News of Note
CRA is applying its policy on the invalidity of s. 45(3) elections on duplex units only prospectively for changes of use after February 21, 2012
Email this ContentIn a Technical Interpretation dated February 21, 2012, CRA indicated that, since a duplex (unless it has been partitioned) is a single property, the change in use of one of the units is not eligible for a s. 45(3) election. When queried about this, CRA stated:
The CRA therefore no longer accepts an election under subsection 45(3) for a change of use referred to in the position taken on February 21, 2012 where this change occurred after that date.
However, the CRA continues to accept an election made under subsection 45(3) after February 21, 2012 for a change of use referred to in the position taken February 21, 2012 where this change of use has been made on or before February 21, 2012 and where it also qualified for this election prior to this position being taken.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 45(3).
CRA confirms that s. 148(7)(a) trumps s. 69(1)(b) and 52(2), but not s. 69(5)
CRA considers that proposed s. 148(7)(a) will prevail over s. 69(1)(b). Accordingly, where an individual makes a non-arm’s length transfer of a insurance policy for nil proceeds, the proceeds of disposition generally will be the greater of the cash surrender value and the adjusted cost basis of the policy, and the fair market value proceeds will not be deemed to be received under s. 69(1)(b).
CRA also confirmed two earlier positions that s. 69(5) (respecting a s. 88(2) wind-up) prevailed over s. 148(7), but that s. 148(7) prevailed over the more general rule in s. 52(2) (respecting dividends in kind).
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.3 under s. 148(7)(a).
CRA states that it will not expand relief from the broad T4A reporting requirements
ITA s. 153(1)(g) and Reg. 200(2) purportedly require the issuance of T4As for most services received. At an earlier juncture, CRA was studying its T4A practices. It has now confirmed that there will be no change, although it will maintain its exception for:
i) where the payment made is less than $500, to the extent that no tax is withheld in respect of the amount, and
ii) where personal services are rendered to an individual by a professional or anyone else practising a trade, or if the services are rendered for the repair or maintenance of the principal residence of an individual.
CRA did not discuss the still-extant statement in RC4157 that:
The CRA is not assessing penalties for failures relating to the completion of box 048 [labelled “Fees for services”].
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.1B under Reg. 200(2).
CRA confirms that an acquisition of control generally will not generate additional T106 filings
Where there is an acquisition of control of a corporation with a calendar year end, thereby resulting in two taxation years ending in that year, CRA will permit the filing of a single T106 to cover both taxation years. The same applies for a non-calendar taxation year provided that the two stub periods add up to 12 months. The form can be filed up to the regular filing-due date (i.e., June 30 where calendar years were used).
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.1C under s. 233.1(2).
CRA reconciles its differing treatment of duplexes and triplexes for change-of-use and principal residence purposes
CRA effectively considers a duplex or triplex to be a single property for purposes of the s. 45 change-of-use rules and as comprising two or three housing units for principal residence exemption purposes – and also considers rental to family members at below-market rents as personal use for s. 45 purposes.
An individual owner of the whole triplex used Unit 1 (representing 50% of the area) for direct personal use and rented out the other two units – then some years later (at the beginning of “Year 11”), started renting out Unit 1, moved into Unit 2 for direct personal use and provided Unit 3 to family members at a low rent.
CRA considered that because, after this change, the use of the single property (the triplex) was still 50% personal and 50% 3rd-party rental, the change of use rules did not apply. However, on a subsequent sale of the triplex, the individual would be required to make separate designations for each unit for which he was claiming the principal residence exemption. This has the effect of entitling the individual to claim the principal residence exemption only for years in which particular units were used personally or by qualifying family members.
Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q. 2 under s. 45(1)(c) and s. 40(2)(b).
CRA references shareholder’s benefit on gratuitous transfer of critical illness policy by corporation to its shareholder
CRA noted that the transfer of a critical illness insurance policy by a corporation to its shareholder would not give rise to a capital gain to the corporation, but appeared to consider that if the transfer was made for no consideration, there would be a taxable shareholder benefit conferred on the shareholder equal to the policy’s fair market value.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q. 1 under s. 15(1).
Jacques – Tax Court treats a 401(k) plan as a savings plan rather than as a superannuation or pension plan
Graham J found that a 401(k) plan before him was a savings plan rather than a superannuation or pension fund or plan, so that a payment of the balance in the fund to the Canadian beneficiary was not income in her hands. Although he also was influenced by the right of an employee under the plan to significantly vary the amount contributed (from nil to 50% of his or her compensation), and to make early withdrawals, what influenced him the most was that generally distributions out of the Plan were to be made in a single lump sum payment. This did not satisfy the test in Woods that:
A superannuation or pension fund or plan is an arrangement which provides for payment of regular post-retirement income to employees… .
Neal Armstrong. Summary of Jacques v. The Queen, 2016 TCC 245 under s. 248(1) - superannuation or pension benefit.
CRA indicates that no loss can be recognized for damages paid by a purchaser for failure to close a purchase
Where a purchaser defaults on its purchase of a rental property, CRA considers that the damages paid by the purchaser to the vendor cannot be recognized as a capital loss “since the purchaser had not disposed of property as defined in subsection 248(1).” This reasoning would seem to apply to deny any recognition for damages paid for any failure of a purchaser to close any agreement of purchase and sale.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.3 under s. 39(1)(b).
Tusk Exploration – Tax Court of Canada finds that Part XII.6 tax applies to CEE which is invalidly (as well as validly) renounced on a look-back basis
A Canadian exploration company argued that it was not subject to Part XII.6 tax on Canadian exploration expenses that it had purported to renounce under the look-back rule - but which were now admittedly not eligible for look back because the flow-through share investors were non-arm’s length – because the reference in Part XII.6 to CEE that it “purported” to renounce under the rule referred only to expenses which had been validly rather than invalidly renounced under the look-back rule.
This argument was doomed notwithstanding one non-tax English decision stating that “’purports’… means ‘has the effect of’.”
Neal Armstrong Summary of Tusk Exploration Ltd. v The Queen, 2016 TCC 238 under s. 211.91(1).
CRA will not accommodate backdating as of the year end re the 3-year SDA bonus exception
A right which otherwise might be taxable under the salary deferral arrangement rules is excluded from the SDA definition if it is a right to a bonus for services rendered in Year 1 which is paid within three years following the end of Year 1 (i.e., by the end of Year 4). CRA will not extend this deadline by a few months to permit performance-based criteria for Year 4 (which affect the amount of the ultimate payout) to be measured based on year-end results for Year 4. CRA noted that the calculation of the three-year deadline was less ambiguous in the English than in the French version.
Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q.4 under s. 248(1) – salary deferral arrangement – para. (k).