News of Note

The 1% monthly tax under s. 204.2(2.1) is imposed on the “cumulative excess amount in respect of RRSPs” (the “cumulative excess”). A component of the cumulative excess is the individual’s “undeducted RRSP premiums,” which is reduced by the amount, if any, by which the total of all amounts received by the individual in the year and before the time out of or under, inter alia, an RRSP or RRIF and included in computing the individual’s income for the year exceeds the amount deducted under s. 60(l) in computing the individual’s income for the year.

CRA confirmed that this reduction occurs on a monthly basis, consistently with the monthly calculation of the tax. For example, if the annuitant made a withdrawal from the individual’s RRSP (or RRIF) in May (that was not recontributed so as to generate a s. 60(l) deduction), thereby eliminating the cumulative excess, no tax would be payable for May or thereafter, but the tax would still be payable for the prior months.

Neal Armstrong. Summary of APFF Financial Strategies and Instruments Roundtable, Q.9 under s. 204.2(1.2) - undeducted RRSP premiums – J.

The taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she qualified as an Australian resident. A citizen and resident of Australia would have largely escaped income taxation on her modest income (mostly working as a waiter) due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of Pt. III of Sched. 7 of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.

The taxpayer, by virtue of her citizenship, was a UK rather than Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (Art. 25) - also found in many of the Canadian treaties - provided:

Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.

The Court found the contention of the Commissioner, that “because s 29 of the Migration Act ensures that an Australian national cannot hold a working holiday visa, no comparison of the kind required by Art 25(1) is possible, and Art 25(1) is not engaged,” to be specious, stating:

[C]onsistent with the text, context, object and purpose of Art 25(1), the relevant comparator is the hypothetical taxpayer in the same circumstances apart from the criterion on which the claim of discriminatory taxation is based. The phrase "in the same circumstances" means in the same circumstances apart from those circumstances attached to the prohibited basis for discriminatory taxation. Here, that is visa status, a characteristic which depends on nationality – a person not being an Australian national – the very attribute protected by Art 25(1).

Accordingly, the taxpayer was shielded by Art. 25 from the more burdensome rate of tax imposed under the domestic backpacker tax provisions.

Neal Armstrong. Summary of Addy v Commissioner of Taxation [2021] HCA 34 under Treaties – Income Tax Conventions – Art. 25.

Suppose that Canco would otherwise realize a capital gain on a liquidation and dissolution of a foreign subsidiary (FA) under s. 88(3). Rather than making a suppression election, it elects under s. 93(1) for the gain to be a dividend. There is plenty of taxable surplus (as a result of previously taxed FAPI) but, absent further planning, there is insufficient underlying foreign tax (UFT) to completely offset the dividend with a (proportionate) s. 113(1)(b) deduction.

That planning could be the claiming by it of a disproportionate amount of UFT with respect to the dividend received (per para. (b) of the “underlying foreign tax applicable” definition in Reg. 5907(1)) instead of a proportionate deduction under s. 113(1)(b). Thus, if there was sufficient UFT in respect of FA, Canco could claim additional UFT sufficient to create an additional deduction that completely eliminates the dividend income.

Neal Armstrong. Summary of Tu Vu, “Application of Disproportionate UFT Election,” Canadian Tax Focus, Vol. 11, No. 4, November 2021, p. 15 under Reg. 5907(1) - underlying foreign tax applicable – para. (b).

An employee, who engages in a short sale transaction to finance the exercise of stock options on the shares of the individual’s employer, short sells identical shares borrowed from a third-party lender and uses the short sale proceeds to inter alia fund the option exercise – and then uses the shares acquired on exercise to cover the short position. The employee had previously made an s. 39(4) election and, at the time of the short sale, held other identical shares.

Regarding the shares that the employee acquired on exercise and promptly disposed of by delivering to the lender to cover the short position, s. 7(1.31) generally would oust the application of ACB averaging under s. 47(1), so that no gain would be realized on that disposition (assuming no value change subsequent to exercise).

However, s. 7(1.31) would not apply to the disposition of the shares that were borrowed and then sold, because such shares “would not have been acquired pursuant to an agreement referred to in subsection 7(1).” Accordingly, a gain would be realized on that initial disposition if the existing shareholding had a low ACB.

CRA also reiterated its position that:

Where, in a taxation year for which an election under subsection 39(4) applies, a taxpayer makes a short sale, the two dispositions of securities (both the one that occurs at the time of the short sale and the one that occurs subsequently when the borrower delivers securities to the lender to cover its short position) are deemed to be dispositions of capital property to the short seller.

Neal Armstrong. Summaries of APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 7(1.31) and s. 39(4).