News of Note

A non-resident individual entered into an agreement to purchase a condo to be constructed in Canada for occupancy by the individual’s daughter while the latter attended a post-secondary institution, which had granted a conditional acceptance. However, the exam results of the daughter at the secondary school she was attending did not meet the standards of the post-secondary institution, and it revoked its conditional acceptance. This resulted in the individual assigning her purchase agreement to another purchaser at a gain.

The Directorate ruled that this assignment was a taxable supply for GST/HST purposes on the basis that the individual had acquired her real estate interest “in the course of a business or an adventure or concern in the nature of trade” (under para. (f) of the definition of “builder”).

The Directorate found that in order to satisfy this test, she was required to inter alia “prove” that her stated primary intention of acquiring the condo for use as a residence for her daughter “was a firm, fixed and settled intention that was not likely to change.” Instead, it viewed the stated purpose as “a tentative, provisional or exploratory contemplation that was conditional or dependent on future events occurring (that is, the … daughter being accepted and attending [the post-secondary institution]).” It also applied the following position:

Generally, if an individual acquires an interest in a residential complex (that is, acquires the interest in the complex before it has been occupied by an individual as a place of residence or lodging) and sells the interest before or while the complex is under construction, then the action of selling the interest is viewed strongly as evidence that the individual acquired the interest in the complex for the primary purpose of selling the interest in the course of a business or an adventure or concern in the nature of trade.

The above comments are at least somewhat at odds with the income tax jurisprudence on what is a real estate adventure in the nature of trade, including the findings under the Racine line of cases that the prospect of resale at a gain if Plan A falls through must be "an operating motivation" in the acquisition in order for the secondary intention doctrine to apply, and did not refer to any of this jurisprudence or even the IT Bulletin on the subject.

Neal Armstrong. Summary of 1 June 2021 GST/HST Ruling 192033r2 under ETA s. 123(1) – builder – (f).

This morning's release of six severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their June 2021 and July 2021 release) is now available for your viewing.

A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. On the other hand, various s. 107 rules are stated to apply to a prescribed trust described in Reg. 4800.1. A trust for employees, which held shares in a family-controlled company, made distributions to employees including family members. Their tax reporting relied on the trust being a prescribed trust, so that a capital gain was treated as being realized on the distribution pursuant to s. 107(2.1) (as a result of an s. 107(2.001) election), with that capital gain being allocated to the beneficiaries.

Webb JA and the Tax Court below treated that distribution as instead having been made by an EBP, so that the full value of the distribution was includible in the beneficiaries’ income under s. 6(1)(g). Webb JA noted that the trust satisfied the terms both of the EBP definition and the description of a prescribed trust. In finding that it was an EBP, he cited Oldman for the proposition that “[o]rdinarily … an Act of Parliament must prevail over inconsistent or conflicting subordinate legislation,” and then stated:

[S]ince the definition of a prescribed trust is set out in the Regulations, the paramountcy of the definition of an employee benefit plan in the Act must govern. Otherwise, the Act would be amended by the Regulations if an arrangement, such as the one in this appeal, is not an employee benefit plan as defined in the Act because it is also a prescribed trust as defined in the Regulations.

Neal Armstrong. Summaries of McNeeley v. Canada, 2021 FCA 218 under s. 248(1) – EBP and Statutory Interpretation – Regulations/Statutory Interpretation.

In light of s. 138.1(1)(f), the taxable income of a related segregated fund trust is deemed for the purposes of computing the income of the trust and beneficiaries under ss. 104(6), (13) and (24) to have been payable in the year to the beneficiaries, with the allocation amongst them to be determined by reference to the terms and conditions of the policy. (There is a similar rule in s. 138.1(3) for capital gains.)

CRA made the point that this is tax law, not real law. In fact, the beneficiaries generally have no entitlement to enforce payment to them of the accruing income. In particular having regard to the CRA view that “to be a right or thing [under s. 70(2)] … the individual would have to be legally entitled to receive the amount at the time of the individual’s death (the right would have to exist)” CRA considered that even though an individual annuitant who died part way through the year was allocated the income that had been earned in the year up to the time of death on the T3 slip received by his executors, he had no legal entitlement to the allocated amounts. Hence, such income was not rights or things, so that it could not be included on a separate s. 70(2) return.

Neal Armstrong. Summary of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.10 under s. 138.1(1)(f).