News of Note

The taxpayer arranged for drivers to drive back to Canada the cars of those who had suffered an incapacitating medical emergency in the U.S. In finding that this did not qualify as a “service of transporting tangible personal property,” so that it was not zero-rated, V.A. Miller J found that this quoted definition required that the property be carried by some mode of transport such as a vehicle, ship or rail car and that merely driving a car did not qualify as transporting it, stating that:

[T]he vehicle cannot be both the personal property and the means of carrying it at the same time.

Neal Armstrong. Summary of Andrews v. The Queen, 2017 TCC 23 under Sched. VI, Pt. VII, s.1(1) – freight transportation service.

Comments on the taxation of trusts resident in Canada include:

• A CRA indication that a charity is a majority-interest beneficiary of a trust when the trustee has the discretion to make a gift to the charity under the declaration of trust may not be correct, given that “it is unclear whether the charity has the power to compel the administration of the trust, which is generally recognized as a necessary condition for a person to be considered a beneficiary.”
• Given that the CRA has indicated in other contexts that an s. 84.1(1)(b) deemed dividend is not deemed to be paid on shares, this suggests that ss. 112(3) to (7) would not apply to a capital dividend that is deemed to be paid under s. 84.1(1)(b).
• S. 107(1)(c), which generally reduces the amount of a loss realized on a disposition of a capital interest in a trust by dividends received under s. 104(19) or (20) could result in double taxation where the beneficiary is a second trust, and the second trust flows out those amounts to its beneficiaries.
• Although a spousal trust that otherwise would qualify for rollover treatment under s. 70(6) but for having U.S. resident trustees may apply for competent authority relief under Article XXIX B(5) of the Canada-U.S. Treaty, that Article requires that the transfer to the spousal trust be made under a will – which is often a problem because US individuals often use an inter vivos trust to reduce or defer US estate tax.
• The CRA view that a trust funded with insurance does not qualify as a spousal trust for purposes of s. 70(6) if the terms of the trust were not set out in the will appears to be incorrect: “A pre-existing declaration of trust that is funded and created pursuant to the terms of the taxpayer's will should be treated as having been created under the terms of the taxpayer's will because the trust did not exist before the transfer.”
• The CRA view that a trust does not qualify as a spousal trust when its terms permit or require the trust to pay life insurance premiums, also is questionable.
• A fully discretionary trust with resident and non-resident beneficiaries and receiving both dividends from shares of US public corporations and interest from Canadian sources should be able to allocate its dividend income first to its resident beneficiaries so that they can access foreign tax credits under ss. 104(19) and 126(1).

Neal Armstrong. Summaries of Elie Roth, Tim Youdan, Chris Anderson and Kim Brown, Chapter 3: “Taxation of Trusts Resident in Canada,” Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016 including under s. 251.1(4)(d), s. 112(3.2), s. 107(1)(c), Treaties Art. 29B, s. 70(6), 104(19).

The NEB has been requiring pipeline companies to set up reclamation trusts to be funded by monthly contributions to the trust made by the pipeline companies based on identifiable charges therefor collected from their customers. CRA has provided three quite similar ruling letters indicating that the trust is a qualifying environmental trust, and that the contributions are deductible under s. 20(1)(ss).

The reclamation trust is a discretionary trust whose beneficiaries also include a federal not-for-profit corporation maintaining funds for the reclamation of abandoned pipelines in Canada, a.k.a., the Orphan Pipeline Fund. This concept of “beneficiary” is somewhat illusory as the trust deed specifies that “distributions from the ACo Reclamation Trust to a Beneficiary or a third party are to be made for the sole purpose of discharging the Beneficiary’s Reclamation Obligations.” CRA ruled that the pipeline company’s reasonable share of income or non-capital of the reclamation trust under s. 107.3(1) for purposes of computing its income and taxable income is 100%.

Neal Armstrong. Summary of 2015 Ruling 2015-0619281R3 under s. 211.6(1) - qualifying environmental trust.

The accumulating fund of a life insurance policy, which is intended to represent its savings element, is compared to that of a notional exemption test policy so as to determine whether the policy holder is exempt from taxation on accruing income. A number of changes to the rules for calculating the accumulating fund will, in a majority of situations, not have much impact – but could have a significant impact for universal life level cost of insurance (UL LCOI) policies, especially for younger ages. Furthermore, respecting changes to the calculation of the 15% Part XII.3 (IIT) tax payable by life insurance companies on the investment income accumulating within life insurance policies:

It is expected that the change in IIT on UL LCOI policies, if flowed through to policyholders, will have a significant impact on [cost of insurance] rates at younger ages (in the range of 6 to 9 percent), gradually decreasing at older ages (for example, 3 percent or less for insured individuals over the age of 60). There will also be an impact on level limited-pay universal life policies (whether on a level cost or yearly renewable term cost).

Neal Armstrong. Summaries of Kevin Wark and Michael O'Connor, “The Next Phase of Life Insurance Policyholder Taxation is Nigh,” Canadian Tax Journal (2016) 64:4, 705 - 50 including under Reg. 1401(1)(c).