News of Note
CRA is reviewing its administrative practice that a gift can be claimed in a terminal return before it is made
Email this ContentPrior to a change in the rules applicable to deaths after 2015, it was CRA’s administrative practice that ``a donation tax credit can be claimed on the deceased taxpayer’s final return so long as the registered charity receives a letter from the estate advising of the gift and its value and the registered charity issues a letter to the estate acknowledging the gift and stating that it will accept the gift.” Under the new regime, it may no longer be clear that a gift will be claimed in the deceased’s terminal return.
CRA is is still reviewing this administrative practice (but, in any event, such administrative relief will not extend to gifts of property transferred to qualified donees more than 60 months after the individual’s death since these gifts do not meet the conditions of s. 118.1(5.1).)
Neal Armstrong. Summary of May 2018 CALU Roundtable, Q.4, 2018-0745851C6 under s. 118.1(1) – total charitable gifts – (c)(i)(C).
Six further full-text translations of CRA interpretations are available
The table below provides descriptors and links for six Interpretation released in July 2013, as fully translated by us.
These (and the other full-text translations covering all French-language Interpretations released in the last 5 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.
CRA indicates that the s. 148(8) rollover can apply on a policy transfer to a substituted child
S. 148(8) provides that, if an interest of a policyholder in a life insurance policy is transferred to the policyholder’s child for no consideration and a child of the policyholder is the person whose life is insured, the interest is deemed to have been disposed of on a rollover basis (based on the adjusted cost basis of the interest).
CRA has previously indicated that an s. 148(8) rollover would not apply to a transfer of a life insurance policy under which more than one person is insured even where all the lives insured meet the definition of child. However, CRA has now indicated that where Father, who has owned a life insurance policy on Child A’s life, transfers the policy to Child B, whom he regards as more financially responsible, the transfer occurs on a rollover basis.
CRA indicated that it is not certain the this result is “consistent with the intended policy of subsection 148(8)" and is referring this matter to Finance.
Neal Armstrong. Summary of 8 May 2018 CALU Roundtable Q. 3, 2018-0745831C6 under s. 148(8).
CRA confirms that there is a double deduction of the ACB of a joint life insurance policy in computing the CDA addition to the two corporate beneficiaries of the proceeds
As amended, para. (d) of the capital dividend account definition now provides that the addition to the CDA for life insurance proceeds is reduced by the adjusted cost basis (ACB) of the policy to any policyholder (rather than only any ACB of the policy to the corporate recipient of the insurance proceeds). In 2017-0690311C6, CRA indicated that where there are two corporate beneficiaries (B and C) of a policy owned by a third corporation (A), the addition to the CDA of B and C on their receipt of the proceeds will be reduced by the full (rather than equitably pro-rated) ACB of the policy to the policyholder (A).
CRA has now indicated that essentially the same anomaly arises in the situation where A (a.k.a., Opco) and B (a.k.a., Holdco A) are the joint owners of a life insurance policy under which A is the beneficiary of $1 million of the death benefit and B as to any excess, and with A paying the premium relating to the $1 million of death benefit coverage, and B making additional deposits on an annual basis.
On the death of the named individual (B’s sole shareholder), the total death benefit is $1.2 million and the policy’s ACB is $150,000. CRA indicated that A’s and B’s CDA additions were $850,000 ($1,000,000 - $150,000) and $50,000 ($200,000 - $150,000), respectively, i.e., the $150,000 ACB was required to be deducted twice.
Neal Armstrong. Summary of under 8 May 2018 CALU Roundtable Q. 2, 2018-0745811C6 under s. 89(1) – capital dividend account – s. (d)(iii).
CRA indicates that the distinction between the provision of services and property under the split income rules will be informed by the rationale of the safe harbour exclusions
The definition of an excluded share under the split income rules requires inter alia that less than 90% of the business income of the corporation be from the provision of services. CRA declined to address the distinction between the provision of services and property respecting a short list of businesses, e.g., selling life insurance or providing investment products, and instead commented:
[I]n most cases, the distinction between whether income is from the provision of services or is other income should be clear. In cases of uncertainty, we will be prepared to provide guidance as required based on a review of all of the relevant circumstances and our understanding of the rationale for the safe harbour exclusions.
Neal Armstrong. Summaries of 8 May 2018 CALU Roundtable, Q.6, 2018-0745871C6 under s. 120.4(1) – excluded share – (a)(i) and (c).
