News of Note

Income Tax Severed Letters 3 July 2019

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

CRA finds that ss. 6(1)(a) and 148(7) applied simultaneously to the transfer of a life insurance policy by an employer to an arm’s length employee

As a result of an arm’s length employee no longer being considered to be a key employee, her employer transfers its “key person” permanent life insurance policy on her life to her for nominal consideration. At the transfer time, the death benefit, cash surrender value (CSV) and adjusted cost basis (ACB) are $1 million, $50,000 and $20,000, respectively. The policy FMV equals its CSV.

CRA found that the employee would have a taxable s. 6(1)(a) benefit based on the $50,000 FMV of the policy, that the employer would realize a policy gain under s. 148(7)(a) of $30,000, being the CSV of $50,000, less the ACB of $20,000 and that the employee would be deemed under s. 148(7)(b) [rather than s. 52(1)] to have acquired the policy at a cost of $50,000.

Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 2, 2019-0799051C6 under s. 6(1)(a) and s. 148(7)(b).

Bakorp – Federal Court of Appeal finds that the only remedy for the failure of CRA to make a s. 152(4.3) adjustment was judicial review of that decision

Following the resolution of a tax dispute for taxation year 1, the taxpayer (Bakorp) requested that the Minister reduce the amount of a non-capital loss that it had carried forward to taxation year 2, and claimed the amount of that loss instead in its return that it filed for taxation year 3. The Minister denied the request and reassessed taxation year 3 to deny the claimed loss.

Webb JA found that in order for Bakorp to have tested its view - that the Minister should have made the requested adjustment to taxation year 2 - it should have sought judicial review of this decision. The Tax Court of Canada lacked jurisdiction to consider this decision of the Minister not to make the s. 152(4.3) adjustment.

Since Bakorp did not seek judicial review by the Federal Court of this decision, the non-capital losses claimed in taxation year 2 had not been adjusted, and per s. 111(3)(a), they could not be claimed again in taxation year 3.

Neal Armstrong. Summary of Bakorp Management Ltd. v. Canada, 2019 FCA 195 under s. 152(4.3).

Reference re Greenhouse Gas Pollution Pricing Act – Ontario Court of Appeal finds that the federal greenhouse gas (GHG) charges are valid under the POGG power

Strathy, CJO found that the fuel charge and excess emissions charges imposed under the Greenhouse Gas Pollution Pricing Act, Part 5 of the Budget Implementation Act, 2018, No. 1 are constitutionally valid on the basis of coming within the national concern branch of the federal peace, order and good government (POGG) power. After noting that “there is today a greater appreciation that environmental pollution can transcend national and international boundaries and it is no longer thought of as a purely local concern,” he stated:

Confining Canada’s jurisdiction to the establishment of minimum national standards to reduce GHG emissions does not result in a massive transfer of broad swaths of provincial jurisdiction to Canada, as Ontario claims.

Although it was unnecessary to address any other bases for finding the charges to be intra vires, he briefly noted (at para. 148);

I agree with Ontario that, given its pith and substance, the Act does not fall under the federal taxation power enumerated in s. 91(3). As noted, the Act falls under the national concern branch of the POGG power.

Neal Armstrong. Summary of Reference re Greenhouse Gas Pollution Pricing Act, 2019 ONCA 544 under Constitution Act, 1867, s. 91.

CRA does not provide any accommodations for the technical impossibility of demonstrating that a life insurance policy issued abroad is exempt

Annual income accrual is required on life insurance policies that are not exempt policies. It is unlikely that testing for compliance with Reg. 306(1) will be routinely performed by the insurer for policies issued outside of Canada where the policyholder is resident in, or immigrates to, Canada. Where the policy is not issued in Canadian currency, there could be failure under the exempt test simply as a result of FX fluctuations. What is such a Canadian taxpayer to do?

CRA responded:

Given that the information to determine the exempt status of a particular life insurance policy is only available in the accounts of the insurer, the onus is on the policyholder to establish that the policy qualifies as an exempt policy.

Summary of 14 May 2019 CLHIA Roundtable Q. 6, 2019-0799101C6 under Reg. 306(1).

CRA indicates that required top-up payments to satisfy the minimum-amount IPP rules do not qualify for income-splitting

The 2011 budget introduced measures for individual pension plans (“IPPs”) that generally parallel the “minimum amount”-based income withdrawal rules for RRIFs, so that minimal withdrawals are required from an IPP if the plan member has attained 71.

CRA considers that any additional payment that an IPP is required to make in a year to comply with the IPP minimum amount rules is not eligible to be split with a spouse/common-law partner under the s. 60.03 income-splitting rules. The definition of “pension income” for such purposes references a “life annuity,” and such top-up payments would not qualify as being part of an annuity, i.e., a series of periodic payments.

Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 14, 2019-0799191C6 under s. 118(7) – pension income – (a)(i).

CRA considers that a TFSA cannot hold a non-commutable life annuity

Life annuities providing benefits that are purely contingent on the life’s continuing survival generally are not commutable. CRA considers that in the absence of commutability, the life annuity contract will not satisfy s. 146.2(2)(e) and, therefore, cannot be registered as a TFSA. In addition, it is not a qualified investment for a trusteed TFSA.

