News of Note

CRA rules on a double pipeline entailing the application of s. 84.1 and s. 88(1)(d) bump

Father bequested his shares of an investments holding company (Aco) directly to his surviving wife (Mother) and to a spousal trust (Trust) for her. Following the death of Mother, her estate and Trust were to engage in a pipeline transaction under which:

  • The estate and Trust transfer their Aco shares under s. 85(1) to a Newco of Trust in consideration for Newco preferred shares. Given that the transferred shares include Aco shares which it had previously issued to Father in an exchange where he had utilized the s. 110.6(1) deduction, ss. 84.1(1) and (2)(a.1)(ii) grind the PUC of such Newco shares.
  • After a specified period, Newco amalgamates with Aco, and redeems the preferred shares for notes. In light of the s. 84.1 grind, this generates deemed dividends and associated capital losses which, in the case of the Trust, it will carry back under s. 111(1)(b) to reduce its taxable capital gain realized on Mother’s death.
  • Amalco will repay the notes at no more than a specified rate over the period commencing with their issuance.

CRA ruled regarding the application of s. 84.1 as described above, the non-application of ss. 84(2), 40(3.6) and s. 245(2), and the application of ss. 88(1)(d.2) and (d.3) to deem Newco to have last acquired control of Aco immediately following Mother's death (regarding a bump of shares held by Aco on the amalgamation).

Neal Armstrong. Summary of 2021 Ruling 2021-0887301R3 F under s. 84(2).

CRA indicates that the scholarship exemption is to be calculated on a month-by-month basis

The scholarship exemption regarding Canadian university students under inter alia ss. 56(3)(a)(i) and 56(3.1)(b) draws a distinction between those students who are full-time (FT) (i.e., generally, spending not less than 10 hours per week on courses in a “qualifying educational program” (QEP)) and those who are part-time (PT) (i.e., not FT but with at least 12 hours per month on the courses in a “specified educational program” (SEP).) The scholarship exemption for an award received by a PT “qualifying student” is generally limited to the cost of materials related to the program, the fees paid to the “designated educational institution” (DEI) in respect of the program, and the basic scholarship exemption of $500 – whereas the full amount of the grant received by an FT qualifying student is eligible for the scholarship exemption under s. 56(3)(a) provided (in the words of CRA) “it is reasonable to conclude that the award is intended to support the individual’s enrolment in the program.”

How is the scholarship exemption to be computed if the status of the student changes from FT to PT for part of a year? For example, an FT student in a four-year undergraduate degree program changes to PT status in a single term by enrolling in a three-week study-abroad program during a particular month. CRA would likely consider the student to be a PT qualifying student in respect of the study-abroad program, so that if the individual were to receive a grant to cover the duration of the study-abroad program, the scholarship exemption would be calculated on the basis that the student was a PT qualifying student in the particular month, so that the scholarship exemption would be limited to the cost of materials related to the study-abroad program, any fees paid to the (Canadian) DEI in respect of that program, and the basic scholarship exemption.

On the other hand, if the student were to take other courses alongside the PT study-abroad program so as to be elevated to FT status for that month, the individual would likely be eligible for the full scholarship exemption.

Neal Armstrong. Summary of 15 August 2022 External T.I. 2022-0926781E5 under s. 56(3.1)(b).

Income Tax Severed Letters 8 February 2023

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Fortius – Federal Court of Appeal finds that CRA was not to be precluded from revoking registered charity status prior to the charity’s objection and appeal being heard

After a registered charity (Fortius) received a notice informing it that its registration as a charity would be revoked 30 days later, it could have followed the normal process of filing an objection and, if the Minister confirmed her decision, filing an appeal pursuant to s. 172(3) (an “application”), which would be heard on its merits. Fortius tried to stop the revocation by bringing a motion applying for an order under s. 168(2)(b) for precluding the Minister from publishing the notice of revocation until Fortius had had the opportunity to pursue the above normal objection (and, if applicable, appeal) process, as well as seeking an interim relief order under Rules 372 and 373 enjoining the Minister from publishing the notice of revocation until the application was decided.

