News of Note
Six further full-text translations of CRA interpretations are available
Email this ContentThe table below provides descriptors and links for a French technical interpretation released in November 2013 and five questions from the October 2013 APFF Roundtables, as fully translated by us.
These (and the other full-text translations covering the last 4 1/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2013-12-04 | 11 October 2013 Roundtable, 2013-0495801C6 F - Dividend Paid to Trust and Schedule 3 of T2 | Income Tax Act - 101-110 - Section 104 - Subsection 104(19) | s. 104(19) designation is not effective until year end of trust |
| Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) | s. 104(19)-designated dividend is not received for s. 186(1)(b) purposes until year end of trust | ||
| 11 October 2013 APFF Roundtable, 2013-0495811C6 F - De Facto Control | Income Tax Act - Section 256 - Subsection 256(5.1) | statutory right of chair to tie-breaking vote does not per se confer de facto control | |
| 2013-11-27 | 29 October 2013 External T.I. 2013-0489771E5 F - Internal Reorganization - 55(3)(a) | Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(v) | relief under s. s. 256(7)(a)(i)(C) or (D) is relevant to s. 55(3.1)(b)(ii), but not to ss. 55(3)(a)(i) to (v) |
| Income Tax Act - Section 248 - Subsection 248(10) | estate distribution of corporation followed by transfer of assets from related corporation could be part of same series | ||
| Income Tax Act - Section 55 - Subsection 55(3.2) - Paragraph 55(3.2)(d) | s. 55(3.2)(d) application to estate distribution of corporation to 3 sibling beneficiaries does not deem them to be related to each other | ||
| 11 October 2013 Roundtable, 2013-0495281C6 F - Question 9 - APFF Round Table | Income Tax Act - Section 146.3 - Subsection 146.3(6.1) | transfer of RRIF by executor to RRIF of surviving spouse | |
| Income Tax Act - Section 212 - Subsection 212(1) - lParagraph 212(1)(q) | direct transfer to RRIF of surviving non-resident spouse | ||
| Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(l) | transfer to RRSP or RRIF of surviving non-resident spouse: SIN required; payment can be made directly to RRSP/RRIF of surviving spouse in accordance with joint instructions even where no specific non-will designation is made | ||
| Income Tax Act - Section 146 - Subsection 146(8.1) | deemed receipt of refund of premiums for amount paid to executor, with deemed benefit to recipient spouse | ||
| 11 October 2013 APFF Roundtable, 2013-0493651C6 F - Affiliated persons and de facto control | Income Tax Act - Section 256 - Subsection 256(5.1) | holding of relatively large note where debtor has a iliquid business could give rise to de facto control | |
| Income Tax Act - Section 40 - Subsection 40(3.61) | exception unavailable for inter vivos trust | ||
| 11 October 2013 APFF Roundtable, 2013-0495781C6 F - GRIP Exceeds Safe Income | Income Tax Act - Section 89 - Subsection 89(1) - Excessive Eligible Dividend Designation | detailed review required to determine whether creation of preferred share dividend to flow out GRIP in excess of SIOH generatd EEDD |
Joint Committee identifies anomalies in the revised split income rules
In addition to broader questions about the scope and practicableness of the revised split income proposals, the Joint Committee has identified quite a number of technical anomalies and oddities respecting the rules, of which a sampling is listed below.
- The definition of an excluded shares excludes shares of a corporation which derives significant income directly or indirectly from a related business. This means that a holding company that annually receives its income as dividends from an Opco in whose business the parents are actively involved will be tainted (so that dividends paid by Holdco to their over-24 inactive child will also be tainted) whereas there likely would not be a problem it there were no Holdco and the family held all their shares in Opco directly.
- The exclusion in para. (b) of the excluded amount definition for spousal separation transfers described in s. 160(4) is quite narrow so that, for example, property transferred indirectly to the separated spouse through a s. 55(3)(a) spin-off transaction would not qualify, nor would an extraordinary discretionary dividend paid on one of her existing shares.
- The definition of “arm’s length capital” for adults who have not attained the age of 24 before the year excludes any borrowing by the specified individual under a loan or other indebtedness including from arm’s length sources – even where there is no security or guarantee provided by a “source individual” (related family member).
- The s. 120.4(1.1)(d)(iii) rule – which deems an amount to be derived from a business to include an amount that is “derived from an amount that is derived directly or indirectly from the business” – will be problematic if interpreted broadly. For example, an Opco dividend is received by a specified individual in respect of Opco’s business, who invests it in shares of Opco 2, which does not carry on any “related business” respecting the individual, with the shares subsequently generating income or a capital gain.
[I]t seems particularly inappropriate for the rule to apply in situations such as [this], where amounts could be deemed to be derived from a related business “through” amounts that have already been received by, and taxed in the hands of an individual.
