News of Note
CRA considers that a contribution of shares to a TFSA is not a “sale” for Reg. 230 purposes
Email this ContentCRA considers that a contribution of shares of a public corporation is not a “sale” of those securities for purposes of Reg. 230. Consequently, there is no obligation of a licensed securities dealer who held shares of a public corporation of an individual in a regular brokerage account to report a transfer of those shares to the individual’s TFSA on a T5008 slip.
Neal Armstrong. Summary of 12 November 2019 External T.I. 2019-0822161E5 F under Reg. 230(1) – “sale.”
Scotti – Court of Quebec agrees with CRA position that broker-paid rebates of life insurance policy premiums are taxable under s. 12(1)(x)
CRA has taken the position (most recently in 2008-0271381E5 and 2010-0359401C6) that a rebate paid by a life insurance broker out of its commission to the client purchasing the policy is taxable to the client under s. 12(1)(x), stating, for example, in 2008-0271381E5, that:
[B]ecause income from a life insurance policy is taxed under section 12.2 or paragraph 56(1)(j) … an amount received as an inducement to purchase a life insurance policy would be an amount received in the course of earning income from property for the purposes of paragraph 12(1)(x).
Croteau, J.C.Q. referred approvingly to these CRA technical interpretations (and a similar ARQ one), which she described as a view that “the holder of a policy that includes both a life insurance component and a savings component holds property that is a source of income.”
The facts before her were more extreme. An insurance broker, whose licence subsequently was revoked, engaged in a scheme to cheat insurers, resulting in his pocketing commissions from them in excess of the amounts he agreed to pay to his clients. One of these clients was the taxpayer, who received amounts ($90,000) that were well in excess of the premiums he was required to pay under a universal whole life policy before he was able to terminate the premium obligations. The $90,000 was taxable to him under the Quebec equivalent of s. 12(1)(x).
Neal Armstrong. Summary of Scotti v. Agence du revenu du Québec, 2019 QCCQ 7579 under s. 12(1)(x).
Income Tax Severed Letters 8 January 2020
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has provided guidance on the Canadian journalism organization rules
Amendments enacted on June 21, 2019 provide three measures intended to provide support to Canadian journalism organizations producing original news content, namely:
- a 25% refundable labour tax credit for salary or wages payable on or after January 1, 2019 in respect of an eligible newsroom employee of a qualified Canadian journalism organization (QCJO) that also qualifies as a qualifying journalism organization (QJO);
- a 15% non-refundable personal income tax credit to allow individuals to claim digital news subscription costs paid to a qualifying organization after 2019 and before 2025; and
- extending eligibility for registration as a qualified donee to registered journalism organizations (RJO), beginning on January 1, 2020.
CRA has published detailed guidance on its interpretation of these measures, especially on the 25% labour tax credit (which is capped at $13,750 per annum per employed journalist), including an attempted articulation of its policy that the journalistic content must be generated “based on journalistic processes and principles, intended for a general audience.” (For this aspect of its positions and practices, it relies on the recommendations of an Independent Advisory Board..) Somewhat as expected, CRA has taken the position that only regular journalist employees can qualify, so that amounts paid by the QJO to freelance employees would not qualify.
CRA notes that the only remedy of an organization which CRA has decided not to accept as a QCJO is to seek judicial review of that decision in the Federal Court.
Many of the concepts used in the RJO definition (or, to be more precise, the “qualifying journalism organization” definition on which it mostly rests) are modeled on the registered charitable organization rules, so that the corresponding CRA policies (e.g., as to what constitutes a permissible related business) have a familiar sound to them.
Summaries of “Guidance on the income tax measures to support journalism” CRA Webpage 23 December 2019 under s. 248(1) - qualified Canadian journalism organization – para. (b), subpara. (a)(v), subpara. (a)(vi), s. 125.6(1) - qualifying journalism organization, qualifying labour expenditure, eligible newsroom employee, s. 125.6(2), s. 12(1)(x), s.118.02(1) - qualifying subscription expense, s.118.02(2), s. 149.1(1) – qualifying journalism organization – para. (b), para. (c).
