When the taxpayer's brother died, his pension scheme paid her a large lump sum. Boyle J. rejected the taxpayer's position that the payment was in the nature of a life insurance payment rather than an amount from a "superannuation or pension benefit" plan. He found at para. 30:

A superannuation or pension fund or plan is an arrangement which provides for payment of regular post-retirement income to employees and determines the entitlement, the amount and frequency of such payments.

The definition of "superannuation or pension benefit" under s. 248(1) includes "any amount received out of or under a superannuation or pension fund or plan." Accordingly, the one-time payment to the taxpayer was an amount from a pension benefit plan, notwithstanding that it was payable because of the contributor's death.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Superannuation or Pension Benefit		135

Watts v. The Queen, 2004 DTC 3111, 2004 TCC 535 (Informal Procedure)

Periodic disability payments received by the taxpayer under the Canada Pension Plan were not received in respect of a "disability insurance plan" and instead were taxable under s. 56(1)(a). Bowman, ACJ stated (at para. 18):

"Insurance is essentially a contractual arrangement between an insured and an insurer and involves an obligation by an insurer, upon payment of premiums, to pay an amount upon an event whose recurrence is in a certain period."

Words and Phrases

insurance

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 118.94		39
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f)		77

Subparagraph 56(1)(a)(i)

Cases

Burchill v. Canada, 2010 DTC 5096 [at 6922], 2010 FCA 145

The Court rejected the taxpayer's argument that the reference in s. 56(1)(a)(i) to pension benefits "received" referred to benefits "constructively received," and that taxpayer was consequently entitled to allocate portions of a lump sum pension payment to earlier taxation years. If that argument were correct, then there would have been no need to enact s. 110.2 (allowing a deduction for prior years' accruals) and s. 120.31 (dealing with "notional tax payable" in prior years).

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Context		101

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f)	a taxpayer-funded disability policy can give rise to exempt receipts	132

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4)	RPP revocation beyond the normal reassessment period retroactively validated an unsupportable reassessment under s. 56(1)(a)(i)	414
Tax Topics - Income Tax Act - Section 152 - Subsection 152(9)	subsequent retroactive deregistration of RPP also retroactively validated an assessment factually made on basis of plan’s invalidity	216
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i)	subsequent retroactive deregistration of RPP would not establish carelessness in previous return filing	197
Tax Topics - General Concepts - Effective Date	subsequent deregistration of RPP retroactively validated reassessment	239
Tax Topics - Income Tax Act - Section 147.1 - Subsection 147.1(12)	subsequent deregistration of RPP beyond normal reassessment period nonetheless retroactively validated reassessment	95

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions	"including without limitation" is expansive	163

Administrative Policy

2021 Ruling 2021-0876671R3 - Transfer between US pension plans

the transfer of a portion of the assets and Canadian beneficiaries from an old to a new US pension plan did not result in receipt under s. 56(1)(a)

Background

Plan A is a U.S. multi-employer defined benefit pension plan under which eligible plan participants accrue retirement benefits, which is maintained and administered by the Plan A Trustees pursuant to the Plan A Trust Agreement as a qualified plan under s. 401(a) of the Internal Revenue Code of 1986 (“IRC”). Although most of the participants live and work (or are retired) live in the U.S. (so that it is not a “retirement compensation arrangement” pursuant to para. (l) of the definition), there are a small number of Canadian Participants.

Specific rules (the “Plan A Canadian Program”) set out in the Plan A rules document, apply only to Canadian Participants, and contain provisions customarily found in Canadian registered pension plans, including protection of accrued benefits, vesting, pension eligibility, and benefit formulae. Significantly, a Canadian Participant is prohibited from commencing pension benefits until attaining the normal retirement date or early retirement eligibility.

The Plan A Canadian Program is administered so as to be exempted from the resident’s arrangement rules in ss. 207.6(5) and (5.1) by satisfying the prescribed contribution conditions in Reg. 6804 relating to foreign plans maintained by foreign non-profit organizations.

Proposed transactions

The Plan B Sponsor will establish Plan B as a U.S. multi-employer defined benefit pension plan under which eligible plan participants will accrue retirement benefits, which will thereafter be maintained as a qualified plan under IRC s. 401(a).

Specific rules (the “Plan B Canadian Program”) will be established that will be substantially similar to the Plan A Canadian Program. On a similar basis to Plan A, no portion of the Plan B will be deemed to be an RCA pursuant to the resident’s arrangement rules in ss. 207.6(5) and (5.1).

The Plan A Trustees and the Plan B Trustees will enter into an agreement (the “Spin-Off Agreement”) to authorize the direct transfer of pension assets and liabilities relating to certain Plan A participants from Plan A to Plan B (the “Proposed Transfer”). None of the affected participants will have any direction or control over the Spin-Off Agreement, other than any general rights that may be afforded under a collective bargaining agreement.

The Proposed Transfer will not result in a distribution from Plan A to any affected participants and will not be a taxable event pursuant to the IRC, and will apply to a portion of the Canadian Participants of Plan A (the “Affected Canadian Participants”), who will cease to be participants of Plan A upon completion of the Proposed Transfer.

Rulings

No amount will be included in computing the income of an Affected Canadian Participant under s. 6(1) or 56(1)(a), nor be subject to withholding under s. 153(1), solely because of the Proposed Transfer.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt	no constructive receipt to Canadian beneficiaries where the transfer of a portion of the assets and Canadian beneficiaries from an old to a new US pension plan	109
Tax Topics - Treaties - Income Tax Conventions - Article 18	the transfer of a portion of the assets and beneficiaries from an old to a new US pension plan did not result in taxable income under the IRC	183
Tax Topics - Income Tax Act - Section 207.6 - Subsection 207.6(5.1)	Reg. 6804 exclusion applied	178

22 December 2020 External T.I. 2020-0849291E5 - Pension Top-up Payments

payments to compensate for a break in pensionable services are treated as payments from an unregistered pension plan

A collective bargaining agreement provided that where a retired employee had a break in service due to a workplace injury with the employer, that retiree would receive the additional pension benefits that would have been provided to that individual under the employer’s registered pension plan had there been such pensionable service under the plan during the break.

CRA indicated:

Such payments would be included in the retiree’s income in the year received as a superannuation or pension benefit pursuant to s. 56(1)(a)(i).
Periodic payments from an unregistered pension plan should be reported in the “Other information” area, code 109, of the T4A rather than in Box 016, and that lump sum payments from an unregistered pension plan should be reported in Box 018, code 190, of the T4A.
As such payments were made from an unregistered plan or arrangement, they would not be eligible for pension income splitting under s. 60.03 or the pension credit under s. 118(3).

5 October 2020 External T.I. 2020-0852671E5 - Provident fund - Isle of Man

pension fund payments are carved out of EPB benefits where s. 6(1)(g)(iii) applies

While the taxpayer was a resident in the United Arab Emirates, the taxpayer’s employer established on behalf of the taxpayer an independent trust in the Isle of Man (the “provident fund” or “PF”) to which the taxpayer and employer made contributions, and the benefits under which are attributable to services rendered by the taxpayer while a non-resident. The taxpayer will begin withdrawing funds from the PF and is described as a resident of Canada. After referring to the employee benefit plan (“EBP”) definition in s. 248(1), CRA noted:

Generally, a plan will be considered to be a pension plan (irrespective of whether it is registered under the Act) “where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payment on or after the employee’s retirement.”
“A foreign pension plan would generally fall within the EBP definition, but a foreign EBP does not necessarily fall within the meaning of a pension plan.”
If the PF is an EBP, the amounts received therefrom would be taxable under s. 6(1)(g), subject to certain exceptions including that in 6(1)(g)(iii) regarding pension benefits received out of the plan that are attributable to services rendered by a person in a period throughout which the person was not resident in Canada – in which event, they would be fully taxable under s. 56(1)(a)(i) “even if the employee’s contributions to the pension plan were not deductible under the Act and even if the pension benefits are tax-free in whole or in part in a foreign jurisdiction.”
Where the amount received out of the PF is a lump sum amount that is taxable under s. 56(1)(a)(i), a deduction may be permitted under s. 60(j) for a transfer to an RRSP or registered pension plan.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(g)	foreign pension plans are EBPs	209

11 September 2020 External T.I. 2019-0824281E5 - Benefits from a UK retirement plan

amounts received out of a UK FURBS are taxable except to the extent there can be a lump sum rolled into an RRSP or RPP

A UK resident is a member of a “funded unapproved retirement benefit scheme” (“FURBS”), which is a UK trust to which the taxpayer’s employer had contributed and the benefits from which are attributable to services rendered by the taxpayer while resident in the UK and before the time of retirement. Will amounts received under the FURBS be included in income if the taxpayer becomes a resident?

After stating that a “foreign pension plan would generally fall within the [employee benefit plan] definition, but a foreign EBP does not necessarily fall within the meaning of a pension plan, CRA indicated that such amounts would be taxable under s. 56(1)(a)(i) if the plan was a pension plan, and if it was any other form of EBP, such amounts would be taxable under s. 6(1)(g).

CRA went on to state:

Where the amount received out of the UK retirement plan is a lump sum amount that is taxable under subparagraph 56(1)(a)(i), a deduction may be permitted under paragraph 60(j) relating to all or a portion of the lump sum which is transferred to a registered retirement savings plan or to a registered pension plan. The tax-deferred rollover is not available for amounts which are received on a periodic basis out of the pension plan, nor is it available for amounts for which the recipient has taken a deduction under subparagraph 110(1)(f)(i) due to a specific provision of the Canada-UK Tax Convention. … [but here] no [such] deduction would be available … .

The s. 56(1)(a)(i)(C.1) exemption would be unavailable.

2019 Ruling 2019-0817751R3 - SERP and Group RRSP

SERP payouts (including as lump sum) included under s. 56(1)(a)(i)

A Canadian public corporation had a group RRSP arrangement under which it approximately matched contributions of employees (“Members”) to the group RRSP. It was now proposed that an unfunded supplemental employee retirement plan (SERP) be created under which the corporation annually will notionally credit to an account for each Member an additional amount equal to 18% of the employment earnings of the Member in excess of those earnings engaging the RRSP dollar limit (subject to an overall cap on the corporation’s contributions, including under the group RRSP, of 15% of the Member’s employment earnings (or 10% in the case of non-executive employees).) The amount credited to the Member’s is notionally increased each year based on 5-year Canada bond yields; and on termination of employment, the Member can determine whether to receive payments based on the amount in the account over 10 years, or as a lump sum.

CRA ruled that there will be no recognition of income by the Member until the times of the inclusion of such payouts under s. 56(1)(a)(i) (e.g., the SERP is not a salary deferral arrangement), and that there can be a corresponding deduction on payout to the corporation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement	SERP that maintains the 18% RRSP contribution amount above the RRSP dollar limit (subject to overall 15% or 10% cap)	547

12 September 2019 External T.I. 2019-0802301E5 - Annuity purchased from foreign pension

no rollover treatment when an annuity is purchased out of a foreign pension plan

An individual who participated in a defined benefit pension plan established in Europe by the U.S. employer for its expatriate employees immigrated to, and became a resident of, Canada following retirement. The employer has decided to wind up the pension plan by using funds in the plan to purchase annuity contracts for each retired member.

After noting that where the conditions under s. 147.4(1) are satisfied, “the individual is deemed not to have received an amount from the RPP as a result of acquiring the annuity and any amounts received under the contract are deemed to be amounts received under the RPP,” so that “there is no immediate taxation on the acquisition of the annuity,” CRA stated:

However, there is no comparable provision in the Act for annuities purchased from foreign pension plans.

… [T]he individual will be considered to have received a pension benefit equal to the fair market value of the annuity contract at the time the individual acquires it and must include this amount in their income under subparagraph 56(1)(a)(i).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 147.4 - Subsection 147.4(1)	s. 147.4(1) permits non-inclusion where annuity is purchased out of RPP	152

2 April 2019 Internal T.I. 2016-0649821I7 F - Unclaimed superannuation or pension benefits

subsequent year’s payment of benefit to a previously-unidentified beneficiary is only income in that year as an “in lieu of” pension amount

A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Direction principale des biens non réclamés [the Unclaimed Property Directorate] ("DPBNR") pursuant to the Québec Unclaimed Property Act (“UPA”) because the person entitled thereto (the surviving spouse or the beneficiary of a deceased RPP member) are unknown at the time. In a subsequent taxation year, the person who was entitled to receive the survivor benefit (“right-holder”), now identified, claims the amount and receives from the DPBNR the net amount that it, in turn, had received from the RPP (i.e., the survivor benefit payable under the RPP, as reduced by federal and provincial income tax withheld at source) as further reduced by its administration fee.

What amount is to be included in the right-holder’s income, and in what year? What if it is an estate that would have been entitled to receive the amount, but the administration of the estate has been completed prior to the DPBNR being in a position to make the payment?

