News of Note
CRA discusses how to report the principal residence exemption when the residence had been expanded from 1 to 2 duplex units
Email this ContentAfter an individual acquired a duplex in January 2011, he used the two units for renting to a third party and as his personal residence, respectively. In July 2019 he ceased to rent out the first unit, and appropriated it to his residence. He made a s. 45(3) election respecting his change of use under s. 45(1)(c) from rental to personal use, so that he was deemed to have not disposed of the rental unit. (Prior to the 2019 Budget changes, this election would not have been possible because, in the view of CRA, changing the use of only one unit in a duplex represents only a partial change of use of a single property.)
He then will dispose of the duplex in December 2022.
CRA indicated that notwithstanding that it considered the duplex to be a single property, the principal residence designation on the 2022 disposition should be made on two designation forms – one respecting the smaller unit that had been used as a residence up to the expansion date, and the second for the expanded unit.
As to the making of the s. 45(3) election, CRA stated:
Where an election under subsection 45(3) is made, the taxpayer must inform the CRA by enclosing a duly signed letter to that effect with the taxpayer’s return for the year in which the taxpayer actually disposed of the property, or earlier if the CRA issues a formal demand for that election. In that letter, the taxpayer should provide all relevant information related to the change of use.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.3 under s. 54 – principal residence exemption - (c) and s. 43(1).
CRA applies the s. 20(1)-preamble source rule, and finds that the principal residence exemption applied to a lease termination payment
A tenant had been annually renewing a lease of a personal-use condo since the time the condo was first leased in July 2013. The condo was sold in February 2019. In order to be able to move in right away, the new owner paid $15,000 to the tenant for early termination of the lease. S. 20(1)(z) provides for deductibility of the amount specified notwithstanding s. 18(1)(a). Did this mean that the $15,000 was deductible in computing the new owner’s income under s. 20(1)(z) notwithstanding that the new owner paid this amount respecting a personal-use asset?
CRA noted that s. 20(1)(z) was not stated to apply notwithstanding the income-source rule in the preamble to s. 20(1). Thus, “the amount to be deducted must be applicable wholly or in part to income from a business or property,” which an examination of the facts might not demonstrate to be the case.
CRA also considered it likely that the tenant continued to have a (single) residential leasehold interest throughout the period since July 2013, so that the $15,000 qualified for the principal residence exemption, i.e., it was consideration for the disposition of the leasehold interest (used as a principal residence) that the tenant had acquired in 2013 and held since then.
Neal Armstrong. Summaries of 11 October 2019 APFF Roundtable, Q.2 under s. 20(1)(z) and s. 40(2)(b).
CRA finds that a transfer of a TFSA to the surviving spouse because of their daughter’s renunciation occurred as a consequence of the deceased’s death
Although an individual made a specific bequest under his will of his TFSA to his adult daughter, she executed a written renunciation of the bequest (that CRA went on to find was deemed by s. 248(9) to result in a “disclaimer” or a “release or surrender” for purposes of s. 248(8)(b),) so that following the TFSA's liquidation by the executor, the proceeds were instead transferred by the executor to the widow of the deceased – who then promptly contributed such proceeds to her own TFSA.
CRA found that, in light of 248(8)(b), such transfer to the widow as a result of the disclaimer qualified as a transfer of this TFSA to her “as a consequence” of his death. Thus, her contribution to her TFSA could qualify as an “exempt contribution” under the s. 207.01(1) definition of that term.
Neal Armstrong. Summary of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 207.01(1) – exempt contribution – (b).
Income Tax Severed Letters 16 October 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA reverses its position that s. 84.1(1)(b) dividends do not generate dividend refunds
In 2002-0128955, CRA indicated that a deemed dividend under s. 84.1(1)(b) would not generate a dividend refund (DR). CRA has now stated:
[W]e have come to the conclusion that the position described in the Interpretation no longer represents the position of the CRA. In particular, according a DR to a corporation deemed to have paid a dividend by virtue of paragraph 84.1(1)(b) provides in our view a result that is more compatible with the integration principle enshrined in the Income Tax Act.
Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.1 under s. 129(1).
CRA notes that an exempt contribution to a TFSA can only be made as of right no more than 30 days before the survivor payment was received from an estate
What happens if the surviving spouse (Ms. Y) of an individual (Mr. X), who bequested his TFSA to her, made a contribution to her TFSA in the amount of Mr. X’s TFSA before the executors liquidated the TFSA and distributed that amount to her?
After indicating that the “exempt contribution” definition in s. 207 did not “require that the survivor payment be received before the contribution is paid,” CRA noted that the definition requires that the contribution be designated on a Form RC240 within 30 days after the day on which the contribution is made (or at any later time that is acceptable to the Minister) – which meant that Ms. Y’s contribution could only so qualify, if made more than 30 days after the survivor payment was received from the estate, if CRA exercised its discretion to extend the 30-day period.