Healius – Federal Court of Australia finds that lump sum payments made to lock-up doctors as customers for a 5-year period were currently deductible
A subsidiary (“Idameneo”) of an Australian public company that provided medical centre facilities and services to doctors in consideration for 50% of the fees generated by them. In order to induce a doctor to join one of the medical centres operated by it, it would typically pay a lump sum in the range of $300,000 to $500,000 to the doctor in consideration for the doctor’s promise to conduct his or her practice from the medical centre for a specified period of around five years, along with an exclusivity covenant. The taxpayer entered into 505 such agreements in the four years that were assessed.
In finding that such payments were not capital expenditures, and were currently deductible, Perram J found that:
“the payments of the lump sums are to be seen as recurrent and ongoing as Idameneo consistently tried to engage doctors to meet its ongoing demand for them. It did so 505 times in the relevant period…”
“the five year term obtained under the contracts here was [not of an enduring] nature. At the end of the five year period, the doctor was free to go …”
“the character of the outgoings was as a payment to win a customer”
The above finding that a five-year agreement did not give rise to an enduring benefit is consistent with BP Australia, which has also been cited in Canada.
Neal Armstrong. Summary of Healius Ltd v Commissioner of Taxation [2019] FCA 2011 under s. 18(1)(b) – capital expenditure v. expense – contract purchases.
CRA publishes detailed GST/HST views on what is a university
The ETA defines a university to mean “a recognized degree-granting institution or an organization that operates a college affiliated with, or a research body of, such an institution”. CRA has published a new GST/HST Memorandum which, in addition to discussing various exemptions applicable to supplies made by a university, provides considerable elaboration on how CRA applies this definition. Points made include:
- CRA takes guidance from any applicable provincial Degree Authority Act in considering whether the institution is a “recognized degree-granting institution.”
- An organization is only considered to be operating a college affiliated with a university where there is a formal affiliation agreement that states that the parent organization (the university) agrees to grant degrees to graduates of the affiliated college in exchange for a certain amount of control over the academic standards of, and the courses offered by, the affiliated college.
- A research organization is considered to be a research body “of” the university if it is owned and controlled by the university. The university is considered to “own” the assets for this purpose in various circumstances including if it is entitled to receive those assets on the winding-up of the body. The university is considered to control if it appoints a majority of the members of the governing body (even if such nominees come from other sectors such as the private sector or the federal government).
Neal Armstrong. Summaries of GST/HST Memorandum 20-3 “Universities” December 2019 under ETA s. 123(1) – university, Sched. V, Pt. III, s. 6, s. 7, s. 7.1 and s. 16.
4 more translated CRA interpretations are available
We have published a further 4 translations of CRA interpretations released in March, 2011. Their descriptors and links appear below.
These are additions to our set of 1,058 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 8 ¾ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for January.
CRA comments on the expansive effect of ss. 104(1) and s. 251(5)(b)(i) on related person status re trusts may be incorrect
Comments on how to characterize the relations of a trust or its beneficiaries to other taxpayers include:
- CRA considers that s. 104(1) applies, and therefore a trust is related to each person related to the trustee of the trust. This position, which appears to be incorrect, is not supported by Wright Estate, and its reasoning seems to break down when a trust has more than one trustee.
- Obiter comments in Propep suggest that the broad definition of “beneficially interested” in s. 248(25) may also apply wherever the term “beneficiary” is used. However, these comments are inconsistent with the presumption of consistent expression, under which the expanded meaning of “beneficially interested” should apply only when the Act expressly states that it does.
- The rights referred to in s. 251(5)(b)(i) include those “in equity.” CRA has considered that s. 251(5)(b)(i) could apply to a beneficiary of a trust unless, under the terms of the trust agreement, the beneficiary could never obtain ownership of the shares or control the voting rights attached to the shares. However, Lyrtech RD Inc. stated that a beneficiary's interest in a discretionary trust does not come within the scope of s. 251(5)(b) [but see, more recently, CO2 Solution Technologies].
- In order for various beneficiaries of a trust, for example, a mutual fund trust which might be subject to a loss restriction event, to be considered to be a majority-interest group of beneficiaries, they must inter alia constitute a group. It is suggested that:
[C]ase-law principles should be applied to determining whether beneficiaries of a trust constitute a group of persons in the following manner:
1) There must be sufficient common connection between the beneficiaries in addition to their being beneficiaries of the same trust. A common identifying feature (such as being non-residents, as in Silicon Graphics) is insufficient to establish such a connection.
