Payment & Receipt

Regarding the allocation of foreign tax by a partnership to a partner, CRA stated:

If the partnership pays the foreign tax on behalf of the partner or the foreign tax is withheld on behalf of the partner in accordance with foreign law from the foreign income paid to the partnership, such amount would be considered [for purposes of s. 53(2)(c)(v)] to be received by the partner on account or in lieu of payment of, or in satisfaction of, a distribution of the partner’s share of the partnership profits or partnership capital.

CRA ruled on a triangular loss-shifting transaction between Lossco and its subsidiary, Profitco, under which Lossco used a daylight loan to make an interest-bearing loan (pursuant to the “IB Note”) to Profitco, who subscribed for preferred shares of its sister, “Numberco,” who made a non-interest-bearing loan to Lossco. There was to be one daylight loan whose proceeds would be circled four times as described above, before it was repaid.

CRA ruled on routine transactions between two Lossco subsidiaries and one Profitco subsidiary of an immediate Canadian parent company involving Lossco loans to the Profitco and Profitco subscriptions for Lossco cumulative preferred shares. The ruling contemplated that the daylight loan to the immediate parent could be in a somewhat small amount borrowed from a group company, with the funds used in setting up the loss shifting structure moved in a circle up to five times. (Using a re-circulating in-house daylight loan would not only likely be cheaper and more expedient, but also could make it easier to give the representation that the daylight loan amount was consistent with that parent’s borrowing capacity.)

Under a provision of an employee benefit plan which was assumed, for discussion purposes, to be grandfathered from the salary deferral arrangement rules, an employee could elect at the time of retirement to receive all amounts accumulated in the plan either immediately or in instalments (through the purchase of an annuity). Some employees had already retired but not yet exercised their election. Having regard to the inclusion of amounts “received” under an EBP, the Directorate indicated that its position, that “if an employee has an unrestricted right to receive amounts from a plan upon retirement, there would, at that time, be deemed receipt of those amounts even if the amounts have not been received,” could be applicable here, so that on retirement such non-electing employees had an inclusion under s. 6(1)(g).

After a UK resident (under age 55) became resident in Canada, the commuted value of the individual’s member benefits under a UK defined-benefit pension plan was transferred directly to a UK self-invested personal pension plan (SIPP) of which the individual was the sole beneficiary. In finding that such commuted value was to be included at the time of the transfer in the individual’s income pursuant to s. 56(1)(a)(i), CRA stated that “the Individual is considered to have constructively received the benefit on the basis that, by virtue of the Transfer, the benefit has been set apart for the Individual.”

When is an amount regarded as received by an eligible entity which has made an election under s. 125.7(4)(e)(i) to use the cash method in determining its qualifying revenues for CEWS purposes, where the amount is received by a third party before being paid to the eligible entity?

CRA indicated that in this regard it would apply the principle in IT-433R, subpara. 3(a) that the meaning of the term "received" is broad enough to consider a taxpayer to have received an amount where it “was received by a person authorized to receive it on behalf of the taxpayer” – and further stated that “a person entitled to receive an amount on behalf of a taxpayer for CEWS purposes may include a person who is entitled to receive the amount for a taxpayer by inter alia an agreement or by statute.”

CRA ruled on transactions which included the borrowing of money by a newly-formed non-resident corporation (Merger Sub1) from a Canadian affiliate (Opco) and its advance of such funds to a transfer agent for shareholders of a non-resident target (Target), pursuant to directions in an internal funding agreement.

A Canadian university agreed with a (perhaps, foreign) Ministry to apply funding received by it to pay the tuition of and a monthly stipend to trainees who were accepted into a University program. CRA stated:

The obligation to prepare and file T4A slips and T4A summaries rests with the payer of the amount. The payer is the person who has discretion and control over the funds, and would not include a person who merely disburses the funds on behalf of the payer without having any discretion or control. Therefore, if the University is not the payer of the amount, it is not obligated to prepare and file T4A slips and T4A summaries.

