News of Note
CRA confirms that its executor’s year policy is relevant only where the executor’s year extends beyond the GRE’s taxation year
Email this ContentAfter referring to the common-law concept of the executor’s year, IT-286R2, para. 6 states:
In spite of such common law rules, where the initial taxation year of a testamentary trust coincides with the executor's year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the Department will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24). However, if even one beneficiary of the trust objects to this treatment with respect to the executor's year, the income of the trust for that year, to the extent that it was not actually disbursed during that year, will be taxed in the hands of the trust. In any case where the trust has been wound-up and the final T-3 return is filed for a period which terminates before the end of the executor's year, the income of the trust (including taxable capital gains) earned for that period is considered to have been paid to the beneficiaries of the trust in the calendar year in which that period ends, except for any part of the trust's income that was disbursed by the trustee to persons other than beneficiaries pursuant to the deceased's will or the operation of law e.g., the will stipulated that debts are to be paid out of income.
CRA elaborated on this position in the context of a graduated rate estate, indicating that:
- This position only applies “where the only reason that an amount of income is not payable to the beneficiaries is that it was earned in the initial 12 months of the estate” and does not apply where the income is not considered by CRA to be payable to the beneficiaries under the terms of the will.
- However, regarding the terms of the will, CRA is prepared to accept that, where the will does not specify which assets the bequests are to be paid from, “the residue of the Estate can include income” so that the income of the estate can be considered to be payable to the beneficiaries for ss. 104(6) and (23) deduction purposes.
- The quoted position allowing income in the executor’s year to be considered as payable to the beneficiaries only if they all so agree applies only where the estate has not been wound up in the executor’s year such that the estate administration continues beyond the first year (otherwise, the income would in fact have been payable in that year).
- The latter point regarding the estate having been wound up “in” the executor’s year, also applies where the end of the estate’s taxation year coincides with end of the executor’s year.
CRA did not say anything about its policy not applying in Quebec.
Neal Armstrong. Summaries of 26 November 2020 STEP Roundtable, Q.1 under s. 104(23) and s. 104(13.3).
1089391 Ontario – Tax Court of Canada denies relief where the taxpayer mistakenly applied for the new housing, rather than new rental property, HST rebate
The taxpayer, a private company, was credited with the new housing rebate, which was assigned by it to the vendor, on its purchase of a new residential condominium unit, notwithstanding that it purchased the unit only for rental purposes. CRA disallowed the new housing rebate and the principal of the taxpayer (the surviving widow of a murder that occurred after the purchase) did not become aware of the need to instead file a new rental property rebate claim until after the filing deadline (when the vendor belatedly informed her that the new housing rebate had been disallowed and sought to recover the amount that had been credited to the taxpayer on the purchase). In confirming CRA’s denial of the taxpayer’s late rental rebate application, Sommerfeldt J found that:
- he lacked jurisdiction to extend the filing deadline for the rental rebate application, as this was a discretion accorded instead to the Minister under ETA s. 281(1);
- the taxpayer could not use the offset mechanism under s. 296(2.1) or the s. 296(3.1) rebate mechanism because it had been assessed to deny the rebate under s. 297(1) rather than being assessed for net tax under s. 296(1); and.
- he could only suggest that this was an appropriate situation for a remission order.
Neal Armstrong. Summaries of 1089391 Ontario Inc. v. The Queen, 2020 TCC 129 under ETA s. 281(1), s. 296(2.1) and s. 296(3.1).
Eyckelhoff – Tax Court of Canada recognizes that a taxpayer-funded disability policy can give rise to exempt receipts
The taxpayer, a Canadian resident, received periodic payments from a Netherlands insurance company (“Aegon”) which she submitted were exempt disability insurance payments, rather than pension payments (which Canada was entitled to include in her income under s. 56(1)(a)(i), consistently with Art. 18 of the Canada-Netherlands Treaty).
Wong J first stated that “where a person pays 100 percent of their disability insurance premiums, both the court and the Minister have treated the resulting benefits as not taxable [citing Béliveau],” but then went on to find that exemption on this basis had not been established by the taxpayer, given that there was insufficient evidence that the Aegon plan was a disability insurance plan or that the taxpayer had paid 100% of the premiums.
Neal Armstrong. Summary of Eyckelhoff v. The Queen, 2020 TCC 130 under s. 56(1)(a)(i).
CRA finds that the purchase and rental of furniture in a furnished apartment is assimilated to the apartment rental activity
S. 149(1)(o.2)(ii)(A)(II) permits a s. 149(1)(o.2) (pension-group) corporation to invest its funds in “a partnership that limits its activities to acquiring, holding, maintaining, improving, leasing or managing capital property that is real property or an interest in real property … owned by the partnership”. CRA indicated that this test would not be breached by virtue of the partnership renting furnished suites in a students’ residence assuming that the furniture was such as “is ordinarily and customarily found in rental apartment units for students.” CRA stated:
[T]he Limited Partnership’s proposed acquisition and ownership of the Furniture for the purpose of furnishing the rental units in the Residence would not be a distinct activity that is separate from its activity of leasing real property.