Subsection 146.2(2) provides that a “qualifying [TFSA] arrangement” must:

(e) … provide that, at the direction of the holder, the issuer shall transfer all or any part of the property held in connection with the arrangement (or an amount equal to its value) to another TFSA of the holder;

CRA apparently is reading into this wording a requirement that the arrangement represent transferable property.

Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 7, 2019-0799121C6 under s. 146.2(2)(e).

6 more translated CRA interpretations are available

We have published a further 6 translations of CRA interpretations released in December 2011. Their descriptors and links appear below.

These are additions to our set of 897 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/2 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for July.

Bundle Date Translated severed letter Summaries under Summary descriptor
2011-12-16 7 October 2011 Roundtable, 2011-0412121C6 F - Interaction between S. 84.1 and S. 85(2.1) Income Tax Act - Section 85 - Subsection 85(2.1) s. 85(2.1) does not apply where s. 84.1(1) applies even if there is no grind under the s. 84.1(1)(a) formula
Income Tax Act - Section 84.1 - Subsection 84.1(1) s. 84.1 can "apply" and thereby prevail over s. 85(2.1) even where there is no s. 84.1 grind
8 October 2010 Roundtable, 2010-0373291C6 F - Tuck-Under Transactions - Safe Income Extractions Income Tax Act - Section 245 - Subsection 245(4) Vaillancourt-Tremblay did not validate all tuck-under transactions
Income Tax Act - Section 84 - Subsection 84(2) CRA accepts use of tuck-under transactions to extract safe income
Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) safe income can be extracted using tuck-under
9 December 2011 Internal T.I. 2011-0399641I7 F - Bien agricole admissible et un lotissement Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) - Subparagraph 110.6(1.3)(c)(ii) 5-year “used principally” test was satisfied where a single lot was used 60% in farming
Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) subdivision does not by itself convert capital property to inventory
2011-12-09 16 November 2011 External T.I. 2011-0423861E5 F - paragraph 53(1)b) Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) example of application of s. 53(1)(b) on dirty s. 85 exchange of common shares with partial SIOH for high PUC/ACB prefs and low PUC/ACB common shares
Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) - Subparagraph (a)(i) - Clause (a)(i)A) example of capital gain for CDA purposes being less than the s. 40 capital gain
22 November 2011 External T.I. 2011-0404021E5 F - Revenu des entrepreneurs Income Tax Act - Section 9 - Timing renovation, and sewage system work, does not qualify as "construction" eligible for completion method
24 November 2011 External T.I. 2011-0424631E5 F - Subsection 256(2) Income Tax Act - Section 181.1 - Subsection 181.1(4) s. 256(2) election causes Aco and Bco not be associated with Cco for s. 125(5.1), but not ss. 181.1(2) and (4), purposes
Income Tax Act - Section 256 - Subsection 256(2) - Paragraph 256(2)(b) - Subparagraph 256(2)(b)(ii) s. 256(2)(b)(ii) election inapplicable for ss. 181.1(2) and (4) purposes

Collins Family Trust – B.C. Supreme Court follows Pallen even though it was “undermined” by Fairmont

Giaschi J granted an application for rescission of transactions “which concerned an almost identical set of facts” to those in Pallen (i.e., transactions which used s. 75(2) for alleged surplus-stripping, and which did not work in light of Sommerer). He stated:

I agree ... that ... Fairmont and Jean Coutu have seriously undermined Pallen. However, Pallen has not been expressly overruled and I am bound to follow it. In my view, it is for the British Columbia Court of Appeal to determine whether Pallen remains good law in light of the legal developments since it was rendered.

Respecting arguments that Satoma had established that these transactions entailed aggressive tax avoidance, he stated:

[T]he evidence before me establishes that the purpose was to shield assets from creditors and to do so in a manner that did not attract tax liability, with both aspects having equal importance.

Neal Armstrong. Summary of Collins Family Trust v Canada (Attorney General), 2019 BCSC 1030 under General Concepts – Rectification.

Bitton Trust – Supreme Court of Canada finds that the ARQ could issue a requirement to a Calgary branch of a Quebec bank

The ARQ, which was seeking to determine whether a supposed Alberta trust was resident in Quebec, issued a requirement to a Calgary branch of the National Bank of Canada for various bank records respecting the trust under the Quebec equivalent of ITA s. 231.2(1). The requirement was sent directly to the branch rather than to the bank’s head office in Quebec because this was required under s. 462(2) of the Bank Act. Before concluding that the ARQ had not exceeded its territorial competence in making this requirement, Rowe J found that the sending of the requirement to the Calgary branch (which was deemed to be a separate entity only for the limited purposes of s. 462) did not detract from the fact that it was sent to a person (the bank) that operated in Quebec, stating:

It would be absurd if the procedural requirements imposed by s. 462(2) … were understood to affect the ARQ’s authority to issue a formal demand to a bank that operates within its territorial jurisdiction.

He added:

[I]f a corporate entity had no operations in Quebec, it is not clear whether the ARQ would have the authority to issue a formal demand to that entity.

Neal Armstrong. Summary of 1068754 Alberta Ltd., trustee of DGGMC Bitton Trust v. ARQ, 2019 SCC 37 under s. 231.2(1).