News of Note

CRA indicates that no TOSI tax applied to a dividend received from the surviving step-mother’s company

Mr. A bequeathed all the common shares of Opco to his surviving spouse, Ms. B, who was actively engaged on a regular, continuous and substantial basis in its business. Opco paid a dividend on the discretionary dividend shares held by Son A, who was the son of Mr. A, but not of Ms. B.

CRA noted that following the death of Mr. A, Son A no longer qualified as Ms. B's child under s. 252(1)(c) . Since she was now unrelated, Ms. B was not a "source individual" in respect of the specified individual (Son A). This, in turn, meant that Opco's business did not constitute a "related business" in respect of Son A , so that Son A could benefit from the "excluded amount" exclusion in s. 120.4(1)(e)(i): no TOSI.

Neal Armstrong. Summary of 11 June 2019 External T.I. 2019-0795291E5 F under s. 120.4(1) – related business.

Income Tax Severed Letters 7 August 2019

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

Prairielane – Tax Court of Canada finds that a “main reason” for a stacked partnership structure was tax deferral rather than generating SBD tax savings

MacPhee J found that the main tax reason for implementing a stacked partnership structure for holding interests in a farm equipment dealership (prior to the introduction of s. 34.2 to cut off this type of planning) was to defer the recognition of corporate tax rather than to access the small business deduction. He also noted that one of the two taxpayers (PLH) had taxable capital in excess of $15 million, so that at most it could only have generated a SBD for one year before its high taxable capital caught up with it under the applicable lagged calculation, and stated:

PLH would not have as a main reason for the creation of the new corporate structure access to the SBD for one year as the cost of creating the newly created structures, as well as the ongoing costs, far exceeded the SBD obtained in 2011.

Neal Armstrong. Summary of Prairielane Holdings Ltd. v. The Queen, 2019 TCC 157 under s. 256(2.1).

CRA applies s. 75(2) to the 1st generation but not 2nd generation income of a non-qualified purported TFSA trust

A trust lost its status as a TFSA because it borrowed money, but continued to exist for a number of subsequent years because it continued to be administered as though it were a TFSA. What was its treatment during that period?

By ceasing to be a qualifying TFSA, the trust ceased to be excluded from the application of s. 75(2) by s. 75(3)(a). Accordingly, s. 75(2) applied to attribute the income of the trust to the individual, subject to one point. That point was that:

Subsection 75(2) does not apply to income earned by a trust from the re-investment of income that was previously subject to attribution (i.e., second generation income), as this income is not earned on property contributed to the trust by a person (or substituted property). Thus, any second generation income earned by the former TFSA trust after deregistration will generally be taxable to the trust to the extent that it is not paid or payable to the beneficiary of the trust.

Neal Armstrong. Summary of 17 July 2019 Internal T.I. 2017-0718021I7 under s. 75(2).

CRA rules on pipeline transaction that includes partial use of s. 164(6) and of the s. 88(1)(d) bump

CRA ruled on a hybrid pipeline transaction in which the two holding companies that were held by the deceased first purchase for cancellation a portion of their participating shares that are now held by the estate in order to generate a deemed dividend to clear out their RDTOH and CDA accounts - with the estate electing under s. 164(6) to treat the resulting capital loss as a capital loss of the deceased. The estate then proceeds with a conventional pipeline transaction in which it transfers its remaining shares of the holding companies to Newco and, after the requisite waiting period, the holding companies are amalgamated with Newco or are wound up into it (in either case, referred to as “Amalco”), and with the notes thereafter being gradually paid off by Amalco.

On the winding-up or amalgamation, preferred shares held by one of the holding corporations in a corporation (whose participating shares are held by a family trust) are to be bumped under s. 88(1)(d) (although there are no rulings on this aspect). The proposed transactions conclude with a s. 88(2) winding up of the Amalco.

Neal Armstrong. Summary of 2019 Ruling 2019-0793281R3 F under s. 84(2).