Neal Armstrong. Summary of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 207.01(1) – exempt contribution – (c).
CRA finds that a diminution in a TFSA held by the executors reduces the exempt contribution that can be made by the survivor
The definition of “exempt contribution” in s. 207.01(1) contemplates that the “survivor” of an individual can make a contribution on an exempt basis to the survivor’s TFSA “as a consequence of the individual’s death, directly or indirectly out of or under [the deceased’s TFSA] that ceased.”
CRA accepts that this “directly or indirectly” wording contemplates situations where “amounts from a deceased holder's TFSA are first paid to the executor of the estate before being paid by the executor to the survivor.”
What happens if the investments in the TFSA declined between the time of death of Mr. X and the subsequent distribution to the survivor (Ms. Y) - say, from $100,000 to $90,000?
It depends. If the executors immediately transferred the TFSA property to an estate investment account, so that the $10,000 diminution in value occurred in that taxable account, then Ms. Y could make an exempt contribution of $100,000 provided that she received a distribution of at least that amount from the estate (e.g., she received a further $10,000 as a residuary beneficiary). On the other hand, if the executors did not liquidate the TFSA until the time of the distribution to Ms. Y, she could only make a $90,000 exempt contribution even if she received a total of $100,000 as estate beneficiary.
Neal Armstrong. Summary of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.4 under s. 207.01(1) – exempt contribution – (b).
CRA finds that a widow who had resided in the home of her deceased husband could access the HBP program and first-time home buyer’s credit
We have published summaries of the questions posed at the 11 October 2019 APFF Financial Strategies and Instruments Roundtable (other that the two questions - Q.1 and Q.3 - for which CRA stated it was still thinking about its answer) along with a translation of the full text of the preliminary written answers of CRA. Next, we will be publishing the (regular) 2019 APFF Roundtable on a piecemeal basis.
First, Q.2 of the Financial Strategies and Instruments Roundtable. Given that a widow, who had been living in the home owned by her deceased husband, was no longer considered to be his spouse when, shortly after his death, she acquired a condo, she was permitted under the home buyer plan rules to use RRSP funds for the purchase and was entitled to the first-time home buyer’s credit. She also would have been entitled under the HBP rules to use her RRSP funds on an acquisition of the home of her deceased husband from the estate, provided that there was an agreement in writing for its acquisition.
Neal Armstrong. Summary of 11 October 2019 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 146.01(1) – regular eligible amount – (f) and s. 118.05(1) – qualifying home – (a).
Finance provides comfort letter re no advantage tax applying where RRSP or TFSA fees (described in s. 20(1)(bb)) are paid by the annuitant or holder
In 29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6, CRA indicated that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan “controlling individual” (i.e., annuitant or holder) typically would now be considered as an “advantage” giving rise to tax under s. 207.05(1) equal to 100% of the fee amount (noting inter alia under the hypothetical arm’s length test in s. 207.01(1) – advantage - (b)(i) that it would not be “commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party”) - but that it would defer applying this new position until January 1, 2018 (subsequently extended by 2017-0722391E5 to January 1, 2019).
Shortly after releasing its new Folio on Advantages, CRA then stated (in 2018-0779261E5) that it was “deferring implementation of the position pending completion of a review of the issue by the Department of Finance.”
Finance has now issued a comfort letter stating:
[W]e have no tax policy concerns with respect to the payment of investment management fees directly by the annuitant/holder of the registered plan. … Generally, the direct payment of fees results in either a net loss, or negligible gain, for the plan holder. We are therefore prepared to recommend … that paragraph (b) of the definition "advantage" … be amended [respecting 2018 and subsequent taxation years] such that it does not apply to payments by a controlling individual of a registered plan, not exceeding a reasonable amount, of fees described in paragraph 20(l)(bb) … .
Neal Armstrong. Summary of 26 August 2019 Comfort Letter - “Advantage”: Exclusion for Investment Management Fees under s. 207.01(1) – advantage – (b)(i).
D’Anjou – Tax Court of Canada finds that a taxpayer should have been informed by a similar loss in the Court of Quebec
In connection with finding that the taxpayer had made a misrepresentation attributable to neglect when he had treated the adjusted cost base of a property he had sold as having been increased by alleged expenses such as municipal and school taxes and financing expenses incurred during the holding of the property, Favreau J noted in particular that the same types of ACB adjustments had been denied for the disposition by the taxpayer of another parcel of vacant land by the Court of Quebec in 2008 QCCQ 7197. The year of disposition thus was validly reassessed beyond the normal reassessment period.
Neal Armstrong. Summaries of D’Anjou v. The Queen, 2019 CCI 208 under s. 152(4)(a)(i) and s. 54 – ACB.