News of Note
We have translated 5 more CRA Interpretations
Email this ContentWe have published a further 5 translations of CRA interpretations released in March, 2010. Their descriptors and links appear below.
These are additions to our set of 1,251 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 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 |
|---|---|---|---|
| 2010-03-26 | 9 February 2010 Internal T.I. 2009-0333571I7 F - Paragraphe 7(1.5) - contrepartie reçue | Income Tax Act - Section 7 - Subsection 7(1.5) | s. 7(1.5) rollover where employees exchanged specific s. 7(1.1) shares for shares of grandparent, even though they also received cash and PUC distribution |
| Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(j) | ACB increased by s. 7(1) benefit that had not yet been triggered due to s. 7(1.5) rollover | ||
| Income Tax Act - Section 116 - Subsection 116(1) | s. 116 certificate required even for shares disposed of under s. 7(1.5) rollover | ||
| Income Tax Act - Section 7 - Subsection 7(1.4) | non-resident ex-employees will be required to recognize s. 7 benefit deferred by s. 7(1.5) when they dispose of the shares acquired in exchange | ||
| 15 March 2010 Internal T.I. 2009-0352731I7 F - Remboursement de rémunération | Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n) | deduction for repayment of amounts received during deferred salary leave period following failure to return to work | |
| 2010-03-19 | 11 March 2010 External T.I. 2009-0345481E5 F - Allocations versées administrateurs bénévoles | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | allowances and travel reimbursements paid by NPO to volunteer directors were non-taxable |
| Income Tax Act - Section 248 - Subsection 248(1) - Office | definition of a “volunteer” (who is excluded from the holder of an “office”) | ||
| 1 March 2010 Internal T.I. 2009-0346951I7 F - Article XVI-Établissement stable-Province | Income Tax Regulations - Regulation 400 - Subsection 400(2) | being on concert tour in Canada did not render the various arenas fixed places of business, given lack of “regularity and recurrence” | |
| Income Tax Regulations - Regulation 400 - Subsection 400(2) - Paragraph 400(2)(e) | using massive stage equipment for Canadian concerts did not result in deemed PEs given that at each venue under 30 days and in Canada under 90 days | ||
| Treaties - Income Tax Conventions - Article 16 | Art. XVI of US Convention applicable irrespective of whether a PE | ||
| 2010-03-12 | 4 March 2010 External T.I. 2009-0343851E5 F - Remboursement des cotisations à un club | Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | reimbursements of employee fitness facility fees are considered principally for employees’ benefit if membership merely improves their performance through increased health |
CRA provides guidance on the “not materially different” requirement of the s. 147.4(1) rollover
S. 147.1 contemplates that the commuted value of an individual’s registered pension plan can be used to purchase an annuity contract in full satisfaction of the individual’s entitlement to benefits under an RPP (with a partial satisfaction scenario also being contemplated). S. 147.1 deems the individual to have not received an amount from an RPP by acquiring the annuity and deems amounts received under the contract to be amounts received under the RPP. Thus, there effectively is a rollover.
One of the conditions for s. 147.1 to apply is that the rights provided under the annuity contract “are not materially different from those provided for under the [RPP].” For example, “an annuity provided from a licensed annuity provider cannot provide payments that have a greater guarantee period than what was available under the RPP.” CRA has provided guidance on this material-difference requirement, including a detailed discussion of COLA adjustments (with some of the issues to be addressed arising from the fact that many RPPs provide full CPI cost-of-living adjustments, whereas licensed annuity providers generally do not offer life annuities with this feature.
In some cases, the commuted value is not enough to provide an annuity that equals the benefits that would have been provided under the RPP. In this case, the individual can choose to receive a reduced lifetime retirement benefit, a reduction in one or more ancillary benefits, or a combination thereof, as long as no element of the benefits under the annuity exceed the amount of that element under the RPP.
If the commuted value is greater than the cost to buy an annuity that replicates the RPP benefits, the excess commuted value cannot be used to provide higher annuity payments under the annuity contract. Under Reg. 8502(d)(ix), the portion of the commuted value that is in excess of the annuity acquisition cost typically must be paid in cash to the individual and included in income.
Neal Armstrong. Summary of Newsletter 20-1, “Registered Pension Plan Annuity Contracts” 24 July 2020 under s. 147.1.
CRA confirms that it generally will not attach value to private company voting rights
CRA confirmed a previous position that “provided that the owners of all the shares of the corporation act in a manner consistent with the assumption that no value attaches to the voting rights, and the rights are eventually extinguished for no consideration, the CRA will generally not attribute value to the rights,” so that, for example, “in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of an estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, the CRA generally accepts not to take into account any premium that could be attributable to such shares for the purposes of subsection 70(5).”
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 7, 2020-0842251C6 under s. 70(5).
