News of Note
CRA indicates that charitable gifts by a spousal trust will disqualify it
Email this ContentS. 70(6)(b)(ii) requires that, in order for there to be a rollover to a spousal testamentary trust under s. 70(6), “no person except the spouse or common-law partner may, before the spouse’s or common-law partner’s death, receive or otherwise obtain the use of any of the income or capital of the trust.” CRA stated:
The mere possibility that a person other than the spouse or common-law partner may, before his or her death, receive or otherwise obtain the use of any of the income or capital of the trust is sufficient to disqualify the trust for purposes of the rollover under subsection 70(6).
Accordingly, the making of charitable donations by such a trust (which essentially were just a continuation of the gifts the surviving spouse had been making before the death of her husband) would disqualify the mooted spousal trust.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.6 under s. 70(6)(b)(ii).
We have translated 9 more CRA interpretations
We have published a further 9 translations of CRA interpretations released in February of 2004. Their descriptors and links appear below.
These are additions to our set of 2,249 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 18 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA indicates guarded acceptance of distributions of LP profits as loans, followed by set-off against draws in January
When will CRA treat loans from a limited partnership received by a limited partner in order to avoid a gain under s. 40(3.1) as a distribution of partnership capital or profits per s. 53(2)(c)(v), so that such negative-ACB gain is not avoided?
CRA responded that it “will generally” not do so where the following five tests are satisfied:
1. “The loan is not made on account of or in full or partial payment of a withdrawal of a limited partner's capital contribution.”
2. The total amount of all loans received by the limited partner in respect of a fiscal period of the partnership does not exceed the total of (i) the limited partner's share of the adjusted net income of the partnership for the fiscal period (i.e., s. 53(1)(e)(i) additions minus 53(2)(c)(i) year losses), and (ii) the ACB of the limited partner's interest at the end of the fiscal year - “or, if there is an excess amount, it is not material in the circumstances”.
3. “Shortly after the end of the fiscal period, the partnership declares a distribution payable to the limited partner in an amount equal to the total amount of the loans received by the limited partner during the fiscal period and the distribution is used to settle the loans to the limited partner (in cash or by way of set-off).”
4. The loan (made in lieu of the cash payment of the distribution) is made primarily for the purpose of avoiding a deemed gain to the limited partner pursuant to s. 40(3.1) that would be realized at the end of the fiscal period of the partnership caused solely by the difference between the time of the addition of the limited partner's share of the adjusted net income of the partnership for the fiscal period, and the time of the deduction of distributions to the limited partner for the fiscal period pursuant to s. 53(2)(c)(v) (other than the mooted loans).
5. The partnership interest is not a tax shelter, and this is not part of a larger series of transactions that includes an avoidance transaction to which s. 245(2) should apply.
These tests are perhaps too corporate. Re the 1st test (and assuming that it is saying something more than the 2nd test), there is no clear distinction (or perhaps none at all) between capital and operating draws for partnerships as contrasted to corporations. Re the 3rd test, the general partner of a limited partnership usually has general authority to act alone regarding all but extraordinary matters, so that it typically would not make the catch-up distribution pursuant to a partnership resolution.
That said, the general thrust appears to be accepting of loans to solve only the problem that cash distributions grind partnership interest ACB right away, whereas the ACB is not righted through an income allocation until the beginning of the following year.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.5 under s. 40(3.1).
CRA is willing to adapt a prescribed requirement, that an election be made by letter attached to the return, to internet filings
A taxpayer must file an election pursuant to Reg. 1101(5b.1) for each eligible non-residential building for which the taxpayer intends to claim the additional CCA. CRA rejected the suggestion that classification of a qualifying non-residential building in a separate Class 1(a) or 1(b) on the taxpayer’s return was sufficient for the it to be considered to have made the election, noting that the text of Reg. 1101(5b.1) effectively indicated that the “taxpayer must … send to the Tax Centre … a letter attached to the taxpayer's income tax return stating the taxpayer's election for each eligible non-residential building for the taxation year in which the subject building is acquired.” However, CRA further stated:
[I]t is possible for the taxpayer to make the election under subsection 1101(5b.1) I.T.R. over the Internet using either of the following methods:
- by using the "T2 Attach-a-doc" service
- indicating this election in the notes to the financial statements in the General Index of Financial Information (GIFI) of the tax return.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.4 under Reg. 1101(5b.1).
