News of Note
CRA finds that the 5-year excluded business exception does not restart on the business incorporation
Email this ContentPara. (b) of the “excluded business” definition of the tax on split income (TOSI) rules includes in an excluded business of a specified individual for a taxation year a business in which she was “actively engaged on a regular, continuous and substantial basis” (“Involved”) in “any five prior taxation years.” CRA followed the guidance in Finance’s Explanatory Notes and found that the five year test could be satisfied where the specified individual was Involved in the business for, say, three years while it was conducted by her spouse as a sole proprietorship, and for a further three years after it was rolled by him into a newly-incorporated Opco. In other words, it was the same business for TOSI purposes throughout the six years.
Accordingly, after she retired, she could receive a s. 104(19)-designated Opco dividend qua beneficiary of a family trust without being subject to the TOSI.
Neal Armstrong. Summary of 19 August 2019 External T.I. 2019-0814181E5 under s. 120.4(1) – excluded business – para. (b).
CRA finds that there was a loss of the TOSI excluded business exception when a specified individual went on extended mat leave
A specified individual, who holds only 5% of the shares of Aco but has been “actively engaged on a regular, continuous and substantial basis” (“Involved”) in the active business of Aco (which is run by her husband) for 2017 through 2019, so that the dividends received by her on her shares of Aco were excluded amounts and, thus, not subject to the tax on split income. If throughout 2020 she were absent from any work because of a maternity leave or temporary (or permanent) disability, would her dividends still be excluded amounts?
CRA indicated that, indeed, the excluded business exception from TOSI would be unavailable in 2020 because she had no involvement in the business. CRA implicitly found that she could not rely in that year on para. (b) of the excluded business definition - which includes in an excluded business of a specified individual for a taxation year a business in which she was Involved in “any five prior taxation years” - because she had only been so Involved for a total of three prior taxation years.
CRA went on to indicate that the reasonable return exception might be available, noting that any application of this exclusion would be:
based on the specific criteria applicable in the circumstances, including the work performed, the property contributed, the risks assumed, the total amounts paid or payable and such other factors as may be relevant.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.18 under s. 120.4(1) – excluded business – para. (b).
Stockton – Federal Court of Australia finds that a US teen who came to Australia for nine months on a “working holiday visa” was a non-resident
The taxpayer was a US citizen who, in her “gap year” after high school, came to Australia for nine months on a “working holiday visa.” She stayed at numerous different houses in various locales in Australia, mostly secured through AirBnB, and had had two periods of employment, totaling about seven months At the time she left Florida for Australia, she had her own room in the family home, which was retained for her while she visited Australia, and she returned to it after her travels.
In finding that the taxpayer was not resident in Australia under general principles, Logan J stated:
… Here, the only habit or pattern in Ms Stockton’s choice of accommodation was that of opportunism antithetical not just to settling in any one locale but to settling anywhere at all in Australia while she was here. … Ms Stockton’s association with Australia during the 2017 income year was only ever casual.
Neal Armstrong. Summary of Stockton v Commissioner of Taxation [2019] FCA 1679 under s. 2(1).
CRA refers to Stewart as the leading case on “business”
The bigger the question, the shorter the answer. When asked to comment on the meaning of “business” in the Act, CRA provided a response a significant portion of which read:
… Stewart considered how to determine whether or not there is income from a source for the purpose of section 9. In that context, it provided guidance that can also be used to determine whether or not a business exists.
Because Parliament and the courts have given "business" a very broad meaning, the CRA does not intend to give specific guidance.
It may be recalled that in Stewart, Iacobucci and Bastarache JJ. stated:
"Equating the term 'business' with the phrase 'reasonable expectation of profit' does not accord with the traditional common law definition of business, which is that 'anything which occupies the time and attention and labour of a man for the purpose of profit is business'."
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.17 under s. 248(1) – business.
CRA states that only s. 74.4(2)(g) provides relief from the joint application of the TOSI and s. 74.4(2) rules
CRA rejected the proposition that the main purpose test in s. 74.4(2), and thus the rule itself, should not apply to an estate freeze transaction resulting in the family trust beneficiaries being subject to the tax on split income (TOSI) on the trust income that was distributed to them. First, CRA noted:
[T]he part of the Purpose Test related to the designated person only turns on the question of whether it is reasonable to consider that one of the main purposes of the transfer made by the individual was to benefit, either directly or indirectly, the designated person, regardless of the tax treatment to the designated person of any income that is part of the benefit the individual was seeking to confer.