S. 56(1)(a) generally requires the recognition of an amount received as or in satisfaction of a pension benefit. A portion of a multi-employer US defined benefit pension plan (a qualified plan under IRC s. 401(a)) was held for the benefit of Canadian-resident participants. CRA ruled that a transfer of a portion of the assets in this plan to a new plan (also qualifying under IRC s. 401(a)) established for the benefit of a portion of the beneficiaries of the old plan, including some of the Canadian beneficiaries, so that they ceased to be participants in the old plan, did not trigger any income inclusion under s. 56(1)(a).

The CEWS (wage subsidy) is generated based on the amounts of “eligible remuneration paid to the eligible employee.” CRA stated, in the context of an employee who also was the controlling shareholder of the eligible entity, that “where salary and wages are only reflected by journal entry as an expense by the employer with a corresponding credit to a due to shareholder loan account, such salary and wages are not considered eligible remuneration paid to an eligible employee.”

A Quebec post-secondary student loan program provided for an initial 12-month “full exemption period” (in which the Quebec government paid the interest charged on the loan by the lender) and a subsequent six-month “partial exemption period” (during which the student borrower was required to pay interest on the loan balance). Following the expiry of this 6-month period, any unpaid interest was capitalized. In addressing whether such capitalized interest qualified as being “paid” under a “loan made” under the Quebec financial assistance program so as to generate a credit under s. 118.62, CRA stated:

By virtue of the Civil Code of Quebec, there can be payment where there is a handing over of money [(“tradition d’argent”)] between the debtor and the creditor or where there is novation by change of debt.

… The mere addition of accrued interest to the principal amount of an original debt is generally not sufficient in itself to constitute a payment of such interest.

If … the addition of interest to the principal … qualifies as a novation … the amount of interest will be considered paid when the novation occurs and will be eligible for the credit by virtue of section 118.62, if all the conditions set out in that section are otherwise satisfied.

The estate of the deceased annuitant of an RRSP was fully settled without the executor (his surviving wife and the sole beneficiary) being aware of the RRSP. Later, the RRSP became unclaimed property and the Quebec Commission for dealing with unclaimed property (the “DPBNR”) instructed the RRSP issuer to liquidate the RRSP and remit the proceeds in cash to it. In a subsequent taxation year, the surviving spouse claimed and received the amount from the DPBNR as the sole estate beneficiary. The amount received by her was net of fees that were imposed by the DPBNR, which were treated under the unclaimed property legislation and regulations (the “UPA and RUPA”) as an obligation of the beneficiary. In finding that there was constructive receipt by her of the portion of the amount against which such fees had been levied, CRA stated:

These fees, which are levied under the provisions of the UPA and the UPA, are imposed in satisfaction of a legal obligation of the beneficial owner to pay them. In this regard, we are of the view that, for purposes of the Act, such amounts are to be considered as having been received (footnote 5 [citing Toth, 2006 TCC 116]) by the beneficial owner for the purposes of the relevant provisions. In this context, we are of the view that the beneficial owner is considered, for the purposes of the Act, to have received not only the amount physically paid to her by the DPBNR but also amounts levied as fees by the DPBNR in satisfaction of a legal obligation of the beneficial owner, in accordance with the provisions of the UPA and the RUPA.

CRA indicated that it is acceptable for an RRSP contribution to be received from a third party (i.e., drawn on a bank account other than the annuitant’s) “provided that the payment is made at the direction or with the concurrence of the annuitant of the RRSP,” so that the RRSP receipt should be issued by the financial institution to the annuitant.

Although CRA usually applies its constructive receipt concepts in the context of employment income recognition, it has applied that concept to pension income recognition under s. 56(1)(a)(i). A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Quebec Unclaimed Property Directorate pursuant to the Quebec Unclaimed Property Act because the person entitled thereto (the “right-holder”) has not been determined. That person, when subsequently identified, receives from the Directorate the net amount that the Directorate, in turn, had received from the RPP, i.e., the survivor benefit payable under the RPP (as reduced by income tax source deductions) paid by the Directorate to the right-holder, as further reduced by its administration fee.

