News of Note
Income Tax Severed Letters 16 October 2019
Email this ContentThis 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[W]e have come to the conclusion that the position described in the Interpretation no longer represents the position of the CRA.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.
CRA indicates that Reg. 8503(26) minimum amount payments or commutation payments are lump sums ineligible for reduction under Canada-U.S. Treaty
The U.S.-resident beneficiary of her deceased mother’s individual pension plan (IPP) received monthly benefits thereunder that were eligible for the 15% Treaty-reduced rate – but thereafter the IPP was wound up by virtue of having reached the end of a 10-year guarantee period. CRA rejected the taxpayer submission that the IPP winding-up distribution was “simply an extension of the periodic guarantee payments,” and found that, since it was a lump sum payment as referenced in the definition of “periodic pension payment” in s. 5 of the Income Tax Conventions Interpretation Act, it was subject to withholding at 25%.
CRA went on to gratuitously state:
[A]ny additional payment that an IPP may be required to make in a particular year to comply with the IPP minimum amount rules in [Reg.] 8503(26) … is not considered to be a periodic pension payment. … Similarly, a commutation payment made to a member or a beneficiary of a member in full or partial satisfaction of their entitlement to benefits under a defined benefit RPP is not a periodic pension payment.
Neal Armstrong. Summary of 12 September 2019 External T.I. 2017-0732681E5 under Treaties – Art. 18.
CRA applies its view that a partner is attributed each PE of a partnership for Reg. 400/403 purposes
Under Regs. 403(1) and (3), a property insurer (or, in this case, a reinsurer) is required to allocate its taxable income to the provinces on the basis of the respective proportions of its net property insurance premiums that are arrived at by allocating its net premiums to the provinces where the insured property is situate – except that if it does not have a permanent establishment in a particular province, the net premiums for the insured property in that province are allocated to the province which has a PE to which those net premiums are “reasonably attributable.”
CRA indicated that, even in this specialized context, it considers that a limited or general partner has a PE wherever the partnership has a PE, so that the reinsurer in question was considered for Reg. 403 purposes to have a PE in various provinces by virtue of being a partner - even though the partnership in question did not carry on any insurance business.
Neal Armstrong. Summary of 8 June 2018 Internal T.I. 2018-0744881I7 under Reg. 403(3).
Income Tax Severed Letters 9 October 2019
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.