News of Note
CRA notes that implementing a life insurance interest sharing strategy may entail the entire policy’s disposition and uncertainties as to what interest is disposed of
Email this ContentAn 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.
We have published 10 more translations of CRA interpretations
We have published a further 10 translations of CRA interpretation released in July and June, 2006. Their descriptors and links appear below.
These are additions to our set of 1,786 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 1/3 years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for November.
CRA relaxes its published policy on deductibility of fees under s. 20(1)(bb) paid to a securities dealer
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 Rulings Directorate will double its rates for rulings work
The Rulings Directorate currently charges $104.04 per hour for the first 10 hours of work on rulings, and $161.26 per hour thereafter. The rates will increase to $221.24 and $281.22 per hour on April 1, 2022 and April 1, 2023, respectively.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.19 under s. 152(1).
CRA indicates that a dividend on shares that were distributed by an inter vivos trust, as directed in a will 15 years previously, can be excluded from TOSI by s. 120.4(1.1)(b)(ii)
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).
CRA indicates that a capital dividend from a related business was not a source of arm’s length capital under the TOSI rules
Paragraph (a) of the “arm’s length capital” definition in respect of a specified individual excludes “income” derived directly or indirectly from a related business in respect of the individual. This means that a capital dividend so derived from the related business is not excluded, so that the specified individual who is between 17 and 23 years can invest that capital dividend without being subject to tax on split income (TOSI), correct?
CRA indicated that a capital dividend paid by Opco to a family trust, which in turn allocated and distributed it to a child beneficiary aged 20, would come within the exclusion in para. (c), which adverts to property transferred directly or indirectly by a related person (namely, Opco, which is controlled by the child’s father) and, thus, would not constitute arm’s length capital when invested by the child in Opco. However, CRA indicated that the safe harbour capital return exclusion in s. (f)(i) of the "excluded amount" definition might be available.
In a separate branch of the same question, CRA also noted that s. (e)(i) of "excluded amount" excludes income of an over-17 individual for a taxation year that is not derived, directly or indirectly, from a related business in respect of the individual for the year. Accordingly, where a specified individual (Ms. Y) receives a dividend from an Investco - that does not carry on a business and pays the dividend out of funds received as a winding-up dividend from an Opco which had sold all its assets in a prior year - that dividend to Ms. Y would be an excluded dividend because it would not be considered to arise, directly or indirectly, from a related business in respect of Ms. Y for the year of receipt of the dividend: the former Opco business was not carried on in that year.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.17 under s. 120.4(1) - arm’s length capital – (c).
Income Tax Severed Letters 27 October 2021
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA may be willing to issue a letter confirming that no s. 116 certificate is required because the true vendor is a resident
CRA confirmed that where there is a disposition of taxable Canadian property by a non-resident acting solely as nominee for the beneficial owner, who is a Canadian resident, no s. 116 certificate is required. Some doubt on this point may have arisen after the Olympia Trust case, finding that a purchaser for s. 116 purposes was the trustee of the purchasing RRSP, not the RRSP plan.
CRA also helpfully stated (regarding a Quebec “counter letter” establishing that the true owner is different from that named in the sale agreement):
[I]n certain cases, the CRA could issue a letter to the taxpayer confirming that it is not necessary to withhold tax or to obtain a certificate of compliance under section 116, thereby recognizing the legal effect of a counter letter … .
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.16 under s. 116(3) and s. 152(4)(a)(i).
CRA confirms that the s. 40(2)(g) formula can be prejudicial where there is delayed home construction on vacant land
An individual held vacant land from 1990 to 1999 and then occupied a new home constructed thereon as the individual’s principal residence from 2000 to the property’s sale in 2020.
CRA confirmed that even if most of the appreciation in the property occurred after 2000, the effect of the formula in s. 40(2)(b) is to apportion the gain on a straight-line basis – it has no discretion to apportion the gain based on the value in 2000.
Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.15 under s. 40(2)(g).
Bank of Nova Scotia – Tax Court of Canada finds that interest accrued from the time of “failure” to report income even though a proximate year’s loss had been available for offset
On March 12, 2015, the Bank wrote to the Minister to ask that $54 million of non-capital loss from its 2008 taxation year be carried back to its 2006 taxation year (ending October 31, 2006) to offset the increase to its income for the 2006 year that would occur when the Minister implemented a concurrent settlement agreement regarding a transfer-pricing audit. The Minister did so, but calculated interest on the increased balance of tax owing for the Bank’s 2006 year up to the date of the written request pursuant to s. 161(7)(b)(iv) (i.e., for the period of around eight years up to March 12, 2015). Thus, interest was caculated on a balance that was not ultimately owed.
Wong J rejected the Bank’s submission that, pursuant to s. 161(7)(b)(iv), such interest should not have accrued after the filing due date for the 2008 loss year return (i.e., April 28, 2009), “that Parliament did not intend for a taxpayer to be subject to interest during periods when a loss was available for carryback but the taxpayer does not know to do so until the conclusion of an audit” and that the loss carryback was as "a consequence of" the CRA audit rather than the Bank's carryback request. She considered the wording of s. 161(7)(b) to be unambiguous, but was fortified in her conclusion by her view that the scheme of the Act is to establish a “self-assessing income tax system under … which the onus is put on the taxpayer,” stating in this regard that:
The Act contemplates retroactive/retrospective liability following reassessment in a self-assessing system. Subsection 152(3) says that liability for tax is unaffected by an incorrect/incomplete assessment or by the fact that no assessment was made. In other words, one is liable for tax owing regardless of the assessment status.
Thus, she considered that the Bank owed tax from the moment it filed its 2006 return on a basis that failed to recognize the income later subject to the transfer-pricing adjustment, and the subsequent non-capital loss could not be recognized until, many years later, that need for its application was identified.
She stated that an Alberta Court of Appeal decision going the other way on a similar provincial provision was “either wrongly decided” or inapplicable federally.
Neal Armstrong. Summary of The Bank of Nova Scotia v. The Queen, 2021 TCC 70 under s. 161(7)(b)(iv).