News of Note
Joint Committee comments on the August 12 Technical Amendments to the trust reporting rules
Email this ContentRecommendations of a Joint Committee subcommittee on the August 12, 2024 technical amendments to ss. 150(1.2) to (1.31) include:
- The exception in s. 150(1.2)(a) for trusts that had been in existence for less than three months at the end of the year should be explicitly extended to trusts that were created and wound-up within three months at any time in the year.
- The exception in s. 150(1.2)(b.1) for trusts with related trustees would not extend to trusts with other family trustees such as aunts or nephews, and the permitted assets should be expanded to include near-cash items (such as gold coins), GICs of credit unions and listed limited partnership units.
- Regarding the requirement respecting the exception in s. 150(1.2)(c) for lawyer trust accounts that, if the trust account is held for a specific client, the only asset must be “money” not exceeding $250,000, the “money” concept should be expanded to near-cash assets.
- The exception in s. 150(1.2)(n) for Canadian registered plans should be extended to exempt foreign plans (e.g., IRC 529 plans, 401(k)s, or Roth IRAs) or exempt RCAs.
- The deemed express trust rule in s. 150(1.3) is broad and might extend to landlord/tenant or licensor/licensee relationships under which one party can act as agent for the other in relation to property held by it.
- Regarding the exceptions from s. 150(1.3) contained in s. 150(1.31), the exception in s. 150(1.31)(a) for where each deemed beneficiary is also a legal owner and there are no legal owners that are not deemed to be beneficiaries seems not to apply once a legal (and beneficial) owner dies or for a “Sawdon” or “Pecore” arrangement, where an individual has legal ownership but beneficial ownership will not vest until later.
- Regarding the exception in s. 150(1.31)(d) for property which is held throughout the year for a partnership, it is legally owned by a general partner and the partners generally are required to file information returns, the “throughout the year” requirement should be removed.
Neal Armstrong. Summaries of Joint Committee, “Trust Reporting,” 11 September 2024 Joint Committee Submission under s. 150(1.2), s. 150(1.3) and s. 150(1.31).
CRA provides an example of the application of the accelerated investment incentive CCA rules and clean ITC rules to solar panel acquisitions
CRA provided an extended example to illustrate the application of the accelerated investment incentive (AII) per Reg. 1100(2) and the “clean tech” ITC under s. 127.45(1) to the acquisition of solar panels. The taxpayer acquired solar panels (as its only relevant acquisitions) for $20M in 2024 (but with their not becoming available for use until January 2025) and acquired and deployed more such panels in 2027 for $10M. The specified energy property rules did not apply.
CRA noted that because the $20M of property was acquired before 2025, it would be a Class 43.2 property (50% CCA rate) rather than a Class 43.1 property (30% CCA rate) even though no CCA could be claimed until 2025 due to the available-for-use rules.
Its CCA claim for 2025 would be calculated as follows:
| Capital cost | $20M |
| AII per Reg. 1100(2) – A - (c)(ii) (i.e., 1/2 X $20M) | $10M |
| Subtotal | $30M |
| CCA (50% Class 43.2 rate) | $15M |
The clean tech ITC for 2027 would be 20% of the capital cost of $20M, or $4M.
The CCA claim for 2027 would consist of a small ($0.25M) claim for the Class 43.2 property (reflecting a UCC deduction for the 2025 ITC claim in addition to the 2025 and 2026 CCA claims) plus CCA regarding the $10M Class 43.1 acquisition calculated as follows:
| Capital cost | $10M |
| AII per Reg. 1100(2) – A - (b)(iii) (i.e., 5/6 X $10M) | $8.33M |
| Subtotal | $18.33M |
| CCA (30% Class 43.2 rate) | $5.5M |
The clean tech ITC for 2027 would be 20% of the capital cost of $10M, or $2M.
Neal Armstrong. Summary of 24 June 2024 External T.I. 2023-1000861E5 under Reg. 1100(2) – A.
