News of Note
CRA states that an eligible dividend designation must state a dollar amount, and that GRIP variances are addressable under s. 185.1(2)
Email this ContentAt 2017-0709021C6 F, CRA accepted that the amount of the dividend paid out of the capital dividend account on a winding-up need not be specifically stated in the applicable resolution. CRA effectively indicated that this accommodation was sui generis, and that it would not allow an eligible dividend designation to state that it was in an amount equaling the lesser of the dividend amount and the general rate income pool ("GRIP") balance at the end of the corporation's taxation year.
The solution to making a designation in a specific dollar amount that was too high was to elect on the excessive dividend amount under s. 185.1(2) to convert it to a non-eligible dividend, so as to avoid the Part III.1 tax. CRA also noted that, administratively, it:
[a]llows … mitigating the effects of an excessive eligible dividend designation by accepting that the election provided for in subsection 185.1(2) can be made by a corporation at the time of filing its income tax return, without having to wait for a notice of assessment of Part III.1 tax to be issued.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q.11, 2020-0852231C6 F under s. 185.1(2).
CRA indicates that s. 247 would apply to an interest-free loan made by a Canadian individual to a non-arm’s length corporation
Is an individual who makes an interest-free loan to a non-resident corporation with which the individual does not deal at arm's length required to include in income an amount equaling the interest that would have been received had an arm's length rate been applied in accordance with s. 247?
After noting that it “does not generally comment on proposed legislation” (i.e., draft s. 247(2.1)) and that “[e]xcept in situations of indirect arrangements or loans referred to in subsection 17(2), section 17 generally does not apply to an amount that is owed to an individual,” CRA stated:
[W]here a taxpayer (including an individual) and a non-resident person with whom the taxpayer does not deal at arm's length enter into a transaction and the terms and conditions between the parties differ from those that would have been entered into between arm's length persons, subsection 247(2) could apply. In such a case, the amounts that would be determined for the purposes of the Income Tax Act in respect of the taxpayer will generally be adjusted to reflect the value or nature of the amounts that would have been determined if the terms and conditions of the transaction had been those that would have been entered into between arm's length persons.
In the scenario presented, we believe that subsection 247(2) would apply and that the individual would be required to include in income an amount of interest equivalent to the adjustment described above, regardless of the proposed addition of subsection 247(2.1).
This is troubling. It presumably was not originally intended that s. 247 would apply, for example, to impute a fee where a Canadian-resident individual provides free advice to her non-resident daughter (or, to get closer to the facts in this question, to the daughter’s non-resident portfolio company), or to recharacterize a gift by her to her daughter (or that company) as an interest-bearing loan. However, this answer does not suggest any such limitation.
This response also of course reflects the recent CRA positions that not coming within s. 17 regarding an outbound loan does not represent a safe harbor from the application of s. 247.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 10, 2020-0852221C6 F under s. 247(2)(a).
CRA indicates that a s. 83(2) dividend election cannot be made on a formula amount
Immediately prior to closing a sale of a private corporation, its shareholder wishes to have all of the capital dividend account distributed to it, but the precise CDA balance cannot be known until year end when the accounts are finalized. Would CRA accept a resolution of the directors and a T2054 form where the amount of the capital dividend was shown only by a mathematical formula, i.e., it would be, at the time of signing, a determinable, but not a determined, amount?
CRA responded, “no,” a precise dollar amount was required to be specified, before going on to note that the maximum late-filing penalty was only $41.67 per month.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 9, 2020-0852211C6 F under s. 83(2).
CRA indicates that s. 83(2.1) does not generally apply to the streaming of capital dividends to one of the original shareholders
ACO (a CCPC) has three corporate shareholders, each holding 10 Class A common shares in its capital: BCO (exempt under s. 149(1)); CCO (a non-resident); and DCO (a taxable CCPC).
After ACO realizes a capital gain on a disposition to a third party that generates a capital dividend account of $100, DCO exchanges its 10 Class A common shares under s. 51 for 10 Class B common shares. ACO then pays a capital dividend of $100 on those Class B common shares.
Before intimating that s. 83(2.1) likely would not apply to such streaming of the CDA to DCO because it was one of the original shareholders, CRA stated:
For the purposes of applying subsection 83(2.1), the CRA has traditionally considered that it is the main purpose of the original acquisition of the shares that must be taken into account when they are exchanged for shares of another class upon reclassification of the capital stock of the corporation. In addition, the CRA is generally of the view that subsection 83(2.1) does not apply to transactions that result in the payment of a capital dividend to certain original shareholders of the corporation. Such positions are largely based on the legislative intent of subsection 83(2.1), which is to prevent a corporation from transferring the balance of its CDA to another corporation or person by selling shares of its capital stock.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 8, 2020-0852201C6 F under s. 83(2.1).
