News of Note
Income Tax Severed Letters 15 February 2023
Email this ContentThis morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The combined operation of the EIFEL rules on a Canco and CFA with FAPI is illustrated
A simple example has been provided to illustrate how the revised draft excessive interest and financing expenses limitation (EIFEL) rules operate in a somewhat consolidated manner where a Canadian corporation has a controlled foreign affiliate (CFA) that generates foreign accrual property income (FAPI).
Canco, which has business income of $1,100 after deducting interest expense of $1,400, also has a wholly-owned CFA that has income from property of $400 after deducting interest expense of $600, and pays no tax – so that Canco’s income including FAPI is $1,500. The interest and financing expense (IFE) of Canco is $1,400 plus its share of the relevant affiliate IFE (RAIFE) of the CFA of $600, or $2,000. Its adjusted taxable income (ATI) is its income of $1,500 plus the IFE of $2,000, or $3,500.
A percentage EIFEL denial is determined by comparing the IFE of $2,000 to 30% of ATI (0.3*$3,500), resulting in an aggregate denial of $950, being 47.5% of the $2,000 IFE. 47.5% of Canco’s $1,400 interest expense, or $665, is denied under s. 18.2(2). 47.5% of the RAIFE of $600, or $285, is denied under s. 95(2)(f.11)(ii)(D), increasing the FAPI inclusion accordingly. These two additions of $665 and $285 increase Canco’s income by $950 from $1,500 to $2,450.
The $950 of denied interest is added to the restricted interest and financing expense (RIFE) of Canco, which can be carried forward indefinitely and deducted by Canco, generally having regard to its capacity to deduct interest under the EIFEL rules in those future years.
If the CFA had incurred a foreign accrual property loss (FAPL) instead of FAPI, the RAIFE of the CFA would nonetheless be included in the IFE of Canco – even though that FAPL might never be deducted in computing Canco’s income.
Neal Armstrong. Summary of Nat Boidman and Eivan Sulaiman, “The EIFEL Proposals and Controlled Foreign Affiliates,” International Tax Highlights, Vol. 2, No. 1, February 2023, p. 5 under s. 95(2)(f.11)(ii)(D).
CRA applies its GST/HST policies to the UHTA concepts of primary residence and continuous occupancy
There is an exemption under s. 6(8) of the Underused Housing Tax Act regarding a home of a non-resident/non-citizen individual that is the “primary place of residence” of that individual or spouse thereof for the year in question, or of a child occupying it in connection with qualifying studies – subject to an obligation of a couple to share this exemption where there is more than one such home. CRA has indicated that it will apply its GST/HST policies in P-288 as to what is meant by “primary place of residence” – so that it cannot be secondary (determined generally by the relative degree of use in the year) to another home. Thus, the quoted term is narrower than the ITA concept of “principal residence.”
Ss. 6(1) and (9) generally provides an exemption for a corporate or individual non-resident where there is “continuous occupancy” of the home by an arm’s length individual under a written lease for specified periods amounting to at least about half the year – with a more intricate variant of this test applying where the occupant is not at arm’s length. Here, as well, CRA is applying its GST/HST policy, which is to consider that an “individual’s continuous occupancy of the dwelling unit for a period is not necessarily interrupted by the individual’s physical absence from the dwelling unit at a time in the period if … the individual still has the right to occupy the dwelling unit throughout their physical absence [and] the right to occupy the dwelling unit is not given to another individual for any period during the physical absence.” In other words, occupancy can include constructive occupancy.
Neal Armstrong. Summary of Underused Housing Tax Notice UHTN6 “Exemption for Primary Place of Residence” January 2023 under UHTA, s. 6(8) and summary of UHTN7 “Exemption for Qualifying Occupancy” under UHTA, s. 6(1).
We have translated 7 more CRA severed letters
We have published a translation of a ruling released by CRA last week and 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 2,376 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 |
|---|---|---|---|
| 2023-02-08 | 2021 Ruling 2021-0887301R3 F - Post-mortem pipeline transaction | Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.3) | application of s. 88(1)(d.3) to pipeline involving shares that had been stepped up under s. 104(4) |
| Income Tax Act - Section 84 - Subsection 84(2) | double pipeline entailing the application of s. 84.1 and s. 88(1)(d) bump | ||
| Income Tax Act - Section 84.1 - Subsection 84.1(2) - Paragraph 84.1(2)(a.1) - Subparagraph 84.1(2)(a.1)(ii) | application of ss. 84.1(1) and (2)(a.1)(ii) to transfer of shares by spousal trust that had received such shares from the testator who had stepped such shares up under s. 110.6(2.1) | ||
| 2003-10-24 | 10 October 2003 External T.I. 2003-0036865 F - TRANSFER DE POLICE D'ASSURANCE
Also released under document number 2003-00368650.
