News of Note
CRA finds that a dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV
Email this ContentA corporation (“Holdco”) holds a policy on the life of its sole shareholder with an adjusted cost basis (“ACB”), cash surrender value (“CSV”) and fair market value (“FMV”) of $200k, $240K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the CSV of $240K, since the FMV of the consideration received by it is nil (so that its gain is $40K) - whereas its proceeds of disposition would have been $450K if Holdco instead had paid a $450K dividend to its shareholder, and he had purchased the policy for $450K. (In both scenarios, he would include a $450K dividend (plus gross-up) in his income.)
CRA considers that the lower gain in the dividend-in-kind scenario might be anomalous, and has raised this with Finance.
CRA did not mention s. 52(2), which provides that property paid as a dividend in kind is deemed to have been disposed of and acquired at its FMV – perhaps because it thought it was obvious that s. 52(2) was trumped by s. 148(7).
Neal Armstrong. Summary of 7 June 2017 External T.I. 2016-0671731E5 Tr under s. 148(7)(a).
Thompson – Tax Court of Canada finds that a failure to keep asking questions constituted carelessness
In Aridi, Hogan J found that there was no "neglect" in the taxpayer’s reliance on incorrect advice from his accountant (which he had probed before accepting), so that the reassessment at issue was statute-barred.
In Thompson, Hogan J declined to extend Aridi to the situation where in Year 1 the taxpayer had inquired of his accountant, Why was his income from his newly-incorporated business lower than his cash draws, and was informed that there was an income deferral because shareholder advances had not yet been required to be converted into taxable bonuses - but had failed to inquire in Years 2 and 3, Why did his reported income continue to be low. If he had continued to ask questions, errors in his Years 2 and 3 returns would have emerged, and this “absence of oversight constitute[d] carelessness” which opened up those returns to reassessment beyond the normal reassessment period.
Neal Armstrong. Summary of Thompson v. The Queen, 2017 TCC 115 under s. 152(4)(a)(i).
The scope of the s. 212(3.6)(b) rule for converting royalties into interest is unclear
S. 212(3.6)(b) extends the back-to-back loan rules to a situation in which an intermediary, who is a “relevant funder,” is a licensee rather than borrowing on a back-to-back basis. It is quite unclear what factual circumstances, if any, will come within the provision:
[I]t is utterly mysterious how a...royalty can be determined, in whole or in part, by reference to an amount of interest or how a relevant funding arrangement can be entered into because a specified royalty arrangement was entered into. While interest is compensation for the use or retention by one person of a sum of money owed to another...a royalty is compensation for the use of property… . It is not clear how a logical or legal connection between interest, on the one hand, and...royalties, on the other, can exist as suggested by paragraph 212(3.6)(b).
It also is unclear whether the rule in s. 212(3.6)(a) for converting upper-tier common share dividends into interest applies where the lower-tier "particular debt" had already disappeared by the time of the dividend declaration.
Neal Armstrong. Summary of Michael N. Kandev, "Canada Expands Back-to-Back Regime: Examining the Character Substitution Rules," Tax Notes International, June 19, 2017, p.1087 under s. 212(3.6)(b).
Income Tax Severed Letters 5 July 2017
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Six further full-text translations of CRA technical interpretations are available
Full-text translations of the three French technical interpretations released last week and of three released on January 7, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last 30 months of CRA releases) are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for July.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2017-06-28 | 30 March 2016 Internal T.I. 2014-0547931I7 F - Voyages offerts par une compagnie | Income Tax Regulations - Regulation 200 - Subsection 200(1) | company providing free trips to incorporated sales reps is required to T4A the individuals if they received the trip qua employee (but not shareholder) of their corporation |
| Income Tax Act - Section 9 - Nature of Income | full value of incentive trips, including business portion, included in income of recipient personal corporations | ||
| 9 March 2017 External T.I. 2017-0689241E5 F - Avantages imposables relatifs aux automobiles ou autres véhicules | Income Tax Act - Section 248 - Subsection 248(1) - Automobile | emergency vehicle's markings must clearly mark it as police or fire vehicle | |
| Income Tax Act - Section 6 - Subsection 6(2) | even where a vehicle available 24 hours a day to a fire chief is clearly marked as a firefighter car, the employer must still estimate whether there is a personal-use benefit | ||
| 15 May 2017 External T.I. 2016-0645891E5 F - Services rendered to a State | Treaties - Article 18 | public-sector nurse did not provide services “to Switzerland” for purposes of Art. 18(2)(a) of the Canada-Swiss Treaty | |
| 2015-01-07 | 27 October 2014 External T.I. 2013-0507001E5 F - Obligation de remplir un T2200 pour un employé | Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(h.1) | employer expected to provide T2200 if applicable |
| 27 October 2014 External T.I. 2012-0471391E5 F - Entreposage d'inventaire à domicile | Income Tax Act - Section 18 - Subsection 18(12) | separate samples storage room part of home office | |
| Income Tax Act - Section 8 - Subsection 8(13) | inventory storage part of work place | ||
| 2 October 2014 External T.I. 2013-0491411E5 F - Allocation pour une automobile | Income Tax Act - Section 3 | compensation for car rides not received in the course of employment or a business | |
| Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) | compensation for providing car rides not received in course of employment |
CRA applies general principles for determining whether TFSA trading is a business
S. 146.2(6) provides that if a TFSA “carries on one or more businesses” then Part I tax is payable on its business income.