CRA confirms that where a private corporation has immaculately-conceived shares of two series, capital dividends can be paid on only one series
CRA confirmed that since s. 248(6) requires a series of shares to be treated as a separate class, a capital dividend could be paid by a private corporation to the holders of only one of the series of shares of a class. Before asking about this, the questioner had commented that the payment of capital dividends only to taxable shareholders of a private company and not to its tax-exempt shareholders, can also be avoided by redemption transactions targeted to the taxable shareholders. CRA, in its response, added:
[I]f it were the case that certain reorganizations or conversions of shares carried out through a transaction, or as part of a series of transactions, one of the main purposes of which is to enable shareholders to receive capital dividends, then the application of subsection 83(2.1) should be considered.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 7, 2020-0852191C6 F under s. 83(2).
CRA is now applying a “proportionate attribution approach” in applying the EIA s. 5(2)(b) test of “control … of … voting shares”
S. 5(2)(b) of the Employment Insurance Act provides that “Insurable employment does not include … the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation.” Équipements Boifor, 2019 CAF 69 concluded that two shareholders did not have insurable employment by virtue of s. 5(2)(b) given that they controlled more than 40% of Boifor's shares, taking into account those individuals’ shares held indirectly through a holding corporation, even though the shares were held on a 50-50 basis and no one individually held control of the holding corporation.
In stating that it accepted Boifor, so that its previous position was reversed, CRA addressed the example of two 50-50 (or 51-49) shareholders of a Holdco wholly owning their employer (Opco), and stated:
In light of the FCA's decision, the CRA must now consider the proportionate attribution approach in similar situations to determine whether the employment of a person who controls more than 40% of the voting shares of the employing corporation is insurable. …
… The proportionate attribution approach leads to the conclusion that the two shareholders each control more than 40% of Opco's voting shares (50% of 100%) for the purposes of EIA paragraph 5(2)(b). …
… [W]here the shareholders held 51% and 49% of the voting shares of Holdco … their employment [also] would not be insurable because they had effective control of 51% and 49% of the voting shares of Opco … .
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 6, 2020-0852181C6 F under EIA s. 5(2)(b).
CRA finds that a deemed s. 248(3) testamentary usufruct trust might access the principal residence exemption on the spousal usufructuary’s death or on her surrendering her interest
A housing unit is subject to a usufruct created by the Quebec will of Mr. X, with Mr. X’s surviving spouse (Ms. X) being the usufructuary, and their child being the bare owner. Ms. X ordinarily inhabits the housing unit.
The creation of the usufruct would create a deemed (testamentary) trust under s. 248(3), which would qualify as a spousal trust for purposes of a s. 70(6) rollover to such trust of the residence assuming that, under the terms of the will, no person other than Ms. X would be entitled during her lifetime to receive or otherwise obtain the use of any part of the income or capital of the trust.
CRA indicated that the death of the usufructuary (Ms. X) would terminate the usufruct and the deemed trust, which would imply the distribution of the housing unit to the bare owner. Upon the termination of the deemed trust, since the distribution of the property by the deemed trust (referred to in s. 104(4)(a)(i)), would be made to a beneficiary other than the surviving spouse, s. 107(4) would apply to the distribution, so that s. 107(2.1) would result in realization of a capital gain by the deemed trust. However, as Ms. X would be beneficially interested in the deemed trust under s. 248(3)(d), she could be considered a specified beneficiary as defined in s. (c.1)(ii) of the "principal residence" definition to the extent that she ordinarily inhabited the residence during the years the deemed trust owned it by virtue of s. 248(3) – thereby allowing the deemed trust to designate the residence as its principal residence, provided that all the other conditions of the "principal residence" definition were satisfied.
Regarding what would be the consequences of Ms. X surrendering her usufruct, CRA noted that such surrender would terminate the deemed trust and result in the distribution of the deemed trust’s property to the bare owner. Ss. 107(2.1) and (4) would apply to this distribution. However, again, the deemed trust could claim the principal residence exemption provided the usual conditions were satisfied.
In another variation, if the usufruct for Ms. X (following Mr. X's death) was for specific term of years, there thus would be a potential for someone other than the surviving spouse to receive or obtain the use of part of the income or capital of the deemed trust during the lifetime of the spouse (Ms. X), so that the condition in s. 70(6)(b)(ii) would not be met, and there would be no spousal rollover on Mr. X’s death.
Finally, what if the bare owner (the child) assigned her bare ownership interest in the residence to her mother, the usufructuary (Ms X), or predeceased her mother? CRA indicated that, pursuant to s. 70(5) or 69(1)(b), the bare owner would be deemed to have received the FMV of the capital interest in the deemed trust on its deemed disposition on the death, or on its assignment to the usufructuary, respectively. Moreover, the assignment to the usufructuary would cause the deemed trust’s termination, so that the housing unit would be distributed to the usufructuary on a rollover basis pursuant to s. 107(2).
