News of Note

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).

Where a person is the operator of a joint venture for the construction of a multiple-unit residential complex by virtue of having managerial or operational control of the JV and does not have an interest in the real property on which the MURC is situated, CRA indicated that such operator cannot account for the GST/HST tax on the deemed self-supply under ETA s. 191(3) (on substantial completion and first tenant occupancy), and claim the new rental housing (s. 256.2(3)) rebate. Its reasoning:

Based on the … the operator … not hav[ing] an interest in the real property on which the MURC is situated, the operator does not meet the conditions set out in paragraph (a) of the definition of “builder.” The CRA will not administratively accept that a person is a builder of a MURC for GST/HST purposes where the person does not meet the conditions set out in the definition of “builder.”

This effectively indicates that a purported appointment of a construction manager (with no real estate ownership interest) as the operator of a JV for the construction of an apartment building or other MURC is illusory. It would appear that, in CRA's eyes, the manager would not be able to claim input tax credits for the costs incurred by it in the construction process, as the ensuing taxable supply under s. 191(3) that would otherwise enable such ITC claims would not, in CRA’s eyes, be deemed to be made by it.

Neal Armstrong. Summary of 27 February 2020 CBA Roundtable, Q.8 under ETA s. 273(1).

The TFSA rules contemplate that the surviving spouse of a deceased TFSA holder can make an “exempt contribution” of the payment to him or her of the TFSA proceeds (the “survivor payment”) to the survivor’s own TFSA within the “rollover period” (ending on December 31 of the year following the holder’s death). One of the requirements for an exempt contribution is that the survivor payment have been made to the survivor during the rollover period “as a consequence of the individual’s death, directly or indirectly out of or under [the holder’s TFSA].”

CRA found that a bequest of TFSA proceeds to a spousal trust which, in turn, distributed the TFSA proceeds in accordance with the deceased’s will to the surviving spouse would qualify as an indirect transfer as a consequence of death, so that this requirement was satisfied. This turned on s. 248(8)(a), which deems a transfer to be as a consequence of death if it occurs as a consequence of the terms of the will, and of the breadth of “directly or indirectly.”

Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 5, 2020-0851601C6 F under s. 207.01(1) – exempt contribution – (b).

The COVID-related relief set out by CRA in International income tax issues: CRA and COVID-19 mostly was stated to expire on October 1, 2020. CRA has now added a supplement to that webpage, which provides inter alia that:

• The relief for the initial period (until September 30, 2020) regarding physical presence of individuals in Canada due to COVID travel restriction being ignored under the common-law factual test of residency and for purposes of the s. 250(1)(a) sojourning rule is extended until the earlier of the date of the lifting of the travel restrictions and December 31, 2021 (this extension does not apply to corporate residency.)
• Although there is no extension of the relief regarding whether a non-resident employer has a fixed place of business in Canada, CRA considers that for there to be such a permanent establishment, the site must have “a semblance of permanence” and it must be at the “disposal” of the employer – so that an individual’s working remotely (in Canada) from home due to the travel restrictions “will generally not be sufficient to meet the thresholds of a permanent establishment.”
• Similarly, regarding an “agency” PE, the individual would not satisfy the requirement of “habitually” exercising a right to conclude contracts on behalf of the non-resident enterprise where the individual “is doing so from Canada solely because of the travel restrictions.”
• Regarding the services PE in Art. IV(9) of the Canada-U.S. Treaty, most such employees would not meet either of the thresholds in Art. IV(9) “if they are not working on projects for Canadian customers.”
• Relief during the initial relief period respecting the 183-day test in Art. XV, 2(b) of the Canada-US Treaty is extended to December 31, 2020 so that physical presence in Canada due to COVID travel reasons will not count towards the 183 days (whereas such days after December 21, 2021 must be included under the 183-day test, with associated withholding and remittance obligations of the employer).
• As an administrative matter, where such relief conditions are met, a non-resident employer will not be required to submit a T4 slip for the 2020 taxation year.
• Where as a result of the travel restrictions, Canadian-resident individuals have been forced to perform their duties for a U.S. employer from their Canadian home and their employer received a CRA letter of authority (to reduce the Canadian source deductions at source to reflect the available foreign tax credit), as an administrative concession, CRA will treat the employment income from the U.S. employer for 2020 that was subject to U.S. withholding as having a U.S. source – so that those individuals can file their tax returns as in prior years and claim a foreign tax credit for the U.S. taxes.
• Alternatively, such individuals may choose to file their 2020 Canadian income tax return in accordance with the income sourcing rules in the Treaty, i.e., reporting their employment income as sourced from Canada since they performed their duties there.

Regarding this alternative:

• Where contributions are made in 2020 under the U.S. Federal Insurance Contributions Act (FICA), administratively the entire amount of the individual’s employment income on which the contributions were based may be included in the individual’s 2020 foreign non-business income for foreign tax credit purposes.
• If the individual has made contributions to a U.S. retirement plan in 2020, the amount deductible on form RC268 may be determined as if the individual had continued to exercise employment duties in the U.S. throughout all of 2020.
• If the individual paid state income tax in 2020, where the state refused to relinquish its right to tax the individual, administratively the individual may claim a foreign tax credit respecting those taxes despite the income being earned in Canada.
• Where such individuals temporarily find it difficult to pay the full amount owing, until after the payment due date when they receive a refund of their withholdings from the U.S., CRA will cancel all or part of the interest or late-payment penalties that arise as a result until a reasonable time after the receipt of the U.S. refund.

Neal Armstrong. Summaries of CRA webpage: International income tax issues: CRA and COVID-19, including VII. Supplemental guidance (to 31 March 2021) under s. 2(1), Treaties Art. 5 and Art. 15.