After noting that CRA has reassessed more than $75 million in additional taxes resulting from audits of TFSAs, CRA indicated that the general principles in IT-479R apply to determining whether securities trading is a business, so that there is no need for guidance specific to TFSAs on this issue.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.13 under s. 146.2(6).
Rona – Federal Court of Appeal agrees that an objectionable CRA tactic to gather input for a requirement letter did not preclude a s. 231.2(3) authorizing order
CRA officials obtained a copy of a form used to open commercial credit on the pretext that they were building contractors, and subsequently used that form in the preparation of a requirement letter to be issued to the taxpayer respecting its business clients.
Boivin JA affirmed the order of Martineau J authorizing the issuance of the requirement letters under s. 231.2(3). Although the CRA stratagem in obtaining the form was objectionable, the form was blank and generally available to the public, the taxpayer was not being audited, and there was no risk that the administration of justice would be brought into disrepute if the requirement letter were served.
Neal Armstrong. Summary of Rona Inc. v. Minister of National Revenue, 2017 CAF 118 under s. 231.2(3).
CRA confirms obligation of trustee of s. 75(2) trust to issue T3 slip to contributor
CRA stated, further to its position at the 2016 STEP Roundtable, Q.13, that a T3 slip should be issued to the settlor of a s. 75(2) trust even though the trust has nil income because the income on the trust property is attributed to the settlor.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.12 under Reg. 204(1).
CRA indicates that a s. 86 reorg before shares are transferred by the executors to a spousal trust will taint the s. 70(6) rollover
CRA confirmed its position at 2015 APFF Roundtable, Q.9 that where the will of the deceased stipulates that specified shares are to be transferred by the executors to a spousal trust but, before they do this, there is a share reorganization that results in different shares being received by the spousal trust, the s. 70(6) spousal rollover will not be available, and the terminal return will reflect a disposition at fair market value.
CRA did not discuss the distinction between s. 86 and s. 51 reorgs. S. 51(1)(c) deems the old shares not to have been disposed of.
Neal Armstrong. Summary of 13 June 2017 STEP Roundtable, Q.11 under s. 70(6).
CRA indicates that even where a vehicle available 24 hours a day to a fire chief is clearly marked as a firefighter car, the employer must still estimate whether there is a personal-use benefit
There is an exclusion from the “automobile” definition (and, thus, from the mechanical rules for imputing taxable employee benefits based on a standby charge and operating expenses) for clearly marked emergency response vehicles. After being asked about fire chiefs, who were on call 24 hours a day throughout the year with a clearly identified vehicle, equipped with all emergency equipment, to enable them to get to an emergency scene quickly, CRA stated that “an emergency response vehicle…is generally considered to be clearly identified if it is readily identifiable by the general public as a police or fire vehicle because of symbols or lettering on the exterior of the vehicle.”
CRA then noted that even if the vehicle comes within the emergency vehicle exclusion, the fire chief or other employee must still be T4’d for a taxable benefit based on the employer’s estimate of the fair market value of any benefit from personal use of the emergency vehicle (which with no guidance being provided on the intractable issue of making this estimate other than to acknowledge that the amount of such factual benefit “is generally less” than that computed under the standby etc. mechanical rules.)
Neal Armstrong. Summaries of 9 March 2017 External T.I. 2017-0689241E5 Tr under s. 6(2) and s. 248(1) - automobile.