News of Note
CRA indicates that a s. 104(27) designation cannot be made for a pension amount received after a trust ceased to be a GRE
Email this ContentCRA stated that where an estate receives a lump sum from a pension plan of the deceased beyond the 36-month period in which it could qualify as a graduated rate estate (“GRE”), CRA would have no discretion to extend the 36-month period.
If the executor is unable to distribute the income under s. 56(1)(a)(i) to the sole beneficiary before the end of the year of receipt, that income could be included in the sole beneficiary’s income under ss. 104(13) and (24) if the beneficiary was entitled to enforce payment of the lump-sum benefit. This income would be treated as property income rather than pension income in the beneficiary’s hands because the trust could only designate under s. 104(27) a pension benefit as pension income of its beneficiary if the benefit was received while it was still a GRE.
Neal Armstrong. Summaries of 15 June 2021 STEP Roundtable, Q.14 under s. 248(1) – GRE, s. 104(24) and s. 104(27).
CRA compares the consequences of making or not making a s. 104(4)(a)(ii.1) election
As noted by CRA, if an alter ego trust does not make the s. 104(4)(a)(ii.1) election, it will be subject to a deemed disposition under s. 104(4)(a) at the end of the day of the settlor’s death, and a deemed year-end on that day under s. 104(13.4)(a). Alternatively, if the election is not made, there is no roll-in of property into the trust (but instead a deemed disposition at fair market value); however, on the death of the settlor, the trust will not have a deemed disposition, nor will there be a deemed year end under s. 104(13.4)(a) and, instead, a deemed disposition would typically occur on the trust’s 21st anniversary.
Neal Armstrong. Summaries of 15 June 2021 STEP Roundtable, Q.13 under s. 104(13.4)(a) and s. 104(4)(a)(ii.1).
CRA confirms that a joint spousal (s. 73(1.01)(c)(iii)) trust can receive jointly or individually owned property from the spouses
CRA confirmed that it is possible for spouses (or common-law partners), both of them over 65, to jointly create a trust which meets the s. 73(1.01)(c)(iii) conditions with a contribution of property jointly-owned by them; and that it is possible for one or both of them to make subsequent contributions to the trust on a s. 73(1) rollover basis with property that is owned jointly by them, and other property that is owned individually.
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.12 under s. 73(1.01)(c)(iii).
CRA indicates that it cannot waive tax for an innocent TFSA overcontribution where the investments become worthless
A new resident of Canada contributed $18,000 to a new TFSA in 2021 due to a misunderstanding of the rules (his contribution room was only $6,000). The shares of the company in which the TFSA invested became worthless.
CRA indicated that the monthly 1% tax under s. 207.03 on the excess amount continues to apply for each month that the excess amount remains and that, as here, the excess TFSA amount cannot be withdrawn, the excess will not be fully eliminated until January 1, 2023 as a result of the new contribution limits for 2022 and 2023.
The potential waiver of tax under s. 207.06(1) requires, inter alia, that he withdraw an amount from his TFSA sufficient to eliminate both the excess TFSA amount and any associated income and capital gains. Again, the individual cannot meet this condition.
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.11 under s. 207.06(1).
CRA indicates that a dividend refund, from a redemption also generating an AOC, arises in the taxation year commencing with the AOC
ACo repurchased all the shares held by one of its 50% shareholders so that there was an acquisition of control (“AOC”) by the other shareholder and a consequential deemed dividend. Will the resulting dividend refund to ACo arise in its new taxation year commencing as a result of the AOC, and would the answer be affected by whether ACo elects under s. 256(9) for the AOC to occur at the time of its actual occurrence rather than at the beginning of the day?
CRA indicated that, either way, the dividend refund to ACo computed under s. 129(1)(a) would be for its new taxation year. CRA in its oral comments did not explain this answer, but it seems to make sense given that the AOC coincides with the event (the repurchase) generating the deemed dividend, and s. 249(4) deems the old taxation year to have ended immediately before the AOC (irrespective of which of the two times the AOC is considered to have occurred).
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.10 under s. 129(1)(a).
CRA confirms what is a non-deductible expense for safe income purposes
When asked to confirm what are non-deductible expenses in the context of the CRA policy that such items must be deducted in computing safe income on hand, CRA indicated that non-deductible expenses generally are cash outflows which are not deducted in computing a corporation’s income for ITA purposes, other than an expense or disbursement made for the acquisition of property or for the repayment of the principal amount of a loan. Examples include:
- dividend paid or payable;
- taxes, including refundable taxes;
- non-deductible interest and penalties;
- charitable donations, gifts and political donations that are not already deducted in net income for tax purposes; and
- the non-deductible portion of expenses or expenditures such as the non-deductible portion of meal and entertainment expenses.