CRA releases the 2024 IFA Roundtable
CRA has provided its official written responses to the questions posed at the May 15, 2024 IFA Roundtable. For convenience of reference, the table below provides links to those answers and to summaries that we prepared in May.
| Topic | Descriptor | |
|---|---|---|
| 15 May 2024 IFA Roundtable Q. 1, 2024-1007651C6 - Principal purpose test and the UK-Canada Tax Treaty | Treaties - Income Tax Conventions - Article 10 | marginally increasing a shareholding to access the Treaty-reduced rate likely would not engage the PPT |
| Treaties - Multilateral Instrument - Article 7 - Article 7(1) | a non-resident’s increasing its voting shareholding in Canco to access the Treaty-reduced dividend withholding rate likely does not engage the PPT | |
| 15 May 2024 IFA Roundtable Q. 2, 2024-1007541C6 - Foreign Entity Classification | Income Tax Act - Section 248 - Subsection 248(1) - Corporation | treatment of Luxembourg SCS or SCSp as a partnership |
| Income Tax Act - Section 96 | Luxembourg SCS or SCSp may be a partnership | |
| 15 May 2024 IFA Roundtable Q. 3, 2024-1007631C6 - Cash Pooling and Notifiable Transactions | Income Tax Act - Section 237.4 - Subsection 237.4(1) - Advisor | whether a professional firm is an advisor turns inter alia on its degree of responsibility for the tax advice etc. |
| Income Tax Act - Section 237.4 - Subsection 237.4(4) | full disclosure of one transaction (e.g., an interest payment) for the series of transactions is sufficient | |
| Income Tax Act - Section 237.4 - Subsection 237.4(2) | cash-pooling arrangement is substantially similar to the back-to-back designated transaction if the Canadian taxpayer as debtor does not withhold on the basis of the higher withholding rate for the ultimate lender | |
| 15 May 2024 IFA Roundtable Q. 4, 2024-1007571C6 - Late-filed PLOI election | Income Tax Act - Section 212.3 - Subsection 212.3(12) | revised procedures for the filing of late PLOI elections |
| Income Tax Act - Section 15 - Subsection 15(2.12) | revised procedure for filing late PLOI election under s. 15(2.12) | |
| 15 May 2024 IFA Roundtable Q. 5, 2024-1007581C6 - Late-filed PLOI election and reassessment of the affected taxation year(s) | Income Tax Act - Section 212.3 - Subsection 212.3(12) | late filing of PLOI election is coupled with an extended reassessment period for the s. 17.1(1) deemed interest |
| Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(iii) - Clause 152(4)(b)(iii) | a late-filing of a PLOI election does not cause the related deemed interest to be statute-barred | |
| 15 May 2024 IFA Roundtable Q. 6, 2024-1007591C6 - PLOI Election Administrative Relief | Income Tax Act - Section 15 - Subsection 15(2.11) - Paragraph 15(2.11)(d) | CRA effectively indicates that to disengage a single PLOI election, the loan agreement must be replaced |
| Income Tax Act - Section 212.3 - Subsection 212.3(11) - Paragraph 212.3(11)(c) | irreversibility of choice to make a single election unless a separate loan agreement is entered into | |
| 15 May 2024 IFA Roundtable Q. 7, 2024-1007641C6 - Principal Purpose Test in the Multilateral Instrument | Treaties - Income Tax Conventions - Article 10 | application of PPT where Treaty-resident pure holdco with ultimate Treaty-resident parent received Canco dividends |
| Treaties - Multilateral Instrument - Article 7 - Article 7(1) | PPT application to a treaty-reduced dividends of Canco paid to a pure Holdco with an ultimate Treaty-resident parent |
Income Tax Severed Letters 18 September 2024
This morning's release of seven severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that it has modified the application of its Indian Act Guideline 4 to reflect replacements of band councils by modern treaty governments
Guideline 4 of CRA’s Employment Income Guidelines respecting the s. 87 Indian Act exemption provides that employment income of a First Nation individual generally will be exempt where the employer is resident on a reserve and is a First Nation band which has a reserve, or a tribal council representing one or more such bands (or a related band organization as described in the Guideline) and where the duties of employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of First Nations individuals who for the most part live on reserves. After noting that “on July 22, 2022, the Minister of Crown-Indigenous Relations announced that the section 87 tax exemption would be available for continuation on modern treaty governments’ former reserves and other First Nations reserves in Canada for prospective and existing modern treaty government beneficiaries who are registered or entitled to be registered under the Indian Act”, CRA indicated that, pending a formal revision of Guideline 4:
[T]he CRA will consider a modern treaty government that was formerly a band as defined under the Indian Act or was created to represent one or more such bands, to be an eligible employer for purposes of Guideline 4.
