News of Note
CRA comments suggest that the rule against accumulations can be problematic for lifetime benefit trusts
Email this ContentUnder the rule against accumulations in Ontario (and other provinces), any trust income after a specified period (“surplus income”) may not be accumulated in or added to the capital of the trust and must go to the person(s) who would have been entitled to it had the accumulation not been directed. A trust established for a dependent mentally-infirm child (the “Dependent Beneficiary”) in such a province could address the rule by directing the surplus income to be paid to a designated beneficiary (a “designated beneficiary clause”) or stipulate that the surplus income be paid to the person(s) entitled to receive that income (an “accumulation clause”). Such a clause would cause the trust not to meet the requirements under s. 60.011(1)(b) for being a lifetime benefit trust (“LBT”) if (as might normally the case, due to the mental infirmity of the Dependent Beneficiary) someone other than the Dependent Beneficiary was named in a designated beneficiary clause or the accumulation clause was drafted to have a similar effect.
Absent such a clause, the surplus income would become part of the residue of the estate and be distributed in accordance with the residuary clause, so that the recipient of the surplus income would receive it by operation of law. However, using this operation-of-law approach would not solve the desire to avoid having the surplus income distributed to the Dependent Beneficiary.
CRA did not suggest any solutions to this dilemma, and stated:
[T]he mere possibility that pursuant to the terms of the trust or will, or by operation of law, a person other than the Dependent Beneficiary can receive the surplus income will cause the trust not to comply with the conditions of subsection 60.011(1). Therefore, such a trust will not qualify as an LBT from the time that the trust is created.
Neal Armstrong. Summary of 14 October 2022 External T.I. 2021-0913801E5 under s. 60.011(1)(b).
FTI Consulting - Quebec Court of Appeal finds that an ITC claim arising under ETA s. 182 after a CCAA filing could not be set off by the ARQ against a pre-filing tax debt
The ARQ, along with CRA, were owed approximately $13.4 million of tax by a corporation immediately before it was placed into protection under the CCAA. Over three years later, the monitor for the corporation made partial payment of damages claims which generated input tax credit claims of approximately $7.5 million as a result of the deemed supplies occurring pursuant to ETA s. 182 and the Quebec equivalent. Whether the ARQ could set off the ITC claims against the amount of tax owing to it (which clearly was a pre-CCAA filing claim) turned principally on whether the ITC claims were pre-filing claims (set-off available) or post-filing claims (set-off likely unavailable).
The ARQ essentially argued that, since the contracts to which the damages related had been entered into before the filing, the damages themselves should be treated as a pre-filing claim. In rejecting this and other ARQ submissions and in finding that the ITC claims were post-filing claims, Kalichman JA stated:
[I]t was only when the interim distribution was made three years after the initial CCAA filing, that payment for the supply of a taxable service was deemed to have been made and the taxes due in respect of that payment were deemed to have been collected. …
The set-off was not permitted.
Neal Armstrong. Summaries of Agence du revenu du Québec v. FTI Consulting Canada Inc., 2022 QCCA 1740 under ETA s. 182 and Statutory Interpretation - Similar Statutes/ in pari materia.
CRA indicates that employer payments made directly to the insurers rather than through the trustee do not disqualify the plan as an ELHT
CRA indicated that an employee life and health trust (ELHT) can qualify as such under s. 144.1(2) even where the trustee in accordance with the terms of the plan requires participating employers to pay premiums directly to the insurance carriers providing benefits under the plan rather than having the employers make contributions into the plan to fund such premiums. Indeed, CRA stated:
[A] trust established to provide [designated employee benefits] to employees and certain related persons may qualify as an ELHT absent employer contributions. For example, a trust established by a union may qualify an ELHT where the union or participating employees have the legal obligation to fund the entire cost of DEB’s (i.e., an employee-pay-all plan).
Neal Armstrong. Summaries of 29 June 2020 External T.I. 2018-0782541E5 under s. 144.1(2) and s. 144.1(4).
Income Tax Severed Letters 11 January 2023
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
The expanded s. 212(13.1)(a) could impose Part XIII tax on transactions with minimal connection to Canada and could be problematic to foreign fund partnerships
The August 9, 2022 proposals would amend s. 212(13.1)(a) to deem a partnership to be a person resident in Canada in respect of the portion of payments made by the partnership to a non-resident person that is deductible in computing a partner’s share of the partnership’s income or loss, to the extent that the partner’s share is taxable under Part I of the Act. This reference to Part I taxability extends to a partner with Part I income resulting from a s. 216 election.
This amendment contemplates a partnership having withholding tax obligations when making payments to a non-resident even if the partnership does not have Canadian-source income.
As an example, a foreign private equity partnership with one or more partners that are resident in Canada may now have a withholding tax obligation on management fees paid to a non-arm’s-length foreign manager if Treaty relief is not available.
