News of Note
CRA notes that it generally will be impossible for a resident individual to properly compute the Canadian income tax results of holding to maturity a UK endowment policy
Email this ContentAn individual, while a non-resident, acquired in 1998 a United Kingdom mortgage endowment policy as an investment plan with a life insurance component. The policy matured in 2023 and the individual received a lump-sum amount from the policy issuer, while a resident of Canada.
CRA noted:
- It had “previously opined that a UK endowment policy would appear to be a life insurance policy within the meaning in subsection 138(12)“.
- On the immigration, the ss. 128.1(1)(b) and (c) rules would apply.
- Although a life insurance policy issued by a non-resident insurer is not specifically precluded from qualifying as an exempt policy, this would require actuarial calculations and information that only the issuing insurer will possess.
- Similarly, the determination of the amounts to be used to compute any policy gain with respect to a life insurance policy (e.g., proceeds of disposition and adjusted cost basis) generally requires information that would be available only in the accounts of the issuer of the policy (i.e., the insurer).
Neal Armstrong. Summaries of 27 January 2025 External T.I. 2024-1018491E5 under s. 138(12) – life insurance policy and s. 148(9) – ACB.
CRA confirms that an individual who is resident under the s. 250(1)(a) sojourning rule cannot be a part-year resident
CRA confirmed that an individual who sojourns in Canada for more than 183 days in a taxation year and, later in the same taxation year, becomes factually resident in Canada, will not have any period of part-year residence in that year (e.g., for purposes of s. 114)) given that the individual is deemed by s. 250(1)(a) to be resident in Canada throughout the taxation year.
Before so concluding, CRA noted that a person who is deemed to be resident in Canada and is not factually resident in Canada will generally not be resident in a particular province for provincial tax purposes. (This presumably would not be the case where the individual became factually resident in a province by December 31 of the sojourning year.)
Neal Armstrong. Summary of 18 November 2024 Internal T.I. 2024-1015501I7 under s. 250(1)(a).
Income Tax Severed Letters 26 February 2025
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Evans – Ontario Superior Court grants an order rectifying a trust allocation resolution so as to set out specific amounts
After a discretionary family trust realized a capital gain from a share sale, the sole trustee passed a resolution in that year providing that “[t]he income of the Trust be allocated to the [three stated] Beneficiaries of the Trust payable by way of demand Promissory Note in such amounts to be determined when the income of the Trust is ascertained … .” Such promissory notes were issued three months later. CRA denied the s. 104(6) deduction for the amount of the taxable capital gain allocated to the three beneficiaries because the resolution did not specify the amounts to be payable to them.
Rady J found that the evidence established that there was an agreement to allocate at least $375,000 (equal to the taxable capital gains deduction) to each of the three beneficiaries, although there was insufficient evidence to establish that the entire taxable capital gain was agreed to be allocated to them. Accordingly, she granted an order to rectify the resolution so as to provide that $375,000 of the taxable capital gain was to be allocated to each of the three beneficiaries, stating in this regard:
I am satisfied that the applicants are not attempting to retroactively amend their agreement to achieve beneficial tax consequences. Rather, they seek to rectify the resolution itself because it did not sufficiently express the agreement they had reached.
She further indicated that the application should not be dismissed on the basis of the trust having the alternative remedy of suing the professional advisors. She described as “apt” the statement in the dissenting reasons of Abella J in Fairmont that the court should not force on the parties an alternative that is neither practical nor certain.
Neal Armstrong. Summary of Evans v. Attorney General of Canada, 2024 ONSC 1955 under General Concepts – Rectification.
CRA confirms that, in Audit’s discretion, it may provide relief where GST/HST has been double-collected
A resident proprietor provided short-term accommodation through the platform of a non-resident company and, as a GST/HST “regular” registrant, charged and collected GST/HST on the rentals. After the introduction of the accommodation platform rules pursuant to s. 211.13(3), the platform commenced to also charge GST/HST on the taxpayer’s supplies of accommodation – which was incorrect, given the proprietor’s registration.
Regarding whether the taxpayer could receive a refund of the “double paid” GST/HST, CRA stated:
Under Policy Statement P-131R, Remittance of tax collected by a person other than the supplier in limited circumstances, the CRA confirmed that it does not intend to collect tax twice on the same supply, and where the supplier and another person are both required to account for the tax, the liability to account for the tax of the supplier or the other person will be discharged where one of them accounts for the tax in its net tax calculation and remits the tax to the CRA.
Policy Statement P-131R is subject to certain exceptions and its application is at audit's discretion at the time of an audit … .
Neal Armstrong. Summary of 18 July 2024 GST/HST Interpretation 245851 under ETA s. 211.13(3) and s. 225(1) – A(a),
Wong – Tax Court of Canada engages in a detailed weighing exercise to determine that two ex-spouses were shared custody parents
After initially denying the Canada child benefit (CCB) claims of the taxpayer in full (on the basis that it was her ex-husband who primarily fulfilled the care responsibilities for their son), CRA assessed her on the basis that they were “shared custody parents,” so that she was entitled to 50% of the CCB amounts.
