News of Note
CRA indicates that the CERS cannot be claimed for an occupied residence, even where the claimant is not the occupant
Email this ContentCRA confirmed that a residence, occupied as such by an individual unrelated to an eligible entity but used by an eligible entity in its business, does not qualify as a qualifying property for purposes of the Canada emergency rent subsidy (“CERS”) rules given the exclusion for a self-contained domestic establishment, i.e. it does not matter that the eligible entity (or a person not dealing at arm’s length with the eligible entity) is not the one occupying the property as a residence.
Neal Armstrong. Summary of 23 November 2021 External T.I. 2021-0881361E5 under s. 125.7(1) - qualifying property.
CRA discusses the potential credit for gifts by will to a US charity
Will a bequest made by will to a U.S. organization qualify for a charitable donation credit on the individual’s final return? CRA summarized the rules under s. 118.1(5.1)(b) and para. (c) of the charitable gift–definition generally permitting a graduated rate estate (GRE) of the individual to carry back the gift amount (for the donation to a charity of property received by it on the individual’s death) to the terminal return of the individual.
CRA went on to discuss the gift limit in para. (a) of the definition of “total gifts” in ss. 118.1(1) and the limited relief provided for gifts to US organizations under Art. XXI(7) of the Canada-U.S. Convention. In particular, it noted that the amount of relief available in this regard is restricted to the income of the resident for that year from U.S. sources, except where the gift is to a college or university at which the resident or a member of the resident's family is or was enrolled. CRA also states that it “accepts that any organization that is exempt under section 501(c)(3) of the U.S. Internal Revenue Code will qualify for the purposes of paragraph 7 of Article XXI of the Treaty.”
Neal Armstrong. Summary of 25 August 2021 External T.I. 2020-0866131E5 under s. 118.1(1) – charitable gift – para. (c) and Treaties - Art. 21.
CRA now indicates that it will only provide transitional administrative relief regarding the GST/HST “digital economy” measures where there is voluntary disclosure
Although CRA misleadingly refers to the 2021 Budget as having introduced, effective July 1, 2021, “GST/HST measures that related to the digital economy,” those measures are broader than that – essentially any non-resident making most types of supplies of services (other than financial services) or intangible personal property to Canadian recipients who are not registered must itself register for GST/HST purposes once it exceeds a de minimis threshold. In Excise and GST/HST News - No. 109, June 28, 2021, CRA stated:
Where the affected businesses and platform operators show that they have taken reasonable measures to comply but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these measures during a 12-month transition period, starting July 1, 2021.
CRA has now substantially narrowed this relief, stating:
Before the CRA exercises its discretion in the administration of the new measures, an affected business or platform operator must first make a submission to the CRA requesting forbearance and obtain the CRA’s written approval that such discretion will be exercised. Submissions may be made to the CRA after July 1, 2021, until further notice.
Neal Armstrong. Summary of Excise and GST/HST News - No. 110 under the heading “Digital economy”, 8 December 2021 under ETA s. 211.12(2).
CRA accepts that commercial businesses can make GST-exempt arranging-for supplies of insurance as a sideline “incidental” activity
CRA refers to an “incidental seller” as “a person who assists the insurer in the issuance of insurance but whose principal business is normally carried on outside the insurance industry (such as retailers, automotive dealers, banks, travel agents)” and notes that an “incidental seller’s service supplied to the insurer would typically include promoting the insurance, assisting the incidental seller’s customer in understanding and obtaining the insurance from the insurer, and collecting the premium from the customer and sending it to the insurer.”
After referring to the Applewood Holdings and Zomaron, CRA stated:
The CRA will apply principles from these decisions to an incidental seller’s supply of services of arranging for the supply of insurance to an insurer.
Where the essential character of the service for which an incidental seller earns its fees is the sale of insurance on behalf of the insurer to the customer, it will generally be considered an exempt supply of a financial service. In such circumstances, the supply by the incidental seller is arranging for the issuance of a financial instrument (such as, an insurance policy).
This is less grudging than the statement in Excise and GST/HST News - No. 109 that:
The CRA will only apply the Zomaron decision to supplies made by an ISO/MSP if the same fact situation exists.
