News of Note

Ossai – Federal Court sets aside a CRA decision on the basis that it was unintelligible

Although the facts are more intricate, they essentially involved the taxpayer, in early 2021, promptly withdrawing $29,000 from his TFSA when he discovered (before being so notified by CRA) that he had over-contributed by $20,000 – then shortly thereafter, contributing a further $6,000 to his TFSA, not realizing that under the “excess TFSA amount” definition, such contributions were not offset by his “excess” TFSA withdrawal earlier in the year of $9,000 because it is only a prior, not a current, year’s withdrawals that restore contribution room. He did not withdraw the excess contributions created by these further contributions until a number of months after CRA had assessed him in 2021 for his $20,000 overcontribution. CRA denied his request for relief under s. 207.06(1) on the basis that the removal of the excess contributions did not occur within a reasonable time frame – but provided no explanation as to why the $9,000 excess withdrawal in 2021 did not offset the further 2021 contributions.

Aylen J found that, in the absence of any such explanation, the CRA adverse decision was “unintelligible and lack[ed] justification and transparency.” The decision was set aside and remitted for re-determination by a different CRA officer.

Neal Armstrong. Summary of Ossai v. Canada (Attorney General), 2023 FC 313 under s. 207.06(1).

CRA comments indicate that a loan from an Ontario partnership to a general partner will be treated as a distribution

CRA indicated that whether a payment made by a limited partnership to a limited partner that was styled as a loan was to be treated as a loan for purposes of ss. 96(2.2)(c) and 53(2)(c)(v) (rather than as a distribution) was to be determined based on the laws of Ontario.

Regarding the common law, the Directorate stated (adverting to the Rye v. Rye/ Klein line of cases):

It is well established at common law that a man cannot contract with himself and that a partner cannot contract with a partnership of which he is a member. Therefore, it is necessary to determine whether a limited partnership can make a loan to a limited partner pursuant to statutory law, thereby overriding such long-standing common law rule.

CRA had earlier referred to s. 60(1) of the Partnership Act (B.C.), which provides that “A limited partner may lend money to, borrow money from and transact business with the limited partnership,” and noted that such a loan therefore can be valid.

Although, on its analysis, this was the very provision at issue, it curiously did not go on to refer to s. 12 of the Limited Partnerships Act (Ontario), which provides a truncated (but likely not maimed) version of s. 60(l) of the B.C. Act: “A limited partner may loan money to and transact other business with the limited partnership … ” (i.e., s. 12 does not specifically refer to limited partner borrowings). However, CRA indicated that the doubts expressed in 2016-0637341E5 as to whether it was possible under the civil law for a limited partnership to make loans to a limited partner were not meant to apply to Ontario limited partnerships.

The above comments suggest that CRA Headquarters would characterize a loan made to a general partner by a partnership governed by the laws of a common law province, such as Ontario, as instead being a distribution.

Neal Armstrong. Summary of 16 December 2019 Internal T.I. 2019-0816101I7 under s. 96(2.2)(c) and Statutory Interpretation – Interpretation Act, s. 8.1.

Income Tax Severed Letters 8 March 2023

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.

BMO Nesbitt Burns – Federal Court of Appeal confirms that providing a full spreadsheet would not breach privilege or amount to an impermissible self-audit

The Federal Court had granted a CRA application pursuant to s. 231.7 seeking an order requiring BMO Nesbit Burns (“NBI”) to provide an unredacted version of a spreadsheet in connection with CRA’s audit of suspected dividend rental arrangement transactions of NBI.

NBI in response to the initial request made pursuant to s. 231.1 had redacted a column in the spreadsheet on the basis that it reflected written legal advice it had received. In rejecting NBI’s claim of privilege, Kane J had stated that the spreadsheet was not more than the mere “operational outcome or end product of legal advice” and did not satisfy the requirement that it “communicate … the very legal advice given by counsel.” Without reviewing these findings in detail, Locke JA found no reversible error.

In rejecting NBI’s further argument that “the Minister’s application should not have been granted in the absence of an ongoing tax audit,” Locke JA noted that the audit was still ongoing when CRA first requested the unredacted spreadsheet,” and then stated:

[I]t cannot have been Parliament’s intent to permit the target of an audit to avoid an order pursuant to subsection 231.7(1) of the Act by delaying compliance with a document request until after issuance of a notice of reassessment. …

He also very briefly rejected NBI’s submission (based on BP Canada) “that ordering production of the unredacted Spreadsheet amounts to requiring NBI to conduct a self-audit or to reveal its ‘soft spots’,” simply stating that BP Canada was distinguishable.

