News of Note
Gerbro Holdings has been affirmed
Email this ContentThe Gerbro Holdings case concerned a privately-held Canadian investment company, whose governing investment guidelines mandated its holding up to 60% of its funds in hedge funds. Although the hedge funds in which the company invested were in low tax-rate jurisdictions, Lamarre ACJ accepted that tax deferral was not “one of the main reasons” for acquiring these investments and that there instead was an “overarching commercial reason for investing" in these funds, e.g., the reputation of the hedge fund managers – and these offshore funds were selected as being the best choices. Accordingly, those investments were not subject to the offshore investment fund rules in s. 94.1.
This decision has now been briefly affirmed in the Court of Appeal, with Webb JA simply stating:
We are not convinced that the Associate Chief Justice made any reviewable error in her thorough and detailed Reasons.
Neal Armstrong. Summary of Gerbro Holdings Co. v. The Queen, 2016 TCC 173, briefly aff’d 2018 FCA 197 under s. 94.1(1).
CRA is no longer requesting country-by-country breakdowns of income derived from mutual funds in its FTC audits
In the autumn of 2017, CRA requested numerous taxpayers to provide information respecting their foreign tax credit claims including as to the allocation of their income from Canadian mutual funds as between the U.S., Europe and Asia. This information was not available on the T3s issued by such mutual funds. In response to a query on this, CRA stated:
[W]here a mutual fund is invested in a significant number of countries and the burden of allocating the respective information may be burdensome to the taxpayer, the CRA will revise its administrative position and request taxpayers to provide an amended tax slip that correctly reflects the federal foreign tax credit amounts claimed. In general, the CRA will no longer systematically require a breakdown of foreign income by country, type of income and foreign taxes paid by country in such situations.
We have now published full-test translations of all the CRA and Finance responses to the questions posed at the two 2018 APFF Roundtables (together with summaries of the questions posed.) We have not summarized various questions posed at the 2018 APFF Financial Strategies and Instruments Roundtable to which the Finance representative did not provide written responses.
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.12 under s. 126(1).
CRA is only waiving penalties for late-filed principal residence dispositions for 2017 and 2016 returns
CRA has summarized the detailed filing requirements for reporting a principal residence disposition and making the designation. CRA also stated:
[T]he administrative practice stated on the CRA's website, allowing the reduction of the penalty for late-filing a principal residence designation, except in the most serious cases, has been extended [from 2016-year dispositions] to dispositions that occurred over the course of the 2017 taxation year.
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.11 under s. 54 – principal residence – (c).
Finance addresses policy re sourcing of student moving expenses
A Finance official was content with the current tax policy of allowing students to deduct eligible moving expenses from scholarship and research grant income (and from employment income if “a full-time student … also moves to take up an employment”) but not from educational assistance payments received out of a registered education savings plan, noting inter alia that “an individual’s scholarships and research grants are more closely tied to a relocation site than income from [an RESP].”
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.9 under s. 62(1)(c)(ii).
CRA finds that the treatment by one municipality of another municipality’s excess sewage was not GST/HST exempt
It is intuitively obvious that the sharing of core municipal functions between municipalities will be GST/HST exempt, right?
Two GST/HST registered municipalities agreed that each would charge the other for the receipt and treatment of the other municipality’s excess wastewater at their respective treatment facilities. Were these charges exempted under ETA Sched. V, Pt. VI, s. 22, which applied to “a supply of a service, made by a municipality … of ... maintaining … a … sewerage … system”?
CRA acknowledged that City of Brandon had found that this wording “is broad enough to include the ‘operation’ of a … sewerage … system,” but characterized what was going on here as instead being “the acceptance, treatment and disposal of … wastewater at the [other’s] municipal wastewater treatment facilities,” so that the exemption was unavailable.
Neal Armstrong. Summary of 29 June 2018 Ruling 125593r under ETA Sched. V, Pt. VI, s. 22.
CRA rules that kinesiology services are not exempt from GST/HST
CRA ruled that kinesiology services (specifically services provided to mobility-impaired patients by a member of the B.C. Association of Kinesiologists) were not GST/HST exempt.
Neal Armstrong. Summary of 25 June 2018 Ruling 143194 under ETA Sched. V, Pt. II, s. 10.
CRA indicates that the 10% of votes and FMV tests for excluded share status can be satisfied on a collective basis
One of the tests for share of a specified individual to be “excluded shares” is that the specified individual own shares of the corporation representing 10% or more of the fair market value of all its shares and 10% or more of the voting rights. CRA stated that these two tests can “be applied at the shareholder level (i.e., based on the aggregate of all classes of shares so owned) versus on each specific class of shares owned by the specified individual” so that, for example, these test would be satisfied if the individual held non-voting common shares representing 20% of the corporation’s equity FMV and special voting shares carrying 20% of the votes but having a nominal FMV.
Neal Armstrong. Summary of 21 August 2018 External T.I. 2018-0771811E5 under s. 120.4(1) – excluded share – (b).
CRA finds that interest on an interspousal loan cannot be paid with a promissory note
Where a loan is made to a spouse at the prescribed interest rate, s. 74.5(2) requires that each year’s interest be “paid” by January 30 of the following year. Although in other contexts, CRA accepts that a promissory note can be issued and accepted as payment of an amount, CRA considers that the context and purpose of the income attribution rules:
favour a more restrictive interpretation of the word "paid", according to which the issuance of a note, although irrevocable, unrestricted and payable on demand, does not satisfy the requirement provided for in those [provisions].
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.10 under s. 74.5(2).
CRA notes factors considered in deciding to backdate an HBP withdrawal
S. 146.01(2)(d) provides that for purposes of the home buyer plan rules in s. 146.01, a withdrawal from an RRSP made by an individual in January of a year “or at such later time as is acceptable to the Minister” is deemed to have been made at the end of the preceding year. When asked what factors CRA would consider in exercising this discretion, CRA mentioned, as the most likely:
- whether the RRSP balance at December 31, 2017 is sufficient to cover the subsequent RRSP withdrawal
- “the dates on which the amounts required for withdrawal were contributed” and
- “the reasons for the withdrawals being made over a period that straddled two calendar years” (e.g., a February closing)
Furthermore:
HBP participants who withdraw over more than one year will generally be contacted by the CRA to confirm details of their participation.
Neal Armstrong. Summary of 2018 APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 146.01(2)(d).
CRA illustrates the effective date of the passive income rules
New s. 125(5.1)(b), which eliminates the business limit of a Canadian-controlled private corporation if it or associated corporations had significant passive income (a.k.a. “aggregate investment income”) in their taxation years ending in the preceding calendar year, is stated to apply to taxation years that begin after 2018. This means that a calendar CCPC with an associated corporation (BCo ) with a November 30 year end must account, in its 2019 taxation year, for its own passive income for the preceding 2018 calendar taxation year and for the passive income of BCo for its year ending on November 30, 2018.
Neal Armstrong. Summary of 20 September 2018 External T.I. 2018-0771871E5 under s. 125(5.1)(b).