Neal Armstrong. Summary of Excise and GST/HST News - No. 110 under the heading “Incidental sellers of insurance”, 8 December 2021 under ETA s. 123(1) – financial service – para. (l).
Income Tax Severed Letters 15 December 2021
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
6610048 Canada – Federal Court of Appeal confirms that a quick exit from a development project at a gain was on income account
The taxpayer acquired an assembly of lots between 2006 and 2008 for development as a mixed use (commercial and residential) project close to a proposed train station that would link the site (in the downtown of the City of Masouche) by train to Montreal. The Court found no reversible error in the Tax Court judgment confirming that gains (realized mostly in 2009) from various dispositions of the lots, before construction had commenced, were on income account. LeBlanc JA stated:
[T]he TCC scrupulously followed the approach … required of it under Safeway. In particular, it concluded from the evidence before it that the appellant's sole motivation at the time of the acquisition of the land in question was clearly to resell it at a profit, noting in this regard that the appellant had never intended to carry out the development project desired by the City of Mascouche. …
[T]he lands in question … were located in close proximity to the future train station … [and] the City of Mascouche had undertaken, in order to facilitate the implementation of the development project on the axis of such station, to modify its urban plan and by-laws, to achieve, before the end of 2007, free circulation on the land and to complete certain infrastructure work. All of this, in the opinion of the TCC, made it objectively foreseeable that the value of the land would increase significantly and rapidly.
Finally, the principals had a real estate development background and the project entailed significant risks (which the taxpayer reduced by exiting early at a gain.)
This case may solidify the reputation of Safeway as being the leading case in the area.
Neal Armstrong. Summary of 6610048 Canada Inc. v. The Queen, 2021 CAF 229 under s. 9 – capital gain v. profit – real estate.
Boeckh - Court of Quebec finds that an investment company focused on capital gains was a trader or dealer for s. 39(5)(a) purposes
Boeckh was a closely-held investment company whose portfolio (of over $100 million for many of the years at issue) was focused on Canadian public companies in the resource and high tech sectors. In finding that an election that Boeckh had made under the Quebec equivalent of s. 39(4) was ineffective by virtue of the exclusion for a trader or dealer in securities, so that its stock market gains were on income account, Riverin JCQ found that:
- A qualified investment professional (an experienced CFA) devoted himself full-time to managing Boeckh’s portfolio;
- The portfolio had what he considered to be a high turnover (of around 30%, with the percentage of securities held for over two years, ranging from 31% to 45%, and those held for over five years ranging from 14% to 24%).
- Boeckh’s objective was to generate gains rather than dividends, and focused on companies with a high potential for appreciation.
In other words, Boeckh managed its portfolio like a typical mutual fund. Note that the s. 39(4) election is not available to mutual funds regarding their non-Canadian portfolios.
Neal Armstrong. Summary of Investissement Boeckh Inc. v. ARQ, Nos. 500-80-033896-169, 500-80-035759-175 under s. 39(5)(a).
Two CRA challenges to cross-border hybrid arrangements are at the Tax Court stage
Alexandra MacLean noted that a number of files in the CRA project on cross-border hybrid mismatches have reached the notice of objection stage, two cases are at the Tax Court stage already, and some files have been resolved through audit agreements.
Neal Armstrong. Summary of Alexandra MacLean on Hybrid Mismatch Rules, 25 November 2021 CTF Panel.
We have published 11 more translations of CRA interpretations
We have published a translation of a ruling released by CRA last week and a further 10 translations of CRA interpretation released in March and February, 2006. Their descriptors and links appear below.