Neal Armstrong. Summaries of BMO Nesbitt Burns Inc. v. Canada (National Revenue), 2023 FCA 43 under s. 232(1) – solicitor-client privilege and s. 231.7.

CRA defines the meaning of “substantially complete” in a UHTA context

UHTA s. 6(7)(k) exempts a person who is not an excluded owner from tax respecting a residential property held at the end of a calendar year where “the construction of the residential property is not substantially completed before April of the calendar year.”

CRA indicated that it may use its GST/HST guidelines in determining when construction of a residential property is substantially completed for UHTA purposes. It stated:

Generally, substantial completion of a residential property means that construction is at a stage of completion (generally 90% or more) that allows an individual to reasonably inhabit the property.

S. 6(7)(l) provides an exemption where “the construction of the residential property is substantially completed in January, February or March of the calendar year, the residential property is offered for sale to the public during the calendar year and the residential property had never been occupied by an individual as a place of residence or lodging during the calendar year.” CRA indicated that this exemption would apply in the following simple example:

  • C and D (who are not citizens or permanent residents) together own all the shares of a Canadian corporation which had substantially completed constructing detached homes in Canada in March 2022.
  • Although the homes had been offered for sale to the public from shortly after the commencement of construction, they were still unsold on December 31, 2022.

Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN13 Exemptions for New Residential Properties February 2023 under UHTA s. 6(7)(k) and s. 6(7)(l).

We have translated 7 more CRA interpretations

We have published a CRA interpretation released last week and a further 6 translations of CRA interpretations released in October of 2003. Their descriptors and links appear below.

These are additions to our set of 2,397 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 19 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2023-03-01 30 June 2022 Internal T.I. 2022-0936671I7 F - Frais de déplacement Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) one-time travel between a home office and the employer’s office was in the course of employment
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(vii.1) per-kilometer allowances for one-time travel between home office and employer’s office qualified under s. 6(1)(b)(vii.1
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) - Subparagraph 6(1)(b)(vii) one-time travel between home office and employer’s office did not qualify as travel away from the employer’s establishment
Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(b) potential exclusion of allowances for meals and hotels paid for travel to a remote work site (an office) of the employer where the employees stay for 3 days
2003-10-17 8 September 2003 Internal T.I. 2003-0010407 F - Gains et pertes sur change étranger
Also released under document number 2003-00104070.

Income Tax Act - Section 39 - Subsection 39(2) s. 39(2) applies to interest on US mortgage
Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) Gaynor applies in computing gain on disposition of US securities
29 September 2003 Internal T.I. 2003-0027347 F - FRAIS MEDICAUX DEPLACEMENT
Also released under document number 2003-00273470.

Income Tax Act - Section 118.2 - Subsection 118.2(2) - Paragraph 118.2(2)(h) travel and accommodation expenses of parents in order to be near their hospitalized child were not covered
24 September 2003 Internal T.I. 2003-0184097 F - perte au titre de placement
Also released under document number 2003-01840970.

Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) Byram accepted: NIB loan can be made with a view to dividends
2003-10-10 11 September 2003 Internal T.I. 2003-0026217 F - Report de Pertes du de Cujus
Also released under document number 2003-00262170.

Income Tax Act - Section 111 - Subsection 111(2) net capital loss in year before death could be carried back rather than applied against all income in the two s. 111(2) years
25 September 2003 Internal T.I. 2003-0032837 F - Market Maker: Reserve Account for Losses
Also released under document number 2003-00328370.

Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) payment of deferred commission amounts held as contingency loss reserve from old employer to new employer was a payment of “remuneration” subject to withholding
General Concepts - Payment & Receipt constructive receipt by employee where reserve loss account (funded out of commissions) is transferred from old brokerage employer to new brokerage employer
2003-10-03 24 September 2003 External T.I. 2003-0028145 F - DON FAIT PAR UN PARTICULIER NON-RESIDENT
Also released under document number 2003-00281450.

Income Tax Act - Section 118.1 - Subsection 118.1(3) non-resident can carry forward a credit five years to when Canadian residence is acquired

CRA purports to require non-resident executors to obtain UHTA clearance certificates

The UHTA reflects the reassuring premise that we will continue to be persons after our deaths. In particular, s. 6(7)(h) provides an exemption from the tax that otherwise would be imposed on a (non-resident/non-citizen) person’s ownership of a residential property at the end of a calendar year “if …the person died during the calendar year or the prior calendar year.” On the other hand, s. 6(7)(i) exempts a person who “is the personal representative of a deceased individual who was an owner of the residential property during the calendar year or the prior calendar year and the person was not otherwise an owner of the residential property in either of those calendar years.”

