News of Note

CRA provides guidance on the UHTA amendments

CRA has published a further Underused Housing Tax Notice providing some basic illustrations of the application of the proposed UHTA amendments released on November 21, 2023.

It notes that where, for example, a Canadian parent and Canadian adult child both hold title to a Canadian residential property, it now will not matter whether they are co-owners or whether one is holding in trust for the other because, either way, they will be excluded owners (i.e., not required to file a return). Similarly, it will no longer matter regarding exempt owner status whether two Canadian individuals are holding title as co-owners or partners.

Due to the addition of a Canadian corporation whose shares are listed on a designated Canadian stock exchange to the excluded owner definition, a Canadian subsidiary of such a listed corporation will now be an excluded owner even if there is substantial foreign ownership of the listed corporation.

Section 4.1 will require an owner to account separately for each capacity in which it holds title (as trustee, partner or for its own account). For example, a foreign national holding title to a Canadian residential property as to 10% as trustee for a specified Canadian trust and as to the other 90% in her individual capacity will, in her capacity of trustee, be an excluded owner, but will be required to file a UHT return as to the 90% interest.

CRA notes that the amended definitions of specified Canadian partnership and specified Canadian trust essentially provide a look-through rule to an upper-tier partnership or trust, so that, for example, a lower-tier partnership will be tainted if any of the members of the upper-tier partnership is not one of the listed Canadian entities. (in fact, these definitions are broader than this, and deal with multi-tier arrangements.)

None of the UHT Notices discuss bare trusts or Quebec nominees.

Neal Armstrong. Summaries of Underused Housing Tax Notice UHTN16 Proposed Amendments to the Underused Housing Tax, 8 March 2024 under UHTA, s. 2, excluded owner – (a)(i), (b). (c)(iii), specified Canadian partnership – (a), specified Canadian trust – (a), s. 4.1, and Underused Housing Tax Regulations – s. 2(3).

CRA indicates that the flipped property rule may not apply where a beneficiary receives the devise of a house of a deceased parent and promptly sells it

Although s. 13(12) deems the gain of a taxpayer from the disposition of a housing unit within 365 days of its acquisition to be an inventory gain, s. 12(13)(b)(i) provides an exception for a disposition which inter alia can reasonably be considered to occur due to the death of a person related to the taxpayer. CRA seemed to accept that this exception might be available, depending on the circumstances, where an estate distributed a housing unit of the deceased to a child beneficiary and such child then sold the unit within 365 days of the distribution.

Neal Armstrong. Summary of 29 January 2024 External T.I. 2023-0990101E5 under s. 12(13)(b)(i).

Darmos Family Trust – Ontario Superior Court of Justice finds that “Alberta” family trusts whose major decisions were made in Ontario, were resident there

The assets of the two Darmos family trusts were mostly shares of corporations holding the investments derived from the sale of a company of which Mr. Darmos had been the principal. Two of the three trustees of each trust were an Alberta lawyer and Alberta trust company, and the third was an Ontario-resident lawyer (Alexopoulos), who had provided longstanding legal counsel to Mr. Darmos.

Ramsay J found that that the central management and control of the two trusts was in Ontario rather than Alberta. Most of the documentation demonstrated that the role of the trustees (other than Alexopoulos) was simply to implement and document the decisions of others, all based in Ontario, i.e., Mr. Darmos (who was actively involved with and directed the management of the trust property, and the assets of the corporations), the accountants for Darmos (KPMG, whose recommendations as to distributions were implemented when these decisions did not originate with Mr. Darmos), Alexopoulos (who handled dealing with the professional advisors) and RBC Dominion Securities (to whom Mr. Darmos had delegated significant investment management functions).

Neal Armstrong. Summary of Theodoros Darmos Family Trust v. Minister of Finance, 2023 ONSC 6431 under s. 2(1).

Income Tax Severed Letters 20 March 2024

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

FU2 – Federal Court of Appeal confirms that Senate vacancies do not invalidate ITA bills passed by it

The taxpayer appealed a reassessment of its 2011 taxation year, which was adversely affected by subsequent retroactive legislation, on the grounds that such legislation was passed by a Senate that had substantial vacancies, contrary to Part IV of the Constitution Act, 1867 (which has detailed provisions respecting the appointment of specified numbers of senators from each province). In confirming the decision below that this claim should be struck, Biringer JA stated:

Crucially, section 35 [of the Constitution Act, 1867] makes it clear that the Senate may exercise its powers notwithstanding any vacancies, as long as there is a quorum of senators … .

