News of Note
Consideration should be given to avoiding an immediate liquidation of an RESP on death
Email this ContentA registered education savings plan will form part of the estate of a deceased sole or last subscriber to the RESP. Accordingly, the will can allow the executors to continue the plan beyond the death of the testator for the benefit of the beneficiary (and contribute to the plan on the beneficiary’s behalf). This would permit future distributions to qualify as educational assistance payments and be taxed at the RESP beneficiary's low marginal tax rate.
Neal Armstrong. Summary of Cole R. Southall, "Continuing RESPs Beyond the Death of the Subscriber," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.13 under s. 146.1(1) - subscriber - para. (c) and s. 146.1(7.1).
Use of a spousal trust now precludes use of the spouse’s capital gains deduction for trust property
Two suggested drawbacks of using a spousal trust are that (i) any capital gains deduction (CGD) otherwise available to the surviving spouse can only be claimed where the spousal trust sells qualified property during the lifetime of the spouse (which often would defeat the testator's intentions), and (ii) having regard to the repeal of s. 110.6(12) for 2016 and subsequent taxation years, there is no ability to use the spouse's CGD on death.
Neal Armstrong. Summary of Dane ZoBell, "Spousal Trusts Have Limited CGD Access," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p. 15 under s. 104(21.2).
CRA rules that a foreign common contractual fund is a co-ownership arrangement rather than a unit trust
Investors subscribe for units of “Subfunds” of an “Umbrella” fund, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described both as a claim against the fund manager and as representing a co-ownership interest as tenant in common in the investment assets of a particular Subfund (with each Subtrust having a different focus as to the bonds or shares it invests in), which are managed by the non-resident fund manager on a discretionary basis and held by a non-resident custodian bank. A unit is specified to not "confer any interest or share in any particular part of the assets of the [funds]."
CRA ruled that the funds were fiscally transparent, so that a non-resident pension fund holding units in a Subfund that, in turn, held Canadian equities, could rely on its exempt pension fund status for Part XIII tax purposes.
This is similar to a less heavily redacted 2014 ruling on an Irish contractual fund (2013-0496831R3 – see also 2009-0345011R3 and 2006-0199741R3), whose description also looked somewhat similar to a unit trust, and was ruled upon to be a co-ownership arrangement.
Neal Armstrong. Summary of 2016 Ruling 2015-0606141R3 under s. 104(1).
Isah – Tax Court of Canada notes obiter that it can address incorrectly computed assessment interest
Imperial Oil indicated that the Tax Court has no jurisdiction to hear an appeal on the computation of refund interest. This is not to be confused with normal assessment interest, as to which Russell J stated:
[I]nterest relief [is] not a matter over which this Court has jurisdiction (unless the wrong interest rate was used or otherwise a wrong calculation of the interest was made, thereby affecting the balance of the appealed (re)assessment).
Neal Armstrong. Summary of Isah v. The Queen, 2018 TCC 28 under s. 171(1).
CRA states that an s. 247(2) transfer pricing adjustment for sales undercharges to a CFA does not decrease the ES of the CFA, nor imply a previous contribution of capital
The Directorate considered that where there was a s. 247(2) transfer pricing adjustment to increase Canco’s income as a result of having undercharged for goods or services provided to a non-resident subsidiary (CFA), s. 247(2) could not also be applied to reduce the exempt surplus or foreign accrual property income of CFA in respect of Canco.
Furthermore, the benefit associated with having undercharged could not be treated as a contribution of capital for purposes of an ACB increase to the CFA shares under s. 53(1)(c). (This CRA comment suggests that the current status of a comment made at the 1987 Annual CTF Roundtable (Q.68) - that on a share subscription, any cost basis denied by s. 69(1)(a) may be treated as a contribution of capital provided there is some increase in the value of the taxpayer's shares – may be uncertain.)
In passing, the Directorate indicated that if there were a transfer pricing adjustment under the foreign tax law, there could be a corresponding adjustment to CFA’s surplus, but stated:
[C]onsideration would have to be given to whether subsection 5907(2) … could reverse that foreign tax law adjustment and to the possible impact of any accompanying transfer of assets to effect a so-called “repatriation” payment.
Neal Armstrong. Summaries of 27 October 2017 Internal T.I. 2017-0694231I7 under s. 247(2), Reg. 5907(2) and s. 53(1)(c).
CRA indicates that a business limit is ground first based on taxable capital before it can be assigned
Under s. 125(5.1), the business limit is reduced on a straight-line basis if the total of the taxable capital of the Canadian-controlled private corporation in question and of associated corporations exceeds $10 million. CRA confirmed that any assignment of a CCPC’s business limit under s. 125(3.2) to another corporation can only occur after its business limit has first been ground under s. 125(5.1). There was no explanation as to why this question might have practical significance.
Neal Armstrong. Summary of 25 January 2018 External T.I. 2017-0709241E5 under s. 125(5.1).
Income Tax Severed Letters 7 February 2018
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA has published all its answers at the 2017 Annual CTF Roundtable
Although we commented on most of the answers provided at the 2017 Annual CTF CRA Roundtable at the time, for convenience the table below provides brief descriptors for the final published CRA responses as well as links to those responses and our summaries thereof.
The split income rules do not apply to salaries
The split income rules, including in their proposed form, do not apply to salaries. Under the Gabco test, a salary is unreasonable if “no reasonable businessman would have contracted to pay such an amount having only [his] business considerations … in mind." This implies that:
[I]t may be justifiable and reasonable to pay a non-arm's-length person an amount in excess of an amount that would be paid to an arm's-length person if the non-arm's-length person exhibits, for example, a degree of loyalty and commitment that an arm's-length person could not….
Neal Armstrong. Summary of Alex Klyguine, "Income Splitting After the New Private Corporation Proposals: Salaries Paid to Family Members," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.2 under s. 67.
A preferred/common unit structure in a Canadian partnership holding foreign affiliates can result in the loss of s. 113 deductions to the Canadian corporate partners
Although s. 93.1 provides a look through rule where Canadian corporations hold significant indirect interests in foreign corporations “through” a partnership, their ability under s. 93.1(2) to claim a deduction under s. 113(1) (e.g., for an exempt surplus distribution) is based on the relative fair market value of their partnership interest rather than the share of the dividend that in fact is distributed to them under the terms of the partnership agreement. This can result in a portion of the dividend not being deductible under s. 113 where the Canadian corporations hold units with differing dividend-sharing attributes, e.g., where the partnership has preferred and common units.
Neal Armstrong. Summary of Karthika Ariyakumaran and Michael Spinelli, "Holding a Foreign Affiliate Through a Partnership," Canadian Tax Focus (Canadian Tax Foundation), Vol. 8, No. 1, February 2018, p.14 under s. 93.1(1).