Neal Armstrong. Summaries of 7 October 2020 APFF Roundtable Q. 5, 2020-0852171C6 F under s. 54 - principal residence – (c.1), s. 107(4), s. 70(6)(b)(ii) and s. 248(3).
CRA will not follow the ARQ in allowing a s. 164(6) loss carryback claim on a terminal return before the GRE’s T3 return is assessed
At the 2019 APFF Provincial Roundtable, Revenu Québec indicated that it is possible to claim the capital loss, realized by a graduated rate estate in its first taxation year and that is subject to the Quebec equivalent of the s. 164(6) carryback election, directly on the deceased's final TP-1 return, where the capital loss is already known at the time the two tax returns are filed.
CRA, for the time being at least, is not budging. It stated:
While there is no provision in the Income Tax Act that prevents the taxpayer's amended T1 Final Return (including the election under paragraphs 164(6)(c) and 164(6)(d)) from being filed before the T3 Return is filed, it is the CRA's administrative practice to assess the T3 Return before the reassessment giving effect to the election can be processed. That practice ensures that the loss claimed and any resulting reduction in tax payable or refund is substantiated.
Relaxing CRA's procedures and any administrative policy in that regard would require a thorough review … . That said, it would be highly unusual for the CRA to allow a loss to be applied to a tax return before the return giving rise to the loss has been assessed.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 4, 2020-0852161C6 F under s. 164(6).
CRA finds that a loan, that had funded a dividend creating a safe income deficit, reduced SIOH when repaid out of safe income earnings
In 2015, Opco, which had safe income of nil but an intangible asset worth $100,000, borrowed $100,000 to pay a dividend on its common shares to its sole shareholder (Mr. X). A Holdco ("Holdco Y") for an arm’s length (Mr. Y) then subscribed a nominal amount for common shares to become a 50% shareholder.
In 2018, after Opco had generated aggregate safe income of $200,000, Mr. X transferred his 50% shareholding to his wholly-owned Holdco ("Holdco X") on a s. 85(1) rollover basis at the shares’ nominal ACB. The $100,000 loan was repaid out of the $200,000 of retained earnings. The FMV of all the shares of Opco (which continued to hold the intangible worth $100,000) was $200,000.
CRA indicated that the safe income attributable to Mr. X’s 50% shareholding was effectively transferred to Holdco X on the s. 85(1) rollover. Regarding the safe income attributable to the shares at the conclusion of these transactions, it indicated that, since the loan was “was repaid out of the corporation's earned or realized income … that income cannot be viewed as contributing to the unrealized gain on the common shares of the capital stock of Opco” – so that the relevant safe income attributable to the 50% shareholding in Opco of each of the two Holdcos was $100,000 - $50,0000, or $50,000.
CRA did not discuss whether this same $100,000 reduction to the safe income of the two shareholdings for the $100,000 loan (or, looked at another way, for the $100,000 negative safe income resulting from the $100,000 dividend) would have also applied prior to the loan repayment.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 3, 2020-0852151C6 F under s. 55(2.1)(c).
CRA provides examples of what it has accepted as a “reasonable error” in making an RRSP or TFSA over-contribution
One of the requirements for the waiver under s. 204.1(4) or 207.06(1) of the penalty tax for an excess contribution to an RRSP or TFSA, respectively, is that the Minister be satisfied that the excess “arose as a consequence of reasonable error.” When asked about its interpretation of “reasonable error,” CRA first stated that “[f]or the error to be reasonable, it must … be considered by an impartial person to be more likely to occur rather than less likely to occur based on the circumstances of the taxpayer.” (This sounds rather like replacing “reasonable error” by “likely error.”)
It then indicated that ignorance of the contribution requirements generally will not be the basis for a waiver, but that “CRA may consider it appropriate to waive tax arising from a third-party error, depending on the circumstances.”
CRA then gave the following examples of instances where CRA has accepted that there was reasonable error:
- The taxpayer's notice of (re)assessment) indicated an RRSP deduction limit of $0, where in fact the limit was a negative amount, so that the taxpayer may have mistakenly believed that the taxpayer was entitled to the $2,000 allowance …;
- The taxpayer, through no personal fault, had over-contributed due to inaccurate information provided on the RRSP deduction limit statement [or by] the CRA…;
- The taxpayer's RRSP deduction limit had been reduced retroactively, due to events such as the late submission of a pension adjustment or amended pension adjustment, or the late submission of an exempt past service pension adjustment or T215 slip … for exempt past service pension adjustments;
- The taxpayer, a TFSA holder, had made multiple contributions to and withdrawals from his TFSA with the objective of maintaining a TFSA account balance below the contribution limit.
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 1, 2020-0852131C6 F under s. 204.1(4).