News of Note
CRA indicates that the requirement for employer profit contributions to an EPSP cannot be waived
Email this ContentIn approximate terms, one of the requirements to qualify as an EPSP is that the employer make payments computed by reference to profits to the plan trustee. CRA stated:
This means that there must be a binding obligation on the employer to make contributions pursuant to the plan’s contribution formula, and that such contributions must actually be made in the event of profits.
If this requirement ceases to be met because the employer no longer wishes to make contributions, the plan will cease to qualify as an EPSP – and it will be a question of fact as to whether it thereafter becomes a salary deferral arrangement, retirement compensation arrangement or an employee benefit plan.
Neal Armstrong. Summary of 11 February 2019 External T.I. 2018-0738561E5 under s. 144(1) - employees profit sharing plan - para. (a).
Mikhail - Tax Court of Canada allows taxpayers to resile from their admission that they received funds from their corporation
After CRA inquired as to the treatment of rebates (in the form of traveller’s cheques, gift cards and prepaid credit cards) received by an incorporated pharmacy from generic pharmaceutical drug manufacturers, the two shareholders (a married couple) decided to treat the rebate amounts as additions to their income and filed T1 amendments accordingly. They may have been assuming that the corporation would receive offsetting deductions (to the amounts of the rebates received by it) through additions to its deductions for services fees paid to the husband and to the employee remuneration paid to the wife.
However, CRA applied its presumption that amounts paid to shareholders generally are received by them qua shareholder rather than employee (or services provider) and assessed the corporation on the basis that it had paid the rebate amounts to the individuals as non-deductible shareholder benefits, so that the rebates were included in income at both the corporate and individual level.
Monaghan J accepted the husband’s testimony that the corporation had spent the rebate amounts purchasing supplies for use in its business and that the reason that they had reported the rebate amounts as personal income was that this would make it easier to deal with CRA as they had no documentary evidence that the rebate amounts were spent at the corporate level. Accordingly, the rebate amounts were not taxable benefits and Monaghan reversed the personal reassessments and confirmed the corporate reassessments.
Neal Armstrong. Summaries of Mikhail v. The Queen, 2019 TCC 49 under s. 15(1) and . 152(4)(a)(i).
Bernardin – Court of Quebec finds that interest that accrued prior to a class action judgment having become res judicata was non-taxable
An individual, by virtue of being part of a group of class action claimants, was awarded damages in 2004 of $1,200 for each of the seven winter seasons in which she had endured snowmobile noise. In 2010 she received a supplementary “indemnity” pursuant to Article 1619 of the Quebec Civil Code of $8,400 (capital) and $6,148 (interest). Whether the interest was taxable under the Taxation Act turned on when her damages were considered to have become “liquidated.”
Coutlée, J.C.Q. found that this liquidation date did not occur until July 3, 2009, being the date on which the Attorney General of Quebec abandoned the appeal which had been launched in December 2004 (reasoning that it was only on that date that “the November 30, 2004 judgment attained the status of res judicata”) – so that only the awarded interest that was referable to the period after July 3, 2009 was taxable to the individual.
Neal Armstrong. Summary of Bernardin v. Agence du revenu du Québec, 2019 QCCQ 846 under s. 12(1)(c).
CRA further clarifies that a qualifying s. 94(2)(t) sale of Canadian shares effects an immediate change in trust residency
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, a 2019 Interpretation has essentially amended 2013-0509111E5 by getting rid of a confusing passage that suggested that for certain purposes the trust remained a deemed resident until year end. The 2019 interpretation confirms that the sale triggers the change back to non-resident status for all relevant purposes.
Neal Armstrong. Summary of 17 January 2019 Internal T.I. 2018-0781041I7 under s. 94(2)(t).
Income Tax Severed Letters 13 March 2019
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Roy – Tax Court of Canada finds that CRA could not deny the carry-forward of excess RRSP contributions as an imposed quid pro quo for forgiving Part X.1 penalty tax
The taxpayer made a substantial overcontribution to his RRSP to fund investments that quickly became worthless. Accordingly, he was not in a position to withdraw the amount of the overcontributions to mitigate the corresponding Part X.1 penalty tax. CRA granted his application to waive that tax under s. 204.1(4). However, it thought that it was fair to also deny him any further deductions of the over-contributed amount in future years as he gradually earned income in those years to utilize the excess. Accordingly, it denied RRSP deductions taken by him in those subsequent years.
Smith J, in allowing the claimed RRSP deductions, stated:
…[T]he Respondent has failed to point to any legislative provision that would allow the Minister to eliminate unused RRSP contributions on the basis that they represent excess contributions.
Moreover … the Court does not make decisions on the basis of fairness ... .
Neal Armstrong. Summary of Roy v. The Queen, 2019 TCC 50 under s. 204.2(1.2).
CRA provides numerical speed limits on a pipeline for a company with a marketable securities “business”
CRA has provided the usual rulings for a pipeline transaction in which the estate sells a company with a “business” of investing and trading in marketable securities to a Newco for consideration comprising mostly a note, followed by an amalgamation of the two companies and the repayment by Amalco to the estate of the note over time.
The ruling letter stipulates that the amalgamation will occur no sooner than 12 months after the sale to Newco, and that thereafter the note will be paid off no faster than 15% per quarter for the first year. This contrasts with, for example, 2014-0540861R3 F and 2014-0548621R3, where these two parameters were 12 months and 25% per quarter, and 2016-0670871R3, where they were 30 months and 15% per quarter.
Neal Armstrong. Summary of 2018 Ruling 2018-0767431R3 under s. 84(2).
The GAAR Committee is looking at a lower percentage of the GAAR cases
After an audit team has made the mandatory referral of any proposed GAAR assessment to the Abusive Tax Avoidance Division at Headquarters, Headquarters then determines whether such assessment is clearly warranted or unwarranted under the jurisprudence or is respecting a structure already considerd by the Committee. In any such case, the proposal does not continue to the GAAR Committee. The GAAR Committee therefore looks at fewer matters than it used to, meets less frequently - and there is a greater tendency to send technical people rather than the named Committee representative to meetings.
Neal Armstrong. Summary of 7 March 2019 CTF Seminar on GAAR: Alexandra MacLean on GAAR under s. 245(4).
Revera Long Term Care – Federal Court requires CRA to reconsider whether a taxpayer’s negligence in over-reporting income in a statute–barred year permits CRA to reassess that year
The taxpayer discovered that it had overreported its income for ITA purposes by $9 million per year for years that were before the normal reassessment period. It requested that CRA reassess it for those years to exclude those amounts from its income - on the basis that the error was due to negligence so that such reassessments were permitted under s.152(4)(a)(i). CRA declined this request, based on a determination that the Minister did not have discretion under s.152(4)(a)(i) in situations where the taxpayer’s negligence leads to over-reported rather than under-reported income.
Ahmed J found CRA’s reasoning to be conclusory and agreed with the taxpayer that as CRA did “not conduct any textual, contextual, and purposive analysis as the Supreme Court of Canada requires” such decision was unreasonable and the request should be returned to CRA for a further decision.
Neal Armstrong. Summary of Revera Long Term Care Inc. v. Canada (National Revenue), 2019 FC 239 under s.152(4)(a)(i).
We have over 800 full-text translations of CRA Interpretations
We have published a further 6 translations of interpretations released in June and May, 2012. Their descriptors and links appear below.
These are additions to our set of 801 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.