News of Note

Sussex Group – Tax Court of Canada reverses a s. 227(9) penalty in full because its amount was established by the taxpayer to be partially incorrect

The appellant determined that the remuneration paid to its two employees (the Suttons) would be allocated as to $165,000 and $192,000 to Mrs. and Mr. Sutton, respectively. CRA noted that all but $12,675 of such remuneration had been deposited into the bank account of Mr. Sutton, considered that all of such deposits to his account were remuneration received by him, and imposed a late source-deductions remittance penalty under s. 227(9) on the appellant regarding its computed under-remittance.

In finding that Mrs. Sutton had constructively received remuneration in excess of the $12,675 deposited into her account, Gagnon J stated:

Case law has noted that the word “receive” means to get or to derive benefit from something, therefore to “enjoy its advantages without necessarily having it in one’s hands”. Moreover, an amount of money is deemed received by an employee when it is available to the employee. …

[A]lthough this Court cannot confirm the exact remuneration received by Mrs. Sutton, and indirectly by Mr. Sutton, it remains clear that the remuneration used by the CRA to assess the penalty is incorrect.

After having noted that “the Crown bears the onus for the penalty,” and in reversing the penalty, Gagnon J stated:

The role of the Court is to determine whether the penalty was either validly imposed or not. …. And adjusting the quantum of a given penalty would be beyond the jurisdiction of this Court. On that basis, it is determined that the evidence in the present case does not support that the conditions to levy the penalty as determined by the Minister have been established.

Neal Armstrong. Summary of Sussex Group - Allan Sutton Realty Corp. v. The King, 2024 TCC 1 (Informal Procedure) under s. 227(9) and General Concepts – Payment and Receipt.

CRA confirms that a home is not acquired for FHSA purposes until it become habitable

CRA has published Q.2 from the November 3, 2023 APFF Financial Strategies and Instruments Roundtable. As discussed in greater detail last November, CRA indicated in the context of the application of the new FHSA rules to a constructed home, that:

  • regarding the requirement in para. (a) of the “qualifying withdrawal” definition - that an individual commenced use of the home as a principal place of residence not later than one year after the qualifying home’s “acquisition” - a “home is generally acquired by the individual when it becomes habitable.”
  • in the scenario where the home is constructed by the individual with the assistance of trades, the requirement in para. (c) of the “qualifying withdrawal” definition - that the individual have entered into an agreement prior to the withdrawal time for the acquisition or construction of the qualifying home before October 1 of the following calendar year - could be satisfied by agreements with such trades, provided that those agreements showed “that sufficiently significant work was undertaken to complete the construction of the qualifying home before October 1 of the calendar year following [the withdrawal].”

Neal Armstrong. Summaries of 3 November 2023 Roundtable, Q.2, 2023-0978631C6 F under s. 146.6(1) - “qualifying withdrawal” - (a), (c).

CRA treats a trust distribution of a life insurance policy to a beneficiary as made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied

CRA has essentially published Q.4 of the 3 November APFF Financial Strategies 2023 Roundtable, along with two other technical interpretations that are quite similar.

Q.4 dealt with a private corporation (Aco) which distributes a life insurance policy of which it is the holder and beneficiary and with an adjusted cost basis (ACB), cash surrender value (CSV) and FMV of $50, $150 and $250, respectively as a dividend in kind to a discretionary family trust shareholder, and such trust then distributes the policy as an income distribution under ss. 104(6), (13) and (19) to a corporate beneficiary (Xco).

The dividend-in-kind of the life insurance policy by a corporation (Aco) to its shareholder is made for no consideration for purposes of s. 148(7)(a)(ii)(B), so that on the dividend-in-kind, the policy is deemed to be disposed of for the greatest of its ACB, CSV and the (nil) consideration received - or $150. However, where a trust transfers the policy to its beneficiary, the beneficiary (Xco) is regarded as giving consideration for the transfer that is all or any part of the beneficiary's income or capital interest in the trust, as applicable. Here, it would be reasonable to consider that such consideration had an FMV of $250.

If s. 106(3) rather than s. 148(7) was regarded as applying to the distribution, s. 106(3) also would generate deemed FMV proceeds. Thus, it made no difference which of s. 106(3) and s. 148(7) prevailed over the other.

Neal Armstrong. Summary of 21 December 2023 External T.I. 2020-0866651E5 F under s. 148(7).