CRA confirms that the mere granting by a corporation of security for a bank loan to a shareholder did not engage the B2B loan rules
In 2017-0690691E5 F, a 50% limited partner (Ms. X) funded her investment in an LP jointly owned with her husband through a $3M bank loan that was secured by a pledge to the bank of a $3M term deposit of the bank held by a corporation (Corporation B) equally owned by her and her husband. In finding that the back-to-back loan rules in s. 15(2.6) et seq. deemed her to owe $3M to Corporation B, CRA indicated that:
- Ms. X had an amount outstanding ($3M) to an “immediate funder” (the bank),
- an amount (the $3M term deposit) was owing by the immediate funder to an “ultimate funder” (Corporation B), and
- "the condition in clause 15(2.16)(c)(i)(B) would be satisfied" (e.g., the $3M loan was permitted to remain outstanding because the term deposit was outstanding).
CRA was subsequently asked about a variation of these facts in which, rather than the $3M term deposit being used, the bank was granted a right to encumber one of Corporation B’s properties. CRA confirmed that in this situation, s. 15(2.16)(c)(i) would not apply, i.e., there no longer were back-to-back amounts owing. Respecting whether the specified right rule in s. 15(2.16)(c)(ii) applied, CRA stated that this would require a comprehensive review, but noted that:
If, under the arrangement between the parties, the bank can only exercise its right to encumber in order to secure payment of Ms. X’s $3M shareholder debt (for example, by placing a lien on the encumbered property to ensure that Corporation B cannot dispose of it without the bank’s consent), then the exception in parentheses would be met and the right to encumber would not constitute a specified right.
Neal Armstrong. Summary of 8 May 2018 CALU Roundtable, Q.1, 2018-0745491C6 under s. 15(2.16)(c).
Income Tax Severed Letters 4 July 2018
This morning's release of eight severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Béliveau – Tax Court of Canada finds that insurance benefits received by an ill dental surgeon to cover her practice expenses were taxable receipts
The taxpayer, a self-employed dental surgeon, received benefits totalling over $600,000 under three Great-West policies during a two-year period of illness. Two of the policies provided coverage for her monthly general professional expenses, and the third policy, styled as professional sickness insurance, provided monthly amounts in the event of her illness. The taxpayer considered that there was no significant distinction between the third policy (replacing lost income) and the first two policies (covering business expenses). In affirming the Minister’s assessment, which treated the amounts paid out to the taxpayer under the first two policies as s. 9 income, Favreau J stated:
The surrogatum principle … is applicable [under which] the tax treatment of sickness insurance benefits depends on what such benefits are intended to replace being, in this case, the general expenses of carrying on the dental clinic.
He went on to indicate that the premiums under the two policies (which the taxpayer had not deducted in computing her income) were deductible.
Neal Armstrong. Summaries of Béliveau v. The Queen, 2018 CCI 87 under s. 9 – compensation payments and s. 18(1)(a) - income-producing purpose.
9118-5322 Québec – Tax Court of Canada indicates that transmitting purchaser new home rebate forms to CRA (or the ARQ) is imperative to the claiming by the builder of the rebate amount
Lafleur J indicated that a builder cannot deduct from net tax for the amount of new housing rebates credited to its home purchasers in a reporting period unless it submits the signed prescribed forms of the purchasers to the ARQ (or CRA, as applicable) in that month. Here, the builder not only failed to transmit the signed forms as required by ETA s. 254(5)(a), but also failed to get the forms signed by the purchasers on a timely basis as required under s. 254(4)(c).
Neal Armstrong. Summary of 9118-5322 Québec Inc. v. The Queen, 2018 CCI 96 under ETA s. s. 254(5)(a).
MacDonald – Federal Court of Appeal effectively affirms George Weston, and finds that the existence of a hedge does not turn on intention
An individual with a significant long-term holding in common shares of a public company (BNS) entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. Starting about seven years later, he started closing out the forward at a loss. The Tax Court had accepted the taxpayer’s testimony that he had intended to profit from the anticipated decline in the value of the BNS shares under the forward contract but nevertheless retained ownership of the shares based on his belief that they would perform well in the long term.
In finding that the taxpayer’s losses under the forward were realized on capital account, Noël CJ stated:
[A]n intention to hedge is not a condition precedent for hedging. It suffices that the person concerned owns assets exposed to market fluctuation risk when the derivative contract is entered into and that the contract has the effect of neutralizing or mitigating that risk.
Mr. MacDonald was not an “accidental hedger”. He was aware of the hedging effect which the Forward Contract would have on the BNS shares … .
After noting that George Weston dealt with a hedge of asset ownership rather than of transactional risk (and before agreeing with the Crown that George Weston was “dispositive” of the case before him), he stated:
A risk arising from ownership is equally capable of being hedged and there is no reason why the established rule that hedging gains or losses are treated the same way as the assets being hedged for tax purposes, should not apply… .
Neal Armstrong. Summary of The Queen v. MacDonald, 2018 FCA 128 under s. 9 – capital gain v. income – futures/forwards/hedges.