News of Note
CRA indicates that payments made to registered charity beneficiaries of a trust can be charitable gifts if the payments made are in the discretion of the trustees
Email this ContentThe residual beneficiaries of an alter ego trust are a class of registered charities as determined by the trustees, the trustees make payments over the next 3 years following the settlor’s death to various of those charities, and at the end of the 3 years, the remaining capital is required to be distributed to registered charities. CRA indicated that the payments made during the 3 years likely qualified as gifts, as they were made at the discretion of the trustees – in which case, a donation tax credit could be claimed. However, as there appeared to be no discretion as to whether the amounts were to be paid to charities at the end of the 3 years, those distributions would not qualify as gifts.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.2 under s. 118.1(1) – total charitable gifts.
CRA further confirms that a qualifying s. 94(2)(t) sale of Canadian shares effects an immediate change in trust residency
We have published the questions that were posed to CRA at the 7 June 2019 STEP CRA Roundtable, together with abbreviated summaries of the CRA oral responses.
If a non-resident trust is "tainted" as a resident trust under s. 94(2)(g) by being issued shares by a resident corporation, it potentially can re-acquire non-residency status under s. 94(2)(t) if it makes a qualifying sale of the shares. When this occurs, it changes its status immediately, so that it is non-resident for the stub period beginning with the sale, is resident for the stub period before the sale, and has a potential deemed disposition of its property under the emigration rule (s. 128.1(4)) as a result of the status change.
2013-0509111E5 confirmed the above results. However, 2018-0781041I7 essentially amended 2013-0509111E5 by expunging a confusing paragraph that suggested that for certain purposes the trust remained a deemed resident until year end. In response to Q.1 posed at the STEP Roundtable, CRA noted that the comments in that paragraph considered what would happen hypothetically “in the absence of s. 94(5),” and that such conclusions were not applicable to the actual state of the law. Thus, the sale triggers the change back to non-resident status for all relevant purposes.
Neal Armstrong. Summary of 7 June 2019 STEP CRA Roundtable, Q.1 under s. 94(2)(t).
PCI Géomatics – Court of Quebec applies McLarty to find that a loan which was repayable only out of increasing revenues was not a forgivable loan
The ARQ assessed on that basis that a non-interest-bearing loan received by a satellite–imaging company (PCI) from Industry Canada was a “forgivable loan,” so that its amount reduced the SR&ED pools of PCI for investment tax credit purposes. PCI was required each year to repay an amount equal to 1/15 of the amount advanced multiplied by an adjustment factor which was: 0 if annual growth in revenues was negative; 1 if such growth was positive but not exceeding 3%; and ranged up to 1.5 for higher growth rates. Thus, there was no explicit requirement to repay the loan if revenues declined.
In finding that the loan was not a forgivable loan, Dortélus JCQ noted that PCI was required to provide loan security and was subject to various restrictive covenants, and then stated:
The fact that there existed a certain uncertainty as to the frequency of repayment of the loan which … depended on fluctuations in the PCI revenues does not suffice to qualify the amounts advanced as government aid.
…PCI justifiably submitted that the position adopted by the ARQ, that [it] was a forgivable loan given that the required repayments were a function of the growth in future revenues (so that the obligation to repay depended on the occurrence of an uncertain and future event), was a position which was relied upon in the dissent and rejected by the majority in McLarty.
Neal Armstrong. Summary of PCI Géomatics Entreprises Inc. v. Agence du revenu du Québec, 2019 QCCQ 2688 under s. 127(9) – government assistance.
Rasmussen – Tax Court of Canada finds that Australian pension plan payments were fully taxable in Canada even though previous contributions had been non-deductible
An Australian police officer made non-deductible contributions to a “QSuper" government pension plan and then, when he became disabled, started receiving periodic “pension” amounts, a portion of which was non-taxable for Australian tax purposes. However, he then promptly immigrated to Canada and became a Canadian resident.
In finding that the pension amounts were fully taxable in Canada, Favreau J stated:
[T]he amounts received by the Appellant from the QSuper were superannuation or pension benefits and that they had to be included in his income in accordance with subparagraph 56(1)(a)(i) of the Act regardless that he was unable to deduct the contributions to the QSuper when he made them.
Neal Armstrong. Summary of Rasmussen v. The Queen, 2019 TCC 124 under s. 56(1)(a)(i).
Glatt – Federal Court orders CRA to pay interest on a refund where CRA thought there was no statutory authority for interest
Following his assessment for a s. 163.2 penalty, the taxpayer paid $1M to CRA so as to offset interest which would be borne by him if the assessment were upheld. After the assessment was vacated pursuant to a consent judgment, CRA issued a Notice of Reassessment showing the cancellation of the penalty and a refund of the $1M but denying any refund interest on the basis that s. 164(3) requires a taxation year to be specified in order for interest to be paid – and a s. 163.2 penalty is not calculated by reference to any particular taxation years.
A significant difficulty with this CRA position was that the Notice of Reassessment in fact, in its upper right-hand corner, stated “Tax year 2012.” Diner J found that this was not an administrative error that was corrected by s. 152(8). The Crown further argued that s. 164(3) also lacked traction on the basis the Notice was improperly described as a “Reassessment” rather than as a “notice of refund” or “refund receipt.”