In affirming that the taxpayer was a shared custody parent, Bocock J found inter alia that the son lived with each parent one-half of the time, that the provision of medical care was not as uneven as she claimed (e.g., he took his son to medical appointments and exclusively handled COVID vaccinations) and her exclusive provision and payment for various extra-curricular activities related to his view that “unregulated, unstructured play and home-centered activities were sometimes preferable given the son’s fairly young age”.
It is peculiar that the ITA administration of a routine personal credit may often require intricate determinations of fact.
Neal Armstrong. Summary of Wong v. The King, 2025 TCC 24 under s. 122.6 – shared-custody parent.
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in January of 2001. Their descriptors and links appear below.
These are additions to our set of 3,117 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 24 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Phantom deductions might increase safe income through offsetting phantom income or non-deductible cash outflows
CRA, departing from Kruco, is now considering that “phantom” income (i.e., income for ITA purposes not resulting in tangible cash inflows) should no longer be included in computing safe income. Although CRA has not publicly addressed the treatment of phantom deductions (i.e., deductions reducing net income but not corresponding to a cash outflow), the ARQ has indicated that no adjustment should be made in computing safe income by taking a phantom deduction into account.
However, it could be argued that a phantom deduction can offset an element that otherwise reduces safe income. For example, where a corporation had income of $1 million, phantom income of $60,000, and a phantom deduction of $80,000 (so that its net income was $980,000), it would seem unreasonable to exclude the $60,000 of phantom income from safe income without offsetting it by at least an equivalent portion of the phantom deduction ($60,000): all the net income of $980,000 can reasonably be regarded as contributing to the capital gain on the shares.
In a second example, where Opco has revenue of $1 million, tangible expenses of $200,000 and a phantom deduction of $150,000 so that its net income is $650,000, and it pays taxes of $150,000, one can consider that the phantom deduction offsets the taxes payable (which otherwise would reduce the safe income attributable to the shares), and that $650,000 ($650,000 net income + [$150,000 phantom deduction − $150,000 tax]) is the resulting safe income contributing to the capital gain on the shares.
Neal Armstrong. Summary of Marc-Antoine Mongrain and Jean-François Thuot, “Income, Phantom Income, and Phantom Deductions,” Canadian Tax Focus, Vol. 15, No. 1, February 2025, p. 2 under s. 55(2.1)(c).
DAC – Federal Court of Appeal refuses to allow a third party to intervene in the DAC (avoidance of CCPC status) case
The moving party (“QPG”) sought an order pursuant to Rule 109 of the Federal Courts Rules to permit it to intervene in the Crown’s appeal of the DAC decision, which found that there was no GAAR abuse in DAC continuing to the British Virgin Islands so as to cease to be a Canadian-controlled private corporation (CCPC).
In the DAC appeal, the parties had not put in issue the Minister’s designation of DAC as a CCPC in its notice of reassessment (nor was this relevant to or even mentioned by the Tax Court) whereas QPG wished to intervene on the issue of whether such a designation overrode the legislative criteria imposed by the Act for determining CCPC status.
Before dismissing the motion to intervene, Stratas JA stated that “[t]he issue raised by QPQ … seeks to reinvent the theory of the case” and that “[t]his is a classic case of a proposed intervention that, if allowed, will commandeer the parties’ case.”
Neal Armstrong. Summary of Canada v. DAC Investment Holdings Inc., 2025 FCA 37 under Federal Courts Rules, Rule 109.
CRA indicates that expenditure limits of associated CCPCs should be converted into a functional currency based on the spot exchange rate at year end
The annual “expenditure limit” of CCPCs (which is gradually reduced as the total of their taxable capital employed in Canada (“TCEC”) increases above $10 million) must be allocated between them. When the associated CCPCs of the taxpayer report their Canadian tax results in Canadian dollars, and the taxpayer reports its Canadian tax results in its elected functional currency, how will the TCEC of the associated corporations be converted into the functional currency?
Although CRA indicated that one possible interpretation would require the associated CCPCs to so convert each component of their TCEC computation (which “would be administratively burdensome”), it concluded:
The day the TCEC of the associated corporation is considered to “arise” for the purposes of determining the conversion rate according to paragraph 261(5)(c) is the last day of the taxation year of the associated corporation for which it is computed because that is the day when the amount of the TCEC is determined pursuant to section 181.2 (hence when an amount relevant to computing the Taxpayer’s Canadian tax results is created).
CRA further stated:
If prior to the date of this letter the Taxpayer was consistently using a different method for converting the TCEC of its associated corporation in its elected functional currency and claimed additional ITC which would not have been available if the Taxpayer used the conversion method put forward in this letter, the CRA will not challenge the computation for those periods.
Neal Armstrong. Summary of 25 November 2024 External T.I. 2023-0974111E5 under s. 261(5)(c).