Where a foreign fund partnership owns subsidiary foreign partnerships which pay interest to it in order to reduce foreign-country taxation, Part XIII tax will apply to the extent that one or more partners of the fund partnership are Canadian residents.
Neal Armstrong. Summaries of Cynthia Morin and Suhaylah Sequeira, “Withholding Tax Obligations: Proposed Amendments to Subsections 212(13.1) and 212(13.2),” International Tax Highlights, Vol. 1, No. 2 November 2022, p. 2 under s. 212(13.1)(a) and s. 212(13.2).
CRA confirms that shares issued to a Canadian parent in consideration for it issuing shares on a Delaware merger had a cost equal to such shares’ FMV
The acquisition of a non-resident target (Target) by a Canadian corporation (Opco) and its Canadian parent (Parent) entailed:
- Parent forming two new stacked non-resident subsidiaries (Merger Sub1 holding Merger Sub2);
- Merger Sub2 being merged into Target with Target being the survivor, with the shareholders of Target having their shares converted into shares issued by Parent and cash paid by Merger Sub1 (which it had borrowed from Opco) and with Merger Sub1 becoming the parent of Target; and
- Merger Sub2 then immediately being merged into Merger Sub1 with Merger Sub1 as the survivor.
In order that Parent could get basis for having issued the share consideration, it was stated in a funding agreement to have issued such shares in consideration for the issuance to it by Merger Sub1 of common shares of Merger Sub1 – and CRA ruled that indeed those shares issued to Parent had a cost to it equal to the FMV of the shares issued by it in turn to the Target shareholders plus any related costs incurred by it.
CRA also ruled that on the first merger, Merger Sub1 disposed of its shares of Merger Sub2 for those shares’ FMV.
CRA further ruled that on the immediately subsequent contribution by Parent of its shares of Merger Sub1 to Opco, it did not realize gain, and Opco had full cost for those shares pursuant to s. 53(1)(c) – and Opco also was able to increase the PUC of its shares in reliance on s. 84(1)(b) in an amount equal to the FMV of those contributed shares.
Neal Armstrong. Summaries of 2021 Ruling 2021-0911211R3 under s. 54 – ACB, s. 248(1) – disposition – (k)(ii), s. 84(1)(c) and General Concepts – Payment and Receipt.
We have translated 6 more CRA interpretations
We have published a further 6 translations of CRA interpretations released in November of 2003. Their descriptors and links appear below.
These are additions to our set of 2,318 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 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 |
|---|---|---|---|
| 2003-11-21 | 12 November 2003 External T.I. 2003-0020275 F - RECOMPENSES
Also released under document number 2003-00202750.
|
Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | $500 gift policy might apply to points awards if redeemable for very limited range of goods/ policy does not apply to sales awards etc. |
| 13 November 2003 Internal T.I. 2003-0039637 F - perte sur creance et frais
Also released under document number 2003-00396370.
|
Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(a) | capital loss under s. 50(1)(a) if deferred proceeds became uncollectible | |
| Income Tax Act - Section 54 - Adjusted Cost Base | legal fees to recover deferred proceeds of share disposition do not increase the shares’ ACB | ||
| 2003-11-14 | 30 October 2003 External T.I. 2003-0037075 F - Associated Corporation and 129(6)
Also released under document number 2003-00370750.
|
Income Tax Act - Section 256 - Subsection 256(2) | corporations associated through s. 256(2) continued as associated for s. 129(6) purposes where the 3rd corporation filed s. 256(2) election not to be associated with either |
| 6 November 2003 External T.I. 2003-0039525 F - Canadian Renewable & Conservation Expenses
Also released under document number 2003-00395250.
|
Income Tax Regulations - Regulation 1219 - Subsection 1219(1) | CCA is not an outlay or expense, and cannot qualify as CRCE | |
| Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(a) | CCA is not an expense incurred | ||
| Income Tax Regulations - Schedules - Schedule II - Class 43.1 - Paragraph (d) - Subparagraph (d)(viii) | computers used in operating landfill biogas site might be Class 10 property, and applications software would be Class 43.1 or Class 12 property/ below-surface pipes would not qualify | ||
| Income Tax Regulations - Schedules - Schedule II - Class 12 - Paragraph 12(o) | applications software used by computers for operation of biogas landfill site would be Class 43.1 or Class 12 property | ||
| 6 November 2003 External T.I. 2003-0041355 F - Subsections 110.(19) and 85(1)
Also released under document number 2003-00413550.
|
Income Tax Act - Section 85 - Subsection 85(1) | s. 85(1) rollover for stepped-up s. 110.6(19) ACB | |
| 5 November 2003 External T.I. 2003-0045085 F - Section 159-Payments on Behalf of Others159(2)
Also released under document number 2003-00450850.
|
Income Tax Act - Section 159 - Subsection 159(2) | trustee in bankruptcy must be acting in that capacity for that exception to apply |
CRA notes that services income earned from an arm’s length CCPC could be ineligible for SBC purposes under the “specified corporate income” rules
CRA commented on an example of the reduction to the small business deduction that may arise under the “specified corporate income” (SCI) rules. Mr. A owned 50% of a real estate management company (Hco), which derived substantially all of its income from providing services to a corporation owned by Mrs. A with a real estate business. Hco was 50% owned by an unrelated third party, and was not associated with Wco.