The Rulings Directorate indicated that the amount to be included under s. 56(1)(a)(i) 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 DPBNR has transferred that amount to the right-holder. In this regard, CRA stated:

To the extent that, at the end of a particular taxation year in which the DPBNR receives a survivor benefit, the right-holder is not clearly identified, the facts as they exist at the end of the taxation year do not permit the inclusion of the survivor benefit in computing a taxpayer's income.

However, respecting the subsequent year of payment of the amount by the Directorate to the now-identified right-holder, CRA stated:

[T]he words "in lieu of" include not only payments having the legal character of a superannuation or pension benefit, but also payments which constitute a reasonable substitute paid instead or in lieu of a superannuation or pension benefit. … [The subsequent year’s payment] is paid to the right-holder in lieu of a superannuation or pension benefit to which the right-holder would otherwise have been entitled, had it not been for the application of the UPA … [and] is to be included in the computation of the right-holder’s income for the year in which the DPBNR pays it to the right-holder.

Where the right-holder is an estate, it should include the survivor benefit under s. 56(1)(a)(i) in computing its income for the year of receipt – but with a deduction to it and an inclusion to its beneficiaries being applicable where those amounts are distributed in accordance with the usual ss. 104(6), (13) and (24) rules. The Directorate went on to state, respecting where the administration of the estate has been completed prior to the DPBNR being in a position to pay the amount:

[T]he CRA will not object to the beneficiaries of the estate who are entitled … to all or part of the survivor benefit amounts being considered to have received those amounts directly from the DPBNR. The same applies if an heir to such an estate has also been deceased for a period of time, and the executor of that heir’s estate had been discharged from that estate’s administration before the DPBNR was able to pay to that executor the amount due. If so, it is pursuant to subparagraph 56(1)(a)(i) that the amounts received or considered received by the beneficiary(ies) of the estate are to be included in computing the beneficiary(ies)’ income.

Words and Phrases

in lieu of

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt	amount received in Year 2 in lieu of pension benefit includes source deductions in Year 1	362

12 April 2018 External T.I. 2016-0640651E5 F - Swiss Pension

a Canadian resident was not subject to Canadian tax on income accruing in a Swiss vested benefits policy

The Swiss pension system has three “pillars,” the second of which consists of pension funds (run by investment foundations) to which both employers and their employees are required to contribute. When a Swiss employee left for Canada, the Swiss legislation required that accumulated funds in the plan be transferred to a vested benefits policy (which would only pay benefits to the taxpayer once retirement age was reached), and upon the taxpayer’s return to Switzerland, the Swiss legislation required that the funds accumulated in the policy be returned to the second pillar pension plan of the taxpayer’s Swiss employer.

CRA considered that, based on its brief description, this policy likely qualified as a “superannuation or pension fund or plan.” Since such a plan is effectively only subject to tax on a cash basis under s. 56(1)(a)(i), the income accruing in the policy was not taxable during the taxpayer’s Canadian residency.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - superannuation or pension fund or plan	Swiss vested benefits policy was a “superannuation or pension fund or plan”	297

10 April 2014 External T.I. 2013-0515681E5 - Death of RPP Member-56(1)(a)

beneficiary dispute/renunciation

The Manitoba Pension Benefits Act (PBA) provides that notwithstanding any beneficiary designation under a registered pension plan, a deceased RPP member's spouse or common-law partner is entitled to the pension benefit. In the context of a dispute concerning who is the deceased RPP member's common-law partner at the time of death, CRA stated:

[T]he taxpayer who is legally entitled to receive and is paid a deceased RPP member's pension benefit is required to include the pension benefit in the taxpayer's income in the year received, in accordance with paragraph 56(1)(a)…. An exception to this requirement may apply where a taxpayer is legally entitled to renounce or disclaim a legacy.

19 March 2014 External T.I. 2014-0522671E5 - HK Pension and Tax Treaty

Hong Kong pension received by Canadian resident

S. 56(1)(a)(i) of the Act extends to benefits from a foreign pension plan that are attributable to services rendered while the individual was not a resident of Canada – so that periodic amounts and a lump sum payment from a Hong Kong pension plan of a former Hong Kong government employee who subsequently became a Canadian resident were taxable in Canada.

25 June 2012 External T.I. 2011-0398691E5 - Conversion of U.S. Traditional IRA into Roth IRA

An individual who converts a traditional US Individual Retirement Account ("IRA") to a Roth IRA is allowed under the Code to spread the resulting income inclusion over the following two taxation years.

CRA confirmed that there is no such allowance under Canadian tax law, and the entire converted amount is treated as a distribution from the IRA and will be included in the year of the conversion, pursuant to s. 56(1)(a)(i)(C.1). CRA stated:

Pursuant to paragraph 1 of Article XVIII of the Convention, amounts received from a traditional IRA by a Canadian resident may be taxed in Canada. However, as an exception, amounts that would be exempt from taxation in the U.S. if paid to a U.S. resident may not be taxed in Canada. In the case at hand, the 2010 conversion amount is not exempt from taxation in the U.S., as the taxation of this amount is simply being deferred. Consequently, the Convention does not apply to prevent the 2010 conversion amount from being taxed in Canada.

CRA noted, however, that "in many cases, Article XVIII of the Convention may apply to either defer or relieve taxation in Canada." Income Tax Technical News, No. 43 describes CRA's position on Roth IRAs in more detail.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 118 - Subsection 118(7) - Pension Income		62
Tax Topics - Income Tax Act - Section 60.03 - Subsection 60.03(1) - Eligible Pension Income		62
Tax Topics - Treaties - Income Tax Conventions - Article 18		227

19 June 2012 External T.I. 2011-0407461E5 - Tax on 401(k) Transfer to IRA and IRA Withdrawal

A Canadian-resident taxpayer had contributed, through his US employer, to a 401(k) plan. Because the contributions preceded 1 January 2009, he could not deduct them from income under Art. XIII(3) of the Canada-US Convention, as that provision was not yet in force. The taxpayer now intends to transfer his entire 401(k) entitlement to a US Individual Retirement Account ("IRA"). The correspondent inquired whether amounts subsequently withdrawn from the IRA could be excluded from income given that his previous contributions represented amounts already included in his income.

CRA indicated that there was no such mechanism. The amounts received out of the IRA must be included in income pursuant to s. 56(1)(a)(i)(C.1).

14 February 2008 Internal T.I. 2007-0256401I7 F - Vente d'un surplus actuariel

amount of asset sale price allocated to actuarial surplus was includible under s. 56(1)(a)(i) as being in lieu of refund of such surplus

Before concluding that the portion of the sale price allocated on the sale of a business division to the actuarial surplus in the pension plan was to be included in the vendor’s income under s. 56(1)(a)(i), the Directorate quoted from Transocean regarding the meaning of “in lieu of payment of”, indicated that this established a test of whether the amount was a "reasonable substitute for a superannuation or pension benefit," and concluded:

Instead of obtaining a refund under the terms of the Plan, the Vendor elected to assign its rights to the Purchaser in consideration for a payment of $XXXXXXXXXX. We are of the view that such payment is a reasonable substitute for the superannuation or pension benefit that it could have received directly from the Plan. Consequently, by virtue of subparagraph 56(1)(a)(i), that amount must be included in the Vendor's income for the taxation year in which it is paid to it.

Words and Phrases

in lieu of

10 January 2005 External T.I. 2004-0095361E5 F - Dommages

damages for negligence resulting in not becoming entitled to QPP would not be income under s. 56(1)(a)(i)

Regarding the treatment of damages received pursuant to proceedings against a professional for negligence resulting in loss of a survivor's pension from the Régie des rentes du Québec [Quebec Pension Plan] ("QPP"), and after noting that there was no requirement that a “superannuation” payment (as contrasted perhaps with a “pension” payment) need not be paid by a former employer, CRA stated:

[T]he amounts must be received out of or under a superannuation or pension plan (including a benefit under the QPP) and consequently, in our view, may be taxable pursuant to subparagraph 56(1)(a)(i) only if the amounts were paid in accordance with the terms of the fund or plan.

Furthermore, paragraph 2 of IT-365R2 states that all amounts received by a taxpayer as compensation for personal injury will be excluded from income, even if they were based on the taxpayer's loss of income in respect of which they were paid. Paragraph 2 of Interpretation Bulletin IT-467R2, Damages, Settlements and Similar Payments, states that damages may pertain to a loss or financial injury to a person arising from negligence as determined by a court. Those amounts are not taxed since they are not derived from a listed source and there is no specific provision to tax them.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a)	courts have preferred to tax on the basis of an identified source	96

1 December 2004 Internal T.I. 2004-0065131I7 F - Sécurité sociale des États-Unis

US disability benefits under the US Social Security Act converted at age 62 to retirement benefits are includible under s. 56(1)(a)(i)

A taxpayer receiving disability benefits under the US Social Security Act, elects to receive retirement benefits at age 62 rather than disability benefits. Must they be included in income? The Directorate responded:

Pension benefits received by a Canadian resident under the U.S. Social Security Act must be included in income pursuant to subparagraph 56(1)(a)(i). Particular attention should also be paid to Article XVIII(5) of the 1980 Canada-United States Income Tax Convention in respect of such payments.

18 May 2004 External T.I. 2002-0168191E5 F - Somme reçue après la fin d'une succession

pension payment received after estate termination was included in beneficiaries’ income pursuant to s. 56(1)(a) rather than s. 104(13)

After an estate was settled and closed, it unexpectedly received an amount from the pension plan of the deceased, representing a refund of excess contributions and interest, that it paid to the heirs (the surviving siblings). CRA stated:

Where, in a taxation year of an estate, the estate receives [such] an amount … and subsequently transfers it to its beneficiaries, the estate must include the amount received and may deduct the amount transferred in computing its income for that taxation year pursuant to paragraphs 56(1)(a) and 104(6)(b) … .

After creditors and legatees by particular title have been paid, an estate usually ends when its residue is transferred to the heirs. Our understanding of your situation is that the estate has been terminated … . Since it cannot be reopened, the amount … was received directly by the heirs. In this case, it is the heirs who must include the amount so received … in computing their income pursuant to paragraph 56(1)(a).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13)	pension payment received after estate termination bypassed the s. 104(6) and s. 104(13) system	167

3 March 2004 External T.I. 2003-004715

Upon the death of a U.S. citizen and resident, the Canadian-resident nephew receives a lump sum distribution in the amount of $100,000 in settlement of his beneficial interest in the IRA of the deceased. The nephew will be required to include the $100,000 amount of the distribution in his gross income, but will be entitled to a $40,000 deduction under s. 691(a) of the Internal Revenue Code equal to the amount of U.S. estate taxes attributable to that amount of income.

The amount to be included in the nephew's income under s. 56(1)(a)(i)(C.1) would be $100,000, i.e., the gross amount of the distribution.

6 February 2004 External T.I. 2003-0049461E5 F - Parité salariale - Pension rétroactive

retroactive pay-equity increase to the pension receipts of the deceased were s. 56(1)(a)(i) inclusions to the receiving estate

An estate received in 2003 an equalization adjustment in respect of superannuation or pension benefits that had been received by an individual under a registered pension plan prior to having died between 1987 to 1993. CRA stated:

[A]n amount received as a result of a parity adjustment in respect of benefits received in the past retains the same character as the amounts to which it relates. Consequently, an equalization adjustment amount that relates to "superannuation or pension benefits" included in income pursuant to subparagraph 56(1)(a)(i) will also be included in income under the terms of subparagraph 56(1)(a)(i) in the year it is received by the estate.

31 October 2003 External T.I. 2003-0045795 F - DEDOMMAGEMENT POUR PERTE DE REVENU

Quebec government compensation to pension plan members for cessation of employer contributions was not itself pension or other income

Also released under document number 2003-00457950.

CCRA did not consider amounts to be paid (at the option of the recipient) in one lump sum or in two instalments, by the Government of Quebec under a program to provide compensation to the members of two pension plans for the loss caused by the cessation of the employer's contributions to the plans not represent an amount received as, or in full or partial payment of, a superannuation or pension benefit within the meaning of subsection 248(1) of the Act and are not a source of income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a)	lump sum government compensation for loss of employer pension plan contributions was not income from a source	47

16 January 1996 External T.I. 9529215 - 401(K), DOUBLE TAX IN CANADA

Where a 401(k) plan for a commuter who is resident in Canada and who is employed in the U.S., is funded only by employee contributions, distributions from the plan will be included in the individual's income in the taxation year in which they are received. "However, should it be reasonable to consider that a portion of the amount received from the Plan is derived from contributions which have been taxed, the Department will accept a reasonable breakdown based on the terms of the Plan, of the distribution between the taxable portion and the non-taxable portion."

