News of Note
CRA considers that an estate gift funded by share redemption proceeds – but not by a dividend – generally will satisfy s. 118.1(5.1)(b)
Email this ContentS. 118.1(5.1)(b) provides the new rules for charitable donations from a (post-2015) graduated rate estate and in most circumstances requires that the donation must be a gift of (i) property that was acquired by the estate on and as a consequence of the death or (ii) property that is substituted for that property. Per CRA, the gift is meant to be paid out of the property owned at death or property substituted for such owned property. CRA will not consider this requirement to be satisfied if the estate uses a dividend received on shares, that were held on death, to make a gift directed by the will: the estate continues to hold the shares so that the dividend is not property substituted for the shares.
On the other hand, if the cash is received for the shares’ redemption, the cash will now qualify as substituted property, so that s. 118.1(5.1)(b) will be satisfied.
S. 248(5)(a) indicates that if there are two substitutions, the ultimate property is substituted property for the original property. Accordingly, if the estate exchanges its shares for shares of a Newco, and Newco then redeems its shares, the cash redemption proceeds will be good substituted property to the estate.
Neal Armstrong. Summary of 19 September 2015 STEP Roundtable, Q. 11 under s. 118.1(5.1)(b).
GMAC Leaseco – Tax Court of Canada finds that an amount received subject to future adjustment was unearned – but, by the same token, it was not “received” for s. 12(1)(x) purposes
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.
CRA specifies the notification requirements for a PUC grind under the foreign affiliate dumping rules
212.3(7)(d) provides that if a CRIC does not file "in prescribed manner a form containing prescribed information" by its filing-due date, amounts which otherwise would have ground the paid-up capital of shares of the CRIC or a qualifying substitute corporation, will be deemed to be paid as a dividend, thereby attracting Part XIII tax. No Regulation has been drafted.
CRA will treat this filing requirement as being satisfied by a letter containing particulars specified by it, including some informational particulars not specifically mentioned in s. 212.3(7)(d)(i).
Neal Armstrong. Summary of 12 June 2015 T.I. 2015-0583821E5 under s. 212.3(7).
CRA finds that s. 116 applies to distributions to non-residents from estates that held Canadian realty where a 2nd-tier trust is utilized
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.
Income Tax Severed Letters 24 June 2015
This morning's release of 20 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
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).