In finding that Fortius had not established that it would suffer irreparable harm if its motion was not granted, Rennie JA noted:

  • Fortius, on its own evidence, was “in no better position to advance evidence on the application than it [was] currently on the motion”;
  • The outcome on this motion would not eliminate the opportunity Fortius had to challenge the Minister’s decision by following the normal objection and appeal procedure;
  • Furthermore, the loss of the statutory benefits conferred upon registered charities was not in itself evidence of irreparable harm, i.e., “irreparable harm does not encompass the ordinary consequences that flow from an entity losing its registered charity status (such as loss of tax-exempt status, ineligibility to issue donation receipts, and payment of a revocation tax pursuant to section 188 ...)”.

Neal Armstrong. Summary of Fortius Foundation v. Canada (National Revenue), 2022 FCA 176 under s. 168(4)(b).

Marchessault – Court of Quebec finds that frequent visits by an Alberta worker (without a permanent Alberta home) to his Quebec parents and friends did not establish Quebec residence

The taxpayer started in 2006 to work exclusively at a succession of pipeline-construction jobs in Alberta (or, on occasion, in B.C.) in all but about three or four of the winter months - during which he would visit his parents and friends in Quebec (while generally staying in a hotel), or travel to warmer locations. Because his work sites kept shifting, he did not acquire a permanent home in Alberta. Previously single, he married in 2016 in Alberta, and moved with his spouse to Quebec in 2020, but following a rupture, he resumed his life in Alberta two years later.

In finding that the taxpayer was not resident in Quebec for the years assessed by the ARQ (2008 to 2013), Bergeron JCQ stated:

The Court does not believe that Mr. Marchessault must deprive himself of the opportunities afforded by his mode of life to visit his parents in order to break his ties of residence to Quebec.

… Mr. Marchessault had a roof in Alberta, without having purchased a home there. However, the … [quoting Thomson] “spatial bounds within which he [spent] his life” were within Alberta throughout the Period … .

Neal Armstrong. Summary of Marchessault v. ARQ, 500-80-040307-200, 6 February 2023 (Court of Quebec) under s. 2(1).

We have translated 6 more CRA interpretations

We have published a further 6 translations of CRA interpretations released in October of 2003. Their descriptors and links appear below.

These are additions to our set of 2,369 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 19 1/3 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).

Bundle Date Translated severed letter Summaries under Summary descriptor
2003-10-24 10 October 2003 External T.I. 2003-0037135 F - CONTRATS DE RENTE VIAGERE
Also released under document number 2003-00371350.

Income Tax Regulations - Regulation 301 - Subsection 301(1) annuity did not qualify as a "life annuity" where payments made to a corporation
15 October 2003 External T.I. 2003-0014535 F - FRAIS DE GARDE D'ENFANTS
Also released under document number 2003-00145350.

Income Tax Act - Section 63 - Subsection 63(3) - Child Care Expense - Paragraph (d) fees for daycare at day sports camp could qualify
10 October 2003 External T.I. 2003-0035645 F - DEDUCTIBILITE DES INTERETS
Also released under document number 2003-00356450.

Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) Ludco and Singleton accepted/ description of how and why cash damming works
Income Tax Act - Section 16 - Subsection 16(1) interest imputed on a non-interest-bearing note issued at a discount consists of simple interest (annually deductible) and compound interest (deductible only at maturity)
10 October 2003 External T.I. 2003-0035665 F - TRANSFER D'UNE POLICE D'ASSURANCE-VIE
Also released under document number 2003-00356650.

Income Tax Act - Section 148 - Subsection 148(7) transfer to shareholder at policy’s FMV is not a “distribution”
10 October 2003 External T.I. 2003-0035675 F - EVALUATION D'UNE POLICE D'ASSURANCE-VIE
Also released under document number 2003-00356750.

Income Tax Act - Section 70 - Subsection 70(5.3) unpaid policy loan to corporation is to be deducted in determining shares’ FMV if the accords with valuation principles
10 October 2003 External T.I. 2003-0037125 F - AVANCE SUR POLICE
Also released under document number 2003-00371250.