27 October 1994 External T.I. 9427125 - DEFERRAL OF LUMP SUM SEVERANCE PAYMENT

If it is a term of her employment contract that an employee has the option to take a retiring allowance in instalments or in a lump sum and such option exercised prior to retirement or termination, she is taxable on receipt of the whole or part of the retiring allowance in the year as received. If such an option is not a term of the employment contract, the whole amount is taxable in the year of termination or retirement regardless of any accommodation made by the employer to pay the retiring allowance and instalments over more than one year.

20 November 1991 T.I. (Tax Window, No. 13, p. 9, ¶1601)

An amount received out of an IRA will represent a "superannuation or pension benefit" taxable under s. 56(1)(a)(i) regardless of the original source of the funds, except to the extent that the amount would not have been subject to tax in the U.S. if the recipient were resident there. In addition, the rollover pursuant to s. 60.01 may be available.

7 March 1991 T.I. (Tax Window, No. 1, p. 21, ¶1151)

Where the pension entitlement of a spouse under a registered pension plan is divided on the breakdown of marriage under the Family Law Act (Ontario), payments made from the plan to the non-member spouse will be included in the income of that non-member under s. 56(1)(a)(i).

8 September 89 T.I. (February 1990 Access Letter, ¶1097)

The payment of the portion of a registered pension plan to a non-member spouse pursuant to the laws of a province as a result of a marriage breakdown will be included in her income pursuant to s. 56(1)(a)(i).

88 C.R. - Q.5

Where a Canadian resident rolls a lump sum payment received out of a U.S. pension fund into an individual retirement account the lump sum received by him is included in income pursuant to s. 56(1)(a)(i). If he is then permitted a deduction under s. 110(1)(f), payments received out of the IRA will be included in his income under s. 56(1)(a)(i).

Locations of other summaries		Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18		50

Clause 56(1)(a)(i)(C.1)

Locations of other summaries		Wordcount
Tax Topics - Income Tax Regulations - Regulation 6803	an IRA which is a custodial arrangement is included	223

Administrative Policy

S5-F3-C1 - Taxation of a Roth IRA

No deferral of income in Roth IRA in absence of Treaty election

1.3 A Roth IRA does not enjoy the income tax deferral benefits afforded under the Act to Canadian registered plans and traditional IRAs. As a result, the income accrued in a Roth IRA is generally taxable in Canada on a current, annual basis.

Deferral for regular IRA - no need to make election under Art. XVIII of U.S. Treaty

1.25 The income accrued in a traditional IRA referred to in subsections 408(a), (b) or (h) of the Code is not subject to current taxation under the Act therefore there is no benefit in filing the Election. These arrangements are defined in subsection 248(1) of the Act and section 6803 of the Regulations as a foreign retirement arrangement for Canadian income tax purposes.

401(k) plans are EBPs or RCAs so that there is statutory deferral

1.26 There are several other types of U.S. retirement arrangements exempt from taxation under the Code that qualify as a pension under the Canada-U.S. Treaty, but that are not foreign retirement arrangements under the Act. These include, for example, 408(p) SIMPLE IRAs, 408(k) SEP IRAs, 401(a) plans, and 401(k), 403(b) or 457(b) plans (including Roth accounts). Whether an individual should file the Election for such an arrangement depends on whether the income accrued in the arrangement is taxable under the Act on a current basis. This would require a complete review of the facts and terms of the particular arrangement. However, it is the CRA’s understanding that employers typically make contributions to such arrangements, in which case the arrangement will be characterized either as an employee benefit plan (EBP) or a retirement compensation arrangement (RCA), as those terms are defined in subsection 248(1). Because an individual who holds an interest in an EBP or RCA is not subject to current taxation under the Act on the income accrued in the arrangement, there is no benefit in filing the Election.

Locations of other summaries		Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18		596
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(3)		115
Tax Topics - Income Tax Act - Section 94.2 - Subsection 94.2(1)		118

29 October 2018 External T.I. 2018-0750411E5 - Transfer from an IRA to a RRSP

deemed withdrawal from IRA rather than subsequent actual withdrawal included in income per s. 56(12)

A Canadian citizen who was a U.S. long term resident under the U.S. expatriation rules was deemed for Code purposes to receive a taxable distribution of his entire interest in his IRA (the “Deemed Distribution”) immediately before his relinquishing of his green card and returning to Canada. When he then made an actual withdrawal of those amounts (the “Withdrawal”) in order to contribute them to his RRSP, they were not subject to further U.S. income tax.

CRA first noted that 2017-0682301E5 essentially indicated that that s. 56(12) deemed the Deemed Distribution to be includible in the taxpayer’s income under s. 56(1)(a)(i)(C.1) and that the Withdrawal would not be so includible if it did not exceed the Deemed Distribution (because it would not be “subject to income taxation” in the U.S. respecting s. 56(1)(a)(i)(C.1).

CRA concluded that the RRSP contribution did not generate a s. 60(j) deduction. The Withdrawal did not qualify as an “eligible amount” for s. 60.01 purposes because it was the amount of the Deemed Distribution (not the Withdrawal) that was included in the Taxpayer’s income under s. 56(12) and s. 56(1)(a)(i)(C.1). Conversely, the amount of the Deemed Distribution also was not an “eligible amount” as it is not a “payment received” for the purpose of s. 60.01.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 60.01	a departing U.S. resident who has a deemed inclusion for his IRA cannot then obtain a s. 60(j) deduction for contributing actual IRA withdrawals to his RRSP	310
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j)	failure to qualify for 60(j) deduction where deemed withdrawal from IRA followed by actual withdrawal	157

29 January 2018 External T.I. 2017-0682301E5 - Deemed Distribution and Withdrawal from IRA

the deemed U.S. income inclusion from an IRA on renouncing U.S. citizenship or relinquishing a green card also is recognized for ITA purposes

The Taxpayer, a Canadian citizen, was considered under the Code to be a U.S. long term resident and to have received a taxable distribution of her entire interest in her IRA the day before she relinquished her green card. This “Deemed Distribution” was treated as an “investment in the contract” and the return of this investment after the expatriation date (as happened here, where the Taxpayer withdrew all the funds in the IRA, but not in excess of the Deemed Distribution (the “Withdrawal”)) after the expatriation date was not included in gross income. What is the ITA treatment of the Deemed Distribution and the subsequent withdrawal (the “Withdrawal”), whether in the same or a subsequent year? CRA responded:

[A]s the Taxpayer was a tax resident of Canada at the time of the Deemed Distribution, the amount of the Deemed Distribution would be included in computing the Taxpayer’s income for Canadian tax purposes pursuant to clause 56(1)(a)(i)(C.1) and subsection 56(12).

The U.S. tax paid by the Taxpayer on the Deemed Distribution would qualify as “non-business-income tax” within the meaning of subsection 126(7). Therefore the U.S. tax paid would factor into the computation of a foreign tax credit under subsection 126(1), provided all the conditions of that subsection were otherwise satisfied. …

Clause 56(1)(a)(i)(C.1) does not apply to include an amount in income to the extent the amount would not be subject to income taxation in the U.S. if the Taxpayer were resident in the U.S. … You have indicated that [the] return of the investment in contract would be excluded from income for U.S. income tax purposes. Based on this…the amount of the Withdrawal would not be included in computing the Taxpayer’s income … .

… [T]he same [would apply] if the Withdrawal took place in a year subsequent to the Taxation Year in which the Deemed Distribution took place … [or] if the Taxpayer was a U.S. citizen, rather than a green card holder, who renounced this US citizenship after becoming a tax resident in Canada … [subject to] subparagraph 4(a) of Article XXIV of the Convention … .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1)	deemed Code taxability of IRA on renouncing U.S. citizenship generally would generate an FTC to deemed Cdn-resident recipient	125
Tax Topics - Income Tax Act - Section 56 - Subsection 56(12)	deemed ITA inclusion on deemed distribution from IRA on renouncing U.S. citizenship or relinquishing green card	78

14 January 2009 External T.I. 2008-0274271E5 F - Rente de la Suisse

does not extend to pension from Switzerland

A Canadian resident receiving an old age pension from Switzerland could not avail of the exclusion in s. 56(1)(a)(i)(C.1) given the narrow scope of Reg.6803.

Locations of other summaries		Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18	exemption under Art. 18(2) of the Canada-Switzerland treaty	59

Subparagraph 56(1)(a)(ii)

Cases

Doyle v. The Queen, 83 DTC 5383, [1983] CTC 339 (FCTD)

After one company was, upon the decision of the taxpayer, wound-up, he occupied substantially the same office at a second company which he controlled and to which the assets of the first company were transferred. It could not be said that he had genuinely retired from the first company, and thus a sum received from it was not a retiring allowance.

Lawson v. The Queen, 82 DTC 6331, [1982] CTC 368 (FCTD)

An amount received in settlement of a claim for dismissal without reasonable notice was received in respect of the termination of employment rather than in respect of retirement.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		23

Administrative Policy

7 April 2020 External T.I. 2019-0832241E5 - Deferral of lump sum retiring allowance

retiring allowance can be elected, on or prior to termination, to be received and recognized in a subsequent year

Respecting a query as to the tax implications of paying a retiring allowance to a terminated employee in the calendar year following the year of termination at the election of the employee, CRA referred to its position in Folio S2-F1-C2, para. 2.26 that an employee can choose, on or before termination of employment, to receive a lump sum in instalments – which are taxable in the years of receipt, and stated:

This position applies equally where payment of the lump sum is deferred to a subsequent year, provided that the individual chooses the deferred option on or before termination of employment.

29 April 1991 T.I. (Tax Window, No. 2, p. 21, ¶1217)

A retiring allowance may be paid in one or more instalments over any period of time and it will not be included in the employee's income until receipt.

Subparagraph 56(1)(a)(iii)

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 89 - Subsection 89(1) - Paragraph 89(1)(a)	trust return not admitted at trial opening where no previous notice and not relied upon by CRA	229
Tax Topics - Income Tax Act - 101-110 - Section 107.1 - Paragraph 107.1(a)	s. 107.1(a) in effect produced a rollover on cash distribution of mooted benefits	181
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)	a distribution from a health and welfare trust to compensate for lost insurance coverage was not a taxable benefit as it did not come within s. 6(4)	316
Tax Topics - General Concepts - Stare Decisis	Supreme Court obiter accorded deference	153
Tax Topics - Income Tax Act - Section 9 - Compensation Payments	surrogatum principle references "why the compensatory amount was paid," and not confined to business receipts	207
Tax Topics - Statutory Interpretation - Specific v. General Provisions	termination payment that did not come within s. 6(4) should be treated as excluded from s. 6(1)(a)	153
Tax Topics - Income Tax Act - Section 6 - Subsection 6(4)	lump sum received as compensation for no longer benefiting from contributions to a group life insurance policy did not come within the terms of s. 6(4)	334

Paragraph 56(1)(a.1)

Administrative Policy

27 April 2004 External T.I. 2003-0048351E5 F - Prestation de décès versée par la RRQ

amounts paid directly to heirs are not included in income

The Public Trustee of Quebec, which is entrusted with the estate of a deceased person, pays an amount to an individual so that the individual can cover the funeral expenses, following which the heirs renounce their interests in the estate. Is such payment taxable to the individual?

CRA stated:

For the 1997 and subsequent taxation years, the tax treatment of death benefits paid by the RRQ is set out in clause 56(1)(a)(i)(F) and paragraph 56(1)(a.1) of the Income Tax Act (the "Act"). Under those provisions, it appears that only a recipient of such a benefit who is also the estate of a deceased taxpayer is required to include that amount in computing income. Thus, any person other than an estate to whom such a benefit is paid does not have to include that amount in computing the person’s income.

It is therefore necessary to determine to whom the death benefit is actually paid. If it is paid to the person directly, this amount does not have to be included in computing the person’s income or that of the estate. However, if the benefit is actually received by the estate, then the estate must include the amount in income pursuant to paragraph 56(1)(a.1). If, according to the T4A (P) slip issued by the RRQ, the death benefit was paid to the "heirs …” of the deceased, this amount must be included in the income of the estate in light of subsections 104(1) and 248(1), under which the heirs of a deceased taxpayer are deemed to be the estate of the deceased for the purposes of the Act.

