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6 May 2014 CALU Roundtable, 2014-0523321C6- 2014 CALU Conference-- summary under Paragraph 20(1)(bb) Summary Under Tax Topics- Income Tax Act- Section 20- Subsection 20(1)- Paragraph 20(1)(bb) segregated fund not a "security" After quoting authorities on the meaning of "security," including a statement in Canadian & Foreign Securities Co. v. ... " CRA responded: A segregated fund policy is a contract of insurance and … is not a share or security of the taxpayer. Consequently … paragraph 20(1)(bb) … does not apply to fees paid by a taxpayer in respect of the advisability of the acquisition or disposition of segregated fund policies, or for the administration or management thereof as the requirements of that paragraph are not met. ...

After noting that it could not respond definitively to the presented facts, CRA responded: As indicated in … IT-206R[, para. 2] the question of whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon, among other things, the degree of interconnection, interlacing or interdependence existing between the business operations. The factors to be considered in making this determination are set out in … IT-206R[, para. 3]. … [T] he question of what is the principal business of a taxpayer that is a corporation within the meaning of subsection 1100(12) I.T.R. is a question of fact …. As stated in … IT-371[, para. 7], there are no established criteria. … [T]he following factors are among those that may be relevant: (a) the profits realized by each of the businesses; (b) the volume and the value of the gross sales or transactions of each business; (c) the value of the assets of each business; (d) the capital employed in each business; and (e) the time, attention and effort expended by the employees, agents or officers in each business. ...

CRA noted that ATI is determined by the formula A + B – C, and A is determined by the formula D – E. with variable D in general terms referring to the taxpayer’s taxable income for the year determined without regard to s. 18.2(2). ...

Regarding when the amount of the credit reduced the ACB of the eligible investments pursuant to s. 53(2)(k), CRA stated: According to the CRA's longstanding position, a tax credit or reduction in the calculation of tax- which is not applied to reduce instalments payable by the taxpayer … is considered to have been received, where all the conditions for obtaining it have been satisfied, at the earliest of the following times: when it reduces the tax payable for a taxation year; at the time it is paid if it allows for or increases a tax refund. In view of the foregoing, where … a qualified investor attaches the prescribed Documents to the tax return that must be filed for a taxation year … in order to claim an amount in respect of the CSEQ, and the amount of the tax credit is less than the balance of tax payable for the year, the CRA is of the view that the CSEQ is received or is entitled to be received on the date of filing of the tax return. … … [T]he qualified investor will be entitled to receive the unused portion of the CSEQ … when the qualified investor files a carryover request, on the date the carryover request is filed. ...

However, Art. 10(7) denied Treaty benefits to a resident if “one of the main purposes of any person concerned with … [a] transfer of the shares … or with the establishment … of the person that is the beneficial owner of the dividend, is for the resident to obtain the benefits of this Article.” ...

X satisfied the active engagement condition with respect to Opco’s business, and further finding that if “Holdco will pay the Dividend to Child X out of the funds from the $100,000 dividend received from Opco or from any dividends previously received from Opco, then … the Dividend would thus have come, directly or indirectly, from a related business- that of Opco- in respect of Child X.” so that the Dividend would be added to the split income of Child X, unless it constituted an excluded amount by virtue of another exclusion, CRA then stated: [I]f it can be determined that Holdco will pay the Dividend to Child X out of its after-tax income from its stock market investments, then that dividend would be an excluded amount for Child X and would not be included in calculating the child’s split income. ... On the other hand, if it were determined that Holdco does not carry on a business, then the Dividend would also be an "excluded amount" in respect of Child X by virtue of subparagraph (e)(i) of the definition … [since] there must be … a business carried on by an entity. … Based on the foregoing, Holdco must adequately monitor its funds derived from stock market investments in order to determine whether those funds were used to pay the Dividend. ...

Therefore … the Taxpayer would be eligible to claim a foreign tax credit … [whose] amount … would be determined based on the computational rules of section 126.... ...

CRA responded: In addition to the factors set out in … IT-447 … the Canadian competent authority may consider some of the following factors: the settlor's residency; the residency of the beneficiaries; the location of the property of the trust; the reason the trust was established in a particular jurisdiction, etc. … In situations where the two countries cannot find common ground, it is possible that the negotiations result in the double residency of the trust. ... In addition, the legislative amendments … [under] the Income Tax Conventions Interpretation Act … a trust deemed to be resident in Canada pursuant to subsection 94(3) is deemed to be resident in Canada … for the purposes of the Convention. … [T]he effect of this new provision is to make it impossible to break the tie because it deems such an equality to be non-existent. In the unlikely event that there is evidence of taxation imposed contrary to the Convention and double taxation, the Canadian competent authority has confirmed to us that it would be prepared to consider the matter and facts specific to the situation leading to double taxation in order to determine whether a unilateral solution is possible or if negotiations with the other Contracting State are required …. ...

CRA responded: [A] taxable dividend designated in favour of a particular beneficiary pursuant to subsection 104(19) will be deemed to have been received by the beneficiary at the time that is the end of the particular taxation year of the trust in which the trust received the dividend … [given that] the designation under subsection 104(19) could only occur at the end of the taxation year of a trust, since … paragraphs 104(19)(a) and (d) require that the designation is made in the [trust] income tax return … [and] it is only at the end of its taxation year that a trust will know its income for the year…. Accordingly … B Co. would be deemed to have received the taxable dividend on the shares of A Co. on December 31 … and …[a]t that date, A Co. and BCo. are not connected. Therefore, B Co. would be subject to Part IV tax …. ...

Was the requirement in s. 110.6(1) – qualified small business corporation share – para. (b), that “throughout the 24 months immediately preceding [February 5, 2011, the share] was not owned by anyone other than the individual or a person … related to the individual” satisfied, having regard to ss. 28 and 35 of the Interpretation Act? ... X … owned the shares … the requirement regarding the 24-month holding period of the shares would not be satisfied …. ...