News of Note
CRA states that recovery tax applies to undistributed income in a QDT at the time of the disabled beneficiary’s death
Email this ContentCRA confirmed that where the disabled beneficiary of a qualified disability trust dies during a year, this will result (in addition presumably to the QDT not qualifying as such in the year of death) in the imposition of “recovery” tax, based on the top marginal rate, on any undistributed income from previous years still in the hands of the trust at the time of the beneficiary’s death. S. 159(3) could apply if the trustee of the former QDT distributed trust property to the estate of the deceased without the recovery tax being paid.
Neal Armstrong. Summaries of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 122(2)(c) and s. 159(2).
CRA states that a beneficiary of a qualified disability trust must be specifically named by the deceased individual
One of the requirements for a testamentary trust to qualify as a qualified disability trust is that each of its beneficiaries be an individual “named as a beneficiary” by the deceased individual. CRA stated:
This term refers to a beneficiary whose name is specifically stated in the instrument under which the trust was created.
Consequently, a beneficiary who is part of a class of persons described in the instrument under which the testamentary trust has been established, such as children or descendants of the deceased individual, as well as a beneficiary who is not yet born, would not be considered as a named beneficiary.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 122(3) - qualified disability trust - para. (b).
CRA provides detailed guidelines on the split-receipting rules
Positions in the new Folio on split-receipting include:
- The common law concept of gift (requiring inter alia that “no benefit or consideration must flow to the donor”) and the civil law concept (encompassing “gifts with partial consideration that are remunerative gifts or gifts with a charge”) differ, so that implicitly, s. 248(30), which can permit recognition of a gift where a benefit of under 80% of the donated property’s value flows back to the donor, is more necessary in the common law provinces.
- Even where this numerical test is satisfied, CRA considers that the other “gift” elements must be satisfied, e.g., “the intention to make a gift.”
- If the amount of advantages (other than cash or near-cash items such as gift certificates) received by the taxpayer (e.g., pens, and a pro rata portion of door prizes) do not exceed the lesser of 10% of the fair market value of the gifted property and $75, they will not be regarded as an advantage for the purposes of determining the eligible amount (i.e, taking into account their modest value, the advantages in fact can exceed 80%, and a receipt can be issued for the larger implied gift).
- Purchasing items at charity auctions generally gives rise to an eligible gift if any excess of the purchase price over the retail price is such as to satisfy the 80% test.
- Membership fees also can give rise to an eligible amount.
- CRA discusses s. 248(39), which is intended to prevent a taxpayer from avoiding a reduction in his gift amount under s. 248(25) (deeming the fair market value of gifted property to be equal to its cost, for example, when it is promptly gifted after purchase), by instead selling the property to the charity and then gifting the proceeds, or property substituted therefor), in a way which suggests that it considers the rule to apply mechanically rather than only in an avoidance context.
- S. 248(41) provides that the eligible amount of a gift is nil if the taxpayer fails to inform the qualified done of any circumstances that would cause the eligible amount of the gift under ss. 248(31), (35), (36), (38) or (39) to be less than the fair market value of the gifted property. CRA stipulates that this required disclosure might include not only the length of time the taxpayer held the property, and whether it was acquired as part of a tax shelter arrangement or from a non-arm’s-length party, but also “whether the taxpayer [was] engaged in a transaction or series of transactions to avoid the deemed fair market value rule.”
Neal Armstrong. Summaries of S7-F1-C1, Split-receipting and Deemed Fair Market Value under s. 118.1(1) – total charitable gifts, s. 248(30), s. 248(32), s. 248(39), s. 143.2(1) – limited-recourse amount, and s. 248(41).
CRA maintains its policies on retiring allowances
The 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.