Paragraph 56(1)(b) - Support

Cases

Tossell v. Canada, 2005 DTC 5365, 2005 FCA 223

Even if the separated husband of the taxpayer was obliged to pay the taxpayer child support at a rate of $3,000 per month, rather than the $2000 per month that he was actually paying, so that arrears were accumulating at a rate of $1,000 per month, a lump sum payment $36,000 made by him to her pursuant to minutes of settlement dated December 16, 1996 that stated that such sum would be paid retroactively in respect of a twelve month period, was not includable in her income under s. 60(b), or deductible by him under s. 56(1)(b). Although the Sills case (85 DTC 5096) stood for the proposition that an obligation to pay an amount on a periodic basis maintained that periodic character even if several such amounts were paid late in a single sum, there was insufficient support that the lump sum was intended to be for arrears of child support and the fact that it was referred to as being "retroactive" indicated that the minutes of settlement were intended to create a new legal obligation rather than to pay arrears of child support. Sharlow J.A. stated (at p. 5370):

"In my view, a written agreement or court order cannot be interpreted as obliging a person to pay arrears of child support unless, at the time the written agreement or court order is made, there is (1) an express or implied recognition of a pre-existing obligation to pay child support for a prior period, (2) an express or implied recognition of a complete or partial or partial breach of that obligation, resulting in arrears of child support, and (3) an obligation set out in the written agreement or court order to pay the arrears in whole or in part."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56.1 - Subsection 56.1(4) - Support Amount		281

The Queen v. Jasper, 94 DTC 6519, [1994] 2 CTC 309 (FCTD)

An amended written separation agreement between the taxpayer and her former husband providing for the payment by him to her of amounts equal to one-half of the monthly mortgage payment on the home that she was occupying with her children and that was to be conveyed to her and her children as tenants in common. Such payments were income receipts to her given that: they were not substantial in relation to her living standard; they did not bear interest, were not subject to acceleration and terminated when the children completed their education or no longer resided at the home, and were non-assignable by her; their payment did not release the husband from future obligations; and their amount was unrelated to the former husband's ownership interest in the property.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Estoppel		115

The Queen v. Sigglekow, 85 DTC 5471, [1985] 2 CTC 251 (FCTD)

The taxpayer's former husband was required by a court order to pay every week the sum of $20 "tax free" for the maintenance of her son. The receipt by the taxpayer of $20 per week was taxable to her, notwithstanding the uncertain meaning of the words "tax free", which her former husband had chosen to ignore.

The Queen v. Sills, 85 DTC 5096, [1985] 1 CTC 49 (FCA)

Where a separation agreement provides that alimony and maintenance payments are payable on a monthly basis, then the alimony and maintenance paid in order to carry out the terms of the separation agreement is received by the payee "pursuant" to the agreement notwithstanding that the payments are not made on time.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) - Paragraph 15(1)(b)		53
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(b)		53

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt	payment references funds transfer	100
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(b)		100

Administrative Policy

16 March 2006 External T.I. 2005-0133301E5 F - Arrérages pension alimentaire reçus par succession

support arrears received by estate were tax-free

Amounts received by an estate in settlement of its claim against the ex-husband of the deceased for arrears of support, were non-taxable to it.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees	legal fees to settle an estate are non-deductible	84

Articles

Durnford, Toope, "Spousal Support in Family Law and Alimony in the Law of Taxation", Canadian Tax Journal, 1994, Vol. 42, No. 1, p. 1.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) - Paragraph 15(1)(b)		0
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(b)		0

Paragraph 56(1)(c)

Cases

James v. The Queen, 85 DTC 5172, [1985] 1 CTC (FCTD)

Payments were found to be received pursuant to a Court order, "even though often late and sometimes for smaller amounts."

Paragraph 56(1)(d) - Annuity payments

Cases

The Queen v. Rumack, 92 DTC 6142, [1992] 1 CTC 57 (FCA)

The taxpayer won a prize of $1,000 per month for life in a lottery sponsored by the Ontario Association for the Mentally Retarded, which funded the payment of the prize through the purchase of an annuity. The annuity constituted income to the taxpayer under s. 56(1)(d), but with a deduction under s. 60(a) for the capital portion.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(4)		29
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base		71
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business		68
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement		68

Wilder v. Minister of National Revenue, 52 DTC 1014, [1951] CTC 304, [1952] 1 S.C.R. 123

The consideration received by the taxpayer for the sale of his business included an "annuity" during his lifetime of $1,000 per month. The monthly amounts received by the taxpayer were not income to him pursuant to s. 3(1)(b) of the Income War Tax Act, which provided for the inclusion in income of "annuities or other annual payments received under the provisions of any contract". Rinfret C.J. stated (p. 1015):

"... on the proper construction of section 3(1)(b) an annuity or annual payment, received under the provisions of a contract, such as the present one, in order to be taxable must be an annual profit or gain. The whole economy of section 3 - and for that matter all of the Income War Tax Act - is that it taxes income and not capital."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Annuity		111

Administrative Policy

30 March 2017 External T.I. 2015-0609951E5 F - Article 18 of the Canada-Turkey Income Tax Convention

capital components are not deduction of cost

The definition of “annuity” in Art. 18 of the Canada-Turkey Treaty excludes “any annuity the cost of which was deductible for the purposes of taxation in the Contracting State in which it was acquired.” Although it might be argued that where a resident of Turkey has acquired a prescribed annuity contract, the portion of each annuity payment that would be treated in the hands of a Canadian resident as a capital payment comes within the quoted exclusion. However, CRA considered that this is not the case given inter alia that the capital portion does not represent a deduction for the cost of the annuity that is available when the annuity is acquired, so that each annuity payment is subject to Part XIII tax .

Locations of other summaries		Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18	capital portion of s. 56(1)(d) is not excluded as an annuity under Canada-Turkey Treaty/RRSP annuity payments are pensions	428
Tax Topics - Other Legislation/Constitution - Federal - Income Tax Conventions Interpretation Act - Section 5 - Pension	RRSP annuity payments to Turkish resident were subject to Pt XIII tax as pension payments	46

18 November 2003 External T.I. 2003-0181195 F - REGLEMENT STRUCTURE

CCRA position on exemption of structured settlements (as described) extends to court-ordered personal injury payments

Also released under document number 2003-01811950.

Does the CCRA position that the staggered payments pursuant to an out-of-court settlement satisfying specified conditions also apply to benefits received pursuant to a court order? CCRA stated:

[P]ersonal injury damages paid in periodic instalments do not constitute an annuity contract for the purposes of the [Act] and the periodic payments themselves are not considered annuity payments.

However, an annuity contract purchased by a taxpayer or the taxpayer's representative with a lump sum received as damages for personal injury will be considered an annuity contract … and will be a source of income to the taxpayer.

Paragraphs 81(1)(g.1) and 81(1)(g.2), however, exempt a taxpayer's income from personal injury damages for taxation years in which the taxpayer was under the age of 21. …

[T]he Agency's position with respect to structured settlements extends to allowing annuities that are subject to the provisions of the second paragraph of section 1616 of the CCQ but would otherwise qualify as structured settlements as described in IT-365R2, to be non-taxable where the minor creditor can elect to receive a lump sum within three months of attaining majority.

The right of the minor to demand immediate payment of the present value of the balance of the annuity receivable within three months of attaining the age of majority is not in itself sufficient to refuse an application for an advance ruling on a structured settlement. … [T]he fact that the order is made by a court does not in itself prevent compliance with the requirements of IT-365R2.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a)	summary of CCRA position on structured settlements	94

20 May 1994 External T.I. 9405045 - STRUCTURED SETTLEMENT UNDER NO FAULT INSURANCE

Provided that all the requirements of the Insurance Act (Ontario) and relevant regulations are complied with, periodic payments made in settlement of damages for personal injury sustained in an automobile accident will be considered as non-taxable damages. Such a settlement will be considered a structured settlement as contemplated in IT-365R2, if the requirements in paragraph 5 are otherwise met.

29 January 1993 T.I. 9200395 (Tax Window, No. 27, p. 1, ¶2360)

Where a casualty insurer acquires an annuity contract to fund a series of periodic payments to compensate an injured party for lost income and acquires a second annuity contract providing for a series of periodic and balloon payments to fund future medical and personal care expenses, with both series of payments having a guarantee period and specified beneficiaries to whom the payments are directed in the event of the injured person's death before the end of the guarantee period, RC will require the first annuity contract to be non-commutable during the guarantee period or the life of the insured person. However, RC will consider it to be acceptable for the second annuity contract to be commutable after the death of the injured person if payments made under the annuity contract after death are directed to the casualty insurer.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c)		140
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business		140
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement		140

22 January 1993 T.I. 9203635 (Tax Window, No. 27, p. 1, ¶2360)

A structured settlement agreement that provides for balloon payments which the injured person can elect in the future to take either as a lump sum or as a further series of periodic payments (whose terms would be determined at the time of making the election) will not comply with IT-365R2 and, therefore, will not be exempt from tax.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c)		61
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business		61
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement		61

29 October 1992 T.I. 922997 (September 1993 Access Letter, p. 414, ¶C56-252)

Discussion of structured settlement by a self-insurer.

21 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 28, ¶1099)

Where an insurance company discharges its obligation to the insured under a disability rider in a life insurance policy by entering into an annuity contract, the annuity payments will be included in the individual's income under ss.12.2(3) or 56(1)(d). Although the monthly payments received by a beneficiary pursuant to a group term life insurance policy are not included in the deceased policy holder's proceeds of disposition for purposes of s. 148(1), the payments constitute annuity payments which must be included in the beneficiary's income under ss.56(1)(d) or 12.2(3).

ATR-40 (18 March 1991) "Structured Settlements"

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 3		15
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business		15
Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement		15

80 C.R. - Q.26

Where payments for damages that have been awarded by a court or resolved in an out-of-court settlement, in respect of personal injuries or death, are paid on a periodic basis, the payments will not be considered to be annuity payments for the purposes of ss.56(1)(d) and 60(a).

Paragraph 56(1)(h) - Registered retirement savings plan, etc.

Paragraph 56(1)(l.1) - Idem [Legal expenses]

Cases

Scharf v. Freure Homes Ltd., 95 DTC 5074 (Ont. Ct. J. (G.D.))

A judgement called for the payment to the plaintiff of $400,000 in damages for wrongful dismissal, and costs of $75,000 plus GST of $5,250. Somers J. found that the defendant had property withheld from the portion of judgement attributable to costs.

Administrative Policy

28 June 2004 Internal T.I. 2004-0073761I7 F - Dommages-intérêts-perte d'emploi

reimbursement of legal costs incurred to recover damages for failure to reinstate were includible under s. 56(1)(l.1)

After the taxpayer was wrongfully dismissed, an arbitrator ordered that the taxpayer be reinstated and be paid his back pay. The corporate employer wrongfully refused to reinstate the taxpayer, and the taxpayer obtained a court order for damages, reimbursement of legal costs and interest.

Regarding such legal costs reimbursement, the Directorate stated:

this reimbursement is not included in the definition of retiring allowance in subsection 248(1) and consequently will not be included in the taxpayer's income by virtue of subparagraph 56(1)(a)(ii). However, the taxpayer will be required to include the $XXXXXXXXXX so repaid in computing his income pursuant to paragraph 56(1)(l.1). The corporation is not required to issue an information slip for the $XXXXXXXXXX.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance	damages for failure to reinstate the taxpayer were a retiring allowance	89
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o.1)	deduction for legal fees incurred to recover damages that were retiring allowance	127
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c)	change regarding pre-judgment interest judicially ordered after 2003	95

8 October 1996 T.I. 962701 (C.T.O. "Loss of Employment, Mental Distress, Damages")

Although reimbursement of legal costs incurred in a wrongful dismissal action are taxable under s. 56(1)(l.1), a contingency fee payable by a client to his or her legal counsel is not an "award or reimbursement in respect of legal expenses" and, instead, is included in employment income under s. 56(1)(a)(ii), to the extent that the damages relate to the loss of employment.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance		111
Tax Topics - Income Tax Regulations - Regulation 100 - Subsection 100(1) - Remuneration		16

Paragraph 56(1)(n) - Scholarships, bursaries, etc.

Cases

Simser v. Canada, 2005 DTC 5001, 2004 FCA 414

Funds received by the taxpayer, who was profoundly deaf and studying to be lawyer, pursuant to the Special Opportunities Grant for Disabled Students With Permanent Disabilities, in order to help defray the costs of real time captioning and sign language interpretation during his attendance at a bar admission course, constituted a bursary for purposes of s. 56(1)(n). The reservation of the grant for students who attained a satisfactory scholastic standard (in addition to being in need of financial assistance) took the grant out of the realm of mere "accommodation", the obligation of the taxpayer to spend the funds on specific services did not alter the nature of the grant, and the grant accorded with various definitions of "bursary" which evoked the notion of financial assistance for needy students.

Words and Phrases

bursary

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(u)		112

The Queen v. Savage, 83 DTC 5409, [1983] CTC 393, [1983] 2 S.C.R. 428

$300 received by an employee of a life insurance company pursuant to its policy of paying such amounts to all of its employees who passed the difficult Life Office Management Association courses was exempt as falling within the ordinary meaning of a "prize for achievement" in the life insurance business, there being no requirement that there have been a contest with others, and it being irrelevant that the amount in the absence of S.56(1)(n) would have been taxable as employment income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)		85
Tax Topics - Statutory Interpretation - Redundancy/reading in words	exclusion in specific provision extended to general provision to avoid redundancy	34

The Queen v. McLaughlin, 78 DTC 6406, [1978] CTC 602 (FCTD)

An award of $10,000 made by a private trust to the Chairman of the Ontario Milk Marketing Board in respect of his contributions to Canadian agriculture was not a "prize" because it was not something that was striven for in a competition or a contest.