Accordingly, it was plain and obvious that the appellant’s Senate vacancy argument had no reasonable prospect of success … . [T]he untenable implication of the appellant’s Senate vacancy argument is that any legislation passed by a quorum of the Senate when there are vacancies in the Senate could also be invalid.

Neal Armstrong. Summary of FU2 Productions Ltd. v. Canada, 2024 FCA 45 under Constitution Act, 1867, s. 35.

CRA indicates that the two-year s. 227(6) time limit for requesting a Part XIII tax refund applies to a request based on a Treaty “as if resident” clause that is silent on the timing point

As an example of an “as if resident” (“AIR”) clause, the Directorate referred to Art. 18(2) of the Canada-Italy Treaty which relevantly indicated that the tax which Canada could impose on a periodic pension arising in Canada does not exceed the lesser of (a) 15% of the excess of the annual pension amount over Cdn.$12,000, and (b) the amount of Canadian tax the recipient would have been required to pay on the annual pension amount had the recipient been resident in Canada. CRA indicated that, by virtue of s. 227(6), a taxpayer request for an assessment of tax under this Treaty provision must be made no later than two years after the end of the calendar year in which the pension amounts were paid, stating:

Generally, domestic law must be applied first and treaty provisions may override those provisions. Since subsection 227(6) of the Act is Canadian domestic law, it is applied first, restricting the timeframe for claiming a refund of excess Part XII.5 or Part XIII tax paid to two years from the end of the taxation year in which the income is received. …Article 18, paragraph 2 … does not provide a specific timeline for making such a request. Further, the Canada-Italy Treaty does not have any other provisions extending the timeframe to a request a refund of tax in respect of taxation that is not in accordance with the provisions of the Canada-Italy Treaty … . Other treaties would need to be reviewed on a case-by-case basis to determine if any of the provisions therein affect the application of subsection 227(6) [citing 9402551].

Neal Armstrong. Summary of 20 June 2023 Internal T.I. 2021-0904981I7 under s. 227(6).

1351231 Ontario – Tax Court of Canada finds that an Airbnb rental property is similar to a motel, lodging house etc. so that, with its short-term rentals, it cannot qualify as a residential complex

The Appellant used a condo unit for the first nine years after purchase for long-term residential rentals and then listed it on Airbnb and rented it out for succession of short-term rentals (under 60 days and sometimes for only one night) before its sale.

Before concluding that the condo unit was excluded from being a residential complex, so that its sale was a taxable supply for GST/HST purposes, D’Arcy J found that, at the time of the sale, the unit was similar premises to a hotel, a motel, an inn, a boarding house and a lodging house given that it along with the listed items represented “premises that are regularly supplied as accommodations to third parties on a short‑term basis for a fee” and provided furnished accommodation.

Furthermore, at the time of sale, “all or substantially all of the leases, under which the Condominium was supplied, provided, or were expected to provide, for periods of continuous possession or use of less than 60 days.” In rejecting the Appellant’s submission that this test was satisfied because over the whole period of its ownership, the condo was leased for over 90% of that period in long-term rentals, D’Arcy J found that the substantially all test was a “point in time” test.

The above conclusion was reinforced by the change-in-use rule in s. 206(2), which applied, by virtue of s. 141.1(3)(a), when the property was first listed on Airbnb, so that there was a deemed acquisition by the Appellant of the property. Since the only use after the property’s deemed acquisition was for making short-term rentals, the same conclusion would be reached without applying a point-in-time test.

Neal Armstrong. Summaries of 1351231 Ontario Inc. v. The King, 2024 TCC 37 under ETA s. 123(1) – residential complex, and s. 206(2).

We have translated 6 more CRA interpretations

We have translated 6 further CRA interpretations released in March of 2002. Their descriptors and links appear below.