- The definition of “related business” does not exclude listed corporations or mutual fund trusts or corporations. For example, a specified individual is a beneficiary of a trust holding shares of a listed arm’s length corporation of which a Canadian-resident sibling is a full-time employee, such that this public corporation is carrying on a “related business” in respect of the specified individual, and so that any income or taxable capital gain of the specified individual included under s. 104(13) or 105(2) in respect of the trust would seem to be subject to the tax.
Neal Armstrong. Summaries of Joint Committee, “Legislative Proposals to Address Income Sprinkling Released December 13, 2017,” 8 March 2018 Joint Committee Submission under s. 120.4(1) – “excluded shares,” “excluded amount,” para. (b), para. (a), “arm’s length capital,” “related business” - para. (c), “excluded business,” and s. 120.4(1)(d)(iii), and s.120.4(3).
Parliamentary Budget Office estimates that most TOSI revenues will be generated in Ontario and Alberta
The Parliamentary Budget Officer has estimated that the split income proposals will generate $589M in additional tax revenues for the 2018-19 fiscal year, of which $356 million will go to the federal government. Families in Ontario, Alberta and Quebec would pay $224M (or 63%), $46M (or 13%) and $23M (or 6.5%) of this amount, respectively. This estimate is based on a scenario where all spouses over 24 would not be subject to the new rules:
The rationale behind this scenario is that it is likely that most spouses have assumed some risk in the family business (for example, using the house as collateral for a bank loan to start the business). Therefore, we assume they would pass the reasonableness test and see the dividends they received as being exempt from the TOSI.
Neal Armstrong. Summaries of Govindadeva Bernier and Tim Scholz, “Income Sprinkling Using Private Corporations,” Office of the Parliamentary Budget Officer (with thanks to “Finance Canada officials for their helpful technical discussions”), 8 March 2018 under s. 120.4(3) and s. 120.4(1) - Excluded Amount - para. (g).
Bacanora Canada effectively will migrate to the UK through a 3-party share exchange
Bacanora Canada, whose key assets are Mexican subsidiaries holding lithium properties, is listed on the TSX, but its shares mostly trade on the AIM. It will effectively migrate to the UK under an Alberta Plan of Arrangement under which there will be a triangular exchange of shares with a newly-formed UK company (Bacanora UK) and a wholly-owned Alberta sub of Bacanora UK (Acquireco), so that the Bacanora Canada shareholders transfer their shares to Acquireco, Acquireco issues shares to Bacanora UK and Bacanora UK issues shares to the Bacanora Canada shareholders – with Bacanora Canada and Acquireco then amalgamating.
This exchange will occur on a taxable basis for Canadian purposes – and the AIM qualifies as a designated exchange for RRSP eligibility purposes. The U.S. tax disclosure indicates that there is substantial uncertainty as to whether the transaction qualifies as a s. 351 reorg given that there is a plan for Bacanora UK to do a substantial equity raise.
The corporation tax rate applicable to Bacanora UK’s taxable profits is currently 19% and from April 2020, will reduce to 17%. The UK rate of capital gains tax on disposal of Bacanora UK shares by basic rate taxpayers will be 10% and, for upper rate and additional rate taxpayers, will be 20% (I vaguely recall rates in Ontario being higher.)
Neal Armstrong. Summary of Bacanora Canada Circular under Other – Continuance/Migrations – New Non-Resident Holdco.
CRA finds that an estate gift of sales proceeds of s. 70(5) property can be carried back to the terminal return – and s. 38(a.1)(ii) zeroes post-death appreciation on estate-donated shares
S. 118.1(5.1)(b) applies to most gifts made by a graduated rate estate of property that was acquired by it on and as a consequence of the deceased’s death “or is property that was substituted for that property.” CRA indicated that this substituted property concept applied where the deceased held appreciated mutual fund units whose cost was stepped up on the death under s. 70(5) and with the executors then determining to sell some of the units and gift the cash proceeds to a registered charity. The significance of this was that the donation credit could be claimed under s. (c)(i)(C) of the definition of “total charitable gifts” in s. 118.1(1) in the deceased’s terminal return, thereby helping to offset some of the tax on the s. 70(5) gain.
There also is a look-back under s. 118.1(5.1) for purposes of s. 38(a.1)(ii), so that if the executors instead donated the MFT units in kind, the terminal return would then be amended to eliminate the s. 70(5) gain on the MFT units and have the gain treated as nil. Furthermore, this would be the case even if the MFT units had substantially appreciated between death and their donation by the executors.
Neal Armstrong. Summaries of 24 July 2017 External T.I. 2017-0698191E5 under s. 118.1(5.1)(b) and s. 118.1(1) - “total charitable gifts”- s. (c)(i)(C).
Samaroo – B.C. Supreme Court awards taxpayers $1.7 million in damages for malicious prosecution by CRA
A couple who operated a restaurant in B.C. have been awarded $1.7 million in damages (including $750,000 in punitive damages) against CRA for malicious prosecution. In reaching the startling conclusion that the prosecution was initiated by CRA, Punnett J stated that the prosecutors “relied on Mr. Kendal [the principal CRA investigator] and the CRA to gather the evidence, draft the final Information, and essentially, do charge approval.”