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Official Languages Act - Section 13		72

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		17
Tax Topics - Income Tax Act - Section 56 - Subsection 56(3)		191

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Substance	labels not deterinative	64
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		172
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		50

Administrative Policy

22 February 2012 External T.I. 2011-0424601E5 F - Scholarships and bursaries paid by a firm

potential qualification under s. 56(1)(n) if bursary paid by employer while student not a summer student or permanent employee

Does s. 6 or 56(1)(n) apply to a student, who has been hired by a professional firm for the summer, and then is provided with a $2,500 bursary by the firm for the following year of law-school studies after being offered, at the end of the summer, a permanent position to take effect after that year? CRA stated:

If the employer-employee relationship was not established at the time of the bursary payment and the amount was not described in subsection 6(3), the bursary would not be an amount received in respect of, in the course of, or by virtue of an office or employment. If none of the other exclusions in subparagraph 56(1)(n)(i) apply, the amount of the bursary would be included under that subparagraph.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)	employer-reimbursed tuition not considered for its training benefit if incurred before employment commenced	393

S1-F2-C2 - Tuition Tax Credit

Where a student receives free tuition or a reduction in tuition fees from an educational institution, the difference between the pre-determined tuition fee established by the educational institution for the course(s) and the amount paid by the student will generally be considered a scholarship or bursary for tax purposes and included in computing the student's income under subparagraph 56(1)(n)(i), unless the amount is included in the student's employment income or the employment income of the student's family member.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(a) - Subparagraph 118.5(1)(a)(i)		111
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(a) - Subparagraph 118.5(1)(a)(i)		282
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(a) - Subparagraph 118.5(1)(a)(ii)		138
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(b)		38
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(b)		132
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(b)		72
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(b)		40
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(b)		161
Tax Topics - Income Tax Act - Section 118.5 - Subsection 118.5(1) - Paragraph 118.5(1)(d)		98
Tax Topics - Income Tax Act - Section 118.61		11
Tax Topics - Income Tax Act - Section 118.81		11

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

Scholarships and bursaries are amounts paid or benefits given to students to enable them to pursue their education. The term bursary is not defined in the Act; however, its meaning is broad enough to encompass almost any form of financial assistance paid to enable a student to pursue his or her education. Bursaries can include amounts paid to defray living expenses, as well as amounts that are directly related to the cost of the education. The extent to which a student has discretion over the use of funds received will not effect its categorization as a bursary (see Simser v. The Queen, 2004 FCA 414, 2005 DTC 5001).

Bursaries and scholarships normally apply to post-secondary education, but can also apply below that level (para. 3.8).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

Amounts awarded to an employee are considered employment income rather than scholarships or bursaries (paras. 3.11-3.13).
Amounts awarded prior to, but in anticipation of, an employment relationship are typically scholarships or bursaries (paras. 3.14-3.16).
An amount awarded in respect of an employee's family member will typically not be an employment benefit, and the full amount may be eligible for the full scholarship exemption under s. 56(3) (para. 3.17). Amounts for elementary or postsecondary school are always an employee benefit (para. 3.18).
Amounts to an employee who is not at arm's length (e.g. a shareholder) are employment benefits or shareholder benefits, as appropriate (para. 3.19-20).
Training allowances are scholarships or bursaries if granted by certain authorities, such as provincial student assistance plans (para. 3.21-3.22).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

3.25 ... [A] fellowship generally refers to an amount paid or benefit given for the purpose of advancing a person's education. As such, it is similar to a scholarship or bursary, with the distinction that a fellowship is generally awarded to a graduate student by a university, charity, or similar body for doctoral studies or post–doctoral work.

Amounts for advancing a person's education post-degree are either employment income under s. 5(1), fellowship income under s. 56(1)(n)(i), research grants under s. 56(1)(o), or some combination thereof. An amount will be:

employment income if it arises in a relationship that is, objectively, an employment relationship (paras. 3.28-3.29);
fellowship income if "the primary purpose of the award is to further the education and training of the recipient in his or her individual capacity, such as studying for a doctoral degree" (para. 3.31); and
a research grant if "the primary purpose of the award is to carry out research for its own sake" (para. 3.32).

An example of an award with a split purpose is a sabbatical leave fellowship, which may be partly for the recipient's education and partly for the research itself. The characterization and apportionment of multi-purpose fellowships may be left to the grantor (who is in the best position to know why it awarded the fellowship), but in any case must be reasonable (para. 3.33).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

The tax treatment of a student loan depends on whether it is a "forgivable loan" or a "repayable award." CRA describes the distinction in detail.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

28 June 2010 External T.I. 2010-0362391E5 F - Revenus de récompenses

awards for winning music competitions might or might not be prescribed prizes

Must a music student include awards received for entries in various music competitions? CRA responded:

Since the awards described in the particular situation would be awards for outstanding achievement in a field of endeavour ordinarily carried on by the taxpayer, such awards would therefore be required to be included in the taxpayer's income under paragraph 56(1)(n), unless they are considered to be awards described in section 7700 of the Regulations.

Whether an award is covered by section 7700 of the Regulations is, however, a question of fact ... .

6 May 2009 External T.I. 2008-0295581E5 F - Bourses et aide financière aux médecins

specialized training grants made to unlicensed medical residents to encourage them to settle in remote areas were s. 56(1)(n) fellowships

Under various programs designed to encourage physicians to settle in remote areas of Quebec, some health and social services agencies in Quebec provide grants or financial assistance to practicing physicians and to medical students respecting (a) specialized training grants awarded to medical residents (with or without a licence) during the last two years of their specialty training, (b) grants to physicians concurrently both practising medicine and serving as medical residents (with or without a licence to practise) and (c) RAMQ [Régie de l'assurance maladie du Québec] scholarship for medical students. CRA stated:

[T]he amounts paid by the Agencies in the form of specialized training, professional development and scholarships paid by the RAMQ qualify generally as fellowships under paragraph 56(1)(n) as they allow medical students and residents (without a licence to practise) to pursue education and further training. These sums must be reported on a T4A slip … .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x)	s. 12(1)(x) inclusion of assistance to foreign doctors to become licensed so that they will practise in a remote area	70

25 July 2008 External T.I. 2008-0284861E5 F - Bourse post-doctorale

post-doctoral fellowship recognized under s. 56(1)(n) rather than (o), as the research was merely a means to furtherance of academic career

Before concluding that the taxpayer was required to include a post-doctoral fellowship under s 56(1)(n), CRA stated:

[A] bursary, scholarship or fellowship is included in paragraph 56(1)(n) if it enables a taxpayer to further the taxpayer’s academic career to the extent that the research is merely a means, however essential, to achieve that purpose. On the other hand, if the primary purpose of the award is to carry out research for its own sake (for example, to further knowledge in a particular field by discovering new facts, or by reinterpreting existing knowledge), the award is considered to be a research grant and is included under paragraph 56(1)(o).

11 August 2006 External T.I. 2006-0195781E5 F - Bourses de perfectionnement

National Research Council fellowships likely are employment income

The Natural Sciences and Engineering Research Council of Canada ("NSERC") paid fellowships to hos organizations to cover $30,000 of the minimum $40,000 cost of engaging graduates to engage in authorized research projects. CRA stated:

[I]t is quite possible that the NSERC fellowship recipient is employed by the host organization because of the relationship of subordination that appears to exist between the IRDF recipient and the host organization.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)	changed tests for distinguishing employment following Sagaz and Wolf	293

9 May 2006 Internal T.I. 2006-0176371I7 F - Bourses d'études ou d'entretien

payments (made by application against student loans) were “given to students who need financial assistance to continue their education” and, thus, were bursaries

After stating that “bursaries are grants given to students who need financial assistance to continue their education,” 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).

Words and Phrases

bursary

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt	bursaries “received” by students even though required to be applied directly to their loans	119

28 February 2005 Internal T.I. 2004-0103991I7 F - Remboursement de frais de scolarité

agreement of employer to pay tuition would have been taxable under s. 6(3) if a benefit

The taxpayer, who had been employed as a temporary lecturer at a University Department, was hired to work as a professor at the Department upon her completion of doctoral studies at a US university and was paid by the Department various of the expenses incurred by her in connection with such studies including the tuition fees of the US university.

CRA found that, given that she entered into the agreement while she was employed as a temporary lecturer with the Department, the tuition reimbursement amounts (if a benefit from employment, which the Directorate went on to find was not the case) were employment income pursuant to s. 6(3) and were excluded from treatment as a scholarship under s. 56(1)(n).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)	payment of tuition fees conditional on a return to extended employment was not a taxable benefit	207

20 June 1994 Internal T.I. 9409396 - SCHOLARSHIP PAID OUT OF A TRUST

Payments out of the net income of a trust to a university to be distributed as scholarships for students selected by the university, will be taxable to them in accordance with s. 56(1)(n) and not under s. 104(13), because the amount received by the student will be as or on account of a scholarship, and not trust income. On the other hand, where an irrevocable inter vivos trust is established to provide scholarship payments to beneficiaries who are children, grandchildren or great-grandchildren of the settlor, such beneficiaries will be taxable under s. 104(13) and will not be entitled to the $500 exemption under s. 56(1)(n).

3 December 1993 Income Tax Severed Letter 9326586 - Allowances Paid by CIDA to Foreign Students and Trainees

Amounts paid to individuals from developing countries in order to come to Canada to attend school full-time (usually for a period of 1 - 3 years) would be considered taxable income under s. 56(1)(n) to the extent the amount received exceeds $500. Such amount would include payment of all living, medical and travel expenses and all allowances.

20 August 1992, T.I. (Tax Window, No. 23, p. 22, ¶2160)

A grant made to enable an artist to undertake a specific artistic project will be included in income. However, a prize prescribed in Regulation 7700 will not be included in income.

6 April 1992 T.I. 920399 (March 1993 Access Letter, p. 69, ¶C56-215; Tax Window, No. 18, p. 22, ¶1859)

Amounts paid to students under Pacific Rim Educational Initiatives constitute scholarships or bursaries pursuant to s. 56(1)(n).

84 C.R. - Q.22

An employee will qualify for the $500 exemption only if the prize is awarded for the successful completion of a course of studies or for an achievement in a field of scientific or scholarly research carried on by the taxpayer.

IT-75R3 "Scholarships, Fellowships, Bursaries, Prizes, and Research Grants".

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		0
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)		0
Tax Topics - Income Tax Regulations - Regulation 7700		0

Articles

Mark Dumalski, Dimitri Sarabalos, "Are Payments to Research Assistants Tax-Free?", Canadian Tax Focus, Vol. 3, No. 2, May 2013, p. 11

The CRA's view is that an award involving a research component should be classified as follows:

1) if the primary purpose of the award is to further the education and training of the recipient, the award will be considered a fellowship (scholarship) (paragraph 3.31);

2) if the primary purpose of the award is to enable the recipient to carry out research for its own sake, the award will be considered a research grant (paragraph 3.32); and

3) if the research is conducted in the context of a traditional employment relationship as determined by the usual factors, the award will be employment income (paragraph 3.29).

...

DiMaria v. The Queen

(2008 TCC 114) stands for the proposition that an amount need not be awarded on the basis of academic achievement in order to be classified as a scholarship; nevertheless, it leaves open the possibility that some selection process or criteria may be necessary, notwithstanding that the payer is free to establish such criteria. In Okonski v. The Queen (2008 TCC 142), decided under the informal procedure, payments were found to be scholarships, notwithstanding that an unlimited number were available. In summary, it is not clear whether payments can be treated as scholarships if they are provided to all or most students in an academic program, as might occur in PhD programs.

Jack Bernstein, "Scholarships: The Enhanced Employee Incentive", CCH Tax Topics, No. 1909, 9 October, 2008

Paragraph 56(1)(o) - Research grants

Cases

Ghali v. Canada, 2005 DTC 5472, 2004 FCA 60

The taxpayer, an associate professor at the University of Laval, received a subsidy from the University during his sabbatical year (which was mandated by the collective agreement) towards the costs of his sabbatical plan which had as its goal the bridging of research underway in the metallurgical field at the University and at other research centres including the exploration of collaboration possibilities, and also entailed his giving a large number of lectures. The subsidies thus were "grants" (any form of financial assistance paid to a person by a public agency in order to achieve an objective of public interest) (p. 54891) and "research or ... similar work" ("a set of scientific, literary and artistic works and activities having as its purpose the discovery and development of knowledge") (p. 5482).

The research grants net of expenses were includible in the taxpayer's income under s. 56(1)(o).