Income Tax Act - Section 148 - Subsection 148(9) - Policy Loan withdrawal can qualify as policy loan even if not named as such under the policy

CRA indicates that crypto miners generally had the change-in-use rules apply to their capital properties on May 18, 2019

CRA indicated that as a result of the legislative change, made in 2021 but effective May 18, 2019, to make “virtual payment instruments,” such as Bitcoin, financial instruments, the change-in-use rules generally would apply on that date to the capital properties of miners, given that prior to that date they would be regarded by CRA as being engaged in commercial activity. Thus, as a substantive matter, they were required to remit GST/HST equal to the properties’ basic tax content (essentially, the GST/HST previously paid on the properties’ purchase).

CRA made this point in a very brief, almost sheepish, manner – so that it may recognize that it may now have legal and practical difficulties in purporting to require those who have already filed their return for the relevant 2019 reporting period, to now refile so as to report an application of the change-in-use rule.

Neal Armstrong. Summaries of GST/HST Notice No. 324, Proposed Amendment Addressing Mining Activities in respect of Cryptoassets, February 2023 under ETA s. 188.2(1) - virtual payment instrument, mining activity, cryptoasset, s. 188.2(2), (4), (5), s. 1123(1) – recipient, s. 141.04(4) and s. 200(2).

CRA respects the effect of a court order providing that a lump sum payment was in satisfaction of a retroactive periodic support obligation

A 2018 court order required retroactive child and spousal support payments to be made by an individual to a former spouse on a monthly basis for the period from 2013 until the date of the order but treated various payments previously made by the individual to the former spouse as being in satisfaction of this periodic obligation and also contemplated that such obligation would be satisfied in part by way of set-off against an obligation of the former spouse to pay an equalization amount to the individual respecting a division of matrimonial property.

After noting that s. 60.1(3) deemed payments made in the previous year and during 2018 up to the time of the order to be made pursuant to the order, so that such payments could potentially qualify for deduction under s. 60(b), CRA turned to the deductibility of amounts paid after the time of the order, and stated:

[W]here the lump-sum amount is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance for a specified period prior to the date of the court order … the lump-sum payment will not, in and of itself, change the nature of the underlying legal obligation of periodic maintenance payments and, if all other requirements are met, the lump-sum amount paid will be deductible to the payer according to the formula in paragraph 60(b) … .

CRA went on to indicate that the above principle would apply even though such lump sum payment of retroactive periodic support was made in part by way of set-off against an obligation of the support recipient to make an equalization payment.

Neal Armstrong. Summaries of 7 September 2022 Internal T.I. 2022-0931081I7 under s. 60.1(3), s. 60(b) and General Concepts – Effective Date.

It may be unclear as to whether maximum CCA should be treated as having been claimed for pre-acquisition taxation years of an LLC under Reg. 5907(2.03)

US LLC acquired depreciable property in 2015 for use in its active business, and then on January 1, 2022, its shares were acquired by a Canadian taxpayer (Acquireco).

Reg. 5907(1)(a)(iii) generally provide that earnings from an active business of an LLC foreign affiliate of a taxpayer resident in Canada shall be computed as if if the business was carried on in Canada and the LLC was resident in Canada; and Reg. 5907(2.03) generally provides that its income or loss from that business for a particular taxation year shall be computed on the basis that for that year and “any” preceding taxation year ending after August 19, 2011. it claimed the maximum CCA and other deductions in computing its income from the business.

Under the above wording, it might seem that the maximum CCA should be treated under Reg. 5907(2.03) as having been claimed in the prior years, thereby increasing the earnings for 2021 and subsequent years. However, it is suggested that it could be argued that no CCA should be considered to be claimed for the pre-acquisition period, given inter alia that prior to the acquisition, US LLC was not a foreign affiliate of Acquireco and, therefore, never claimed depreciation in computing income with respect to Acquireco.

Neal Armstrong. Summary of Nakul Kohli and Simon Townsend, “Computing UCC for Newly Acquired LLCs,” Canadian Tax Focus, Vol. 13, No. 1, February 2023, p. 9 under Reg. 5907(2.03).

Income Tax Severed Letters 1 February 2023

This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.