These are additions to our set of 1,849 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 15 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2021-12-08 | 2020 Ruling 2020-0844081R3 F - Rollout of property to beneficiaries | Income Tax Act - 101-110 - Section 107 - Subsection 107(2) | s. 107(2) applicable to distribution of trust’s shares to beneficiaries followed by an immediate s. 85(1) roll into holdco controlled by father |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(4) | a trust should distribute shares of an Amalco whose predecessor had received shares as beneficiary of another discretionary family trust before the latter’s 21-year anniversary | ||
| 2006-03-17 | 3 March 2006 Internal T.I. 2005-0151871I7 F - Déduction des intérêts | Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) | notes issued to replace notes issued to pay dividends did not qualify as refinancing borrowed money under s. 20(3) or as being for the acquisition of property per s. 20(1)(c)(ii)subsequently confirmed in 2006-0182321I7 F |
| 13 February 2006 External T.I. 2005-0153561E5 F - Aggregate Investment Income | Income Tax Act - Section 129 - Subsection 129(4) - Aggregate Investment Income - Paragraph (b) - Subparagraph (b)(iv) | rental income allocated by a unit trust could be active business income | |
| 2006-03-03 | 15 February 2006 External T.I. 2005-0126831E5 F - 120.4(1) - définition : montant exclu | Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Amount - Paragraph (a) | para. (a) exclusion does not apply to substituted property |
| Income Tax Act - Section 248 - Subsection 248(5) | phrase “substituted property” must be used to engage s. 248(5) | ||
| 1 February 2006 External T.I. 2005-0142411E5 F - Don entre vifs - bien agricole admissible | Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) | words of transfer not determinative as to whether there is a gift or sale for nominal consideration | |
| 17 February 2006 External T.I. 2005-0153931E5 F - Primes d'installation médecins | Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) | signing bonuses to medical practitioners to establish in remote areas are taxable | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | signing bonuses to medical practitioners to locate in remote areas are a taxable benefit | ||
| 2006-02-17 | 2 February 2006 External T.I. 2005-0152871E5 F - Crédit d'impôt pour emploi à l'étranger | Income Tax Act - Section 122.3 - Subsection 122.3(1) - Paragraph 122.3(1)(a) | partial funding under Reg. 3400 international development assistance program precludes credit |
| 7 February 2006 External T.I. 2005-0122381E5 F - Consequential assessment | Income Tax Act - Section 152 - Subsection 152(4.3) | taxpayer following a redetermination to allow a loss for Year 1 can carry that loss forward to a statute-barred year pursuant to s. 152(4.3) | |
| 2 February 2006 External T.I. 2005-0127351E5 F - Fiducie révocable -Prêt authentique | Income Tax Act - Section 75 - Subsection 75(2) | exception for bona fide loans/trustee may guarantee a loan | |
| 2006-02-10 | 2 February 2006 External T.I. 2005-0111911E5 F - Participation indivise dans un immeuble-fiducie | Income Tax Act - Section 70 - Subsection 70(5) | grant under will of usufruct and bare ownership to surviving spouse and children, respectively, resulted in a deemed s. 70(5) disposition to a testamentary trust |
| Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) | grant under will of usufruct in 2-unit property to surviving spouse constituted a disposition to a testamentary trust which could make the (c.1) designation for the home unit | ||
| 2 February 2006 External T.I. 2005-0152431E5 F - Utilization of non-capital losses | Income Tax Act - Section 69 - Subsection 69(11) | s. 69(11) would not apply where losses are applied against services income of Amalco | |
| Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(a) - Subparagraph 256(7)(a)(i) | s. 256(7)(a)(i) applicable where sister transfers Lossco to Profitco owned equally by her and three siblings |
CRA warns that a trust should distribute shares of an Amalco whose predecessor had received shares as beneficiary of another discretionary family trust before the latter’s 21-year anniversary
CRA ruled that s. 107(2) would apply to the distribution of the shares of two CCPCs (Zco, a holding company, and Xco, an investment company) by a discretionary family trust (Trust 2) to its beneficiaries, who were father (Mr. A), mother (Ms. A) and the two children – following which the shares of Mr. A and of the children would be transferred on a s. 85(1) rollover basis into a holding company controlled by Mr. A.
Zco was the result of an amalgamation between it and a subsidiary (Yco), whose shares Zco had received under s. 107(2) in its capacity of beneficiary of another discretionary family trust (Trust 1). After issuing its s. 107(2) ruling regarding the distribution by Trust 2, CRA issued a caution that s. 245(2) could be applied to deem s. 104(4) (the 21-year deemed realization rule) to be applicable to Trust 2 if the distribution by it of its Zco shares did not occur before the 21st anniversary of the settlement of Trust 1.
Neal Armstrong. Summary of 2020 Ruling 2020-0844081R3 F under s. 107(2).