CRA indicated that the amount to be included under s. 56(1)(a)(i) in the right-holder’s income is the gross amount of the survivor benefit payable under the RPP, as indicated in the T4A slip issued by the RPP administrator, which should be included for the taxation year in which the Directorate transferred that amount to the right-holder. Its reasoning was that the amount could not be considered to be “received” as a pension benefit in the year of payment by the RPP administrator to the Directorate because the right-holder had not yet been identified – whereas in the subsequent year of payment over by the Directorate to the right-holder, that right-holder is receiving that amount under s. 56(1)(a)(i) as being “in lieu of” a superannuation or pension benefit.

CRA further stated:

[I]t is the gross amount of the survivor benefit, as shown on the T4A slip issued by the RPP administrator, that must be included in computing the income of the right-holder, even if the right-holder does not physically receive the full amount. In other words, the right-holder is, for the purposes of the Act, considered to have received not only the amount physically paid to the right-holder by the DPBNR but also the amounts that were withheld by the RPP administrator for (federal and provincial) taxes of the right-holder, as well as the fees charged by the DPBNR

Where a loan is made to a spouse at the prescribed interest rate, s. 74.5(2) requires that each year’s interest be “paid” by January 30 of the following year. CRA considered that the context and purpose of the income attribution rules:

favours a more restrictive interpretation of the word "paid", according to which the issuance of a note, although irrevocable, unrestricted and payable on demand, does not satisfy the requirement provided for in those [provisions].

An individual shareholder immigrates to Canada, thereby becoming a Canadian resident. NRCo issues a $1,000 promissory note to her in satisfaction of a dividend declared before her immigration (with the note being paid after the immigration). The dividend would be considered received at the time when the shareholder was still a non-resident of Canada on the presumption (applying Banner Pharmacaps) that the note was issued and delivered to her in satisfaction of the obligation to pay the dividend.

A loan or indebtedness will be considered to have been repaid by a debtor by way of set-off against a receivable of the debtor "if the set-off represents a legal discharge of the loan or indebtedness." This generally will be accepted to have occurred "if the intention to do so is evidenced in the relevant books and records including any contracts or agreements between the parties and the accounting records of the parties."

A dividend of a taxable Canadian corporation owned by an individual is not paid in money but is recorded in its books as an increase in a loan owing to the shareholder or as a decrease in a loan made to the shareholder. CRA quoted Hickman Motors that "the law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions," and further stated (TaxInterpretations translation):

The necessary documentation must be provided in a particular instance to corroborate that factually and legally a dividend has been paid by the corporation and received by the shareholder. In this regard, book entries are ancillary and serve only to report transactions. ...

[W]e refer you to ... 2007-0229311I7 where the facts of the situation presented did not allow for the conclusion that by virtue of accounting entries, a capital dividend had actually been received by a corporation.

Respecting a question as to when dividends are paid and received for T5 purposes, CRA stated:

In Innovative Installation Inc. v The Queen, 2009 TCC 580, the Tax Court of Canada explained that "received" does not require "proceeds to pass directly to the taxpayer. The taxpayer can notionally or constructively receive it."

Therefore, it is our view that, generally, the date on which the dividend is paid, whether by cheque, electronic payment, offset or credit to the shareholder's account, would also be the date on which the amount is received.

Vendor sold blocks of shares in the capital of a corporation (the “Purchaser”) to the Purchaser, with the purchase price being payable over a following number of years based a percentage in each year of the annual consolidated after-tax profits of the Purchaser. The deemed dividend arising in the year of the repurchase under s. 84(3) was deemed by s. 55(2) to be proceeds of disposition. Was the reserve under s. 40(1)(a)(iii) available as a deduction from this capital gain?

The Directorate confirmed that 1999-0009295 (respecting the availability of a reserve under s. 40(1)(a)(iii) to a capital gain under s. 55(2) where the capital gain arose on the receipt of a promissory note made as a conditional payment) still was valid. stating:

[A] shareholder would be entitled to the reserve under subparagraph 40(1)(a)(iii) in such a context if the promissory note is considered to have been accepted as evidence of or security for the balance payable of the purchase price of the shares. On the other hand, in a situation where the promissory note is considered as "absolute payment" of the debt, the shareholder would not be entitled to such reserve.

CRA went on to indicate that essentially the same positon applied to the above facts where the unpaid purchase price was not evidenced by a promissory note and was payable on an earnout basis with a prepayment right which had not yet been exercised.