CRA noted that, absent an election under s. 125(3.2), the total active business income (ABI) derived by Hco from Wco would be excluded under s. 125(1)(a)(i)(B) from its income eligible for the SBD, notwithstanding that Hco and Wco were described as dealing with each other at arm’s length. This was because (applying the two conditions in s. (a)(i)(A) of the SCI definition): Mrs. W, who had an interest in Wco, did not deal at arm’s length with a shareholder of Hco (Mr. A); and it was not the case that substantially all of Hco’s ABI was from the provision of services (or property) to persons (other than Wco) with which Hco dealt at arm’s length.
However, the ABI otherwise carved out under the SCI definition could be restored under s. 125(1)(a)(ii.1) to the extent that Wco assigned all or a portion of its business limit to Hco under s. 125(3.2).
Neal Armstrong. Summary of 20 October 2022 External T.I. 2020-0869681E5 under s. 125(7) - “specified corporate income” - s. (a)(i).
CRA indicates that the daughter of the deceased, who is his sole beneficiary and the sole executor, is not related to the estate
A non-resident estate holding the Canadian condo of the Canadian deceased and cash, sells the condo for cash and utilizes the principal residence exemption to exempt the gain, and then distributes cash to the sole beneficiary who is the U-S.-resident daughter of the deceased (who also serves as the estate’s sole executor).
After noting its general position that “where a trust distributes assets in satisfaction of a non-resident beneficiary's capital interest in the trust, the beneficiary is considered to have disposed of that interest,” CRA indicated that, unlike the taxable Canadian property definition, the test under Art. XIII(3)(b)(iii) of the Canada-U.S. Treaty as to whether the value of an interest in a trust is derived principally from real property situated in Canada was a point in time test, so that it would not matter that the cash held by the estate at the time of the distribution was derived from Canadian real estate. Accordingly, s. 116(6.1)(a) would be met because the property would be “treaty-protected property” at the time of the distribution. Furthermore, a notice was not required to be given by the daughter beneficiary under s. 116(6.1)(b) because the estate of her parent (of which she was the sole executor) was not considered to be related to her. Thus, no s. 116 certificate would be required for the distribution.
Neal Armstrong. Summaries of 25 July 2022 External T.I. 2021-0905871E5 under s. 150(1.1)(b)(iii) and s. 116(6.1).
Kone Inc. – Court of Quebec finds that a cross-border repo was not an abuse of the s. 17 rule
The taxpayer (“KQI”), which was a Canadian operating subsidiary in a group ultimately controlled by a Finnish parent, used funds that had been borrowed by a Canadian holding company in the group and advanced to KQI as an interest-bearing loan and share subscription proceeds to purchase, for a cash purchase price of $394 million, cumulative preferred shares of “Kone USA” (a group company with an active business) from the non-resident affiliated company (“Kone BV”) to which such shares had recently been issued as a stock dividend. At the same time, KQI agreed to resell such preferred shares at pre-agreed higher prices, to Kone BV in three and five years’ time, which in fact occurred. The gain arising under this resale was deemed under s. 93 to be dividends coming out of exempt surplus of Kone USA. The funds so received by Kone BV were used indirectly to fund purchases by the Kone group of targets with complementary businesses.
The ARQ sought to impute interest income to KQI under TA s. 127.6, the Quebec equivalent of ITA s. 17(1), on the basis that the above “repo” transaction was a sham that should instead be characterized as an interest-free loan by KQI to Kone BV or, alternatively, that the repo transaction represented an abusive avoidance of such s. 17 equivalent for Quebec GAAR purposes.
In rejecting the sham argument, Fournier JCQ noted that although the parties had agreed to treat the repo transaction as a secured loan by KQI to Kone BV for U.S. tax purposes, such characterization under the US “substance over form” tax doctrine did not detract from the “actual legal obligations agreed to between the parties in Canada and Quebec.”
In rejecting the application of the Quebec GAAR, he found that the required element of abuse of the s. 17-equivalent rule had not been established. He noted that such rule “contemplated blocking the exporting of income and preventing Canadian corporations from using their capital outside Canada by means of loans or advance not bearing a reasonable rate of interest and which remains unpaid for more than one year,” whereas here, no such loan or advance had occurred and KQI had “instead acquired from Kone BV the shares of Kone USA, which it had agreed to hold for a certain passage of time and to then resell them.”
Neal Armstrong. Summary of Kone Inc. v. ARQ, No. 500-80-028109-149 (Court of Quebec, 22 December 2022) under s. 245(4).