These are additions to our set of 2,780 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2002-03-01 12 March 2002 Internal T.I. 2001-0094067 F - DEDOMMAGEMENT - TITRE DE PROPRIETE Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees legal fees incurred in ownership dispute were capital expenditures
Income Tax Act - Section 54 - Proceeds of Disposition damages received for use of a property contrary to the recipient’s co-ownership right were tax-free receipts
Income Tax Act - Section 3 - Paragraph 3(a) damages received for separated spouse’s unlawful use of taxpayer’s property were tax-free receipts
21 March 2002 Internal T.I. 2001-010133A F - VALIDITE D'UN JUGEMENT - PENSION ALIMENTAIRE Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount where couple reconcile and then separate a second time, child custody thereafter paid will not qualify as support amounts if no new agreement or judgment
20 March 2002 External T.I. 2001-0113815 F - TVQ SUR PRIMES D'ASSURANCE - SALAIRE Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) employee would not be credited with a contribution on paying Quebec sales tax on wage loss plan premiums/ the employer paying them would not be a contribution
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) employee would not be credited with a contribution on paying Quebec sales tax on wage loss plan premiums/ the employer paying them would not be a contribution
25 March 2002 Internal T.I. 2001-0113497 F - REMBOURSEMENT DE PRESTATIONS ASS. EMPLOI Income Tax Act - Section 60 - Paragraph 60(n) - Subparagraph 60(n)(iii) repayment of EI benefits due to award of wrongful dismissal damages was deductible under s. 60(n)(iii)
Income Tax Act - Section 60 - Paragraph 60(v.1) repayment of EI benefits due to award of wrongful dismissal damages was deductible under s. 60(n)(iii) rather than s. 60(v.1)
14 March 2002 External T.I. 2002-0119695 F - Income & Losses/Business or Property General Concepts - Agency criteria applied for determining presence of agency
12 March 2002 External T.I. 2002-0125885 F - Section 55(3)(a) - Exception55(3)(a) Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) s. 55(3)(a) applies where Opco redeems 50% shareholder (Holdco A) where other shareholder is owned by the son respecting the spousal trust owning Holdco A

CRA confirms that the s. 115.2 safe harbour can extend to lending and that administrative services by themselves may be excluded on general principles

A limited partnership (“Foreign LP”) has exclusively non-resident partners and its Canadian corporate general partner has delegated the management of its activity of making loans to an affiliated Canadian-resident manager. Regarding the application of the safe-harbour rule as to the limited partners being considered to carry on business in Canada through the Manager, CRA indicated that the making of loans by the Manager on behalf of Foreign LP would generally qualify as “designated investment services” given that “there is no indication that an acquisition, holding and disposition of a debt acquired on original issue through the services of a Canadian service provider are meant to be excluded from the application of subsection 115.2(2).”

Although the definition of “designated investment service” relevantly excluded only investment management and advice, CRA indicated that mere administrative services performed by the Manager would not by themselves cause the limited partners to be considered to be carrying on business in Canada (and similarly regarding any administrative services of the GP.)

Neal Armstrong. Summaries of 17 November 2023 External T.I. 2023-0965891E5 under s. 115.2(1) – Designated investment services, paras. (b), (a).

Verrier - Quebec Court of Appeal finds that reimbursements for life insurance policy premiums should be prorated between portions taxable under s. 12(1)(x), and non-taxable portions

Verrier participated in a scheme of an insurance broker (Chabot) to defraud life insurance companies which rested on the commissions generated to Chabot from the sale of universal life policies substantially exceeding the premiums payable under those policies during the first two years of their term (beyond which, they could be cancelled without Chabot being required to repay his commissions). Chabot sold a large policy to Verrier, and after Chabot subsequently ceased making reimbursement payments to Verrier, the policy was subsequently cancelled by the insurer for the resulting non-payment of premiums by Verrier.

At issue in this appeal was whether the reimbursement payments qualified under the Quebec equivalent of s. 12(1)(x) as being “received by the taxpayer in the year, in the course of earning income from a business or property”.

Mainville JCA found that the insurance coverage provided under the policy did not constitute income from property and instead represented a non-taxable benefit. However, the investment account provided for by the policy was property exploited for the purpose of deriving income therefrom and, therefore, came within the s. 12(1)(x) equivalent. However, although the income generated on the investment account was exempted, it effectively would be subject to deferred taxation when the policy was redeemed for its cash surrender value under the Quebec equivalent of s. 148(1). Approximately 1/3 of the premiums were used by the insurer to purchase the (non-taxable) insurance coverage and 2/3 were used to purchase investments chosen by Verrier (a source of deferred taxable income). Mainville JCA found that the reimbursement payments should be apportioned on the same basis, so that 2/3 of each payment was taxable under the Quebec s. 12(1)(x) equivalent.

In further finding that it was irrelevant that in fact Verrier did not generate any income from the policy under s. 148(1), Mainville JCA stated:

If the property in question is reasonably likely to generate income, [the s. 12(1)(x) equivalent] can apply, regardless of whether the property actually generates income or whether the taxpayer decides to dispose of it before it generates income.

Neal Armstrong. Summary of Verrier v. Agence du revenu du Québec, 2024 QCCA 298 under s. 12(1)(x) and Statutory Interpretation - Provincial Law.