In response to a question as to whether "a demand note payable, which is accepted as absolute payment of salary owing to an employee, constitutes satisfactory evidence of the payment of that salary," CRA stated:

An ordinary promissory note is generally regarded as a promise to pay a debt at a later date, and not as payment of the debt on the date on which the note was issued. However, an amount may be considered to be "paid" by a promissory note if an agreement between the parties clearly indicates that the note was accepted as absolute payment.

Are the cash assets of Opco reduced by the amount of issued and outstanding cheques that have not yet been cashed? CRA responded:

Under the civil law in force in Quebec, the delivery of an outstanding cheque does not constitute payment … [and] the date of payment of a debt settled by cheque is considered to be the date on which the cheque is honoured or paid by the bank … .

[Here] the cheques in circulation and not yet cashed do not constitute payments of the amounts due to Opco's suppliers and … consequently, there can be no reduction in the amount of the cash of Opco as long as the bank does not honour or pay such cheques.

CRA stated:

In factual situations similar to the Innovative Installation case, the CRA will apply the position adopted by the Court in that case.

Consequently, in a situation where a corporation can demonstrate that life insurance proceeds that were paid directly to a financial institution have reduced its debt to the financial institution, the life insurance proceeds will be considered as "received" by that corporation for the purpose of applying subparagraph (d)(ii) of the definition of CDA … .

Cheques issued by Opco but not yet cashed would not reduce its cash on hand given that under the applicable law (the Quebec Civil Code), the issuance of a cheque does not constitute payment, so that the debt is not settled until the cheque is honoured.

All the condo owners in a condo complex that was used only in a high-end commercial accommodation business leased their units to a manager for a share equalling 50% of the aggregate rental income (but with the municipal taxes and condominium fees for common services continuing to be borne by the co-owners directly).

After the manager ceased operations, the syndicate of co-owners took over the operation of the condominium complex, but because there was no working capital, the syndicate retained for a period of 120 days all the revenues generated by the operation of the condominium complex. Now, the syndicate of co-owners has raised a special assessment, corresponding to the amount of the overdue rental income, to serve as working capital for the operation of the commercial accommodation business. Is this special assessment of the taxpayer (one of the co-owners, and amounting in the taxpayer’s case to $7,000) deductible in computing income?

Before addressing the deductibility issue, CRA first noted that this constituted a “compensation” (i.e., set-off) arrangement, and stated:

[T]he two taxpayers involved in the compensation are deemed to have made the payment of their respective debts, even if, in fact, no movement of funds has taken place.

In your situation, the syndicate would therefore be considered to have paid to you the amount of $7,000 in payment as your share of the rental income, which should be included in your income as such, regardless of whether or not that amount was paid to you. For your part, you would be deemed to have paid the amount of $7,000 as a special assessment.

In commenting on whether an RRSP premium is considered to have been paid within the first 60 days of a year, CRA stated:

In general, we consider a premium to have been paid on or before the 60th day after the end of the calendar year if the RRSP issuer received a cheque for an RRSP contribution on or before the 60th day, and the date of the cheque is also on or before the 60th day. In the absence of abuse, the date of deposit to the RRSP account will not be a factor that we will consider.

The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. Before finding that the issuance of the second note did not constitute a payment by novation, CRA quoted from Quebec commentary that “[a]s a general rule, the mere delivery of a promissory note does not entail novation of the pre-existing obligation” and the “promissory bill is then considered as a simple means of acknowledging the debt.”

CRA indicated that an individual would be considered to be personally paying taxes of a trust that had made a s. 104(13.1) where he received distributions from the trust net of such taxes.

Debt owing to the taxpayer following an asset sale provided that interest may be added to the principal of the debt, which is what occurred. In finding that the capitalized interest was not a separate loan of money, so that the interest thereon could only be deducted under s. 20(1)(c) rather than (d), CRA stated:

The facts submitted did not show that there was an actual transfer of money, and that the “mere statement that an amount of interest was added to the principal of the original debt does not seem to us sufficient to conclude that there was a … [fresh] loan between the parties.”