In finding CRA malice, he stated that the Mr. Kendall “knowingly misstated evidence essential to the proof of the actus reus despite being aware of its importance, [and] filed a misleading report knowing it would be relied upon to authorize the prosecution.”
In finding that there was no malice of the prosecutor (and, thus, no tort liability for him) Punnett J stated:
He struck me as a lawyer, who, through negligence or otherwise, gave up control of the prosecution to Mr. Kendal and the CRA and in so doing risked a miscarriage of justice. However, a failure to act properly as a result of negligence or a lack of understanding of the issues or a failure to properly exercise prosecutorial discretion does not in itself amount to malice.
He went on to find that, as the taxpayers’ s. 7 Charter rights had also been breached, damages would have been payable under s. 24 of the Charter if their damages had not already been recoverable in tort.
Neal Armstrong. Summaries of Samaroo v. Canada Revenue Agency, 2018 BCSC 324 under General Concepts – Malicious Prosecution and Charter - s. 24(1).
CRA releases its new policy on the computation of aircraft-use benefits
Today, CRA released to various interested parties its policy on the computation of taxable benefits arising from the personal use of aircraft, which will be effective for individual taxation years commencing after 2017 (unless the taxpayer agrees to its earlier application). This policy is generally less favourable than that in (cancelled) IT-160R3 under which, for example, the benefit could be computed based on the cost of a first-class ticket in a wider range of circumstances (and for a “small, inexpensive aircraft,” might be based on an economy class fare) – and there was no mention of an imputed available-for-use benefit based on the aircraft’s cost.
According to CRA, in computing the value of the taxable benefit arising from the personal use of a corporation’s or employer’s aircraft by its shareholders or employees, there are three main scenarios to consider:
- When the shareholders or employees take a flight on the aircraft where there is a business purpose for their presence on the flight, and there is a personal purpose for others taking the flight, the value of the taxable benefit for the latter personal use would be equal to the highest priced ticket available in the marketplace for an equivalent commercial flight.
- When the shareholder or employee takes a flight on the aircraft where there is no business purpose for the flight, the value of the taxable benefit is equal to the price of the charter of an equivalent aircraft for an equivalent flight (with this amount being split between the relevant individuals). However, in the employee case, where “an open market charter is not a viable option based on the unique circumstances of the flight, for example there are demonstrable bona fide security concerns for the employee, the taxable benefit will be computed pursuant to scenario 1 for that particular flight.”
- Where the shareholder or employee uses the aircraft primarily for personal purposes relative to the aircraft’s total use during the calendar year (taking into account use by non-arm’s length persons), the value of the taxable benefit is equal to the personal use portion of the aircraft’s operating costs plus an imputed available-for-use amount. To compute the available-for-use amount for an owned aircraft, you first multiply the aircraft cost by an imputed monthly interest rate (generally, that under Reg. 4301(a).) The operating benefit and the available-for-use amount are then computed by multiplying the respective costs by the personal use portion relative to the total use portion based on the aircraft log book or other evidence.
Neal Armstrong. Summary of AD-18-01: 2018-03-07 Taxable Benefit for the Personal Use of an Aircraft under s. 6(1)(a).
Income Tax Severed Letters 7 March 2018
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Iggillis – Federal Court of Appeal indicates that privilege is not lost when a tax opinion is shared with a party with a “sufficient common interest in the same transactions”
Solicitor-client privilege over a tax-planning memo prepared for the purchaser in a tax-structured purchase transaction by a tax lawyer was not lost when the tax lawyer provided the memo in draft form to the vendors' tax lawyer, whose comments resulted in memo revisions. CRA had taken the position that the sharing of the opinion with a “third party” represented a waiver of its previous confidentiality. Webb JA stated:
[W]hen dealing with complex statutes such as the Income Tax Act, sharing of opinions may well lead to efficiencies in completing the transactions and the clients may well be better served as the application of the Income Tax Act will be of interest to all of the parties to the series of transactions. … [The appellants] had sufficient common interest in the transactions to warrant a finding that … the … memo is protected from disclosure by solicitor-client privilege.
Neal Armstrong. Summary of Iggillis Holdings Inc. and Ian Gillis v. The Queen, 2018 FCA 51 under s. 232(1) – solicitor-client privilege.
Rowntree – Federal Court of Australia indicates that a loan or other contract can only be achieved explicitly or by being evinced by conduct
If a shareholder is the sole director of his company, then it should follow that an advance made to him by his company was a loan if that was his intent, right? Rares J disagreed, quoting previous judicial statements that:
Corporate decisions and acts can only be achieved in explicit ways… . Coincidence of the identity of the sole director, the sole shareholder and the person by whom services are provided does not mean that the corporate decision to enter into a service contract and the actual formation of the contract can take place wholly within the individual’s head and be revealed, if at all, only when it suits him or her to reveal it.
and that:
The question … is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.
Neal Armstrong. Summary of Rowntree v Commissioner of Taxation, [2018] FCA 182 under s. 15(1).