News of Note

CRA noted that the effect of excluding most taxable capital gains from the definition of “full rate taxable income” in s. 123.4(1) is that where a CCPC, that has realized business income and taxable capital gains (e.g., from a sale of that business) in a year, has also made a charitable gift, the donation produces a tax reduction based on the low tax rate applicable to the business income rather than the higher rate applicable to aggregate investment income such as taxable capital gains.

Neal Armstrong. Summary of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 123.4(1) - full rate taxable income – (b).

An individual owning a policy on that individual’s life with coverage of $1 million, a cash surrender value (“CSV”) of $250,000 and an adjusted cost basis ("ACB") of $150,000, donates ½ of the individual’s interest in the policy to a registered charity or, alternatively, only donates ½ of the entitlement to the CSV. Rather than responding to a query as to how the gain under s. 148(7) should be computed, CRA referred to the threshold issue of whether such a transaction would result “in a disposition of the entire interest in the policy rather than just a portion of it.” Furthermore, even if this was “a life insurance interest sharing strategy” that did not entail a disposition of the entire policy:

it would be necessary to determine whether it is possible to determine what fraction of the whole represents the portion assigned to the donee and also whether, as a result of the assignment, the donor and donee would be joint policyholders or, rather, each would own a separate policy.

Neal Armstrong. Summary of 2021 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 148(9) - disposition.

CRA has now published a more accommodating position than set out in 1990 regarding whether fees paid by clients of securities dealers for the management of their portfolios (e.g., fees calculated as a percentage of the assets in the portfolio) are deductible under s. 20(1)(bb). That provision provides for the deductibility of a fee paid for “advice as to the advisability of purchasing or selling a specific share or security of the taxpayer” or for “services in respect of the administration or management of shares or securities of the taxpayer” where the principal business of the service provider is “advising others as to the advisability of purchasing or selling specific shares or securities, or … includes the provision of services in respect of the administration or management of shares or securities.”

CRA stated that:

[I]t is reasonable to assume that the principal business of a person licensed as a securities dealer is to advise on the advisability of purchasing or selling shares or securities or to provide services in respect of the administration or management of shares or securities.

and that fees (other than “commissions” – as to whose meaning CRA was somewhat nebulous) paid to a securities dealer:

would be fully deductible pursuant to paragraph 20(1)(bb) provided that they are reasonable in relation to the services received and that they are in respect of the administration or management of shares or securities.

Neal Armstrong. Summary of 8 October 2021 APFF Financial Strategies and Instruments Roundtable, Q.1 under s. 20(1)(bb).

The will of an individual (Mr. X), who had for many years been actively involved in the business of an Opco, provided for a portion of his Opco shares to go to a testamentary trust for his 20-year old child. CRA indicated that the child would be deemed by s. 120.4(1.1)(b)(ii) to have been also actively engaged in the Opco business, so that the Opco dividends received by the child through the trust were deemed to be “excluded amounts.” Also, a deemed dividend received by the child over 15 years later when a distribution of the Opco shares occurs on the distribution date established in the testamentary trust was to be followed by a redemption in the child’s hands of those shares.

An alternate scenario involved an inter vivos trust holding Opco shares at the time of Mr. X’s death which were directed under the trust deed to be applied as directed in Mr. X’s will – which provided the same terms as described above. Here, since the shares held in the trust were not acquired by it as a consequence of Mr. X’s death (they had been settled on it before his death), the s. 120.4(1.1)(b)(ii) rule could not be applied to render the dividends distributed by the trust to the child as excluded amounts. However, this issue was cured once the shares were distributed by the inter vivos trust to the child on the distribution-date 15 years later, since such distribution occurred as directed in Mr. X’s will and, therefore, as a consequence of his death. Consequently, the deemed dividend received on the ensuing redemption of those shares would be deemed to be an excluded amount.

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.18 under s. 120.4(1.1)(b)(ii).