In also finding that no Pt. XIII tax had been triggered, CRA applied Quebec Cartier Mining to conclude that the taxpayer did not pay the increased and capitalized interest on an annual basis and did not credit the vendor with such interest.

After noting that payment of two back-to-back capital dividends (from “Subco” to “Parentco,” and form it to its individual shareholder) had been accomplished only by accounting entries, the Directorate found that this was insufficient to give rise to a capital dividend “received” by Parentco, so that there had been no addition to its capital dividend account. In this regard, it stated:

[T]he mere making of the accounting entries … does not in itself constitute the payment of a dividend … by either Subco or Parentco. …

[H]owever … a dividend can be paid by a corporation and received by its recipient without any monetary movement, for example, by the issuance of a demand note that is accepted as an absolute payment by the recipient.

After finding that a lump-sum payment to cover support-payment arrears could be considered as an amount payable on a periodic basis, even though it was less than the amount initially anticipated, the Directorate went on to note:

The Court of Appeal judge decided to credit the amount of $XXXXXXXXXX, which consisted of expenses incurred by Monsieur for the benefit of the child, against the balance of the arrears owed to Madame by Monsieur. From a legal point of view, that mechanism is known as "judicial set-off". It is a method of extinguishing a debt in the same way as payment. However, as stated in S. Fisher v. The Queen, 2000 DTC 3612, there is a significant difference between a payment and a set-off. Generally speaking, where there is set-off of a debt, the debt cannot be said to have been paid unless the parties agree between themselves that the set-off constitutes payment.

In the present situation, the two parties had not agreed between themselves that the set-off could be a method of payment of the obligation. Consequently, we are of the view that the amount of $XXXXXXXXXX cannot be considered a payment. Since Monsieur did not "pay" that amount, he will not be able to deduct it as support because of the wording of paragraph 60(b), which refers to amounts paid. The reasoning is the same for Madame. Since she did not receive that amount ... .

CCRA reviewed the line of cases culminating in Teleglobe, and concluded that the amount paid by the issuer on the conversion of its convertible debentures should be treated as the stated capital of the shares issued, which equaled the face amount of the converted debentures.

In indicating that outstanding cheques of a corporation do not represent loans or advances, CCRA stated:

The delivery of a cheque (other than a certified cheque, money order or any other equivalent instrument) by a corporation governed by the Civil Code does not constitute a payment since, according to Article 1564 of the Civil Code, the payment transaction cannot be completed until the debtor's bank has actually paid the amount. …

Consequently, the payment date is considered to be the date on which the cheque is honoured or discharged by the bank, which normally occurs … on the date on which the cheque in question is debited from the debtor's account.

Regarding whether a mutual fund trust beneficiary had a legal entitlement to the income of the trust where a promissory note for the income amount was issued to the beneficiary, RC stated:

[O]rdinarily a promissory note is given and received as acknowledgement of the existence of and/or the conditional payment of a debt and does not itself create the debt. Where the trustee allocates the income of the trust to the beneficiary, as described above, then it is our view that the beneficiary will become entitled to legally enforce payment of the amount at that time under subsection 104(24) of the Act only where the promissory note is made payable on demand.

CRA found that bursaries paid to Quebec students under the Program québécois de prêts et bourses (the Quebec loans and bursaries program) by converting loans initially made to them into bursaries (following an ARQ verification of their income) that, thus, did not have to be repaid, were includible in income under s. 56(1)(n), subject to the exclusions under s. 56(3). CRA stated in this regard:

[S]tudents in Quebec "receive" a bursary even though they are only an intermediary between [the Ministry] and the financial institution and have no control over the bursary (the amount of the bursary being directly applied to the reduction of the loan granted to the student).

In indicating that a cash pooling arrangement entered into by a Canadian subsidiary with its non-resident parent corporation could result in an income inclusion under s. 15(2), Revenue Canada indicated that its review of the jurisprudence on s. 15(2) suggested that debts between a shareholder and a particular corporation do not generally offset for purposes of determining either whether the shareholder became indebted to the corporation in the first place, or whether that indebtedness has been repaid.