Presumably the same approach applies to the investment/real estate undertaking test in s. 132(6)(b). (See also 2018-0784701E5 - renting furnished apartments gave rise exclusively to rents.)
Neal Armstrong. Summary of 15 September 2020 External T.I. 2020-0854471E5 under s. 149(1)(o.2)(ii)(A).
Income Tax Severed Letters 25 November 2020
This morning's release of one severed letter from the Income Tax Rulings Directorate is now available for your viewing.
Ouazana – Tax Court of Canada finds that a retroactive GST registration of a real estate buyer relieved the vendor of liability for failure to charge GST
In February 2014, the taxpayer made a taxable supply of real property to a purchaser which represented that it was registered for GST and QST purposes but, in fact, was not, so that the registration numbers it provided were invalid. In 2016, the purchaser was re-registered with retroactive effect to the sale date in February 2014 with the same registration numbers that it had provided to the taxpayer.
In finding that the retroactive registration was effective for ETA s. 221(2)(b) purposes, so that the appellant could not be reassessed for its failure to charge GST to the purchaser, Favreau J stated:
When the effective date of registration is backdated, the retroactive effect of the registration must be recognized for all purposes of the ETA unless there is a clear provision of the ETA to the contrary. No such provision seems to exist in respect of paragraph 221(2)(b).
He contrasted the situation here of a voluntary registration under s. 241(1), where “there is no limitation to the discretionary power of the Minister to backdate the effective date of registration,” and a non-voluntary registration under s. 241(1.5), where there is essentially no ability of the Minister to backdate the registration date.
Neal Armstrong. Summary of Ouazana v. The Queen. 2020 TCC 124 under ETA s. 241(1).
Rémillard – Federal Court finds that the certified Federal Court record is open to the public absent a specific confidentiality order
The taxpayer, a retired businessman living in Barbados, sought to challenge, through judicial review, information requests made by CRA (who was reviewing his residency status) to other countries’ tax authorities. After he had requested the certified record contemplated by Federal Court Rules 317 and 318, he was contacted by a journalist inquiring about the application. The taxpayer immediately obtained a judicial provisional confidentiality order, and launched an application for a declaration that the material communicated in accordance with Rule 318 did not form part of the public court file, but was rather akin to documents produced on discovery so as to be subject to an implied undertaking of confidentiality. Pamel J concluded that there were significant differences between discovery procedures and the communication of the certified record, and that the latter was not subject to the implied undertaking rule. Pamel J referred in numerous places in his reasons to the “open court” principle, including the statement by the Supreme Court in Sierra Club that “[t]he link between openness in judicial proceedings and freedom of expression has been firmly established by this Court,” and further stated:
Section 26 of the FCR is clear. The open court principle allows any person to inspect a court record and any annex "that is available to the public" … .
While the general rule is that documents in a court file or annex are public, not all documents in the court file or annex are necessarily "available to the public". Documents or material that are treated as confidential under a rule of law or that are subject to a confidentiality order of the Court continue to be treated as confidential and are designated as such at the time of filing with the Court, identifying the relevant rule of law or court order, if any (s. 152(1) FCR). Otherwise, the FCR do not provide a mechanism for recognizing the confidentiality of documents "in the possession of the Registry".
The taxpayer also unsuccessfully argued that making the certified record public as a matter of course violated section 8 of the Charter.
Pamel J dismissed the motion to declare the entire certified record confidential. However it remained open to the taxpayer to make a motion for a confidentiality order in accordance with the Sierra Club principles.
Neal Armstrong. Summaries of Rémillard v. Canada (Revenu national), 2020 CF 1061 under Federal Court Rules, s. 318(1) and s. 26(1) and Charter, s. 8.
Our translations of CRA Interpretations go back over 11 years
We have published 5 further translations of CRA interpretation released in November and October, 2009. Their descriptors and links appear below.
