News of Note
CRA (reversing position) finds that the QSBC character of capital gains can be flowed out in a 2-tier trust structure
Email this ContentA graduated rate estate distributed a taxable capital gain - realized from the sale of qualified small business corporation (QSBC) shares - to the two testamentary trusts that were its beneficiaries with those trusts, in turn, distributing the taxable capital gains in the same year to their individual beneficiaries. CRA found that (with the appropriate designations made at both trust levels under ss. 104(21) and (21.2)) the taxable capital gains would retain their character in the individuals’ hands as being from QSBC shares dispositions for s. 110.6(2.1) deduction purposes.
This reverses 2016-0667361E5, which found that the eligibility of a gain for the capital gains deduction is lost when it is distributed by a lower-tier to upper-tier trust.
Neal Armstrong. Summary of 2020 STEP Roundtable, Q.17 under s. 104(21.2).
300 audits were in progress at year end (and another 150 completed) as a result of OTIP tips
When asked for updates on the offshore tax informant program, CRA stated:
As of December 31, 2019, the OTIP has received nearly 5,500 calls of which of over 1,600 have been from potential informants, received over 750 written submissions and has entered into nearly 50 contracts with informants.
… [O]ver 150 audits of taxpayers have been completed, nearly $60 million has been assessed of which approximately $20 million has been collected and over 300 audits of taxpayers are in progress.
Neal Armstrong. Summary of 2020 STEP Roundtable, Q.16 under s. 152(1).
We have translated 5 more CRA Interpretations
We have published 5 further translations of CRA interpretation released in September and August , 2009. Their descriptors and links appear below.
These are additions to our set of 1,336 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for December.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2009-09-25 | 28 August 2009 External T.I. 2009-0325881E5 F - Application of Subsection 89(8) | Income Tax Act - Section 89 - Subsection 89(8) | no deduction under element C for loss of target incurred in the year after the change of control |
| 2009-09-04 | 20 August 2009 Internal T.I. 2009-0326941I7 F - Intérêts, Taxe sur le capital, déductibilité | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | provincial capital tax and interest thereon generally is deductible/income taxes are not |
| 2009-08-28 | 20 August 2009 External T.I. 2008-0294531E5 F - Placement admissible REÉR - Parts privilégiées RIC | Income Tax Act - Section 146 - Subsection 146(5) | premium can be paid in kind with contribution of shares, if validly issued |
| 2009-08-14 | 21 July 2009 Internal T.I. 2009-0322591I7 F - Déduction des intérêts | Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(b) | issuance of replacement promissory note for amount of previous principal plus capitalized interest was not a crediting of such interest |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition | replacement of note and capitalized interest by new note with increased amount did not constitute payment by novation of the old debt | ||
| General Concepts - Payment & Receipt | replacement of note with capitalized note with note for full amount did not constitute payment by novation | ||
| 2009-08-07 | 29 July 2009 External T.I. 2008-0297011E5 F - Conversion de participations dans une SNC | Income Tax Act - Section 248 - Subsection 248(1) - Disposition | no disposition if new partnerships interests exchanged for old interests that in totality are not substantially distinguishable |
| Income Tax Act - Section 97 - Subsection 97(2) | s. 97(2) rollover not available if new partnerships interests exchanged for old interests are not in totality substantially distinguishable | ||
| Income Tax Act - Section 96 - Subsection 96(1.01) | s. 96(1.01) inapplicable where only income interest and not capital interest disposed of | ||
| Income Tax Act - Section 43 - Subsection 43(1) | where only income interest and not capital interest in a partnership disposed of, there is part disposition of partnership interest with resulting reduced ACB for remainder interest |
CRA notes that it has no discretion to extend the one-year deadline under s. 164(6) for sustaining the post-death capital loss
After noting that CRA has the authority under Reg. 600(b) to accept a late filed s. 164(6) election, it also “noted that this does not change the requirement that the losses to which this election applies must have been incurred in the first taxation year of the estate.” After noting the Joint Committee submission to Finance that this one-year requirement should be alleviated, CRA stated that it “is prepared to work with Finance should they seek our views on this issue.”