Words and Phrases

research grant

Administrative Policy

31 July 2014 External T.I. 2013-0509291E5 - Research grants

reduction of faculty salary and receipt of research grant

A faculty member will forgo salary and instead receive a research grant to undertake a specific research project. The research activity may be a normal part of the individual's terms of employment or if the faculty member may be on a sabbatical leave.

CRA stated that the primary purpose of the grant must to carry out research, that when the member is "retained on part salary, the research project undertaken must not be the type of research work ordinarily expected of the faculty member as part of his or her normal employment duties," and that if the member forgoes a portion of the member's salary, there should be a commensurate reduction in normal employment duties. CRA then stated "when the requirements are met, certain amounts paid to faculty members under a program such as you described could be considered a research grant for purposes of paragraph 56(1)(o)… ."

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

CRA adopts a definition of research set out in Ghali: "a set of scientific, literary and artistic works and activities having as its purpose the discovery and development of knowledge." Research Grants do not include:

research for the sake of developing the researcher's research skills;
awards for vague grants; or
generally speaking, the work of undergraduates.

If the term of the grant does not mention research, s. 56(1)(n) applies even if a great deal of research is in fact done.

Words and Phrases

research

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

Grants given to a person outside of a corporation's or university's own organization are considered to be research grants under s. 56(1)(o) regardless of whether the research belongs to the grantor or recipient (para. 3.61).

A grant to an employee may be a research grant, but only if the research is unrelated to the recipient's ordinary duties - for example, a grant to a faculty member on sabbatical (paras. 3.62-3.63).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

For the purposes of paragraph 56(1)(o), a research grant is not considered to be received at any time if all of the following circumstances apply:

The funds are made available to an individual who holds an academic appointment at a university, hospital, or similar institution, to enable the individual to carry on research or similar work;

the funds are paid directly to the university, hospital, or similar institution;

the funds are provided only to pay for the costs of the research project; and

the funds were not used by the individual and were not otherwise available for the personal benefit of the individual.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

Payments made out of a grant to a co-researcher are research grants under s. 56(1)(o) and payments to an employee are not. Payments to a student may be either research grants or employment income, depending chiefly on the extent to which the student is supervised - The more independently the student operates, the stronger the case for the student's remuneration falling under s. 56(1)(o).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

Travel expenses are typically allowable research expenses, but if the researcher establishes a temporary base away from home then the taxpayer may be considered to be residing there - in which case many expenses that would otherwise be travel expenses, such as food and rent, would become living expenses.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)		166
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

24 June 2011 External T.I. 2011-0409741E5 F - Déductions d'impôt sur une bourse de recherche

assistance received by unenrolled student towards Ph.D. thesis research assistance was a research grant under s. 56(1)(o)

A Chinese student worked at the organization’s premises on a doctoral thesis and who was not enrolled in a Canadian university received a scholarship award from it. Was it exempt? Before going on to discuss a Treaty exemption, CRA stated:

[R]esearch grants that are received by an individual are included in income pursuant to paragraph 56(1)(o) of the ITA. A scholarship awarded to a student to complete a research project leading to a Ph.D. and other amounts received by the student to cover the student’s maintenance and study expenses while working on their doctoral dissertation would normally qualify as a research grant within the meaning of paragraph 56(1)(o) … .

Locations of other summaries		Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 20	assistance received by unenrolled Chinese student towards Ph.D. thesis research assistance was Treaty-exempt	120

23 March 2011 External T.I. 2010-0382351E5 F - Bourses d'études ou subventions de recherche

research was conducted in course of doctoral studies, so that expenses thereof non-deductible

Can an individual who received various scholarships in the course of pursuing a doctorate at a university, deduct the costs of acquiring a motor-powered glider in conducting a research project? In responding “no,” CRA stated:

Where a taxpayer continues the taxpayer’s studies and receives scholarships or fellowships, the taxpayer will not be able to deduct the expenses incurred for the studies for which the scholarships were paid to the taxpayer … [whereas] paragraph 56(1)(o) permits a taxpayer to deduct expenses incurred in a taxation year for the purpose of continuing the taxpayer’s research.

… If the principal purpose of the award is pursuing the recipient's education and training for the recipient (for example, if the recipient is studying for a PhD), the scholarship is included in accordance with subparagraph 56(1)(n)(i), even though research is being done to achieve that objective.

On the other hand, if the principal purpose of an award is to perform research for its own sake (for example, to deepen knowledge in a particular field by making a discovery or finding a new interpretation of known facts), the award is considered to be a research grant and is included pursuant to paragraph 56(1)(o). Where such research allows the recipient to continue the recipient’s education and training, such a benefit does not negate the principal purpose of the grant provided that such benefit could be considered to be a secondary purpose of the grant or an inevitable but incidental benefit.

… In your situation, the scholarships you receive seem to be scholarships or fellowships, not research grants, because …the research you are currently conducting is focused on obtaining a postgraduate degree.

Words and Phrases

scholarship

IT-75R3 "Scholarships, Fellowships, Bursaries, Prizes, and Research Grants".

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		0
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)		0
Tax Topics - Income Tax Regulations - Regulation 7700		0

Paragraph 56(1)(r) - Financial assistance

Administrative Policy

9 July 2020 Internal T.I. 2020-0854701I7 - Withholdings from CERB/CSB payments

CERB and CESB payments are government assistance

The Directorate found that the source deduction requirements (including graduated rates) under Reg. 102(1) applied to Canada emergency response benefit (CERB) and Canada emergency student benefit (CESB) payments having regard inter alia to their being governmental financial assistance under s. 56(1)(r), so that they were deemed to be “remuneration” under para. (h) of the definition in Reg. 100(1).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Regulations - Regulation 102 - Subsection 102(1)	CERB and CESB payments are deemed remuneration for source deduction purposes	125
Tax Topics - Income Tax Regulations - Regulation 100 - Subsection 100(4)	there is a deemed establishment of a deemed employer of a deemed employee where s. 56(1)(r) government assistance is paid	185

17 July 2015 External T.I. 2014-0517091E5 - Wage Subsidies

wage subsidies or supplements to disabled

Under a wage subsidy program, the delivery organization will provide wage subsidies to employers to assist with wage costs of hiring "barriered" clients, who are paid directly by the employer. In addition, the clients may also receive additional amounts paid directly from the delivery organization or paid to a third party for the benefit of the client, for living supports, dependent care, transportation, essential work supplies, personal grooming, food, and certifications and licenses. Does s. 56(1)(r) apply?

CRA indicated that where the funding provided through a program established under the Canada-XX Labour Market Development Agreement, appeared to be includible under s. 56(1)(r)(iii). Where the funding is provided under other programs as earning supplements under a project sponsored by a government in Canada to encourage individuals to obtain or keep employment, the amounts would be included in income under s. 56(1)(r)(i). Otherwise, the amounts could be considered social assistance and included in income under s. 56(1)(u).

17 July 2015 External T.I. 2014-0517081E5 - Assistance for individuals with disabilities

federal assistance to those with disabilities

Amounts received by individuals with disabilities under a program to replace the employment programs and services funded under Part II of the Employment Insurance Act (the "EI Act") and the employment programs targeting XXXXXXXXXX recipients, for communication, hearing and assistive tools, special assessments paid to third parties, payments relating to ergonomic equipment (such as special keyboards and chairs), and assistive technical training supports (such as speech recognition software). Are the amounts taxable to the recipient?

CRA indicated that where the funding is provided through a program that is established under the Canada-XX Labour Market Development Agreement, the amounts appear to be included under s. 56(1)(r)(iii). Where the funding is provided from other programs, the amounts would likely be considered social assistance under s. 56(1)(u), but would not be included in income if the assistance falls under one of the exemptions found in Regulation 233(2)

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(u)	federal assistance to those with disabilities	147

4 March 2015 Internal T.I. 2014-0527751I7 F - Soutien de revenu accordé aux individus

includes amounts received under the active employment measures of Emploi-Québec

After describing the active employment measures of Emploi-Québec and referencing the tests in s. 56(1)(r)(iii), CRA stated:

[W]e are of the view that the XXXXXXXXXX program comes within subparagraph 56(1)(r)(iii) and that the amount received by a taxpayer under this program must be included in his or her income under this subparagraph. This is also the conclusion…in the Michaud case.

S1-F2-C3 - Scholarships, Research Grants and Other Education Assistance

The deduction [under s. 110(1)(g) by way of s. 56(1)(r)] applies only to tuition assistance and not to other types of assistance a student may receive in connection with the student's training. The deduction is restricted to instances where:

the amount of the assistance is included in the student's income;

the student is not permitted to claim a tuition tax credit under subsection 118.5(1) for the tuition fees paid under the program; and

the amount is not otherwise deductible in computing the taxpayer's income for the year.

To the extent of any amounts or benefits repaid by the taxpayer which were previously included in income under paragraph 56(1)(r) and for which a deduction was not claimed under paragraph 110(1)(g), a deduction under subparagraph 60(n)(vi) is allowed in the year of repayment.

(However, s. 60(n)(vi) does not apply to repayments of employment insurance benefits.)

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		27
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		238
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		137
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		132
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		51
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		66
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		119
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		73
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(o)		98
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n)		163

12 February 2007 External T.I. 2006-0205981E5 F - DAS programme de soutien financier pour handicapés

assistance paid to those with disabilities to assisting taking up employment came within s. 56(1)(r)

A not-for-profit organization ("NPO") receives funds from the federal Opportunities Fund for Persons with Disabilities program of Human Resources and Skills Development Canada in order to provide funding to individuals with disabilities to assist them to enter or re-enter the labour market. CRA confirmed that the services provided by the NPO came within ITA s. 56(1)(r), so that they were “remuneration” under para. (h) of the definition thereof in Reg. 100(1) so that the payments were subject to source deductions and subject to an obligation to issue a T4A under Reg. 200(2)(c).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Regulations - Regulation 100 - Subsection 100(1) - Remuneration - Paragraph (h)	assistance paid to those with disabilities to assisting taking up employment was “remuneration” subject to source deductions	94

Subparagraph 56(1)(r)(iv)

Administrative Policy

2 January 2008 External T.I. 2007-0228241E5 F - Programme canadien d'options familles agricoles

payments under the Canadian Farm Families Options Program to those without a farming source of income would be included under s. 56(1)(r)(iv)

Regarding payments made under the Canadian Farm Families Options Program (Options Program) to provide farmers and their families with immediate financial assistance and access to professional development services, CRA indicated that in the case of program recipients who did not have any other farm income (shareholders, spouses without a farm business), such amounts would be included under s. 56(1)(r)(iv), whereas in the case of recipients who otherwise had a farming business income, the payments would be included in their farming business income pursuant to s. 9(1), or s. 28(1) if they had elected the cash method.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit	payments under the Canadian Farm Families Options Program were business income to those with a farming source of income	97
Tax Topics - Income Tax Act - Section 146 - Subsection 146(1) - Earned Income	payments under the Canadian Farm Families Options Program to those without a farming source of income would be excluded from earned income	130

Paragraph 56(1)(u) - Social assistance payments

Cases

Simser v. Canada, 2005 DTC 5001, 2004 FCA 414

A Special Opportunities Grant for Disabled Students With Permanent Disabilities received by the taxpayer, who was permanently deaf and applied the grant to cover part of the costs of real time captioning and sign language interpretation while attending a bar admission course, was to be characterized as a bursary for purposes of s. 56(1)(n) rather than a social assistance payment for purposes of s. 56(1)(u). Nadon J.A. stated (at p. 5013) that:

"If the true purpose of a bursary is to provide financial assistance to students, then it makes no sense to exclude from the definition thereof funds awarded on condition that financial needs be assessed."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n)		130

Administrative Policy

21 February 2006 Internal T.I. 2006-0169341I7 F - Montants reçus sous le programme "Devenir"

amounts received by those in need as supplementary amounts to cover additional guidance costs, including reimbursement of transportation costs, were social assistance

The "Devenir" program, targets employment assistance recipients in the most difficult economic and social situations who are not employable, who are encouraged to use certain support and guidance services and, in addition to the basic benefit, receive additional payments, including a support allowance paid to those claimants who actively participate in the program's occupational activities (in the amount of $130 per month), and reimbursement of additional costs associated with participation in the "Devenir" program, such as childcare and transportation costs.

After referring to the definition of “social assistance” for the purposes of Part V of the Federal-Provincial Fiscal Arrangements Act as "aid in any form to or in respect of a person in need,” the Directorate found that these amounts were includible under s. 56(1)(u) and deductible under s. 110(1)(f), noting that, in the case of the transportation costs:

Although those costs are in the form of expense reimbursements, they are nonetheless amounts received as social assistance benefits based on a needs test that are paid under a government assistance program.