CRA treats the deemed proceeds arising on death from a jointly owned whole life policy as being simply a valuation matter
Opco and its sole shareholder (A) jointly acquired a universal life insurance policy on the life of A, whose stipulated death benefit equals $1 million plus the fund value of the policy immediately before A’s death. Under a co-ownership agreement, Opco is entitled to the $1 million face amount on death and bears the annual insurance charges; and A is entitled to make additional (exempt-test qualifying) deposits into the policy, can designate the fund value recipient, and is also entitled to the cash surrender value (“CSV”) on any pre-death termination.
A dies when the fund value (and CSV) of the policy equals $200,000, so that Opco receives $1 million and A’s estate receives $200,000. Is the FMV of the life insurance policy under s. 70(5.3) (generally valuing a life policy for inter alia s. 70 purposes at its CSV) $200,000; and is the FMV of Opco’s interest in the policy nil, as it has no interest in the CSV pursuant to the co-ownership agreement?
CRA responded:
[W]e cannot definitively conclude that the FMV of the interest in the life insurance policy to Opco will be nil. The terms and conditions of the shared ownership arrangement, the specific life insurance contract and all other related agreements which may form part of the particular arrangement and the particular facts at the given time would have to be considered in the determination of the FMV of Opco’s interest in the life insurance policy.
… The CRA does not have its own method for computing the FMV; this computation is based upon the facts known on the valuation date, to which the principles and standards of the Canadian Institute of Chartered Business Valuators are applied.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 5, 2020-0842191C6 under s. 70(5.3).
GST/HST Severed Letters June 2020
The morning's release of one severed letter from the HST/HST Rulings Directorate (identified by them as their June 2020 release) is now available for your viewing.
CRA indicates that an interest in a related segregated fund trust could be transferred on a s. 85(1) rollover basis
S. 39(1)(a)(iii) provides that a taxpayer’s capital gain excludes gain from the disposition of an insurance policy, including a life insurance policy, except for “that part of a life insurance policy in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust”. CRA considered that on this basis “a disposition of an interest in a related segregated fund trust will generally result in capital gains treatment” so that “the interest may be considered a capital property, and accordingly, an eligible property under paragraph 85(1.1)(a) of the Act for purposes of subsection 85(1).” Accordingly, such an interest could be transferred on a s. 85(1) rollover basis.
Neal Armstrong. Summaries of 8 July 2020 CALU Roundtable Q. 4, 2020-0842171C6 under s. 85(1.1)(a) and s. 138.1(1)(e).
CRA indicates that the two components received under a “face amount plus fund value” universal life policy are included in computing the corporate policy owner’s CDA
CRA indicated that where an exempt universal life held by Opco on the life of its shareholder paid two amounts to Opco on the death of the individual - the fund value of the policy (being the accumulated balance of the investment accounts within the policy at the time of the death of the life insured); and the face amount – the total of those two amounts would be “proceeds of a life insurance policy” for purposes of computing the increase to the capital dividend account of Opco.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 3, 2020-0842151C6 under s. 89(1) – capital dividend account – (d)(ii).
CRA comments on the use of notes in hybrid pipelines to fund estate taxes or other liabilities
In 2018-0767431R3, the amount of the pipeline note paid in any single quarter in the first post-amalgamation year was not to exceed 15%, and in 2018-0780201R3, this percentage was 10%. CRA effectively intimated that these specific percentages and other “gradual repayment” particulars were offered up by the pipeline ruling applicant and were not imposed by it.
When asked if it is permissible for the estate to borrow funds from the pipeline corporation in order to pay its liabilities (e.g., for taxes) during the period in which the note is being repaid following the amalgamation of the pipeline corporation, CRA noted that as “an example,” this can occur in a hybrid pipeline transaction in which there is a preliminary redemption of shares of the estate for a note (subject s. 84(3)) with a resulting carryback of a loss under s. 164(6).
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 6, 2020-0842241C6 under s. 84(2).
CRA confirms that a refund of premiums on death under a life insurance policy does not entail its disposition but can increase the CDA of the corporate owner
A private corporation is the owner and beneficiary of an exempt life insurance policy (with an adjusted cost basis of $90,000) on the life of a shareholder, who dies from, say, suicide or skydiving, which does not void the policy, but instead results in the insurer repaying all premiums ($100,000).
CRA confirmed that there is a CDA addition of $10,000 under para. (d) of the CDA definition respecting the receipt of “proceeds of a life insurance policy... of which the corporation was... a beneficiary" received as a “consequence of the death of any person;" while at the same time, pursuant to para. (j) of s. 148(9) - “disposition,” there is no disposition in relation to an interest in a life insurance policy.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 2, 2020-0842141C6 under s. 89(1) – capital dividend account – (d).
Income Tax Severed Letters 19 August 2020
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.