News of Note

Caplan – Court of Quebec finds that family trust income purportedly distributed to the children beneficiaries was in fact received by the father as beneficiary

Two university-age children received income-distribution cheques from the discretionary family trust, and endorsed them to their father (who was one of the two trustees as well as a beneficiary), who professed to spend such funds on expenditures for the benefit of the children, such as covering part of the costs of the family car and condominium. In confirming the inclusion of the distributed income amounts in the income of the father under the Quebec equivalent of s. 104(13), Bourgeois JCQ stated:

… Michael and Megan each acted as an accommodation party, whether as an agent or nominee, for their father.

… Michael and Megan never had control of the sums that were paid to them by the Trust.

Laplante is similar, although it put more emphasis on there being a “simulation” (a concept akin to sham).

Neal Armstrong. Summary of Caplan v. Agence du revenu du Québec, 2019 QCCQ 3269 under s. 104(13).

CRA indicates that a 3rd party can make an RRSP contribution

CRA indicated that it is acceptable for an RRSP contribution to be received from a third party (i.e., drawn on a bank account other than the annuitant’s) “provided that the payment is made at the direction or with the concurrence of the annuitant of the RRSP,” so that the RRSP receipt should be issued by the financial institution to the annuitant.

Neal Armstrong. Summary of 14 May 2019 CLHIA Roundtable Q. 3, 2019-0799111C6 under s. 146(5).

Income Tax Severed Letters 26 June 2019

This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Aquilini Estate – Tax Court of Canada finds that partnership income and losses should be allocated proportionately to capital invested and recognizing work performed

The facts of this case, involving the successful application by CRA of s. 103(1.1), are perhaps too extreme to merit an extensive description. Pizzitelli J found that income and losses, which were allocated to a holding partnership by lower tier partnerships, had been allocated by it, in turn, to its family members in a manner that was highly disproportionate to the relative capital invested and that was negatively correlated with the work performed (the losses were allocated to the three brothers who did the work, and other entities which did no work were allocated income.)

Pizzitelli J rejected submissions that “all circumstances, including personal family circumstances and personal estate planning goals must be considered” and that the income and loss allocation methodology could be supported from the standpoint of estate planning objectives – and instead thought that “the reasonable business person would only consider factors relevant to their own business considerations having regard to their own business interest,” which confirmed his view that the focus should be on the respective capital invested and work performed.

Neal Armstrong. Summary of Aquilini Estate v. The Queen, 2019 TCC 132 under s. 103(1.1).

Ngai – Federal Court of Appeal reverses a finding that a rebate could be claimed by an agent

The Tax Court found that an individual, who co-signed a new home purchase agreement with her nephew, did so as agent for her nephew and that she claimed the Ontario HST new housing rebate as agent and bare trustee for her nephew, so that the rebate was available. Webb JA essentially indicated that the person claiming the rebate must herself qualify for the rebate, which was not the case as the only individual to occupy the new home was an unrelated individual to the claimant.

Webb JA also implied that if the nephew had instead claimed the rebate, the rebate also would have been unavailable on the authority of Cheema (a case in which, by the way, Webb JA had dissented, but now accepts) given that a co-purchaser of the property (the aunt of the rebate claimant in this alternative scenario) did not occupy the property and was unrelated to the occupant.

Neal Armstrong. Summary of Canada v. Ngai, 2019 FCA 181 under ETA s. 254(2)(g) and Tax Court Rules, s. 6(1)(h).

6 more translated CRA interpretations are available

We have published a further 6 translations of CRA interpretations released in December 2011. Their descriptors and links appear below.

These are additions to our set of 891 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/2 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for July.

Bundle Date Translated severed letter Summaries under Summary descriptor
2011-12-16 8 December 2011 External T.I. 2011-0427451E5 F - Statut de résidence fiscale Income Tax Act - Section 2 - Subsection 2(1) Rulings Directorate does not determine residency
6 December 2011 External T.I. 2010-0384701E5 F - Décès contribuable - Immobilisation admissible Income Tax Act - Section 70 - Subsection 70(5.1) application of s. 70(5.1) to bequest of goodwill
General Concepts - Effective Date CRA policy of price adjustment clauses inapplicable where deferred sale price subsequently adjusted
Income Tax Act - Section 152 - Subsection 152(4.2) CRA policy for adjusting a statute-barred year for a reduction in the 5th year of staged-proceeds sale
15 November 2011 External T.I. 2011-0415881E5 F - Pension alimentaire pour enfants Treaties - Income Tax Conventions - Article 18 taxpayer not entitled to deduct child support payments upon becoming a non-resident
9 December 2011 External T.I. 2011-0429321E5 F - Changement d'usage Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) FMV is measured at the time of change of use
21 November 2011 External T.I. 2011-0426481E5 F - Actions admissibles de petite entreprise Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(14) - Paragraph 110.6(14)(f) - Subparagraph 110.6(14)(f)(ii) - Clause 110.6(14)(f)(ii)(A) “substantially all” (meaning 90% or more) test satisfied even though only leasehold interest in real estate transferred
17 November 2011 External T.I. 2011-0414811E5 F - Frais médicaux- fins esthétiques Income Tax Act - Section 118.2 - Subsection 118.2(2.1) qualifying breast surgery expenses

Black – Tax Court of Canada finds that an ancillary income-earning purpose for making a loan whose terms were never finalized was sufficient to satisfy s. 20(1)(c)(i)

Conrad Black controlled both Hollinger Inc. (“Inc.”) and Hollinger International Inc. (“International”). In 2004, the Delaware Court of Chancery ordered Black and Inc. jointly to pay to International damages equalling the amount of a “non-compete” payment of U.S$16,6 million that International had paid to Inc., plus interest thereon. Black used money borrowed from a third party ("Quest") at 12.68% interest to pay all of such damages, but argued that he had advanced such funds on behalf of Inc. in satisfaction of an interest-bearing loan that he had orally agreed to make in the same amount to Inc. Although the Audit Committee of Inc. had approved the receipt of a loan from Black, the relationship between the independent directors of Inc. and Black deteriorated, and the alleged loan by him to Inc. was never formally documented – and following subsequent litigation, all of Black’s alleged rights in that regard were extinguished in a settlement in which he agreed to pay damages to Inc.

