News of Note
CRA indicates that a dissolved corporation can be a “participating employer” in an RPP
Email this ContentWhere more than one employer participates in a registered pension plan, s. 147.2(2)(a)(vi) requires that the assets and actuarial liabilities be apportioned in a reasonable manner among the participating employers in respect of their employees and former employees. CRA considers that for this purpose and other uses of the concept of a participating employer, an employer is considered to be a participating employer even if it has been dissolved or otherwise ceased to exist. Thus, in the example of the application of s. 147.2(2)(a)(vi), RPP assets and liabilities continue to be apportioned to the dissolved employer.
Neal Armstrong. Summary of 26 June 2019 Internal T.I. 2019-0791761I7 under s. 147.2(2)(a)(vi) and Statutory Interpretation – Interpretation Act, s. 33(3).
Gekas – Federal Court finds that CRA’s denial of relief from penalty tax on TFSA over-contributions relating to errors of the financial institution was unreasonable
S. 207.06(1) indicates that the Minister may waive the tax on an excess TFSA contribution where “the individual establishes to the satisfaction of the Minister that the liability arose as a consequence of a reasonable error” and the excess (together with any income thereon) is distributed “without delay.” The individual made two excess contributions of $10,000 each to his TFSA in 2016 due to his financial institution garbling instructions that he had given. Immediately on finding out about these over-contributions (when he was assessed by CRA), he withdrew those excess amounts.
Boswell J remitted the matter for redetermination by a fresh CRA delegate, stating:
[T]he Delegate’s decision is unreasonable because it did not fully assess the extent to which the excess contributions resulted from the mistakes of persons other than the Applicant.
Neal Armstrong. Summary of Gekas v. Canada (Attorney General), 2019 FC 1031 under s. 207.06(1).
CRA indicates that no TOSI tax applied to a dividend received from the surviving step-mother’s company
Mr. A bequeathed all the common shares of Opco to his surviving spouse, Ms. B, who was actively engaged on a regular, continuous and substantial basis in its business. Opco paid a dividend on the discretionary dividend shares held by Son A, who was the son of Mr. A, but not of Ms. B.
CRA noted that following the death of Mr. A, Son A no longer qualified as Ms. B's child under s. 252(1)(c) . Since she was now unrelated, Ms. B was not a "source individual" in respect of the specified individual (Son A). This, in turn, meant that Opco's business did not constitute a "related business" in respect of Son A , so that Son A could benefit from the "excluded amount" exclusion in s. 120.4(1)(e)(i): no TOSI.
Neal Armstrong. Summary of 11 June 2019 External T.I. 2019-0795291E5 F under s. 120.4(1) – related business.
Income Tax Severed Letters 7 August 2019
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Prairielane – Tax Court of Canada finds that a “main reason” for a stacked partnership structure was tax deferral rather than generating SBD tax savings
MacPhee J found that the main tax reason for implementing a stacked partnership structure for holding interests in a farm equipment dealership (prior to the introduction of s. 34.2 to cut off this type of planning) was to defer the recognition of corporate tax rather than to access the small business deduction. He also noted that one of the two taxpayers (PLH) had taxable capital in excess of $15 million, so that at most it could only have generated a SBD for one year before its high taxable capital caught up with it under the applicable lagged calculation, and stated:
PLH would not have as a main reason for the creation of the new corporate structure access to the SBD for one year as the cost of creating the newly created structures, as well as the ongoing costs, far exceeded the SBD obtained in 2011.
Neal Armstrong. Summary of Prairielane Holdings Ltd. v. The Queen, 2019 TCC 157 under s. 256(2.1).
CRA applies s. 75(2) to the 1st generation but not 2nd generation income of a non-qualified purported TFSA trust
A trust lost its status as a TFSA because it borrowed money, but continued to exist for a number of subsequent years because it continued to be administered as though it were a TFSA. What was its treatment during that period?
By ceasing to be a qualifying TFSA, the trust ceased to be excluded from the application of s. 75(2) by s. 75(3)(a). Accordingly, s. 75(2) applied to attribute the income of the trust to the individual, subject to one point. That point was that:
Subsection 75(2) does not apply to income earned by a trust from the re-investment of income that was previously subject to attribution (i.e., second generation income), as this income is not earned on property contributed to the trust by a person (or substituted property). Thus, any second generation income earned by the former TFSA trust after deregistration will generally be taxable to the trust to the extent that it is not paid or payable to the beneficiary of the trust.
Neal Armstrong. Summary of 17 July 2019 Internal T.I. 2017-0718021I7 under s. 75(2).
CRA rules on pipeline transaction that includes partial use of s. 164(6) and of the s. 88(1)(d) bump
CRA ruled on a hybrid pipeline transaction in which the two holding companies that were held by the deceased first purchase for cancellation a portion of their participating shares that are now held by the estate in order to generate a deemed dividend to clear out their RDTOH and CDA accounts - with the estate electing under s. 164(6) to treat the resulting capital loss as a capital loss of the deceased. The estate then proceeds with a conventional pipeline transaction in which it transfers its remaining shares of the holding companies to Newco and, after the requisite waiting period, the holding companies are amalgamated with Newco or are wound up into it (in either case, referred to as “Amalco”), and with the notes thereafter being gradually paid off by Amalco.
On the winding-up or amalgamation, preferred shares held by one of the holding corporations in a corporation (whose participating shares are held by a family trust) are to be bumped under s. 88(1)(d) (although there are no rulings on this aspect). The proposed transactions conclude with a s. 88(2) winding up of the Amalco.
Neal Armstrong. Summary of 2019 Ruling 2019-0793281R3 F under s. 84(2).
9 more translated CRA interpretations are available
We have published 2 translations of CRA interpretations released last week, and a further 7 translations of CRA interpretations released in November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.
These are additions to our set of 927 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.
CRA found that failure to charge for services rendered by a Canco to a NR sub of a NR trust tainted the NR trust under s. 94(2)
The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco provided services for no consideration to LLC1.
The Directorate concluded that Canco thereby was rendered a resident contributor to NRTrust (so that NRTrust was deemed to be a s. 94-resident trust) because
- s. 94(2)(f) deemed there to be a transfer of property to that trust, and
- it would be reasonable to view there as having been a resulting increase in the fair market value of the LLC1 shares.
In the Directorate’s view, this result obtained even if s. 247(2) also applied to deem Canco to have received FMV consideration for its services.
Essentially the same result obtained if Canco made an interest-free loan to LLC1 rather than providing free services. Similarly, the application of s. 17 (or s. 247(2)) to that loan would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust.
Neal Armstrong. Summaries of 28 May 2019 Internal T.I. 2018-0772971I7 under s. 94(2)(a).
CRA notes that two years were required to pass before proceeds from the sale of a related business could generate excluded share income for TOSI purposes
In Year X3, Investco sells all the shares of Opco, which was the only related business respecting the specified individual (Investco’s shareholder) and uses the proceeds in an investments business. CRA indicated that dividends paid by Investco to the individual shareholder cannot qualify for the excluded share (“tax on split income” or TOSI) exception until Year X5. For instance, in Year X4, the income of Investco was tainted because in its last taxation year (X3) it had received dividend income from Opco and, in any event, the taxable capital gain realized by it in that year was deemed by s. 120.4(1.1)(d)(i)(B) to be income derived from the Opco business.
Neal Armstrong. Summary of 12 June 2019 External T.I. 2019-0792011E5 F under s. 120.4(1) – excluded share – (c).