It is unclear whether the taxpayer would have succeeded if CRA had not made the “mistake” of referring to 2012 in the Reassessment, given that Diner J also indicated that denying interest on the refund was inconsistent with Grenon.
He took the unusual step of ordering CRA to pay the interest, rather than remitting the matter back to CRA for further consideration.
Neal Armstrong. Summary of Glatt v. Canada (National Revenue), 2019 FC 738 under s. 164(3).
Income Tax Severed Letters 5 June 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
6075240 Canada – Federal Court notes that s. 152(3.1), unlike its Quebec equivalent, does not give a taxpayer longer to respond to an arbitrary assessment than a normal assessment
The Minister made arbitrary assessments of the taxpayer following its failure to file some annual returns. In refusing to review the refusal of the Minister to process returns for those years filed more than three years after those assessments, Grammond J. stated that the normal reassessment period “applies to all assessments, whether they were issued following the filing of a tax return or not.”
After noting that s. 152(3.1), unlike the equivalent Quebec provision, “does not provide that the normal reassessment period can begin at the time when the taxpayer files a tax return, if that time is after a first notice of assessment is sent,” Grammond J. stated:
[T]he Quebec statute cannot be used to interpret the federal statute. I agree that this lack of consistency between the two statutes may be a source of confusion for Quebec taxpayers and that it might be considered a source of unfairness, but it is not my role to rewrite the Act to avoid such an outcome.
Neal Armstrong. Summary of 6075240 Canada Inc. v. Canada (National Revenue), 2019 FC 642 under s. 152(4).
Ghumman – Tax Court of Canada finds that a life insurance salesman was taxable on compensation received for selling himself a life insurance policy
IT-470R stated:
[W]here a life insurance salesperson acquires a life insurance policy, a commission received by that salesperson on that policy is not taxable provided the salesperson owns that policy and is obligated to make the required premium payments thereon.
Guide T4130 subsequently added a statement that this policy “only applies where the income received is not significant and the insurance policy has no investment component or business use.”
Sommerfeldt J confirmed an inclusion in the employment income of a life insurance salesman of $57K in commissions received by his corporation for his purchase of a life insurance policy on his life that were then paid to him as salary. Sommerfeldt J stated that such assessment accorded with the Act, and that, in any event, this situation did not fall within the stated administrative policy (even leaving aside the CRA position that the amounts were “significant”) given that the commissions were not received by the individual directly but, rather, by his corporation.
Neal Armstrong. Summary of Ghumman v. The Queen, 2019 TCC 125 under s. 5(1).
CRA draws negative inferences from a rule intended to provide a GST/HST-exemption safe harbour
Proposed s. 7.4 of ETA, Sched V, Pt. II would generally exempt a single supply of a “multidisciplinary health care service” where substantially all of the consideration for the supply is reasonably attributable to two or more particular services listed in ss. 5 to 7.3 of that Part.
CRA has inferred that if the “substantially all” test is not satisfied, all of the consideration for the composite supply is taxable. For example, if a rehab service for a fixed fee could reasonably be attributed as to 82% to “good” services (chiropractic, physiotherapy, acupuncture) and 18% to massage therapy services, ALL of the fee is treated as taxable. This example is particularly striking because the three “good” services are all listed in paragraphs within the same exemption section (s. 7). Since the predominant character of the supply is of a service described in s. 7, why does the single supply doctrine not apply to exempt the supply without reference to s. 7.4? The answer may be that CRA is inferring that Finance was intending to exempt only what was described in its s. 7.4 safe harbour.
Contrast this with the definition of “institutional health care service” which in a similar listing of paragraphs sets out various services provided at, for example, an assisted-living facility that are included in that exemption, such as meals, accommodation and the personal care workers. It clearly is not intended that the fee charged to a resident is not exempted because he or she receives a single supply rather than separate supplies of these listed components. The only difference appears to be a purely semantic one – the s. 7 services are not given a label of, say, regulated health care service.
Neal Armstrong. Summary of GST/HST Notices - Notice 311, Proposed Exemption of Multidisciplinary Health Care Services, May 2019 under ETA, Sched V, Pt. II, s. 7.4.
Anand – Tax Court of Canada accepts oral evidence that the parties' written contract did not reflect their contractual intent
CRA assessed an individual (“Anand”) on the basis that he had provided services as a general contractor for the construction of a new home (so that he should have charged HST on the full cost to the landowning couple (Dr. Gupta and Dr. Khanna) rather than merely providing services as a construction manager for a fee of $50,000 per year. CRA relied on a contract which had been drafted by Dr. Gupta, perhaps using a template he found on the internet.
Hogan J accepted the oral testimony of Anand and Dr. Gupta that the written contract did not reflect their contractual intent. Such parol evidence could be admitted since there were significant inconsistencies in the contract’s drafting amounting to “patent ambiguity.” Even if there had been no such patent ambiguity, Hogan J might have been prepared to come to the same result on the basis that “latent ambiguity” arose from the “factual matrix” surrounding the contract.
Thus the services of the various trades were received by Anand as agent for the couple.
Neal Armstrong. Summary of Anand v. The Queen, 2019 TCC 119 under General Concepts – Evidence.