News of Note
Income Tax Severed Letters 14 October 2020
Email this ContentThis morning's release of two severed letters from the Income Tax Rulings Direcorate is now available for your viewing.
CRA adds some positions on its CEWS webpage
CRA has expanded some of its positions in its Webpage Q&A on the CEWS (wage subsidy). These include:
- CRA will recognize employee cost sharing arrangements where, for example, medical professionals share support staff and only one entity has a payroll account with CRA to handle the source deductions – so that, provided the other employers open up payroll accounts with CRA, they can apply for the CEWS based on their agreed share of the payroll.
- Regarding the requirement in the definition of “eligible employee” that the individual be “employed in Canada,” CRA stated that “generally, a person exercises the functions of their employment at the place where they are physically present,” so that “when that place is situated outside Canada, that person will not generally be considered as being ‘employed in Canada’.”
- Amounts paid by an eligible employer to an eligible employee as a maternity or parental top-up amount are generally considered as eligible remuneration for the relevant claim period.
Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 6 October 2020 under s. 125.7(1) – eligible employee, eligible remuneration.
Van der Steen – Federal Court of Appeal confirms lack of donative intent for an alleged donation
The taxpayer, a lawyer, withdrew $100,000 from his RRSP and “contributed” an amount exceeding the withdrawal amount (and well in excess of the net withdrawal amount after giving effect to source deductions) to a registered charity. CRA alleged that under the arrangement the taxpayer was to receive a kickback of a substantial portion of the donation from the charity. Webb JA confirmed the Tax Court’s finding that the taxpayer had failed to establish his donative intent, so that he was not entitled to charitable credits for his “donation.”
Neal Armstrong. Summaries of Van der Steen v. Canada, 2020 FCA 168 under General Concepts – Onus and s. 118.1(1) – total charitable gifts.
CRA provides an extended survey of tax issues for artists
CRA has expanded or altered various positions in IT–257R, Canada Council Grants, IT-504R2, Visual Artists and Writers, and IT‑525R, Performing Artists, in its new Folio on Artists and Writers.
CRA states that in distinguishing between an employment contract and a contract for services in the common law provinces, it applies the following two-step approach:
Step 1 - Look at the intention of the parties when they entered into the working arrangement.
Step 2 - Determine whether the intent of the parties is reflected in the facts by looking at the following elements:
• the level of control the payer has over the worker's activities
• whether the worker or payer provides the tools and equipment
• whether the worker can subcontract the work or hire assistants
• the degree of financial risk the worker takes
• the degree of responsibility for investment and management the worker holds
• the worker's opportunity for profit
• any other relevant factors, such as written contracts.
Then determine whether the actual working conditions are more consistent with a contract of service or with a contract for services.
This approach (and a somewhat similar three-step approach applied in Quebec) appears to give somewhat less weight to the parties’ subjective intention than suggested in Insurance Institute.
In light of Stewart and Walls, the reliance in IT-504R2 on the reasonable expectation of profit test in identifying whether there is a business or a merely personal endeavour has been dropped. However (presumably in part because artistic activities also typically satisfy a personal interest), CRA insists on the application of a list of objective tests in verifying that there is a business. It concludes this discussion by stating:
In the case of an artist or writer, it is possible they may not realize a profit during their lifetime. In order for the taxpayer to be considered to have undertaken the activity in pursuit of profit, i.e. to be considered to be carrying on business, the artistic or literary endeavours must be carried on in a sufficiently commercial or business-like manner.
CRA provides an intricate example showing that an employed musician may be better off deducting his expenses of travelling to performances under s. 8(1)(h) rather than (q).
A gift of art by a visual artist will be considered to be on income account if the artist created the work with the intention of selling it, but instead donated it - whereas gifts of items such as original manuscripts, letters, memoranda, or similar papers would generally be considered to be of capital property.
The proceeds of disposition deemed to result from the gift can be reduced by a designation under s. 118.1(7.1) – or, where there is a gift of certified cultural property, are automatically reduced (assuming no “advantage”) while at the same time generating full charitable credits – all as discussed in detail.
Neal Armstrong. Summaries of Folio S4-F14-C1 Artists and Writers 9 October 2020 under General Concepts – Substance, s. 5(1), s. 3(a) – business source, s. 9 – nature of income, s. 10(6), s. 18(1)(a) – income-producing purpose, s. 8(1)(p), s. 56(3)(b), Reg. 200(2), s. 9 – capital gain v. profit – commodities, s. 118.1(1) – total cultural gifts and s. 118.1(7.1).
CRA publishes its position on the Treaty exemption for Roth IRA income and distributions
Comments of CRA in its new Folio on Roth IRAs include:
- A Roth IRA does not enjoy the income tax deferral benefits afforded under the Act to Canadian registered plans and traditional IRAs, so that (absent an election under Art. XVIII of the Canada-U.S. Treaty), the income accrues in the Roth IRA to a Canadian resident on a current, annual basis.
- In particular, although CRA would generally expect a Roth IRA that was a trust for the benefit of an individual resident in Canada to be exempted from the s. 94 rules as an exempt foreign trust, the individual (sole) beneficiary will be required to recognize the trust’s foreign accrual property income under ss. 94.2 and 95.
- A resident individual can file an election under Art. XVIII(7) to defer taxation in Canada respecting undistributed income accruing in a Roth IRA.
