News of Note

S. 90(9) permits the s. 90(6) income inclusion to Canco, that otherwise would result from an unpaid upstream loan to it from FA, to be reduced by applicable FA surplus balances. However, s. 90(9)(b) provides that such surplus must "not [be] relevant…in respect of any deduction claimed under subsection…113(1) in respect of a dividend paid, during the period in which the particular loan…is outstanding… ."

CRA is flexible in applying this exclusion. For example, it is willing to treat exempt surplus as being reduced on a LIFO basis so that, if following the upstream loan, there is an actual FA dividend, it is willing to treat that as coming out of subsequently generated exempt surplus rather than trenching for s. 90(9)(b) purposes on previous exempt surplus that may be needed under s. 90(9). Furthermore, CRA notes that "that the relevant time at which to measure surplus is the [s. 90(6)] dividend time and not any time in a subsequent year in which a subsection 90(9) deduction is claimed to offset a subsection 90(12) inclusion [bringing back into income a previous year’s s. 90(9) deduction]," so that it would not matter for s 90(9) purposes if there is an exempt loss is a year subsequent to that for the dividend time.

Finally, in an extension of 2013-0483791C6 (where CRA indicated that a Reg. 5901(2)(b) election can be made on a notional s. 90(9) dividend), and assuming the numbers work, CRA considers that the s. 90(6) deemed dividend from Upstream Loan 1 can be eliminated under s. 90(9) based on exempt surplus at the time, and that the s. 90(6) deemed dividend from Upstream Loan 2 can be eliminated under s. 90(9) based on making a Reg. 5901(2)(b) election on this notional dividend.

Neal Armstrong. Summary of 28 May 2015 IFA Roundtable, Q. 4, 2015-0581501C6 under s. 90(9).

The taxpayer was owed interest (at 25% p.a.) by a relative’s company which, in turn, had essentially all its assets invested in loans to an arm’s length company which, as it emerged by April 2010, was engaged in a Ponzi scheme. Owen J found that whether there was a bad (or doubtful) debt for the interest as at the taxation year end (December 31, 2009) could be assessed in light of the circumstances at the filing-due date (April 30, 2010) – stating a useful principle that "the taxpayer may rely on information that comes into existence after the end of the year, but before the filing-due date, to fulfill his…obligation to report."

Respecting an argument that the taxpayer was required by s. 20(1)(l) or (p) to have "included" the interest in income before being entitled to the reserve – whereas, in fact, neither interest nor deduction appeared in the return (although an explanatory letter was attached) - Owen J stated (perhaps inconsistently with Langdon, Sears and Dominion) that this did "not alter the fact that the interest was included in [the taxpayer’s] income for 2009 by virtue of the application of the provisions of the ITA to the facts." Furthermore, "it is well established that it is open to a taxpayer to amend his return through the appeal process."

As its computers are dyslexic, CRA dislikes an income reporting or reserve deduction requirement being satisfied by attaching a letter.

Neal Armstrong. Summaries of Donne v. The Queen, 2015 TCC 150, under s. 20(1)(l) and s. 20(1)(p)(i).

GMAC received "support payments" from GMC in order to inflate the residual values stated in its leases of cars to GMC customers, thereby reducing the lease payments but resulting in a likely loss on lease termination.  GMAC was obligated to pay GMC to the extent that the net amount of such losses was less than the support payments previously received.

Graham J found that the support payments were not earned until lease termination (when the repayment obligation could be quantified.)

This case would have wide ramifications and likely incite a Finance response, if it were considered to establish that any amount received which was subject to a potential future price adjustment is not income until that potential disappears.  More probably, this case should be considered a modest extension of cases dealing with provisional amounts such as deposits (e.g., Atlantic Engine, Dominion Taxicab, cf. Maple Leaf), so that where an amount is received which both parties agree is only an estimate of an amount which will not be established until later, it is only income when they agree on the consideration - or the case may simply be wrong as the Crown did not argue s. 12(1)(a).

GMAC argued that, because the support payments were not earned when received, the exclusion in s. 12(1)(x)(v) for income receipts did not apply, so that s. 13(7.4) elections to exclude those amounts from income had been validly made.  Graham J found that for the same reason that a support payment was unearned (i.e., there was "no legal right to keep the amount"), it also was not received for s. 12(1)(x) purposes.  He registered a reaction that the s. 13(7.4) election also would not be available because the "support payments were received to replace lost income rather than in respect of the cost of the vehicles."

He found that "excess kilometre charges" paid by customers on returning their vehicles at lease termination were income receipts rather than proceeds of disposition under s. 13(21), i.e., it was not good enough that they were received contemporaneously with the sale by GMAC of the returned vehicles and related to their depreciation in value.

Neal Armstrong.  Summaries of GMAC Leaseco Corporation v. The Queen, 2015 TCC 146 under s. 9 – timing, s. 12(1)(x), s. 9 – compensation payments, s. 9 – computation of profit, s. 18(1)(a) – timing.

An interest in an estate will be taxable Canadian property if, at any time within the previous 60 months, more than 50% of the fair market value of that interest was derived directly or indirectly from Canadian real estate. CRA considers that a capital distribution on such an interest is subject to s. 116 clearance certificate obligations.

Can this be avoided if the estate is required (following its sale of the real estate) to distribute a portion of the estate residue to a resident trust with a non-resident beneficiary ("Son’s Trust"), with Son’s Trust (which has never held real estate) then making a capital distribution to the non-resident beneficiary (Son)?

CRA noted that if (as appears likely) the distribution to Son’s Trust does not result in a change in the beneficial ownership of the distributed property, s. 248(25.1) will deem Son’s Trust to be a continuation of the estate, so that Son’s interest will be taxable Canadian property based on the estate’s previous ownership of Canadian real estate. On the other hand, if s. 248(25.1) does not apply, so that Son’s Trust is separate from the estate, CRA nonetheless would consider that Son had an interest in the residue of the estate which, as it was derived from Canadian real estate, would cause Son’s trust interest to be taxable Canadian property.

Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 10 under s. 248(1) - taxable Canadian property.