These are additions to our set of 1,326 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2009-11-06 | 16 October 2009 Internal T.I. 2009-0337721I7 F - Perte lors de fusion étrangère | Income Tax Act - Section 87 - Subsection 87(8) | claiming of capital loss in promptly-filed amended return would be accepted as an election |
| Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(b) | s. 40(3.4) not applicable to foreign triangular merger to which s. 87(8) was elected not to apply | ||
| 2009-10-30 | 20 October 2009 External T.I. 2009-0328441E5 F - Fiducie testamentaire | Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a) | unlikely to have been a distribution as a consequence of death where mooted testamentary trust formed by beneficiaries by their own agreement |
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) would apply if heirs form a trust to provide for their sister out of the residue, with the remainder to them on her death | ||
| 23 October 2009 External T.I. 2009-0309861E5 F - Tax-free Savings Accounts | Income Tax Act - Section 143.2 - Subsection 143.2(2) - Paragraph 146.2(2)(c) | contribution by spouse causes cessation as TFSA | |
| Income Tax Act - Section 74.5 - Subsection 74.5(12) - Paragraph 74.5(12)(c) | s. 74.5(12)(c) inapplicable to contribution of property to TFSA of contributor’s spouse followed by spouse’s withdrawal of property and investment of proceeds | ||
| 20 October 2009 External T.I. 2009-0327911E5 F - Fiducie non-résidente Contribuant résidant | Income Tax Act - Section 94 - Subsection 94(1) - Resident Contributor | any period of residence in Canada even if prior to a period when the person was non-resident in Canada is included in computing the 60-month period | |
| 2009-10-23 | 13 October 2009 External T.I. 2009-0342091E5 F - Revenu d'emploi exonéré par Conv.- frais de garde | Treaties - Income Tax Conventions - Article 19 | employment income that was Treaty-exempt was to be reported (on a separate line), with the s. 110(1)(f)(i) deduction then claimed |
| Income Tax Act - Section 63 - Subsection 63(2) | child care expenses could only be claimed by the spouse with the lower net income, notwithstanding that her income was Treaty-exempt |
Lockwood Financial – Tax Court of Canada finds that shares received on a deferred basis from a successor of a client were fee income in the year of entitlement to receive
A broker (Lockwood) whose business included brokering deals for junior resource companies earned an up-front fee for brokering a farm-in deal for a client (LEO) in 2010. Its fee included a component that was payable in the form of 833,333 shares of LEO (which the payment agreement stated had a “deemed value” of $250,000 in total) when LEO had earned an interest in the subject resource property by having made the targeted exploration or development expenditures. However, in June 2011, LEO was taken over by a second company (AOI - which happened to be the other party to the farm-in deal) under a plan of arrangement. Lockwood brought an action to receive shares of AOI (based on the exchange ratio under the plan of arrangement) in lieu of the promised shares of LEO, and in June 2012, it was agreed that it would receive a smaller number of shares of AOI in full satisfaction of its claim. Lockwood disposed of these shares during the balance of the same (2012) taxation year.
Lockwood submitted that this fee component should have been recognized by it in its 2010 rather than 2012 taxation year in the amount of $250,000 and that the excess of the proceeds received by it in 2012 over this amount was a capital gain. St-Hilaire J instead found that:
- This fee did not become receivable, and was not to be recognized as income, in 2010, as “its right to receive this compensation cannot be said to have been ‘absolute and under no restriction’” in 2010.
- Had it been received, the payment of the LEO shares would have been a payment to Lockwood for services rendered and, hence, would have been business income.
- Since the AOI shares received in 2012 under the settlement replaced the LEO shares, the AOI shares, valued on the settlement date, were received for services rendered, so that such value was business income to Lockwood in its 2012 taxation year.
- This amount recognized as the consideration for Lockwood’s services “thus becomes the adjusted cost base of the AOI shares received in 2012. That is the amount that the taxpayer gave up to acquire the shares”.
- Thus, the proceeds for the AOI shares received in excess of that ACB was a capital gain.
Neal Armstrong. Summaries of Lockwood Financial Ltd. v. The Queen, 2020 TCC 128 under s. 12(1)(b) and s. 54 – ACB.
Keybrand Foods – Federal Court of Appeal finds that a transaction with a financially subordinate company was a non-arm’s length transaction
The taxpayer (“Keybrand”) and its wholly-owning parent (“BWS”) were guarantors of loans made to a start-up company (“Vidabode”) by GE Capital. In order to fund the discharge of the GE Capital loans following a Vidabode default, Keybrand subscribed $19.5 million for Vidabode common shares (of which $14.3 million was funded with a bank borrowing), thereby resulting in Keybrand holding about 39% of the common shares of Vidabode in addition to the 41% already held at that point by BWS. A receiver was retained two weeks later by BWS in its capacity of a secured creditor of Vidabode, and on May 6, 2011, Vidabode filed for bankruptcy.
Webb JA confirmed that Keybrand did not generate an allowable business investment loss on its subsequent disposition (under s. 50(1)(b)(iii)) of its shares of Vidabode, on the basis that the share subscription transaction was one between persons not dealing at arm’s length – so that s. 69(1)(a) deemed the cost of those shares to Keybrand to be their nil fair market value.
Webb JA made note of the “directing mind” test applied in the Robson Leather case (whose facts revealed “a striking similarity,” as in both cases there was “substantial debt” owing by a company with poor prospects to the relevant family.) He then stated:
Given the degree of financial dependence of Vidabode on BWS and Keybrand and the lack of any negotiation with respect to the terms and conditions (including the price) related to the share subscription, it is more likely than not that Keybrand controlled both sides of the transaction related to the issue of shares by Vidabode to Keybrand.
Webb JA also confirmed that the interest on the bank loan to fund the shares subscription was non-deductible, given that the factual findings of the Tax Court supported its conclusion “that Keybrand did not have a reasonable expectation of income in acquiring the shares of Vidabode and hence did not borrow the money for the purpose of earning income from property.”
Neal Armstrong. Summaries of Keybrand Foods Inc. v. Canada, 2020 FCA 201 under s. 251(1)(c), s. 20(1)(c)(i) and General Concepts - Purpose/Intention.