Neal Armstrong. Summary of 2020 STEP Roundtable, Q.15 under s. 164(6).
CRA indicates that a non-resident estate (using GRE graduated rates), then its NR residuary beneficiaries, could file under s. 216 respecting a Canadian rental property
On the death of a non-resident individual, who had been filing T1 returns pursuant to the s. 216 rules regarding a Canadian rental property, that property was acquired by her non-resident estate at FMV, then was distributed to her two non-resident children (Y and Z - the residuary beneficiaries) as equal co-owners. CRA indicated:
- The non-resident estate can be a graduated rate estate (“GRE”) and the estate is not precluded from filing T3 returns pursuant to s. 216. (“There is no provision in the Act prohibiting an estate filing under section 216 from qualifying as a GRE … [so as to] be taxed at the graduated rates in respect of the net rental income.”)
- S. 107(2) could apply to the distribution of the rental property to the non-resident beneficiaries (“Real … property situated in Canada is … described in subparagraph 128.1(4)(b)(i). Therefore, subsection 107(5) should not apply to deny the tax-deferred rollover of the rental property to Y and Z … .”
- “Provided that the section 216 requirements are satisfied, from the time they acquire beneficial ownership of the property, Y and Z could elect to file under Part I pursuant to section 216 in respect of their share of income derived from the rental property.”
Neal Armstrong. Summary of 2020 STEP Roundtable, Q.13 under s. 216(1) and s. 107(2).
CRA repeats that distributions by a Canadian discretionary trust to a NR-owned Canadian corporate beneficiary of TCP not carved-out in s. 107(5) appear abusive
In 2017-0724301C6, CRA indicated that it quite possibly was a GAARable circumvention of ss. 107(5) and (2.1) for a Canadian-resident discretionary trust to effect a s. 107(2) distribution of property that was not taxable Canadian property to a Canadian corporation that was in incorporated by one or more of its non-resident beneficiaries. which was a corporate beneficiary.
At the 2019 CTF Annual Conference (2019-0823581C6), CRA indicated that it had recommended that GAAR be applied to a similar distribution by a Canadian resident discretionary trust - where the distributed property (namely, shares of a real estate corporation) was taxable Canadian property (TCP) that did not come within the carveouts to s. 107(5) (being property described in ss. 128.1(4)(b)(i) to (iii) or a share of the capital stock of an NRO) - on the basis that, even though the property that was transferred was TCP, it was not the type of property that was specifically carved out in s. 107(5), so that such a transfer is an abuse of ss. 107(2), (2.1) and (5). CRA noted that it would be appropriate to apply the same conclusion whether or not the transactions are undertaken to avoid the 21-year disposition rule under s. 104(4).
CRA has now reiterated this position a year later at the 2020 STEP Roundtable without any significant changes. Repetition is emphasis.
Neal Armstrong. Summary of 2020 STEP Roundtable, Q.12 under s. 107(5).
CRA applies its policy that a s. 104(19) designation is effective on December 31 to Pt. IV tax and terminal return inclusions
A Canadian resident personal trust receives a dividend from ACo, and distributes the dividend to B Co (a beneficiary) to which A Co is connected – but they cease to be connected corporations by December 31 of that year. CRA indicated that the connected-corporation Pt. IV tax exemption did not apply to the dividend received by B Co since the s. 104(19) designation is considered to be effective only at the end of the trust’s taxation year – at which time they were no longer connected.
