income unless another exclusion applies, for example, if the related business is itself an excluded business.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.6 under s. 120.4(1) – excluded shares.
In TOSI context, CRA considers that “income” means “revenue” and applies a single supply doctrine to incidental provisions of property
Under the split income proposals, dividends or gains from “excluded shares” are excluded from the tax on split income. Subpara. (a)(i) of the excluded share definition requires that at least 90% of the corporation’s "business income" be from the provision of services, and para. (c) requires that "all or substantially all of the income" of the corporation be not derived directly or indirectly from related businesses.
CRA indicated that these references to “business income” and “income” are to gross income rather than net income.
Where the corporation has income from the provision of services and from income from non-services, the two should generally be computed separately. However, CRA apparently considered that where the non-service income was necessary for or incidental to the provision of the services themselves, all of the income would be considered to be services income. This is reminiscent of the single supply doctrine applied on the GST side (see, e.g., OA Brown and, most recently, Intrawest).
It remains to be seen whether CRA ports over the expansive interpretation it has given in the GST context to the concept of a supply of property. For example, it considers (e.g., in 2014 CBAO Roundtable, Q.35) that a fee for a training session or seminar is for the supply of intangible personal property rather than of a service. Or maybe CRA will look more to the M&P and Class 29 cases (see, e.g., Reg Rad, Crown Tire, Canadian Wirevision and Will-Kare).
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.5 under s. 120.4(1) – excluded shares.
626468 New Brunswick – Tax Court of Canada finds that safe income was reduced by corporate income taxes that would be computed on that income
An individual rolled his apartment building into a Newco in consideration for a mortgage assumption and shares with nominal paid-up capital, and then rolled those shares into a new Holdco. Following the realization shortly thereafter by Newco of a taxable capital gain and recapture of depreciation on a sale of the building, Newco increased the adjusted cost base to Holdco of its shares by effecting a series of s. 84(1) dividends (including a capital dividend) – following which the individual sold his shares of Holdco to a third party for a sale price based on the amount of cash sitting in Newco.
D’Auray J followed Deuce Holdings and a statement in Kruco in finding that the safe income of Newco was reduced by the amount of corporate income tax ultimately payable by it on its gain on the building sale. She also rejected the argument of Holdco that at the time of sale, no income taxes had yet become payable (because the income for the year had not yet been determined) so that there were not yet any corporate income taxes to deduct from safe income.
Neal Armstrong. Summary of 626468 New Brunswick Inc. v. The Queen, 2018 TCC 100 under s. 55(2.1)(c).
CRA confirms that safe income flows through on a spousal rollover of shares on death
CRA considers that there is no flow-through to the estate and beneficiaries of safe income attributable to shares where they were deemed to have been disposed of on death for their fair market value (thereby crystallizing that safe income in the shares’ stepped-up adjusted cost base) whereas the safe income does flow through where there was a rollover of the shares under s. 70(6).
Neal Armstrong. Summary of 2018 STEP Roundtable, Q.4 under s. 55(2.1)(c).
CRA considers that a non-GRE trust can have a calendar tax year even where it was dissolved
Ss. 249(1)(b) and 249(5) provide that the taxation year for a graduated rate estate is based on the period for which the accounts are normally made up, which in CRA’s view means that the final T3 return for a GRE is due within 90 days of the final distribution (thereby ceasing the need to make up accounts). For a non-GRE trust, s. 249(1)(c) defines the taxation year to be the calendar year (except as otherwise provided), so that the due date is 90 days thereafter.
Thus, if a non-GRE trust is wound up in mid-February, it might seem that the return cannot be filed until the following year. However, in fact, the T3 assessing personnel will assess such a return that is filed after the final distribution date and before the calendar year end.
The proposition that a non-GRE trust’s taxation year can end after it ceases to exist may generate difficulties in applying any throughout-the-year test to it.
Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.3 under s. 249(5).
CRA confirms that the 21-year rule’s application to testamentary trusts is almost always computed from the testator’s date of death
CRA considers most testamentary trusts to arise on the date of death of the testator, so that the 21-year rule generally is computed from that date.
Unusually, the creation date of the testamentary trust might not be concurrent with the testator’s date of death - for example, the will provides that, on the date of the death of the first-generation beneficiaries, such as the spouse, the trustee is to divide the remaining property into equal parts and hold each portion in a new trust for each of the testator’s children. In that situation, the latter trust may be viewed as being created some time after the testator’s date of death. However, the deemed disposition date of those new trusts would still be based on the testator’s date of death because of the rule in s. 104(5.8), which was described as intended to prevent any restarting of the 21-year clock through trust-to-trust transfers.
Neal Armstrong. Summary of 2018 STEP Roundtable, Q.2 under s. 104(4)(b).
Income Tax Severed Letters 30 May 2018
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.