Words and Phrases

social assistance

4 October 2019 External T.I. 2019-0825431E5 - Tenant relocation assistance

non-means-tested compensation received by residential tenants from a developer to compensate them for their dislocation costs was non-taxable

The City required a developer to pay tenants, whose units in a residential complex were to be replaced or renovated, (at their option) lump sums to compensate them for their moving and relocation expenses, or a supplement equal to their additional rental cost (subject to a cap) while they were awaiting a return to the developed complex. Eligibility to receive the lump-sum or the top-up supplement amount was not based on a financial means, needs or income test of the displaced tenant. CRA concluded:

[I]t does not appear that these amounts would constitute income from a source, including social assistance under paragraph 56(1)(u) … .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 3	compensation received by residential tenants from a developer to compensate them for their dislocation costs was non-taxable	181

17 July 2015 External T.I. 2014-0517081E5 - Assistance for individuals with disabilities

federal assistance to those with disabilities

Amounts received by individuals with disabilities under a program to replace the employment programs and services funded under Part II of the Employment Insurance Act (the "EI Act") and the employment programs targeting XXXXXXXXXX recipients, for communication, hearing and assisting tools, special assessments paid to third parties, payments relating to ergonomic equipment (such as special keyboards and chairs), and technical training supports (such as speech recognition software). Are the amounts taxable to the recipient?

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r)	federal assistance to those with disabilities	148

29 July 2015 External T.I. 2015-0575631E5 - social assistance

potential exclusion of payments in kind

A social assistance organization may purchase items such as cookware, cutlery, furniture and food cards to assist its clients. Funds may also be provided sporadically during the year to assist in paying rent, to purchase clothes for a job interview and for other needs. Must the value of the non-monetary items be reported on a T5007 and what is meant by a "series of payments" for reporting purposes? CRA responded:

A non-monetary item provided to an individual could be a social assistance payment if a payment was made to obtain the item for the benefit of the individual. However, if no payment was made to obtain a non-monetary item given to an individual (for example, donated household goods or furniture), the value of the non-monetary item would likely not be considered a social assistance payment for the purpose of paragraph 56(1)(u)… .

After discussion the means test, and quoting Reg. 233(2) including the reference to ""series of payments," CRA stated:

[A] series of payments…is a number of similar payments made in a particular year to an individual under the same program of a government or other organization.

…[I]f an amount is considered social assistance…but a financial "means, needs or income" test is not used to determine eligibility when assisting a client, or the amount is excluded from the reporting requirements by subsection 233(2)…, the amount does not have to be reported on a T5007 and is not included in the recipient's income under paragraph 56(1)(u)… . [I]f it is not social assistance included in income under paragraph 56(1)(u), [it] would likely not be included in income of the client under any other provision of the Act.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 3	payments in kind by social assistance organization	87
Tax Topics - Income Tax Regulations - Regulation 233 - Subsection 233(2)	potential exclusion of payments in kind	259

14 February 2014 Internal T.I. 2013-0495661I7 - Taxability of payment from US charitable trust

financial assistance to former charity employee

Monthly allowances received by a former employee of a US charitable trust is not income to him given that they are "financial assistance is based on the individual's personal financial needs" so that "the amounts received from the Fund are likely received in the individual's personal capacity rather than by virtue of the individual's employment." However, "since the criteria of paragraph 56(1)(u) appear to have been met, the financial assistance should be included in the individual's net income under that paragraph and deducted under paragraph 110(1)(f)."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b)	financial assistance to former charity employee	88

2 September 2011 Internal T.I. 2011-0419111I7 F - Programme de compensation du MESS

social assistance payments aggregating less than $500 not required to be included in income

After noting that payments made by Ministère de l'Emploi et de la Solidarité sociale (the "MESS") to individuals, who were homeless and receiving financial assistance of last-resort represented social assistance payments described in s. 56(1)(u), CRA stated:

ITR subsection 233(2) provides that a T5007 return does not have to be filed in certain circumstances, including where: the payment is paid as a part of a series of payments, the total of which in the particular year does not exceed $500 … .

Where a social assistance payment is not required to be reported in a T5007 return by reason of ITR subsection 233(2), the Canada Revenue Agency is of the view that the benefit does not have to be included in computing the recipient’s net income under paragraph 56(1)(u). In this case, it appears that ITR subsection 233(2) applies to amounts paid under the Program. In such a case, no source deduction would be necessary.

2 February 2010 Internal T.I. 2009-0345741I7 F - Programme d'aide financière d'urgence ("PAFU")

social assistance paid without a means, needs or income test was not income to recipient

After referencing the fact that under the current Quebec PAFU [Emergency Financial Assistance Program] regulatory framework, the financial assistance could be paid (by the Ministry of Employment and Social Solidarity (the "MESS")) as a lump sum without regard to the means of the single adult or family receiving such assistance, the Directorate stated:

[T]he English version of paragraph 56(1)(u) is the one to be applied since it is consistent with the wording of paragraph 110(1)(f), which uses similar expressions in both languages, namely the expression "après examen des ressources, des besoins ou du revenu" in the French version and the expression "on the basis of a means, needs or income test" in the English version. …

Since the PAFU is primarily intended to meet the needs of people affected by an emergency situation, we believe that the financial assistance that will be paid by the MESS in the form of a lump sum to cover living expenses and/or specific costs will be paid after a review of needs by the MESS, without the MESS conducting a means or income test for people affected by an emergency situation. This financial assistance would therefore be a social assistance benefit under section 56(1)(u).

After further referencing the possibility that the lump sum payment of PAFU financial assistance could be made without a means, needs, or income test, the Directorate stated:

In the absence of a means, needs or income test, an amount paid under the PAFU would not satisfy the conditions of paragraph 56(1)(u) and would not have to be included in income. Consequently, the person paying the amount would not have to make source deductions or issue information slips.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Regulations - Regulation 233 - Subsection 233(2) - Paragraph 233(2)(g)	lump sum emergency assistance under Quebec program would not be required to be included in income because no information slip required	183

18 March 2008 External T.I. 2008-0265861E5 F - Programme d'aide financière d'urgence ("PAFU")

s. 56(1)(u) applied to emergency assistance not based on an income test

Regarding the treatment exemption under s. 56(1)(u) of amounts paid under the Programme d'aide financière d'urgence (PAFU) by the Ministry of Employment and Social Solidarity (the "MESS") to people who find themselves in an emergency situation, particularly because of a geopolitical event, CRA concluded that such assistance was included in the recipients’ income under s. 56(1)(u) and deducted under s. 110(1)(f). In this regard, the summary stated:

The English version of paragraph 56(1)(u) of the Act uses the expression "means, needs or income", while the French version uses the word "et" between the words besoins and revenu. Where the two versions of the Act do not use exactly the same terms, the broader meaning, which is more consistent with the legislative intent and purpose of the Act, should be chosen in this case. The consistent wording of the expression "means, needs or income" in the English version of paragraph 56(1)(u), which has remained the same since the paragraph was introduced into the Act, must be used.

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - French and English Version	English version of s. 56(1)(u), as the broader of the two, was to be preferred	59
Tax Topics - Income Tax Act - Section 153 - Subsection 153(1)	no source deductions from social assistance payments	35

20 July 2007 Internal T.I. 2007-0230451I7 F - Aide financière aux mineures enceintes

financial assistance to pregnant minors was includible under s. 56(1)(u) and deductible under s. 110(1)(f)

A program under the Individual and Family Assistance Act (Quebec) , provided temporary financial assistance to pregnant women under the age of 18, residing in Quebec lacking in family and economic resources, from the 20th week of pregnancy until the birth of the child. That assistance was based on the risk to the health and physical integrity of the mother and the unborn child and the financial support granted to applicants was based on their income and resources, assessed on a monthly basis.

The Directorate indicated that such financial assistance was to be included in income under s/ 56(1)(u) as social assistance benefits but that there was an offsetting deduction under s, 110(1)(f), stating (in its summary):

After reviewing the program, its terms and conditions and its application, we are of the opinion that the amounts paid under the program are paid following an examination of the applicants' resources, needs and income.

3 October 2006 Internal T.I. 2006-0208161I7 F - Projet pilote - Alternative jeunesse

Quebec youth alternative payments are social assistance

Regarding assistance payments under the program "Alternative jeunesse" ["Youth Alternative" program] of the Ministère de l'emploi et de la solidarité sociale du Québec to young adults who voluntarily agree to an intervention plan for reintegration into the labour market, CRA stated:

The youth allowance is paid to a participant in the "Alternative jeunesse" program as a replacement for the basic employment assistance benefit. Since the latter is paid following an examination of the participant's needs, resources and income, it is clear that the youth allowance constitutes a social assistance benefit under paragraph 56(1)(u). …

[T]hey can also benefit from an offsetting deduction under paragraph 110(1)(f) so that those amounts are not taxed.

11 December 1995 Internal T.I. 95056370 - Traitement fiscal - versement particulier - indien

benefits paid to Cree hunters regarding their hunting and trapping activities were s. 56(1)(u) support payments that were not exempted under s. 87

Are benefits paid to a Status Indian by the Cree Hunters and Trappers Income Security Board to be included in computing the recipient’s income under s. 56(1)(u), or are they excluded under the Indian Act, where such benefits are paid respecting hunting, trapping or fishing activities that occur on or off a reserve, and to Status Indians residing on or off the reserve? CRA stated:

The purpose of the Hunters and Trappers Act Benefit is to enable Status Indians and their family members to continue to live their traditional lifestyle and to provide them with a guaranteed income in that regard. This program is open to all Cree hunters and trappers whether or not they are resident on a reserve.

In its summary, CRA stated:

These benefits provide financial support to all Cree hunters and trappers, whether or not they reside on a reserve. We consider those benefits to be "social assistance benefits" … .

… The benefits are not solely for the benefit of an Indian resident on a reserve and are therefore not personal property of an Indian resident on a reserve and are therefore not exempt from taxation under [the Indian Act].

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Indian Act - Section 87	benefits paid to Crees to support their traditional hunter lifestyle were social assistance	285

13 January 1992 T.I. (Tax Window, No. 15, p. 21, ¶1696)

Grants made under the Home Adaptions for Seniors Independence Program are includible under s. 56(1)(u).

16 August 1991 T.I. (Tax Window, No. 7, p. 16, ¶1394)

There is no provision in the Act which permits a deduction for the repayment of social assistance payments.

7 September 89 Memorandum (February 1990 Access Letter, ¶1121)

Payments by the Quebec government to low-income workers pursuant to the Parental Wage Assistance program constitute social assistance payments. Should a beneficiary have to reimburse some of the money received under the program, he would not be entitled to a deduction.

Paragraph 56(1)(v) - Workers’ compensation

Cases

Canada v. Whitney, 2002 DTC 7145, 2002 FCA 266

Amounts received by the taxpayer from her employer (the New Brunswick government) for a work-related injury, as required by a clause in the collective agreement, did not qualify as compensation received under an employees' compensation law notwithstanding that the collective agreement required that the injury be certified by the Workers' Compensation Board.

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc.		61

Administrative Policy

22 February 2012 External T.I. 2011-0421671E5 F - Loss of retirement income benefit - death

inclusion under s. 56(1)(v), offsetting deduction under s. 110(1)(f)(ii), for Ontario WSIB lump sum on death

A lump sum received by the estate of a deceased injured worker from the Ontario Workplace Safety and Insurance Board would be included in income under s. 56(1)(v) (which might be the return of the estate or of the survivor) but deducted under s. 110(1)(f)(ii).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1) - Paragraph 110(1)(f) - Subparagraph 110(1)(f)(ii)	deduction for WSIB compensation paid to estate of deceased injured worker	158

23 November 2009 Internal T.I. 2009-0324731I7 F - Demande d'exemption administrative

lump sum worker’s compensation payment could affect Pt. I.2 (OAS clawback) tax

An individual incurred legal fees to recover in excess of $80,000 in Quebec workers’ compensation (CSST) payments. After finding that the legal fees were non-deductible, the Directorate stated:

In addition, CSST benefits paid retroactively must be included in income in the year they are received by virtue of paragraph 56(1)(v). They are then deducted in calculating taxable income under subparagraph 110(1)(f)(ii).

The receipt of a lump sum for CSST benefits may result in an amount payable under Part I.2 of the Income Tax Act that is different from the amount that would have been payable if the taxpayer had received these CSST benefits over a period of several years. Similarly, the fact that a lump sum amount is included in computing a taxpayer's net income and deductible in computing the taxpayer’s taxable income may affect certain credits and benefits provided for in the Act that are based on net income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(b)	legal fees to recover lump sum worker’s compensation payment were non-deductible	50

25 January 2007 External T.I. 2006-0213961E5 F - Rémunération, assurance salaire, indemnité CSST

amount paid by employer in advance of workers’ compensation was reportable as s. 6(1)(f)(iii) income, with the employee later taking a s. 8(1)(n) deduction and a s. 56(1)(v) inclusion

In Year 1, pending the employee’s application for worker’s compensation from the CSST for a disability (which ceased later in the year), the employer paid the employee salary insurance benefits of $40,000, with the employee receiving $10,000 in salary in Year 1 outside the period of disability.