9 more translated CRA interpretations are available

We have published 2 translations of CRA interpretations released last week, and a further 7 translations of CRA interpretations released in November, 2011 (all of them, from the October 2011 APFF Roundtables). Their descriptors and links appear below.

These are additions to our set of 927 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 3/4 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-07-31 12 June 2019 External T.I. 2019-0792011E5 F - TOSI definition excluded shares Income Tax Act - Section 120.4 - Subsection 120.4(1.1) - Paragraph 120.4(1.1)(d) income derived from related business included income from reinvesting sales proceeds from sale thereof in preceding year
Income Tax Act - Section 120.4 - Subsection 120.4(1) - Excluded Shares - Paragraph (c) two years were required to pass before proceeds from the sale of a related business could generate excluded share income for TOSI purposes
13 August 2018 Internal T.I. 2018-0763611I7 F - Subpar 152(4)(b)(iii) and FAPI Income Tax Act - Section 152 - Subsection 152(4.01) - Paragraph 152(4.01)(b) - Subaragraph 152(4.01)(b)(iii) reassessment of FAPI from marketable securities related to their previous contribution by the taxpayer
Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(iii) the extended reassessment period can apply to FAPI earned even before the 2018 Budget
2011-11-04 7 October 2011 Roundtable, 2011-0411951C6 F - Retenues à la source - options d'achat d'actions Income Tax Regulations - Regulation 6204 - Subsection 6204(1) - Paragraph 6204(1)(a) conferral on employer of share repurchase right to set off against source deduction obligation engages the exclusion
Income Tax Regulations - Regulation 6204 - Subsection 6204(1) - Paragraph 6204(1)(b) loss of prescribed share status where employer granted redemption right to cover s. 153(1.01) withholding obligations
Income Tax Act - Section 153 - Subsection 153(1.01) treatment of net share issuances under review
7 October 2011 Roundtable, 2011-0408251C6 F - REER, règle d'attribution, retenues à la source Income Tax Act - Section 146 - Subsection 146(8.3) s. 146(8.3) applied since not yet separated at time of withdrawal even though withholding for account of spouse
Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(j) application of s. 153(1)(j) not affected by application of s. 146(8.3)
7 October 2011 Roundtable, 2011-0399401C6 - Butterfly, life insurance policies, grandfathering Income Tax Act - Section 55 - Subsection 55(4) s. 55(4) in applicable if the principal reason for parent’s control of DC was parent's economic interests
Income Tax Act - Section 55 - Subsection 55(1) - Distribution CSV of life insurance policy was a cash asset - FMV excess could be an investment asset if no cash-out intention
Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(a) a policy loan under a life insurance policy to reduce its CSV would trigger s. 55(3.1)(a)
7 October 2011 Roundtable, 2011-0413081C6 F - 227(4) et (4.1) - vente d'un bien à un tiers Income Tax Act - Section 227 - Subsection 227(4.1) deemed trust applies only to sales proceeds (but such a purchaser does not include a seizing creditor)
Income Tax Act - Section 227 - Subsection 227(4) deemed trust is a universal floating charge that traces through to sales proceeds
7 October 2011 Roundtable, 2011-0412161C6 F - Timing of the increase in interest - stock option Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) grant of in-the-money options to key employee as part of same series could be a significant increase in interest – which otherwise occurs on exercise
7 October 2011 Roundtable, 2011-0399421C6 F - Options, biens identiques, PBR Income Tax Act - Section 7 - Subsection 7(1.3) application of s. 47(1) takes s. 7(1.3) into account
7 October 2011 Roundtable, 2011-0399441C6 F - T1135 - coût indiqué d'une assurance-vie Income Tax Act - Section 233.3 - Subsection 233.3(1) - Reporting Entity cost amount of foreign policy is its adjusted cost basis
Income Tax Act - Section 248 - Subsection 248(1) - Cost Amount - Paragraph (f) adjusted cost basis of policy is generally its “cost” under para. (f)

CRA found that failure to charge for services rendered by a Canco to a NR sub of a NR trust tainted the NR trust under s. 94(2)

The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco provided services for no consideration to LLC1.