Income Tax Severed Letters 24 January 2024

This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Csak – Tax Court of Canada finds that a taxpayer could reverse a s. 160 assessment because inter alia her transferor husband had given a waiver for the primary assessment on a Sunday

Two months after their marriage, the taxpayer received (on January 8, 1993) from her 80-year old ailing husband (“CC”) the transfer of a property valued in excess of his subsequently assessed tax liabilities for various taxation years including his 1988 and 1989 years (as a result of losses from a partnership investment being denied). CRA alleged that it received a timely waiver by CC for his 1988 year. CRA also received a waiver for his 1989 year on the Monday immediately following the expiry of the normal reassessment period on the previous day.

Owen J rejected the taxpayer’s submission that she was not liable under s. 160(1) because she had provided full consideration for the transfer through her agreement to marry CC and care for him. However, he found (based on Gaucher) that she was not precluded from disputing the validity of the assessments of her under s. 160(2) on the grounds that the waivers proffered by CRA were invalid, even though this issue had not been raised in the unsuccessful group appeal by CC and others of the denial of the partnership losses.

Regarding the waiver for 1988, Owen J found that the burden on the Minister to establish that the waiver had been timely-received had not been met with evidence of a CRA employee that an unstamped signed waiver was included in the taxpayer’s physical file along with a time-stamped letter on behalf of the taxpayer that was not established to have been attached in front of the waiver.

Regarding the waiver for 1989 and in finding that s. 26 of the Interpretation Act (which provided that “Where the time limited for the doing of a thing expires or falls on a holiday, the thing may be done on the day next following that is not a holiday”), did not have the effect of deeming the waiver to have been received during the normal reassessment period expiring on the Sunday, Owen J stated:

A taxpayer filing a waiver is not facing a deadline that would preclude the taxpayer from doing anything. … The deadline relates solely to the validity of the waiver itself, not to the doing of something by the person filing the waiver.

Neal Armstrong. Summaries of Csak v. The King, 2024 TCC 9 under s. 160(1), s. 160(2), and s. 152(4)(a)(ii).

Gestion Roy – Federal Court of Appeal confirms that a company’s payment of premiums on whole life policies where it was the beneficiary but not owner engaged ss. 15(1) and 246(1)

Various whole life policies on the life of a resident individual (Mr. Roy) were owned by (i) a holding company (“Gestion Roy”), controlled by Mr. Roy and which was the majority shareholder of a consulting firm (“R3D”), or by (ii) another holding company (“445 Canada”) which was wholly-owned by Mr. Roy but which was not a shareholder of R3D. However, R3D was the revocable beneficiary of any death benefits under the policies and paid all the premiums.

Boivin JA confirmed the inclusions in Gestion Roy’s income under s. 15(1) of the annual premium amounts paid on Gestion Roy’s policies for the reasons given in the Tax Court. Gestion Roy was the owner of such policies (entitling it to the cash surrender value of the policies at any time), so that it was “enriched” when the premiums were paid by R3D– and it was irrelevant to this point that, in fact, Gestion Roy never received any distribution on its policies. (What in fact occurred a number of years later was that, on the sale of R3D and R3D assets to a third-party purchaser, R3D received the cash surrender value of most of the policies on their termination.)

In also confirming the Tax Court’s finding that it followed from this that the payment by R3D of the premiums on the policies of 445 Canada resulted in corresponding inclusions under s. 246(1) to 445 Canada, Boivin JA stated:

[W]e agree with the TCC's conclusion that the analysis to be performed under subsection 246(1) is substantially the same as that required under subsection 15(1) (see Laliberté).

Neal Armstrong. Summaries of Gestion M.-A. Roy Inc. v. Canada, 2024 CAF 16 under s. 15(1) and s. 246(1).

We have translated 6 more CRA interpretations

We have translated 6 further CRA interpretations released during May of 2002. Their descriptors and links appear below.