CRA obliquely confirms that there is no adverse CEWS impact of a non-resident parent paying dividends to individuals
CRA was presented with the proposition that publicly traded companies or their subsidiaries are not entitled to any CEWS grants for the claim period in which dividends were paid to individuals who are holders of common shares, and with the example of a parent company listed on the Paris stock exchange, with a Canadian subsidiary in Canada and an individual shareholder, which declares a dividend to be paid on March 31, 2022. CRA effectively indicated that the payment of a dividend at the parent level was irrelevant, and there would only be an adverse CEWS impact under the rules in ss. 125.7(2.01) and (14.1) if the Canadian subsidiary itself paid a dividend to an individual.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.3 under s. 125.7(2.01).
CRA declines to comment on whether a right to a top-up in the event of an IPO is inconsistent with receiving FMV proceeds
There is an exception in s. (f)(ii) of the taxable preferred share definition to accommodate inter alia a clause under which a person agrees to acquire the share for an amount not exceeding the FMV of the share at the time of the acquisition, and a comparable exception in s. (a) of the short-term preferred share definition. CRA was asked various questions including whether, where a clause permits a shareholder to redeem its common shares at FMV, the provision for further compensation in the event that there was a public offering within 12 months at a higher price would cause the exception to not be available.
CRA gave a non-committal response - which is better than a negative response.
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.2 under s. 248(1) – taxable preferred share – s. (f)(ii).
CRA indicates that contingent liabilities that reduce shares’ FMV should also reduce safe income on hand
We have published summaries of the questions posed at the 7 October 2022 APFF Roundtable together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers.
Q.1 dealt with an example where the FMV of Holdco’s shares of Opco (having a nil ACB) is $1,000,000, consisting of shareholder’s equity (i.e., share capital and retained earnings, also equaling safe income earnings) of $800,000, unrealized gains of $500,000 and contingent liabilities and accounting provisions valued at $300,000. It was suggested to CRA that in determining safe income on hand, the accounting contingencies and reserves should be considered to reduce first the unrealized gains rather than the safe income on hand.
CRA maintained its “longstanding position that to the extent that contingencies and accounting reserves have the effect of reducing the inherent gain on a corporation's share, such amounts should reduce the corporation's safe income on hand” – but indicated that it would “be prepared to consider more specific situations in the context of a request for advance rulings… .”
Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.1 under s. 55(2.1)(c).
CRA indicates it can choose under s. 118.1(17) which gifts to apply loanbacks
A corporation made charitable gifts in 2007, as well as in 2015 to 2017, to a private charitable foundation. Interest-bearing loans were made in 2012 and 2015, by the foundation to the corporation and persons not dealing at arm’s length with it, contrary to s. 118.1(16)(c)(ii).
S. 118.1(16) provided that the gift amounts were to be reduced by a loan made back to the corporation by the charity within the following 60 months – so that, for example, the 2007 gift amount could be reduced by the 2012 loanback amount. S. 118.1(17) provided an ordering rule whereby, if a loss amount “has been applied under [s. 118.1(16)]” to reduce a gift amount, it cannot be applied to reduce another gift amount.
The Directorate confirmed that since CRA in fact had not applied the 2012 loanback amount to reduce the 2007 gift amount (presumably, because of statute-barring), the 2012 loanback amount was available to be applied to reduce the subsequent gift amounts.
Neal Armstrong. Summary of 18 July 2022 Internal T.I. 2021-0921671I7 under s. 118.1(17).
CRA indicates that periods of farming use of a property as a rental property can count towards the principally-used test in s. 73(3)(c)
S. 73(3)(c) specifies that one of the requirements for the rollover in s. 73(3.1) to be available for a parent-to-child transfer of farmland is that
the property has been used principally in a farming … business in which the taxpayer, the taxpayer’s spouse or common-law partner, a child or a parent of the taxpayer, was actively engaged on a regular and continuous basis … .
CRA indicated:
- The “principally” test could be measured by relative years of use, so that the test would be satisfied if over the total relevant period, the active farming use test was satisfied during a majority of the years during that period.
- Years of active use by the taxpayer or one of the listed related persons in the farming business would count for these purposes even if the taxpayer was merely renting rather than owning the property for those years.
CRA appeared to accept that this test was satisfied, for instance, where the taxpayer rented the property for 14 years for active use by him in his farming business, then owned the property for a further 20 years (including 3 years of active use by him in his farming business before then starting to rent out the property for the remaining 16 years) before the mooted rollover to his child: the 17 years of active use in his farming business (including 14 years of use as a rental property) represented a majority of the 33-year period.
Neal Armstrong. Summary of 12 September 2022 External T.I. 2020-0863671E5 under s. 73(3)(c).
Income Tax Severed Letters 12 October 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.