A firm (ABC), that employed market makers, maintained a separate account for each employee into which a portion of the commissions earned by the employee was retained and held in a contingency loss reserve account, which was to be used to cover any losses resulting from the employee's transactions, and with the employee having access to the account on leaving the employment – except that where the employee moved employment to another member firm of the same clearinghouse ABC could, at the request of and for the benefit of the employee, transfer the funds accumulated in its reserve account to another similar account administered by the new employer.

In finding that such transfer would be subject to withholding under s. 153(1)(a) on the basis inter alia that there was constructive receipt by the employee, the Directorate stated:

[T]his payment is made to the employee by ABC, even if the employee does not receive it directly. … The employee chooses to direct the payment to the new employer's reserve account for the employee’s benefit, rather than personally collecting the funds. Although the use of the money is limited after it has been paid into the new reserve account, this still provides an immediate benefit to the employee. This conclusion is based on the constructive receipt doctrine which has been developed by the courts.

CCRA indicated that salary that was forfeited by RCMP officer for misconduct nonetheless was to be treated as includible in the officer’s income as salary which was to be treated as having been received by the individual before its forfeiture as a fine.

In finding that a cash-basis farmer realized income on the transfer of inventory for a promissory note, CRA stated:

Since the promissory note was accepted as consideration for the transfer of the inventory, and given that none of the documents provide any remedy for non-payment, it appears that payment could only be enforced under the terms of the promissory note. Therefore, on the basis of the documents submitted, it is our view that the promissory note constitutes absolute payment … .

A gross-up on a debt obligation owing to a Canadian lender will be included in the Canadian lender's income under s. 9 or s. 12(1)(c) even "where the gross-up is paid or credited to the government of a foreign country on the Canadian lender's behalf since the Canadian lender would have constructively received the gross-up".

A payment by cheque is equivalent to a payment in cash as long as no special circumstances lead to another conclusion, and the cheque is not dishonoured on presentation for payment. Accordingly, where a cash-basis farmer receives a cheque from the Canadian Wheat Board, he will be considered to have received payment at that time notwithstanding that he returns the cheque to the Board for reissue in the subsequent year.

Payment of a patronage dividend may be effected by the issuance of shares or debt instruments, where such an arrangement is authorized by the customer.

Bank overdrafts are considered to have arisen to the extent that they have been utilized or drawn upon. For these purposes, RC, in common law jurisdictions, applies the conditional payment principle (determining the date of payment as the date of delivery of the cheque by a debtor to its creditor) established in such cases as Marreco v. Richardson (1908), 2 K.B. 584, at 593 (C.A.) and Moody v. MNR, 57 DTC 1050, at 1054 (Ex Ct).

Bonds issued to a Canadian bank in settlement of arrears interest on a non-performing loan of a Brazilian debtor would not be considered to constitute payment by the debtor and receipt by the bank of interest on the underlying loans, in light of the comments in Cross v. London and Provincial Trust Ltd., [1938] 1 K.B.D. 792.

For farmers on the cash method, a post-dated cheque that is received on a date that a debt owing to the taxpayer is not yet payable will be brought into income on the earlier of the date the debt becomes payable and the date the cheque is negotiated. However, where a post-dated cheque is accepted as absolute payment of the debt, the amount of the cheque is considered to be income at the time it is received.

A direct payment by a non-resident to Revenue Canada of a tax liability of a related Canadian corporation would entail the receipt of an amount by the Canadian corporation for purposes of s. 12(1)(x).

Because the function of a journal entry is to record a transaction rather than to make it legally effective, the reclassification of a shareholder's loan into remuneration payable by a journal entry would not be considered to be payment of the remuneration.

A taxpayer is not considered to have "paid" interest on a loan owing by him to a charitable foundation by virtue only of journal entries being recorded in his ledgers and those of the foundation.

No payment will be considered to occur pursuant to an agreement between the parties to the effect that interest on a promissory note will be deemed to be paid and then loaned back to the borrower.

Where a promissory note is given in consideration for services, the acceptance of the note would be considered to be an amount received under s. 12(1)(a) where the note has been accepted as absolute payment for the services, whereas if the note has been accepted as conditional payment, s. 12(1)(a) will apply only when actual payments are made on the note assuming the related services have not yet been performed at that time.