Second, there was a provision (s. 74.4(2)(g)) that was intended to address the potential overlap between the two (s. 74.4 and TOSI) rules, whose narrow scope and application, CRA described as follows:
[P]aragraph 74.4(2)(g) only mitigates the impact, resulting from the application of subsection 74.4(2), on the transferring individual by reducing the amount that the transferring individual is deemed to have received as interest. That reduction is the amount to be included in computing the designated person's income for the year as a taxable dividend that the designated person received, if it is reasonable to consider that it is part of the benefit that the taxpayer sought to confer and is included in computing the designated person’s split income for any taxation year.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.16 under s. 74.4(2).
CRA concludes that beneficiaries of a family trust can benefit from the excluded debt exception from the TOSI rules
S. (d)(i) of the s. 120.4(1) “split income” definition excludes an amount in respect of a debt obligation of a mutual fund corporation or trust or of a corporation whose shares are listed on a designated stock exchange (an “Excluded Debt”). If the sole asset held by a trust is an Excluded Debt, would the interest thereon that is included in a beneficiary’s income under s. 104(13) be in respect of an Excluded Debt?
CRA first noted that the preamble to s. 108(5)(a) (which converts income of a trust from another source into undifferentiated property income in the hands of the beneficiary to whom it is distributed) provides that that rule does not apply to s. 120.4, and stated: “Thus, for the purposes of section 120.4, the character of the amounts allocated by a trust will be maintained.” (See also Archer-Shee v. Baker, Gilhooly and Kemp.)
CRA then concluded that interest on an Excluded Debt of a trust could maintain its status as such for purposes of the s (d)(i) exclusion when distributed to a beneficiary who was a specified individual.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.15 under s. 120.4(1) - “split income.” - (d)(i).
Aubin – Court of Quebec finds that there was no taxable benefit in paying the employee’s costs of attending a retreat hosted by a client
A senior employee (Aubin) of the National Bank of Canada was invited by an important client of the Bank (Colabor) to attend, along with his spouse, a conference hosted by Colabar in Vienna in 2011 and in Chile in 2012 for Colabor’s senior employees and commercial partners. The Bank paid the full costs of Aubin’s attendance at the two conferences, which were $7568 in 2011 and $12,898 in 2012 as well as the same costs of a second employee and spouse attending the 2011 conference.
In finding that there was no taxable benefit under the Quebec equivalent of s. 6(1)(a), Forlini JCQ stated:
[Their] participation … was principally for the benefit of the Bank and not for the taxpayers. Furthermore, the taxpayers as well as their spouses attended at the conferences at the express request of their employer.
… Doubtless, the taxpayers experienced a certain pleasure in visiting museums, wineries and tourist attractions during the conferences, but such pleasure had an accessory and secondary character to the purpose of the activity, i.e., developing a business relationship between the Bank and an important client.
Neal Armstrong. Summary of Aubin v. Agence du revenu du Québec, 2019 QCCQ 6243 under s. 6(1)(a).
CRA confirms that the directors can authorize a late capital dividend election after the dividend declaration
CRA confirmed that the advance authorization of a late capital dividend election (described in s. 83(3)(c)) by the directors need not be made before the declaration of the dividend in question, and need only be made before the filing of the late election.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.13 under s. 83(3).
CRA finds that two 50% shareholders of two corporations likely acting in concert to produce connectedness
The common shares of X Corp. and Y Corp were held equally by two unrelated corporations. Whether Y Corp. was connected to X Corp. - so that a deemed dividend arising on the redemption by Y Corp. of non-voting redeemable preferred shares held by X Corp. would not be subject to Part IV tax under s. 186(1)(a) - turned on whether the two shareholder corporations were not dealing at arm's length with X Corp. In finding that this was likely the case, CRA applied the presumption in Folio S1-F5-C1 that:
In the case of a closely-held corporation (for example, where there are two or three unrelated shareholders, none of which individually controls the corporation) the CRA considers that there is a presumption that the shareholders of such a closely-held corporation will act together to control the corporation. In order to rebut this presumption, it would be necessary to show that no one is controlling the corporation and that the decision-making process in the corporation is effectively deadlocked.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.12 under s. 186(2).
Income Tax Severed Letters 23 October 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.