CRA also indicated that no amendments to Guidelines 1 to 3 were required for their application to First Nations employees who were modern treaty government beneficiaries.
Neal Armstrong. Summary of 24 July 2024 External T.I. 2023-0998901E5 under Indian Act, s. 87.
CRA reviews the effect of receiving a BC forgivable loan to construct and rent out a secondary suite
The BC Secondary Suite Incentive Program assists qualifying homeowners to create a new secondary suite or accessory dwelling unit (a “Secondary Suite”) on the property of their principal residence, by providing a forgivable loan in the amount of 50% of the Secondary Suite’s construction costs, subject to a maximum loan amount. It must be rented at no more than a rent affordability limit for at least five years to a tenant who is not an immediate family member, and the loan amount will be forgiven over five years if all of the program requirements are satisfied.
The findings of CRA included:
- The Stewart test likely suggests that (even with the below-market rents), the Secondary Suites constitute a source of income, being property income, notwithstanding any generation of a loss.
- The forgivable loan when received would reduce the cost of the property pursuant to s. 13(7.1) or 53(2)(k), so that s. 12(1)(x) would not apply by virtue of the exclusion in s. 12(1)(x)(vi).
- The creation of a Secondary Suite, either within or detached from the homeowner’s home, generally would trigger a deemed disposition pertaining to the converted portion, pursuant to s. 45(1)(c)(ii).
- However, the homeowner could make an election pursuant to s. 45(2) to defer the recognition of any resulting gain to a later taxation year.
- For principal residence exemption purposes, the Secondary Suite, and the balance, would be treated as two distinct housing units (essentially because each could be ordinarily inhabited separate from the other) so that the principal residence exemption for any particular year could only be claimed for one of the two units, as also discussed below.
- Although the ordinarily-inhabited condition under the principal residence definition would not generally be met for the Secondary Suite while being rented to third parties, where it was subject to the s. 45(2) election it could nonetheless qualify as the taxpayer’s principal residence for up to four taxation years during which the election remained in effect – so that the homeowner would be able to choose for such a year to designate the Secondary Suite rather than the balance of the property as that taxpayer’s principal residence.
Neal Armstrong. Summaries of 27 June 2024 External T.I. 2023-1000391E5 under s. 3(a), s. 54 – ACB, s. 13(7.1), s. 45(1)(c)(ii), s. 45(2) and s. 54 – principal residence.
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in August and July of 2001. Their descriptors and links appear below.
These are additions to our set of 2,946 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 23 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Alcoa – Court of Quebec finds that an unrecoverable receivable was not a bad debt to the extent compensated under a standby letter of credit
The supply agreement between Alcoa and a purchaser (Sural) provided that Sural would maintain a standby letter of credit of US$16 million to ensure payment by Sural of the amounts invoiced by Alcoa. After Sural entered into CCAA proceedings, and was in default as to the payment of US$52.7 million (including GST and QST) in invoices, Alcoa made a demand for, and was paid, US$16 million by the Bank under the L.C. However, Alcoa treated the full invoice amounts as bad debts for QSTA and ETA purposes. The ARQ denied the portion of Alcoa’s bad debt deduction that corresponded to the QST (and GST) components of US$16 million.
After referring to the presumption in Re Rizzo, [1998] 1 SCR 27 that “the legislature does not intend to produce absurd consequences,” Bourgeois JCQ indicated that the position of Alcoa entailed it both claiming a bad debt deduction for the QST and GST included in the US$16 million and also receiving compensation for those amounts under the L.C.
After also noting that the L.C. was issued pursuant to the agreement for the supply of aluminum to Sural and for invoicing Sural therefor, he concluded that the US$16 million should be considered as a partial payment of the unpaid Sural invoices, so that the ARQ position was confirmed.
