News of Note
CRA maintains its policies on retiring allowances
Email this ContentThe CRA positions in the Folio on Retiring Allowances are generally quite similar to those in IT-337R4, although CRA no longer discusses the treatment to employers of retiring allowances, presumably because this would not fit into its Folio taxonomy. Although the significance of the distinction from ordinary employment income is fading with the phasing out of the s. 60(j.1) transfers to RRSPs, CRA also still recognizes that damages received by an employee for harassment, defamation or human rights violations are exempt.
Neal Armstrong. Summary of S2-F1-C2, Retiring Allowances under s. 248(1) – retiring allowance.
CRA states guidelines on what is a business
In its Folio on the Meaning of Farming and Farming Business, CRA has carried forward most of its positions on what constitutes farming from three IT Bulletins and also updated for some more recent positions, e.g., that farming does not include raising pets. Of more general interest, CRA states guidelines for applying Stewart in determining whether farming activities are a business.
Neal Armstrong. Summaries of S4-F11-C1 under s. 248(1) – farming, s. 4(1)(a) and s. 3(a) – business source.
The ASPA rules can have an unexpected impact on share purchase transactions
Where a target holds partnerships which have a different fiscal period end, and to which the adjusted stub period accrual (ASPA) rules apply, the application of the ASPA rules may result in the partnership income being recognized in hands of the target at times that are substantially different from the times at which such income was earned in the hands of the partnerships, including potentially in the second taxation year of the target following the acquisition of control. This should be taken into account in assessing the application of clauses in the Agreement of Purchase and Sale which allocate respective responsibilities for target taxes.
Neal Armstrong. Summary of Janette Pantry and Robyn Campbell, “Partnerships and ASPA on Acquisition of Control,” Canadian Tax Highlights, Vol. 24, No. 10, October 2016, p. 3 under s. 34.2(1) - adjusted stub period accrual.
Double income inclusions can still arise under the revised stub period FAPI rules
If exceptions do not apply, a controlled foreign affiliate of a taxpayer is deemed under draft s. 91(1.2) of the revised stub period foreign accrual property income rules to have a deemed stub year-end in respect of the taxpayer and a corporation or a partnership that is connected to the taxpayer. However, because the deemed year-end extends only to connected corporations and partnerships, double income inclusion may still arise:
Assume that a Canco disposes of a CFA to a non-arm's-length Canadian individual who does not own the CFA before the transfer and who continues to own the CFA at the end of its normal year-end. In this case, the stub period FAPI is included twice: in the hands of both the Canco and the individual. Similar anomalies arise if the transferor is another individual instead of a Canco, or if the transferee is a trust, or if a partnership with non-corporate members is involved.
Neal Armstrong. Summary of Melanie Huynh and Paul Barnicke, "September 2016 FA Proposals," Canadian Tax Highlights, Vol. 24, No. 10, October 2016, p. 8 under s. 91(1.1).
Mazo – Tax Court of Canada finds that successful participation in a pyramid scheme gives rise to business income
Graham J found that whereas successful participation in a Ponzi scheme gives rise to property income, successful participation in a pyramid scheme gives rise to business income. His reasoning:
[A] participant in a Ponzi scheme is conned by the promoter into investing in something fake. A participant in a pyramid scheme is conned by the promoter into believing that the scheme will actually work and that he or she will profit through his or her own efforts [in recruiting “sales” people lower in the pyramid].
Neal Armstrong. Summaries of Mazo v. The Queen, 2016 TCC 232 under s. 248(1) – business and s. 9 – timing.
The intended operation of a separation agreement can be undercut by death of the transferor spouse
A husband agreed in his separation agreement with his spouse to transfer to her a capital property, and the property in his RRSP. However, he died before the transfers were made. CRA confirmed that the transfers to her by his estate could not occur on a tax-deferred basis under ss. 146(16) and 73(1). Accordingly, it may be desirable in some circumstances (at least in the case of property held outside an RRSP) for the transferor spouse to seek the creation in the separation agreement of an immediate beneficial interest for the transferee spouse in the identified property.
When asked about this, a Finance representative stated:
The Department of Finance is ready to consider the issue identified in the question to determine whether the rules give rise to anomalies in certain circumstances in tax policy terms, in the context of its on-going revision of the ITA rules.
Well shy of a comfort letter!
Neal Armstrong. Summaries of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.5 under s. 73(1.01)(b) and s. 146(16).
Income Tax Severed Letters 9 November 2016
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on a disclaimer resulting in a rollout of estate assets under an intestacy
An estate (that was a testamentary trust) holding appreciated assets has five grandchildren who would receive as residuary beneficiaries under the estate following the death of “Ms. A and Mr. B” (presumably siblings or siblings in law, and parents of the grandchildren). CRA ruled that a disclaimer by the grandchildren - resulting in a distribution of the residue of the estate assets to Ms. A and Mr. B on an intestacy – would not result in any of the grandchildren receiving proceeds of disposition, and that such distribution would occur under s. 107(2).
Neal Armstrong. Summary of 2016 Ruling 2015-0606771R3 under s. 107(2).
CRA confirms that Daniels did not extend the Indian Act exemption to Métis and non-status Indians
Daniels (2016 SCC 12) found that non-status Indians and Métis are "Indians" for the purposes of s. 91(24) of the Constitution Act, 1867. CRA has confirmed that this has not expanded the tax exemption in s. 87 of the Indian Act, which “only applies to an individual who is an Indian as defined in the Indian Act.”
Neal Armstrong. Summary of 30 August 2016 External T.I. 2016-0656851E5 under Indian Act, s. 87.
CRA confirms that the application of s. 75(2) to only one property in a trust can taint all the other trust property under s. 107(4.1)
CRA confirmed that a personal trust was tainted under s. 107(4.1) when it was settled with a gold coin by one of the capital beneficiaries – so that until the settlor died, none of the other property in the trust could be rolled out under s. 107(2) to the other capital beneficiaries even though such property had been acquired in an arm’s length purchase from an arm’s length vendor. Whether the vendor of such property was still in existence or not was irrelevant.
Neal Armstrong. Summary of 12 May 2016 External T.I. 2014-0552341E5 under s. 107(4.1).