CRA provided a simple example illustrating the relationship between the two provisions involving individuals all of whom were not permanent residents or citizens.

  • The estate arising on the death of C on December 15, 2022 included a Canadian detached home, whose registered title was in C’s name. C (through D, the executor) was required to file a UHTA return for 2022, but was exempted as a substantive matter for that year under s. 6(7)(h). Essentially the same would have applied for 2023 if registered title had continued in C’s name until December 31, 2023, e.g., the s. 6(7)(h) exemption would have applied because C died the prior year.
  • However, the registered title was transferred to the executor (D) in February 2023. D must file a return for the property for the 2023 calendar year, but is exempted from the tax under s. 6(7)(i) because D is the executor of a deceased individual who was the property’s owner during the prior year (2022), and D is not an owner otherwise than in D’s capacity of executor.

CRA also indicated that (the executor or other representative of a deceased individual’s estate “must” obtain a CRA clearance certificate (under UHTA s. 11(4), equivalent to ITA s. 159(2)) confirming no unpaid UHTA amounts before making any distribution out of the estate, so as to avoid personal liability. This will come as a surprise to non-resident executors of non-resident estates.

Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN11 Exemptions for Deceased Individuals and Their Personal Representatives or Co-owners February 2023 under s. 6(7)(h), s. 6(7)(i), s. 6(7)(j), s. 2 – ownership percentage, and s. 11(4).

CRA finds that one-time travel between a home office and the employer’s office was in the course of employment, and that such office could be a special work site

Given the great distance between the residence of new employees hired by the employer for a 24-month period and the employer's offices, they work from home. Although their contract of employment designates one of the employer's offices as their place of work, they are only required to attend there for a single three-day visit for training and team building activities.

CRA indicated that given that the employer’s office was not the employees’ regular place of employment, their travel between home and that office quailed as travel in the course of their employment. This signified that reimbursement for their travel expenses (e.g., for bus and hotels) was not a taxable benefit under s. 6(1)(a). Furthermore, for those who travelled using their own vehicles, a reasonable per-kilometre allowance payable by their employer would not be included in their income pursuant to s. 6(1)(b) by virtue of the exception in s. 6(1)(b)(vii.1), again because such travel would be considered to be in the course of their employment.

Any allowances paid for other types of travel expenses (e.g., for meals) would not qualify for exclusion under s. 6(1)(b)(vii) given the requirement under that provision that the travel be away from the municipality (and, where applicable, metropolitan area) where the employer’s establishment was situated and the CRA position “that a home office is not an employer's establishment.” However, such allowances potentially would qualify for exclusion under s. 6(6)(b) (i.e., travel for temporary work at a special work site of the employer).

Neal Armstrong. Summaries of 30 June 2022 Internal T.I. 2022-0936671I7 F under s. 6(1)(a), s. 6(1)(b)(vii.1), s. 6(1)(b)(vii) and s. 6(6)(b).

CRA indicates that employee beneficiaries of a mooted ELHT form a single class if their benefit entitlements are reasonably similar

In order to qualify as an employee life and health trust (ELHT), s. 144.1(2)(e)(i) or (ii) must be satisfied. The test in s. 144.1(2)(e)(i)(A) requires that the “trust … contains at least one class of beneficiaries where the members of the class represent at least 25% of all of the beneficiaries of the trust who are employees of the participating employers under the trust.” The term “class of beneficiaries” is defined in s. 144.1(1) “as a group of beneficiaries who have identical rights or interests under the trust.”

CRA considered a plan covering all the non-unionized employees of over 1,000 stores in a retail chain, where the benefits offered to the employees varied by participating employer, so that there could be different classes of benefits and coverage levels offered to the employees of the different participating employers. In indicating that there being no 25% group with the same benefit entitlements or coverage would not necessarily preclude the s. 144.1(2)(e)(i) test from being satisfied, CRA stated:

[A] “right”, as it pertains to an ELHT, includes an entitlement to designated employee benefits (“DEBs”). Thus, where the employees of several participating employers have the same rights under the trust (but not necessarily the same benefit entitlements or coverage), it is our view that such employees may collectively form a class of beneficiaries for purposes of clause 144.1(2)(e)(i)(A) of the Act as long as the benefit entitlements for each employee in the class are reasonably similar. This could be the case, for example, if a particular designated benefit plan offers various levels of benefit coverage that are different but similar to those offered by another participating employer whose employees are included in the class.

Neal Armstrong. Summary of 5 December 2022 External T.I. 2021-0915921E5 under s. 144.1(2)(e)(i).

Income Tax Severed Letters 1 March 2023

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.