- A distribution from a Roth IRA to the individual generally is not taxable in Canada under Art. XVIII(1) to the extent that the Roth IRA qualifies as a pension – which will generally be the case except to the extent the individual contributes to the Roth IRA while a resident.
- CRA notes that the effect of such a “Canadian Contribution” is to split a Roth IRA into two parts – one part consisting of the balance in the Roth IRA immediately before the Canadian Contribution and the other part consisting of the Canadian contribution (and any subsequent contributions) and all income accrued in the Roth IRA after the Canadian Contribution. The first part continues to be considered a pension and remains exempt from taxation in Canada (if an election had been filed). The second part ceases to be considered a pension and becomes subject to Canadian taxation.
- A Canadian Contribution does not include a contribution made before 2009, or a rollover contribution from another Roth IRA or a Roth 401(k) arrangement – but does include a conversion from a traditional IRA, or from a qualified retirement plan (such as a traditional 401(k) or profit sharing plan), to a Roth IRA.
- The election should be filed on or before the individual’s filing-due date for the tax year in which the individual became resident in Canada.
- No T1135, T1141, T1142 or T1134 reporting is required for a Roth IRA if the election has been made, and no Canadian Contribution has been made.
Neal Armstrong. Summaries of Income Tax Folio S5-F3-C1, Taxation of a Roth IRA under s. 56(1)(a)(i)(C.1), s. 94.2(1), Treaties – Income Tax Conventions – Art. 18 and s. 233.3(3).
We have translated 6 more CRA Interpretations
We have published a further 6 translations of CRA interpretations released in January, 2010. Their descriptors and links appear below.
These are additions to our set of 1,291 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
2078970 Ontario – Federal Court of Appeal indicates that an s. 152(1.4) determination’s validity awaits a factual Tax Court determination of the partnership’s existence
CRA determined that two limited partnerships did not exist because their partners were not carrying on business in common with a view to profit, and issued notices of determination to the partnerships under s. 152(1.4) determining that losses reported by the purported partnerships for the three years commencing in 2006 were, for this reason, nil. The following question was posed under Rule 58:
Where the Minister has at all times concluded that no partnership existed, can the Minister issue a valid Notice of Determination in respect of that purported partnership under subsection 152(1.4) … .
Webb JA essentially indicated that the real question was whether the partnership in fact existed, which was a factual determination to be made by the Tax Court, so that the question posed was premature. If, in fact, the partnerships did not exist, then no valid determinations could have been made under s. 152(1.4), so that the answer to the question clearly could not be an unqualified “yes.” Furthermore, since the Tax Court Judge had instead determined that the answer was no, it would follow that the s. 152(1.4) determinations that had been made were not valid determinations - without any finding being made as to the validity of the partnerships, so that this validity issue would be required to be addressed following CRA assessments of the multitude of partners, if it were not statute-barred from doing so. Accordingly, Webb JA concluded that the question posed was “premature,” and that the key question of the validity of the partnerships should be pursued before the Tax Court by getting on with the appeals.
Neal Armstrong. Summaries of Canada v. 2078970 Ontario Inc.,, as designated partner of Lux Operating Limited Partnership, 2020 FCA 162 under s. 152(1.4) and s. 152(1.8).
CRA indicates that the percentage of completion method can be used in computing qualifying revenue, but not marking securities to market
S. 125.7(4) requires that qualifying revenue of an eligible entity generally “be determined in accordance with its normal accounting practices.” CRA considers that:
“[R]evenue” under normal accounting practices generally requires the satisfaction of certain performance obligations, such as the sale of goods or the performance of services that would typically result in a corresponding inflow of cash, accounts receivables or other consideration.
CRA applied this test to find that the “revenue reported by the entity under the percentage of completion method would generally be considered ‘qualifying revenue’,” whereas mark-to-market valuation adjustments made by to the carrying value of investments by investment and brokerage firms would not give rise to an “inflow of cash, receivables or other consideration” under the above test, so that such (unrealized) gains or /losses would not affect qualifying revenue.
Neal Armstrong. Summary of 21 September 2020 External T.I. 2020-0855831E5 under s. 125.7(4).
CRA seems to indicate that joint tenants holding a share are one shareholder, not two
S. 130.1(6)(d) requires inter alia that a mortgage investment corporation have at least 20 shareholders. How is this test applied where a husband and wife hold a share as joint tenants (with rights of survivorship)?
After noting that under a joint tenancy, “the joint tenants have concurrent ownership and possession of the same property,” CRA stated:
[W]here two or more joint owners of a share of a corporation are considered one shareholder under relevant corporate law or are entitled to jointly receive any dividend paid on the share by the corporation, the joint owners of the share will generally be counted as one shareholder for purposes of paragraph 130.1(6)(d) … .
The first test might seem silly – obviously, they are two persons, not one. However, given the quoted acknowledgement above of the concurrent nature of ownership in joint tenancy, the second test seems to be saying that they would be regarded as one shareholder.
This approach might be relevant elsewhere, e.g., in determining whether a mooted mutual fund trust has 150 beneficiaries under Reg. 4801(b).
Neal Armstrong. Summary of 12 August 2020 External T.I. 2019-0833841E5 under s. 130.1(6)(d).
Income Tax Severed Letters 7 October 2020
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.