News of Note

CRA considers that s. 94(10) can impose a a retroactive obligation on a non-resident trust to file returns for up to five previous taxation years

A previous long-term Canadian resident left Canada, made a contribution more than five years later (say, in 2010) to a non-resident trust with Canadian beneficiaries, and then returned to Canada in 2015, less than 60 months later. CRA indicated that s. 94(10) would then apply to all the post-contribution years, i.e., 2010 through to 2015, to deem the trust to be resident in Canada in those years. Consequently, it would be retroactively delinquent for having failed to file (and pay) the requisite returns (and tax) for those years.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.7(b) under s. 94(10).

Joint Committee suggests expansion of range of income eligible for the small business deduction

The Joint Committee has submitted that "if a taxpayer expends at least 500 hours in any year on an activity, then in policy terms that taxpayer is contributing sufficiently to the Canadian economy that his income should benefit from the SBD incentive."

Neal Armstrong. See Joint Committee Submissions.

Joint Committee makes submissions on proposed s. 152(9) amendment

Although draft legislation has not yet been released to implement the April 2015 Budget proposal to amend s. 152(9) "to clarify" that CRA and the courts "may increase or adjust an amount included in an assessment that is under objection or appeal at any time, provided the total amount of the assessment does not increase," the Joint Committee has made submissions on the scope of the proposed amendment, including that it should not affect the operation of the normal statute-barring rules, undercut settlements, or adversely interact with the rules for issue specification by large corporations.

Neal Armstrong. See Joint Committee Submissions.

CRA permits the use of late-filed s. 104(13.2) designations to carry back a capital loss to offset a s. 104(13.4) capital gain

In the case of a spousal, alter ego or joint partner trust, s. 104(13.4)(b) provides that income is deemed to have become payable to the individual whose death caused a deemed disposition of the trust property under s. 104(4). CRA accepts that this taxable capital gain can subsequently be eliminated essentially as described in the previous post, i.e., a late-filed s. 104(13.2) designation is available in order to carry back and apply an allowable capital loss subsequently realized by the trust - unless there is retroactive tax planning.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.6(a) under s. 104(13.2).

CRA permits a trust to make a late-filed s. 104(13.1) or (13.2) designation to access subsequent years’ losses

CRA considers that the new s. 104(13.3) rule establish that a trust can only make designations under s. 104(13.1) or (13.2) to apply non-capital or capital losses of other years to bring taxable income down to nil. But what if the loss in question has not yet arisen?

CRA accepts that if a trust has pushed out income to its beneficiaries in Year 1 and in, say, Year 3, realizes a non-capital or capital loss, it can amend its return for Year 1 to include income, which it previously had pushed out to its beneficiaries, in its income, thereby resulting in net income that can be offset by a loss carryback – and with the beneficiaries' returns then being reassessed to exclude the previous inclusion under s. 104(13).  This is premised on there being no retroactive tax planning involved and on the  years in question not being statute-barred.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.5 under s. 104(13.1).

The Canadian competent authority generally will grant an S corp agreement

Dual resident individual shareholders of an S Corp can apply to the Canadian competent authority under Art. XIX, para. 5 of the Canada-U.S. Treaty for an agreement to have the S Corp treated for Canadian purposes as a controlled foreign affiliate earning foreign accrual property income. This permits the Canadian and US income to be synchronized so as to avoid loss of Canadian foreign tax credits.

By implication, the competent authority generally will grant the request as a matter of course unless "the shareholder does not submit the information requested by a competent authority or the Canadian shareholder is seeking to revise his Canadian tax reporting for past years." It is acceptable (although not encouraged) for the shareholder to request an S Corporation agreement and then file the Canadian returns in the expectation that an S Corporation agreement ultimately will be provided.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.4 under Treaties – Art. 29.

CRA maintains its position that redeemable prefs are equity for thin cap purposes

CRA has confirmed its position that (absent something wonky which it has not seen) it will treat redeemable preferred shares as equity rather than debt for thin cap purposes notwithstanding the proposals in the new ASC Exposure Draft.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.3 under s. 18(5) – equity amount.

CRA considers that all of a deceased’s property on death after 2015 is initially one graduated rate estate

Notwithstanding what arguably is an implication to the contrary in para. (e) of the definition of graduated rate estate, CRA considers that a deceased has only one estate encompassing all of his or her property wherever it may be situated, and that this is so even if there are multiple wills with different executors.

Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q.2(a) and Q.2(b) under s. 248(1) - graduated rate estate.

CRA rules on transactions where a mine which was planned to be restarted was represented to be excluded property

S. 95(2)(e) generally provides a rollover at the relevant cost base where a foreign affiliate is wound up into another, but not for the wind-up of a partnership – even apparently where the wind-up of the partnership occurs by operation of law as a result of its two FA partners being wound up into their FA parent.

In this general situation, CRA gave a ruling that a distribution of the assets of a mine held by the partnership did not give rise to foreign accrual property income provided that the assets were excluded property.  The mine in question had been previously shut down, but now further reserves had been identified and there was a plan to resume operations.

Summary of 2015 Ruling 2014-0536661R3 under s. 95(1) – foreign accrual property income.

CRA finds that lease termination damages received by a non-resident lessor were subject to Part XIII tax

In Transocean, the Federal Court of Appeal found that damages received by a non-resident lessor of a boat for repudiation of the lease before its commencement were received by it in lieu of rent, so that the payment was subject to Part XIII tax under s. 212(1)(d). CRA has applied Transocean to find that a lump sum received by a non-resident lessor of property pursuant to a liquidated damages clause for termination of a lease of Canadian property to a Canadian lessee was subject to withholding.

Neal Armstrong. Summary of 10 March 2015 Memo 2015-0574291I7 under s. 212(1).

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