The Directorate concluded that Canco thereby was rendered a resident contributor to NRTrust (so that NRTrust was deemed to be a s. 94-resident trust) because

  • s. 94(2)(f) deemed there to be a transfer of property to that trust, and
  • it would be reasonable to view there as having been a resulting increase in the fair market value of the LLC1 shares.

In the Directorate’s view, this result obtained even if s. 247(2) also applied to deem Canco to have received FMV consideration for its services.

Essentially the same result obtained if Canco made an interest-free loan to LLC1 rather than providing free services. Similarly, the application of s. 17 (or s. 247(2)) to that loan would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust.

Neal Armstrong. Summaries of 28 May 2019 Internal T.I. 2018-0772971I7 under s. 94(2)(a).

CRA notes that two years were required to pass before proceeds from the sale of a related business could generate excluded share income for TOSI purposes

In Year X3, Investco sells all the shares of Opco, which was the only related business respecting the specified individual (Investco’s shareholder) and uses the proceeds in an investments business. CRA indicated that dividends paid by Investco to the individual shareholder cannot qualify for the excluded share (“tax on split income” or TOSI) exception until Year X5. For instance, in Year X4, the income of Investco was tainted because in its last taxation year (X3) it had received dividend income from Opco and, in any event, the taxable capital gain realized by it in that year was deemed by s. 120.4(1.1)(d)(i)(B) to be income derived from the Opco business.

­­­­­­­­­­­­­­­­­­Neal Armstrong. Summary of 12 June 2019 External T.I. 2019-0792011E5 F under s. 120.4(1) – excluded share – (c).

CRA considers that the extended reassessment period can apply to FAPI earned even before the 2018 Budget

The Canadian corporate “Taxpayer” contributed marketable securities to a wholly-owned controlled foreign affiliate ("ForeignCo") in exchange for shares. Could CRA rely on the extended reassessment period under ss. 152(4)(b)(iii) and 152(4.01)(b)(iii) to reassess the Taxpayer respecting the foreign accrual property income (FAPI) earned by ForeignCo from the marketable securities (for a taxation year before the 2018 Budget reversal of Ho)? In responding “yes”, CRA stated:

[W]here there is a causal link between the FAPI earned by an FA and the taxpayer's investment in the capital stock of that FA, and where the shares have been acquired by the taxpayer directly from the FA, the adjustment attributable to FAPI arising from the assessment or reassessment can reasonably be considered to have been made as a result of a transaction (the investment in the FA) between the taxpayer and a related non-resident corporation (the FA). …

[T]he reassessments would be attributable to FAPI arising directly from the contribution by the Taxpayer of the Marketable Securities to ForeignCo which … would be a "transaction" between Holdco and ForeignCo referred to in subparagraph 152(4)(b)(iii) that it would be reasonable to consider as relating to the reassessments for purposes of subparagraph 152(4.01)(b)(iii).

Neal Armstrong. Summary of 13 August 2018 Internal T.I. 2018-0763611I7 F under s. 152(4.01)(b)(iii).

CRA illustrates s. 249(3), and accords s. 22 elections to Amalco

CRA has augmented its Folio on amalgamations.

It indicates, in an example, that if a predecessor with a calendar taxation year amalgamated on January 2, 2019, s. 249(3) would prevent the taxation year that otherwise would have ended on December 31, 2018 from being extended to January 1, 2019.

Notwithstanding no continuity rule in s. 87(2) to this effect, CRA will permit Amalco to make a s. 22 election respecting receivables generated by sales of a predecessor, provided that there was no disruption in the operation of the business between the time of the amalgamation and the business sale (and assuming the usual s. 22 conditions were satisfied).

Neal Armstrong. Additional summaries of Folio S4-F7-C1 under s. 249(3) and s. 22(1).