He attempted to distinguish Policy Statement P-058R (now obsolete), in which CRA concluded that a credit insurance claim payment that related to the indemnification of an account receivable that became a bad debt did not constitute the recovery of the bad debt for the purposes of ETA s. 231(3).
Neal Armstrong. Summaries of Alcoa Canada Cie v. ARQ, 500-80-042769-225 (6 September 2024, Court of Quebec) under ETA s. 231(1) and s. 123(1) - money.
CRA rules on a non-resident parent issuing flow-through shares to renounce its CEE, and renounced CEE of its Canadian sub, re a mine restart project
A Canadian exploration company (the Company) wholly-owned by a non-resident company (Company B) whose shares are listed, determined that its mine that had produced, but never successfully, could be restarted if it were able to significantly expand the resource so as to potentially support a much higher throughput. It proposed to engage in scout and expansion drilling at surface, and in expansion and infill drilling underground, including related work such as the construction of underground infrastructure, in order to expand the resource. CRA ruled that the property was not a mine that had come into production in reasonable commercial quantities for the purposes of s. (f)(vi) of the definition of CEE in s. 66.1(6), and also gave a ruling regarding the qualification of the expenditures as CEE.
It was proposed that Company B would acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value. The proceeds of disposition would be included by the Company in element “F” of the definition of cumulative CDE, and Company B would include its expenditure as a CDE pursuant to para. (e) of that definition – with the Company distributing its sales proceeds as a PUC distribution to Company B.
The Company would then conduct exploration for its own account and as agent for Company B. The Company’s portion of the exploration expenditures would be financed by its issuing flow-through (common) shares (FTS) to Company B. To fund its exploration work, Company B would issue FTS to Canadian investors, and renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company. The reason for Company B issuing FTS is that its listed shares may be more attractive to the Canadian investors.
CRA ruled that:
- Provided that Company B is carrying on a business in Canada, s. 66(12.71) will not apply to prevent Company B from renouncing CEE as per the above.
- Provided Company B and the Company continue to be related at all relevant times, s. 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B.
Neal Armstrong. Summaries of 2023 Ruling 2023-0961681R3 under s. 66.1(6) – CEE – (f) and s. 66(12.71).
CRA now treats a payment of withholding tax by a partnership “on behalf of” its partners as an ACB-reducing distribution to them
Would the allocation of foreign tax by a partnership to a partner be regarded as a withdrawal by the particular partner that reduced the ACB of its partnership interest? CRA stated:
If the partnership pays the foreign tax on behalf of the partner or the foreign tax is withheld on behalf of the partner in accordance with foreign law from the foreign income paid to the partnership, such amount would be considered [for purposes of s. 53(2)(c)(v)] to be received by the partner on account or in lieu of payment of, or in satisfaction of, a distribution of the partner’s share of the partnership profits or partnership capital. Consequently, subparagraph 53(2)(c)(v) of the Act would reduce the ACB of the partner’s interest in the partnership for the amount of any non-business income tax paid by the partnership on behalf of the partner. …
CRA went on to note that such ACB reductions could trigger negative ACB gains under s. 40(3.1).
This position on s. 53(2)(c) overruled 2004-0075931E5, which stated that “paragraph 53(2)(c) does not provide for a deduction in computing the adjusted cost base of a taxpayer's interest in a partnership for the amount of any non-business income tax paid to a foreign country through the accounts of the partnership that was allocated to the particular partner… .”
CRA is effectively treating such an imposition of withholding tax on the income of a partnership the same as if the partnership had distributed those amounts to its partners in order for them to satisfy their personal liability. It is unclear which foreign jurisdictions treat such taxes as pro rata liabilities of the partners rather than of the recipient of the income (the partnership). On the other hand, if the foreign taxes are income taxes imposed on the income of the partnership (e.g., for a US partnership that has checked the box), then presumably it would be clear that those taxes were not partner liabilities.
Neal Armstrong. Summaries of 10 April 2024 External T.I. 2021-0919231E5 under s. 53(2)(c)(v) and s. 40(3.1).