In addition, 2016-0672321C6 states that contingent liabilities and accounting reserves also need to be taken into account.
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.9 under s. 55(2.1)(c).
CRA indicates that a trust with children beneficiaries could not roll-out property under s. 107(2) to a trust for the benefit of those children
Having regard to the approaching 21-year anniversary, the trustees of a resident discretionary family trust of which only the children are beneficiaries decide to distribute the trust property to a newly created trust which has been settled for the benefit of the children. CRA found that the transfer of the trust property to the new trust would not occur on a s. 107(2) rollover basis.
Without referencing Propep, it indicated that the term “beneficiary” in s. 107(2) included a person "beneficially interested" in the trust, which term was defined in s. 248(25) and that, in order for a person to be beneficially entitled under s. 248(25)(a) on the basis of having any right “as a beneficiary under the trust to receive any income or capital of the particular trust,” the person must have that right as a beneficiary.
Since the trust agreement did not include a trust for the benefit of the children (nor contemplate any such trust as a future beneficiary), s. 107(2) would not apply on the transfer of property from the trust to the new trust, which was not a “beneficiary.”
CRA went on to note that it had not considered whether s. 248(1) – “disposition” – (f) or s. 107.4(3) could accord rollover treatment.
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.7 under s. 107(2).
Income Tax Severed Letters 23 June 2021
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA confirms that no particular T3 disclosure is required where all the interests in a trust have vested indefeasibly
Para. (g) of the definition of a trust effectively provides an exemption from the 21-year deemed disposition rule in s. 104(4)(b) where all interests in the trust in question have vested indefeasibly, subject to exceptions.
CRA indicated that its comments in 2018-0744111C6, as to what is required in order for an interest in a trust to vest indefeasibly, still apply: the situation must be one where the beneficiary can be ascertained and there is no condition precedent to the beneficiary holding such trust interest; and there must be no condition subsequent or possible future event or limitation that could revoke, limit or defeat the beneficiary’s interest in the trust.
After also indicating that the T3 return does not request information on whether all of a trust’s interests have vested indefeasibly, CRA noted that those handling CRA’s intake and assessment of T3 returns have seen various approaches including a covering letter or a note on the top of the return explaining why no T1055 form was being filed (or simply stating that all interests had vested indefeasibly), or filing a blank T1055 along with such a note.
Finally, CRA provided a reminder that where a beneficiary’s indefeasibly vested capital interest is disposed of on death pursuant to s. 70(5), s. 107.4(4) deems the fair market value proceeds thereof to be no less than the beneficiary’s pro rata share of the fair market value of the total net assets of the trust immediately before the death.
Neal Armstrong. Summaries of 15 June 2021 STEP Roundtable, Q.6 under s. 108(1) – trust – s. (g) and s. 70(5).
CRA confirms that "second generation income" is not subject to s. 75(2) attribution
The settlor of an alter ego trust contributes to the trust an interest in a limited partnership that generates business income. CRA indicated that although the partnership business income (or loss) allocated to the trust would not be attributed to the settlor (s. 75(2) does not attribute business income), the settlor of an alter ego trust must be entitled to receive all of the income of the trust that arises before the settlor’s death, so that the settlor would still end up having property income in his or her hands under ss. 104(13) and 108(5).
In response to a separate question regarding how s. 75(2) would apply where proceeds or income of property of the alter ego trust was reinvested, CRA indicated that, in light of the s. 248(5) substituted-property rule, the attribution would continue to apply if securities were repeatedly sold and reinvested in other securities, so that the income including taxable capital gains arising on the substituted property would continue to be attributed to the settlor under s. 75(2). However, any income or loss derived from the reinvestment of the earnings (the "second generation income") would not be attributed to the settlor. Thus, the income earned on the substituted-property securities is attributed pursuant to s. 75(2) as first generation income, but any income earned on that income will not be attributed.
However, again, the trust would need to make the second generation income earned by it payable to the beneficiary under s. 104(13), so that s. 108(5) will generally apply to the income thereby included in the settlor’s hands subject to recharacterization under a designation such as s. 104(19) or 104(21).
Neal Armstrong. Summary of 15 June 2021 STEP Roundtable, Q.5 under s. 75(2).