2) The common connection might include but is not limited to a voting agreement, an agreement to act in concert, or a business or family relationship.
3) Beneficiaries may share a mutually beneficial objective, such as maximizing the value of their investments in the trust, without being considered a group.
4) Beneficiaries can participate in modern corporate or commercial steps, such as granting a proxy or participating in a reorganization of the trust (for example, a fund merger pursuant to section 132.2), without being considered a group.
5) Whether the beneficiaries know, can identify, or communicate with each other is relevant in determining whether they are a group.
Neal Armstrong. Summaries of Jeffrey T. Love and Kenneth R. Hauser, “How Various Aggregation Rules Apply to Trusts,” 2018 Conference Report (Canadian Tax Foundation), 28: 1-79 under s. 248(25)(a), s. 248(25)(b)(ii), s. 248(25), s. 251.1(1)(g), s. 251.1(3) – majority-interest beneficiary, s. 251.1(4)(d)(i), s. 251.1(3) – majority-interest group of beneficiaries, s. 251(2)(c)(i), s. 251(5)(b)(i), s. 251(1)(b), s. 256(1.2)(f).
Holding a non-resident corporation through a partnership may generate FAPI, but also might convert FAPI to active business income
The interposition of a partnership between a small stakeholder and a non-resident corporation (Forco) may generate FAPI given that a partnership (including, it is thought, a non-resident one) is a taxpayer for income-computation purposes and Forco has become a controlled foreign affiliate of the partnership.
However, the interposition of partnership may also operate favourably through engaging s. 95(2)(a)(ii)(B):
[F]our arm’s-length Canadian corporations (Cancos) each own 25 percent of the shares of a non-resident corporation (Forco 1). In turn, Forco 1 owns 30 percent of the shares of another non-resident corporation (Forco 2), and Forco 1 makes an interest-bearing loan to Forco 2 to fund Forco 2’s active business. … [B]ecause none of the Cancos have a qualifying interest in Forco 2, the recharacterization rule in clause 95(2)(a)(ii)(B), for example, would not be available since each Canco would hold less than 10 percent of Forco 2 on a lookthrough basis.
Alternatively, if the Cancos formed a partnership and the partnership held the shares of Forco 1, FAPI would be determined at the level of the partnership. In this case, the partnership would have a 25 percent indirect interest in Forco 2 and would therefore have a qualifying interest in Forco 2. In that case, the recharacterization rule in clause 95(2)(a)(ii)(B) may apply … .
Neal Armstrong. Summaries of Ilia Korkh and Eivan Sulaiman, “Outbound Partnerships: FAPI in Unexpected Places,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 10 under s. 91(1) and s. 95(2)(a)(ii)(B).
The interaction of the ss. 17 and 247(2.1) rules might generate double taxation
Under proposed s. 247(2.1), amounts are subject first to adjustments as to their quantum (or nature) under s. 247(2), before other provisions can then be applied to such adjusted amounts. Accordingly, cross-border short-term loans that do not meet the conditions of s. 17(8) could now be subject to an imputation of interest based on an arm's-length rate.
S. 17(7) recognizes that where Pt. XIII tax has been imposed on the amount of a loan made to a non-resident by a resident lender, it is inappropriate to also impute interest on that loan under s. 17. However, as s. 247(2) will now apply first, this raises the possibility that an amount of interest will be included in the lender's income in addition to the recognition of a shareholder benefit to the borrower equal to the loan amount.
S. 17 contains recharacterization rules, e.g. for back-to-back loans (s. 17(11.2)) or loans through partnerships or trusts (ss. 17(4) to (6).) Such transactions usually will not be recharacterized under s. 247(2)(d). This raises the possibility of imputation of interest under s. 17 based on the recharacterized transactions rather than interest imputation occurring only under the s. 247(2) rules.
Neal Armstrong Summary of François Fournier-Gendron, “Amendments to the Act: The Impact of Proposed Subsection 247(2.1) on Section 17,” Canadian Tax Highlights, Vol. 27, No. 12, December 2019, p. 5 under s. 247(2.1).