|
Income Tax Act - Section 15 - Subsection 15(1) | benefit to shareholder on gratuitous transfer to it of critical illness policy entitled to refund of premiums on maturity |
| Income Tax Act - Section 148 - Subsection 148(7) | s. 148(7) inapplicable to critical illness policy | ||
| General Concepts - Fair Market Value - Other | FMV of critical illness policy takes refundable premium amount into account | ||
| 16 October 2003 Internal T.I. 2003-0032537 F - EQUIVALENT POUR PERSONNE
Also released under document number 2003-00325370.
|
Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b) | young child could not claim credit for mother | |
| 10 October 2003 External T.I. 2003-0037145 F - CONVENTION DE RETRAITE
Also released under document number 2003-00371450.
|
Income Tax Act - Section 207.6 - Subsection 207.6(2) - Paragraph 207.6(2)(d) | deemed withdrawals from RCA through payment of insurance benefits not subject to tax under para. (d) | |
| 10 October 2003 External T.I. 2003-0035385 F - POLICE D'ASSURANCE CONTRE MALADIE GRAVE
Also released under document number 2003-00353850.
|
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | premiums on critical illness policy are non-deductible to the corporate policyholder even if it is the beneficiary | |
| Income Tax Act - Section 15 - Subsection 15(1) | corporate payment of premiums on critical illness policy for its sole shareholder generated taxable benefit | ||
| 10 October 2003 External T.I. 2003-0035655 F - CBR D'UNE POLICE D'ASSURANCE TRANSFEREE
Also released under document number 2003-00356550.
|
Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis | ACB addition, for gratuitous transfer of corporation’s life insurance policy under s. 148(7) to the insured shareholder/employee, equals excess of policy ACB over its CSV | |
| Income Tax Act - Section 148 - Subsection 148(7) | consequences of gratuitous transfer of corporation’s life insurance policy under s. 148(7) to the insured shareholder/employee | ||
| 10 October 2003 External T.I. 2003-0035685 F - DEDUCTION INTERETS MONTANT RAISON
Also released under document number 2003-00356850.
|
Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | reasonableness of interest rate assessed in light of comparable market rates and issue premiums |
CRA notes onerous property-by-property reporting requirements under the Underused Housing Tax Act
CRA has issued a series of Notices regarding the Underused Housing Tax Act, dealing mostly with basic topics. A number of the points made in the first five Notices relate to a potentially onerous requirement to file returns even where there is no tax payable.
A Canadian corporation (whose shares are unlisted) generally will not qualify as an “excluded owner” so that it will be required to file a return for 2022 and subsequent years for each “residential property” (such as a detached house, townhouse or condo unit) whose registered title it held on December 31 of the year, even if it was exempted from the tax on the basis of being a “specified Canadian corporation” (referencing the requisite “direct or indirect” ownership or control by Canadian citizens or permanent residents) or on the basis of the properties themselves satisfying one of the various exemptions (e.g. for very recent construction).
The stated penalty for not filing a return for a year (including 2022) by the April 30 deadline is stated to be a minimum of $5,000 for an individual and $10,000 for any other person. Thus, a nominee for a developer holding 100 recently-constructed condo units in inventory on December 31, 2022 apparently would be subject to a minimum penalty of $1,000,000 for failure to file nil returns by May 1, 2023. Each return is 6 pages long plus 3 pages of instructions.
The penalty is calculated as the greater of the above minimum and percentages (increasing with the degree of lateness) of the tax owing. If the returns are not filed until after December 31 of the following year, the penalty for these purposes is computed ignoring any available exemption under ss. 6(7)(c) to (f), e.g., the exemptions for seasonal residences or for residences that were uninhabitable for at least 120 days in the year due to renovation work.
CRA does not acknowledge any due diligence or other defences to the penalty.
Similar issues arise where properties are held by a partner or trustee.
Neal Armstrong. Summary of Underused Housing Tax Notice UHTN2 “Calculating the Underused Housing Tax Payable” under UHTA, s. 47(2), summaries of UHTN4 “Exemptions for Specified Canadian Partnerships, Trusts and Corporations” under UHTA, s. 2 - Specified Canadian Partnership, Specified Canadian Trust and Specified Canadian Corporation and summary of UHTN5 “Exemption for Vacation Properties” under Underused Housing Tax Regulations, s. 2(2).
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).