News of Note
The Rulings Directorate pre-rulings consultation program requires a detailed advance written submission
Email this ContentGuidelines provided by the Income Tax Rulings Directorate on the pre-rulings consultation program include:
- there must be an advance written application which includes the taxpayers’ names, "all relevant facts and proposed transactions related to the unique, new technical issue(s)" and "an explanation of the issue(s)"
- the Directorate generally will schedule the teleconference to occur within three weeks of receipt of the application (although on an exceptional basis a meeting may instead be arranged), and it is implied that the Directorate will consider the technical issues in advance of the call
- however, it will not be bound by its comments on the call (which also cannot be recorded), and the overall answer will either be a "no" or an indication that it "would consider the issue further in the context of an advance income tax ruling"
- the Directorate may pass along what it learns to Audit or Finance
Where there is a contemplated transaction, this process in some respects will be more informative (and much more timely) than asking for a technical interpretation, and may result in an increase in the number of transactions which are substantially completed before a ruling application is granted.
Neal Armstrong. Summary of Toronto Centre Canada Revenue Agency & Professionals Group Newsletter, Vol. 13: Issue 4, December 2014 under s. 152(1).
Kennedy – English Chancery Division finds that there can be a partial rescission of a trust appointment on the grounds of equitable mistake
An English family trust would not have included a distribution of shares to the trust settlor (Mr Kennedy) in an "appointment" of trust property in favour of various beneficiaries, if the trust’s advisor had been aware that losses of the trust already had been used up. Following Pitt (also applied in Pallen), Sir Terence Etherton found that the clause of the appointment dealing with the distributions to Mr Kennedy could be rescinded on grounds of equitable mistake. In particular, he found that there could be partial rescission, so that the clauses of the appointment in favour of the other beneficiaries were not rescinded.
On the other hand, given the narrowness of the English doctrine of rectification, the particular clause for the distributions to Mr Kennedy (whose wording referred to the remainder of the trust fund) could not be rectified so as to exclude the shares and refer only to cash, rather than being rescinded in its entirety.
Neal Armstrong. Summary of Kennedy & Ors v. Kennedy & Ors, [2015] BTC 2, [2014] EWHC 4129 under Rectification and Rescission.
CRA considers that a transfer from a deceased annuitant’s RRSP to a surviving non-resident spouse’s RRSP or RRIF is subject to Part XIII tax if she cannot obtain a SIN
S. 212(1)(l) contemplates that a refund of premiums paid out of an RRSP to a surviving non-resident spouse can generally be made free of withholding tax if it is contributed into the surviving spouse's RRSP or RRIF. However, the related required documentation contemplates that the surviving spouse will provide his or her SIN – and someone who is not eligible for government benefits generally cannot obtain one.
Gotcha! CRA considers that:
[I]f a non-resident surviving spouse does not have or cannot obtain a SIN, that person will not be allowed to make a tax-free transfer to an RRSP or a RRIF… . CRA does not intend to provide any administrative relief to the surviving spouse who does not hold or cannot obtain a SIN… .
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 2, 2014-0534821C6 F under s. 212(1)(l).
Gouveia - Federal Court of Appeal treats an individual’s reputation and income-earning capacity as a capital asset
Dawson JA briefly affirmed a finding of Favreau J that $2.1 million in legal fees incurred by a CEO, who also earned consulting fees from his income trust, mostly to defend against OSC charges respecting allegedly misstated financial statements, were non-deductible given that "deduction of legal fees incurred to preserve the [taxpayer’s] reputation and capacity to earn future income is prohibited by paragraph 18(1)(b)."
This is consistent with Cimolai and a judicial pattern of treating expenditures to preserve a capital asset as being capital expenditures.
Neal Armstrong. Summary of Gouveia v. The Queen, 2014 FCA 289 under s. 18(1)(a) – legal and other professional fees.
S. 15(1.4)(c) helps avoid double taxation of car benefits
CRA has confirmed that s. 15(1.4)(c) can operate to prevent double taxation, so that if Son has an automobile benefit conferred on him by his corporate employer which is included in his employment income, that benefit will not be included in the income of his father (the corporate shareholder) notwithstanding the broad scope of s. 15(5).
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 1, 2014-0538101C6 F under s. 15(1.4)(c).
Making a s. 89(11) election does not trigger a year end
Where a corporation which otherwise would be a Canadian-controlled corporation makes a s. 89(11) election for a taxation year, it is deemed throughout that taxation year and thereafter (subject to revocation of the election) not to be a CCPC for specified purposes, including s. 249(3.1), which deems a year end when a corporation becomes or ceases to be a CCPC. However, since the deemed status change from making the election thus occurs at the very beginning of that taxation year, there is no effect on its taxation year end.
Neal Armstrong. Summary of 22 October 2014 Memo 2014-0550191I7 under s. 249(3.1).
CRA grants SDA ruling for SAR plan for CCPC whose FMV is determined using a simplistic formula
CRA ruled that "stock appreciation rights" of employees of a Canadian-controlled private corporation would not constitute a salary deferral arrangement before they could exercise cash-out rights. Cash-outs (based on the appreciation in their notional units from the time of grant) can occur not only on termination of employment but also when the fair market value of the CCPC passes specified thresholds. The FMV of the CCPC will be computed in accordance with a formula which starts with a weighted average of a multiple of adjusted EBITDA for various trailing reporting periods ("to ensure that the value of SAR Units is not unduly affected by a year that is exceptionally good or exceptionally bad"), and then adds cash (but not other working capital) and (in an obvious departure from valuation principles) the cumulative amount of corporate distributions, and subtracts debt (but not accrued liabilities).
The take away may be that in this context CRA is amenable to the FMV of an unlisted company being computed in accordance with an objective, but somewhat smoothed and arbitrary (and, therefore, at least somewhat inaccurate), formula.
Neal Armstrong. Summary of 2013 Ruling 2012-0435221R3 under s. 248(1) – salary deferral arrangement.
CRA finds that a copyright royalty paid for the use of photographs in a TV production is exempted from withholding
CRA considers that payments to a non-resident for the right to use photographs in a TV program enjoy the copyright withholding tax exemption without being excluded under s. 212(5) as a payment for the use of a film.
This is similar to 2013-0514291E5 F, where CRA states that it does not consider that this exclusion will apply where separate copyright royalties are paid to a non-resident for the right to reproduce music which is used in a film.
Neal Armstrong. Summaries of 5 November 2014 T.I. 2013-0506191E5 under s. 212(5) and s. 212(1)(d)(vi).
Brogan Family Trust – Ontario Supreme Court finds that CRA need not be notified of a rectification application to save unassessed tax
In Ontario, there generally is no need to notify CRA of a rectification application if the tax to be saved or avoided through the rectification has not yet been assessed by CRA.
Neal Armstrong. Summary of Canada (Attorney-General) v. Brogan Family Trust, 2014 ONSC 6354 under General Concepts – Rectification.
CRA challenges TFSA day trading
In contrast to s. 146(4)(b), which exempts an RRSP’s income from a business to the extent that the income is from trading qualified investments (see 2014-0538221C6 F), s. 146.2(6) indicates that a TFSA is taxable on its taxable income from any business.
CRA apparently is challenging day trading within TFSAs, and a case is expected "in the next year or two."
Neal Armstrong. Summary of Arthur B.C. Drache, "TFSAs as a Business," The Canadian Taxpayer, January 2, 2015 – Vol. xxxvii No. 1, p. 5 under s. 146.2(6).