These are additions to our set of 2700 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 21 3/4 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2002-05-10 24 May 2002 External T.I. 2002-0123225 F - REER DONNE EN GARANTIE Income Tax Act - Section 146 - Subsection 146(8) generally no double taxation under s. 146(8) on payout on guarantee if property’s value previously included under s. 146(10)/ gross-up for source deduction purposes
Income Tax Act - Section 146 - Subsection 146(10) inclusion under s. 146(10) for secured guarantee not limited to loan value, and ousts application of s. 146(8) if payment made by RRSP pursuant to guarantee
Income Tax Act - Section 248 - Subsection 248(28) s. 248(28) prevents double inclusion under s. 146(10) when secured guarantee given and under s. 146(8) when guarantee called
24 May 2002 Internal T.I. 2001-0113597 F - ASSURANCE CONTRE LES MALADIES GRAVES Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) if a clause providing for the return of premiums on death was ancillary, the policy could still qualify as a group sickness or accident insurance plan
20 May 2002 External T.I. 2002-0117885 F - Lien de dépendance et application de 120.4 Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(a) trustee is related to individual if its trustee is so related
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) split income definition applied on the basis that the business of a partnership is carried on by its partners and that a trust if related based on the relatedness of its trustee
Income Tax Act - 101-110 - Section 104 - Subsection 104(1) s. 104(1) indicates that related party status of trust is tested through its trustee
2 May 2002 External T.I. 2002-0134335 F - Sous-aliéna 104(4)a)(i) et 110.6(15)a)(i) Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(15) - Paragraph 110.6(15)(a) - Subparagraph 110.6(15)(a)(i) s. 110.6(15)(a)(i) deeming rule does not apply for s. 104(4)(a)(i) purposes
15 May 2002 External T.I. 2001-0103605 F - Prêt par un Associé à une Société Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest on loan by partner to partnership is treated as interest rather than income allocation if there is a loan rather than partnership contribution under provincial law
Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(g) if a loan made by a partner is at law a loan rather than a partnership contribution, the interest thereon will be treated as interest rather than profit allocation
31 May 2002 External T.I. 2001-0110095 F - ALLOCATIONS NON IMPOSABLES Income Tax Act - Section 6 - Subsection 6(16) - Paragraph 6(16)(a) mobility impairment means significant difficulty moving around that lasts 12 months

CRA treats a Swiss collective investment vehicle as a flow-through for purposes of the pension/ retirement fund dividend exemption in the Canada-Swiss treaty

A collective investment scheme (the “Fund”) established under Swiss law is an arrangement by which investors pool their assets to be managed by and in the name of a Swiss regulated fund management company (the “Management Company’) for the account of the investors, whose proportionate entitlements to income and to cash or in-kind redemption proceeds are represented by non-voting units. The Fund was established by a contract of the investors with the Manager and the non-resident custodian of the Fund assets (the “Custodian”), and lacks legal personality. The Custodian delegated the custody of Canadian securities (being mostly listed shares of Canadian companies) to the “Canadian Sub-Custodian.” The Fund unitholders are all Swiss entities providing pension or retirement plans.

CRA effectively ruled that this arrangement would be treated like a co-ownership arrangement rather than like an entity such as a trust, so that dividends paid on the Canadian shares would benefit from the Canadian withholding tax exemption in Art. 10 of the Canada-Swiss Treaty for Canadian dividends received by Swiss pension/ retirement entities.

Neal Armstrong. Summary of 2024 Ruling 2019-0817961R3 under Treaties – Income Tax Conventions – Art. 10.

CRA rules on transactions to increase the PUC of shares of Cdn. parent in its Canadian subsidiary before the re-domestication of parent engaging s. 128.1(4)

After being acquired by a foreign acquiror, a Canadian mining company (Parent Amalco) re-domesticated to a foreign jurisdiction (presumably, the U.S.) so that it was subject to the s. 128.1(4) emigration rules. Before this continuance out of Canada, it engaged in transactions to increase the PUC of the shares of its principal Canadian subsidiary, e.g., transferring under s. 85(1) a royalty interest and shares of other Canadian subsidiaries to that subsidiary for treasury shares.

CRA ruled that the PUC-increase steps were effective, and would not be altered by s. 245(2). However, it required a representation of the subsidiary that it will not use its retained earnings or contributed surplus in computing its equity amount for s. 18(5) purposes without first obtaining a positive ruling.

Neal Armstrong. Summary of 2020 Ruling 2019-0817051R3 under s. 89(1) – paid-up capital.

Declaration of a private company dividend immediately before an s. 128.1(4)(b) emigration of the shareholder appears to be tax-neutral

Suppose that, shortly before the emigration of a resident individual holding shares of a private corporation (Xco), Xco declared a dividend in an amount equal to the FMV of Xco’s net assets but did not pay it until after the individual became non-resident. The unpaid dividend represented a right of the individual (likely, a capital property) that was owned at the time of ceasing to be resident, so that the tax on the capital gain from the disposition thereof pursuant to s. 128.1(4)(b), plus the Part XIII tax, equals the s. 128.1(4)(b) and Part XIII tax that would have been paid by the individual had the individual emigrated before the dividend declaration.

The position in 9640475 – that s. 128.1(4)(b) would apply to tax the individual on the emigration as if the declared and unpaid dividend had been paid - appears to be incorrect. As noted, the individual is only deemed to have disposed of the right to the dividend and not to have received it.

Neal Armstrong. Summary of David M. Sherman, Bal Katlai and Kenneth Keung, “Can an Unpaid Dividend Avoid Departure Tax?”, Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 9 under s. 128.1(4)(b).

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