Rossiter CJ accepted Black’s position that the borrowed money had been used by Black to make a loan to Inc., so that Black was entitled to an interest deduction on his borrowed funds, stating:

… Black and Inc. reached an agreement on the essential terms of the loan and left the details to be worked out at a later date. The fact that a formal document outlining those essential terms was to be prepared later on and signed … does not alter the validity of the earlier contract. …

Since Black had an obligation to pay interest expenses on the Quest Loan, Black had to earn interest income on the loan to Inc. in order for him to be made whole. …

… While I find that this was an ancillary purpose compared to his primary purpose of helping Inc., that was a bona fide objective of his investment, which is capable of providing the requisite purpose for interest deductibility under paragraph 20(1)(c).

Neal Armstrong. Summary of Black v. The Queen, 2019 TCC 135 under s. 20(1)(c).

CRA rules that interest on borrowed money used to pay a premium on the cash redemption of convertible debentures is deductible

A Canadian public company (ACo ) will force the conversion of its outstanding convertible debentures, by issuing a notice to redeem them for their principal amount. However, upon receiving notice that the debentureholders are converting, it will then exercise a further right to redeem such debentures in cash for their value based on the market value of the underlying shares, thereby resulting in the payment by it of a substantial cash redemption premium. The redemption will be funded with borrowed money.

CRA applied the “fill the hole” concept to rule that the interest on the borrowed money used to pay the premium will be deductible under s. 20(1)(c)(i) given that the accumulated profits of ACo at the time of the redemption will exceed the premium. More routinely, it also ruled that the borrowed money used to repay the debentures’ principal will be deductible in light of s. 20(3).

Neal Armstrong. Summaries of 2018 Ruling 2018-0740931R3 F under s. 20(1)(c)(i) and s. 20(3).

CRA states that the SDA exception for SAR plans is unavailable where dividend equivalents are paid in cash

The share appreciation rights (SAR) plan of an employer corporation provides for dividend equivalents on SAR units that are satisfied by way of cash payments made annually to employee participants.

CRA indicated that if the current vesting period for a SAR unit granted under the plan was extended from three years to five years (so that the three year bonus plan safe harbour in para. (k) of the salary deferral arrangement definition no longer applied), then the plan would not be considered to come within CRA’s accommodation of SAR plans, so that the SDA rules could apply. CRA stated:

If a SAR plan provides for dividend equivalents to be paid in cash on an accelerated basis (such as annually or after each dividend payment date) without the whole of the corresponding unit being redeemed, the CRA general position will cease to apply with effect from the time that the employee becomes entitled to receive the first such dividend equivalent payment. This is because, in such a case, the units would not be considered to be solely for future services.

Neal Armstrong. Summaries of 14 May 2019 External T.I. 2017-0737571E5 under s. 248(1) - salary deferral arrangement and s. 6(14).

The expansion of the FAD rules creates tension with existing FAD rules which implicitly contemplate a real non-resident parent

The Budget proposed amendment to the foreign affiliate dumping (FAD) rules would expand them to situations where the non-resident “parent” of the CRIC is a non-resident individual or a group of non-resident persons not dealing with each other at arm’s length (a “NAL group”).

The existing “more closely connected business” (“MCCB”) exception in s. 212.3(16) is simply unworkable where the deemed “controlling” person is a trust beneficiary by virtue of s. 212.3(26). In addition, s. 212.3(26)(c) (re a discretionary beneficiary having a deemed 100% interest) could deem multiple discretionary beneficiaries to each own 100% of the shares owned by the trust, leading to multiple incidence of tax on multiple deemed dividends. Given that the core premise -- that absent tax considerations, the investment in the FA would have been made by the discretionary beneficiary is almost certainly false -- s. 212.3(26)(c) should be scrapped.

Ss. 212.3(26)(a) and (b) (providing a look-through rule to non-resident trust beneficiaries) also are unnecessary – if the CRIC is controlled by a Canadian-resident trust (albeit, with non-resident beneficiaries), the CRIC will in reality be controlled by Canadian-resident decision makers.

The addition of the concept of a NAL group is fraught since identifying such a group is a difficult question of fact which it very well might be impracticable for the CRIC to determine. In addition, why should a NAL group who have gone to the trouble to negotiate a shareholders agreement for the CRIC be regarded as the real direct investors in the FA? Furthermore, the s. 212.3(16) exception would be very difficult to apply where the deemed “parents” do not exercise control.

Neal Armstrong. Summaries of Joint Committee “Foreign Affiliate Dumping, Derivative Forward Agreement and Transfer Pricing Amendments Announced in the 2019 Federal Budget” 24 May 2019 Submission of the Joint Committee under s. 212.3(1)(b), s. 212.3(16), s. 212.3(26), s. 212.3(18), s. 12(1)(z.7), s. 248(1) – tax-indifferent investor, s. 247(1.1) and s. 152(4)(b)(iii).