A follow-up point: if a beneficiary receives an amount that is designated as a taxable dividend, but that individual dies during the year, that dividend nonetheless is included in the individual’s terminal return (even though the death occurred before the December 31 effective date of the dividend designation) given that the taxation year of an individual (even of a deceased individual) is the calendar year and there “is no provision in the Act that shortens a taxpayer’s taxation year in his or her year of death so as to cause it to end as at the taxpayer’s date of death.” Thus, the requirement in s. 104(13) - that the dividend be income from a trust whose taxation year did not end before that of the individual - is satisfied.
Neal Armstrong. Summaries of 26 November 2020 STEP Roundtable, Q.11 under s. 186(1)(a) and s. 104(13).
CRA states that the forgivable loan portion of a CEBA loan is a s. 12(1)(x)(iv) receipt
The Canada Emergency Business Account (“CEBA”) program provides interest-free loans of up to $40,000 to small businesses and not-for-profit organizations to fund their expenses. Repaying the balance of the loan on or before December 31, 2022 results in loan forgiveness of 25%. CRA indicated that:
- The forgivable portion of the loan is recognized as an income inclusion under s. 12(1)(x)(iv) as a “forgivable loan …in respect of...an outlay or expense”.
- That amount may effectively offset under s. 12(2.2) against the amount of the related expenses.
- In the year of repayment of 75% of the loan, there are no further tax consequences.
- A taxpayer not qualifying for the 25% forgiveness who settles the loan for 100% of the principal may generally claim a deduction under s. 20(1)(hh) equalling the previous s. 12(1)(x) inclusion – even where the taxpayer made the s. 12(2.2) election.
This interpretation may be portable to forgivable loans received by indebted landlords under the Canada Emergency Commercial Rent Assistance Program (the “CECRA”) program.
Neal Armstrong. Summary of 10 November 2020 External T.I. 2020-0861461E5 under s. 12(1)(x)(iv).
CRA rules that the negative repo spread on a reverse repo was not interest
In a traditional “reverse repo” (the term, as contrasted with “repo,” that is used where the transaction is viewed from the perspective of the purchaser rather than the seller), the securities such as bonds are purchased for $X in cash and agreed to be repurchased by the seller at a later date at a somewhat higher price. This positive spread represents what economically is interest that the purchaser is earning on its cash. But what if the reverse repo occurs in a negative interest rate environment, so that the bond is repurchased by the seller at a “negative repo spread” (i.e., the repurchase price is lower than $X)?
CRA ruled that “[t]he negative repo spread … will not be considered to be interest or an amount paid or credited as, on account or in lieu of, or in satisfaction of interest for the purposes of paragraph 212(1)(b).” In its (less than prolix) reasons provided in its summary, it stated that “the agreements are purchase and sale agreements to which subsection 260(2) does not apply.” The notion appears to be that the form of the transactions (a sale and repurchase) will not be recharacterized. CRA might also have said (but did not) that negative interest is not interest.
This ruling interested the parties because they were affiliates. In particular, the purchaser (presumably, a resident) might have been concerned that the negative interest that in effect was paid by it to its non-arm’s length and non-resident counterparty might be subject to Part XIII tax.
Neal Armstrong. Summary of 2019 Ruling 2018-0776381R3 under s. 212(1)(b).
CRA states that investing carried on with the proceeds of sale of a business in which the spousal shareholders had been engaged full time generally would generate TOSI on resulting dividends
After a husband and wife’s corporation (in whose business they had worked full time for 5 years) has sold its business and reinvested the proceeds, they receive dividends out of the resulting investment income generated. Assuming that the exception for “excluded shares” did not apply, would the dividends be split income, because the definition of “excluded business” could no longer be met because the business had ceased?
CRA noted that the corporation’s investment activities might be a new business that is a related business, but stated that, in such case:
[T]he excluded business exception would not apply to husband and/or wife if such individual is not considered to be actively engaged in that investment business on a regular, continuous and substantial basis either during the particular taxation year or in any five prior taxation years. Consequently, the taxable dividends will be split income subject to TOSI unless another excluded amount exception applies.
Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.10 under s. 120.4(1) – split income.