In Year 2, the CSST paid $30,000 in benefits for Year 1 and issued a T5007 slip to the employee for that amount. The employer reversed the accounting entries for the $40,000 in salary insurance benefits paid in Year 1 and, as required by the collective agreement, paid the employee the difference between the amount received from the CSST and the salary that the employee would normally have received had he been at work. The employee also received his regular salary of $65,000.

CRA indicated that the wage maintenance amount of $40,000 paid in advance of the receipt of the workers’ compensation was reportable as s. 6(1)(f)(iii) income , with the employee taking a s. 8(1)(n) deduction when this amount was repaid out of his regular salary, and with the workers’ compensation being included in his income on receipt under s. 56(1)(v).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(f) - Subparagraph 6(1)(f)(iii)	wage maintenance amount paid in advance of workers’ compensation was reportable as s. 6(1)(f)(iii) income, with s. 8(1)(n) deduction when repaid after receipt under s. 56(1)(v)	396

18 December 2006 Internal T.I. 2006-0208611I7 F - Indemnités pour lésions professionnelles

application of ss. 56(1)(v) and 110(1)(f)(ii) to non-contractual amounts paid by bank pursuant to Canada Labour Code to Ontario employees, not in excess of the WSIB scales

A bank, wishes to establish a compensation plan for its Ontario-resident employees, who suffer work-related injuries or illnesses, pursuant to 239.1(2) of the Canada Labour Code, which provides:

Every employer shall subscribe to a plan that provides an employee who is absent from work due to work-related illness or injury with wage replacement, payable at an equivalent rate to that provided for under the applicable workers’ compensation legislation in the employee’s province of permanent residence.

The provincial legislation is Ontario's Workplace Safety and Insurance legislation. The employer will use an intermediary, to manage and pay the compensation.

The Directorate stated:

For compensation to be considered subject to paragraph 56(1)(v) of the Act, it must not be governed by a contractual undertaking. …

In addition, since employees reside in Ontario, the compensation paid must not exceed the compensation payable under Ontario's Workplace Safety and Insurance Act. If the employer guarantees the full amount of wages or a percentage that is greater than the percentage payable under Ontario's workers' compensation legislation, the amounts received by the employee in excess of the compensation payable under the provincial legislation are fully taxable. …

[B]enefits received by an employee pursuant to an employer's obligation under the Code are considered to be received under a federal workers' compensation statute for the purposes of paragraph 56(1)(v) and subparagraph 110(1)(f)(ii). …

Compensation received under a workers' compensation act of Canada or of a province in respect of injury, disability or death must be included in computing the employee's income pursuant to paragraph 56(1)(v). That same allowance is deductible in computing the employee's taxable income pursuant to subparagraph 110(1)(f)(ii). No withholding under subsection 153(1) is required … . [T]he use of the administrative services of an intermediary does not change the above tax consequences.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Regulations - Regulation 232 - Subsection 232(4)	Reg. 232(4) exclusions are broader than those listed	140

4 December 2006 Internal T.I. 2006-0211061I7 F - Rentes pour incapacité et stabilisation sociale

monthly disability benefits after accident, and monthly top-up payment after return to work at lower pay, came within ss. 56(1)(v) and 110(1)(f)(ii)

Commission de la santé et de la sécurité du travail du Québec (the "CSST") pays monthly pensions for disability of workers as well as monthly payments to compensate for the difference between the person's wages before and after the accident. CRA found that, as such amounts were paid as financial assistance payments under a provincial workers' compensation act to compensate for loss of employment income as a result of disability, illness or injury, they were compensation payments to be included under s. 56(1)(v) and deducted under s. 110(1)(f)(ii).

IT-202R2 "Employees' or Workers' Compensation

13 November 1992 T.I. 922953 (September 1993 Access Letter, p. 414, ¶C56-253)

Where parents providing services as trustees or attendants receive disability payments on behalf of a disabled worker, such amounts will be included in the disabled worker's income under s. 56(1)(v), and will be deductible to the payor under s. 110(1)(f)(ii).

Paragraph 56(1)(x) - Retirement compensation arrangement

Administrative Policy

24 January 2005 External T.I. 2004-0099471E5 F - Convention de retraite pour un actionnaire-employé

Part XI.3 tax and s. 56(1)(x) income inclusion apply even where RCA contribution is partially or fully non-deductible

Are contributions by a corporation to an RCA deductible in computing its income where the contributions relate to services rendered by a shareholder-employee while self-employed and before the corporation’s incorporation, and can the RCA be funded when such contributions are not deductible to the employer? After paraphrasing the s. 20(1)(r) wording, indicating that, to be deductible, “the contributions must relate to services rendered to that corporation as an employee” and discussing the s. 67 limitation, CRA stated:

[T]hat subsection does not … restrict the contributions necessary to fund an RCA. Thus, the excess of a contribution that is not deductible pursuant to paragraph 20(1)(r) will be subject to the 50% refundable tax under Part XI.3 and will be included in computing the shareholder-employee's income pursuant to paragraph 56(1)(x) for the year in which the shareholder-employee receives the RCA amounts in question.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(r)	no deduction regarding pre-incorporation services, and longstanding CRA position re shareholder-manager compensation	129
Tax Topics - Income Tax Act - Section 67	81 Roundtable position on shareholder-manager compensation also applies to RCA contributions	109
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement	a significant reduction in bonus or salary matched by an RCA contribution likely suggests it instead is an SDA	244

8 June 1993 Memorandum (Tax Window, No. 32, p. 17, ¶2614)

Discussion of the options available in respect of the receipt of a lump sum from a U.S. pension plan.

6 August 1991 T.I. (Tax Window, No. 8, p. 7, ¶1421)

Where funds in a foreign pension plan are transferred directly to a registered pension plan in a lump sum, the transfer will not be taxable if the employee is a Canadian resident, the terms of the registered pension plan required the transfer and the transfer did not occur at the employee's request.

Subsection 56(2) - Indirect payments

Cases

4431472 Canada Inc. v. Canada (Attorney General), 2021 FC 812

it would be reasonable for CRA to reverse a s. 56(2) assessment of the shareholder where it had refused to reverse the inclusion of the same income to the corporation

A Canadian corporation (“443 Inc”) filed its tax returns on the basis that distributions received by it from a trust were distributions of fee income (the “GAM fees”). However, it changed its view and filed amended returns for those years requesting that CRA reassess and issue refunds based on the GAM fees not being income from a source. CRA did not reassess those returns.

Subsequently, CRA assessed the sole individual shareholder of 443 Inc. on the basis that the GAM fees were includible in his income under s. 56(2). He appealed those reassessments to the Tax Court.

443 Inc. sought judicial review of a decision whereby the Minister appeared to make a “final” determination not to proceed with the processing of the amended tax returns of 443 Inc. Pamel J set this decision aside on the basis that it in fact was unclear whether what was decided was (1) an outright refusal to exercise the Minister’s discretion to reassess 443 Inc, so as to issue the requested refunds, or (2) a “finalization” of her earlier proposal to postpone her decision on processing the amended returns until the issue as to whether the GAM fees were income was judicially determined.

In explaining the significance of the distinction between these two alternatives, Pamel J had earlier noted the statement in IT-335R2 regarding s. 56(2) that “it is normally the … CRA … practice not to assess the same income twice." He indicated that if indeed the Minister had made a final determination not to reassess (i.e., the 1^st alternative), so that the effect was to clearly impose double taxation (i.e., inclusion of the GAM fees in the hands both of 443 Inc. and its shareholder), “the reasonable corollary decision would be for Minister to take a consistent position in respect of [the shareholder’s] appeal of his reassessments” (para. 75) (i.e., it would be “reasonable” for the Minister to reverse the s. 56(2) reassessments for those years).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(1)	reversal of CRA decision not to reassess on the basis that it was unclear whether it was a final decision	585

Ludmer v. Attorney General of Canada, 2018 QCCS 3381, aff'd 2020 QCCA 697

recurring fee reduction amounts received for no work were income and taxable under s. 56(2) when directed to controlled company

Two of the taxpayers (“Ludmer” and Steinberg”) were invested along with family, friends and acquaintances (all resident in Canada) in a BVI company (“SLT”) whose investments were managed by a non-resident hedge fund manager (“GAM”). When GAM proposed that SLT be merged with another fund managed by GAM in which non-residents were investors, it was agreed that, in light of the merged fund being subject to a higher level of fees than those to which SLT had been subject, that a Bermuda company owned indirectly by two Steinberg and Ludmer non-resident trusts would receive annual “fees” from the time of the 1994 merger that effectively represented a rebate of the higher fees imposed on the Canadian investors (although they were described to be consideration for services that, in fact, were never provided). This arrangement was replaced in 2007 by a new agreement in which the “fees” were paid directly to two newly-established Canadian-resident family trusts.

In finding that it was not unreasonable for CRA to assess on the basis that these payments were includible in the income of Steinberg and Ludmer under s. 56(2), Hamilton JCS stated (at paras. 614-615):

The GAM payments were not in the nature of a windfall. They were made pursuant to a contract. They were enforceable, organized, foreseeable and customary since 1995. … [T]he contracts provided for services to be provided as consideration for the payments. …

The argument put forward ... that they are “nothings” for Canadian tax purposes because they are merely reputational payments arising in a non-business circumstance may ultimately be upheld by the Tax Court, but it is not so clear at this stage as to render the CRA’s position unreasonable.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i)	nature of the legal advice relied upon was unclear	417
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1)	improper advancing of “settlement” elements that were not sustainable	45
Tax Topics - Income Tax Act - Section 94.1 - Subsection 94.1(1)	equity-linked notes held in BVI company were portfolio investments held with a tax avoidance purpose, but were not subject to 7000(2)(d) interest accrual	576
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(d)	mere possibility of locking in value accretion each year did not crystallize the maximum amount of interest respecting the year	484
Tax Topics - General Concepts - Negligence, Fiduciary Duty and Fault	damages awarded against CRA for inter alia making unreasonable reassessments	260
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit	recurring fee reduction amounts received for no work were income from a source	313

Lambert v. Canada, 2005 DTC 5499, 2004 FCA 389

A taxable benefit was earned by the taxpayer when a corporation partly owned by him funded the costs of installing a new engine in an aircraft of a corporation wholly owned by the taxpayer.

James v. Canada, 2001 DTC 5075 (FCA)

no s. 56(2) inclusion to taxpayer if recipient of the transferred property had earned it rather than the taxpayer

Amounts that had been earned for work done by the taxpayer (James) for a corporation ("K.C.R. Investments") and that were paid by K.C.R. Investments at his direction to his common-law spouse ("Kirsten") were included in his income under s. 56(2).

Counsel for the taxpayer submitted that in order for s. 56(2) to apply, there must be evidence that the actual recipient of the amounts (Kirsten) would not be subject to tax on the amounts. The Court found that this submission represented a misinterpretation of the Winter case (90 DTC 6681), which simply recognized that s. 56(2) cannot apply to an amount that is properly taxable as income in the hands of the person who actually received it and that such an amount must be an amount that only the taxpayer is entitled to receive as income.

In this regard, after referring (at para. 36) to the fourth condition for the application of s. 56(2), that “the payment would have been included in the reassessed taxpayer's income if it had been received by him or her,” the Court stated (at paras. 46-47):

It is implicit in the fourth condition that the payment in question must be an amount that only the taxpayer, in this case Mr. James, is entitled to receive as income… .

…[T]he payments made by K.C.R. Investments Ltd. to Ms. Kirsten could not be remuneration for Ms. Kirsten's services and at the same time be remuneration for the services of Mr. James. … If the payments were remuneration payable to Ms. Kirsten for her services, subsection 56(2) would not require the payments to be taxed in the hands of Mr. James. However, if Ms. Kirsten did not provide services that would justify an entitlement to the payments in question, but Mr. James did, the inescapable conclusion is that subsection 56(2) must be applied to cause the payments to be taxable in the hands of Mr. James.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Audit Procedure		101
Tax Topics - General Concepts - Evidence		54
Tax Topics - Income Tax Act - Section 165 - Subsection 165(3)	vacating not a remedy for lack of due dispatch	86

Neuman v. M.N.R., 98 DTC 6297, [1998] 1 S.C.R. 770, [1998] 3 CTC 177

inapplicable to dividends on discretionary shares paid to inactive spouse

The taxpayer transferred his shares of a commercial real estate company to a newly-incorporated company ("Melru") in consideration for 1,285.714 Class G shares of Melru. He and his wife then paid $1 and $99 as the subscription prices for one common share and 99 Class F shares of Melru, respectively. Over a year later, his wife became the sole director and dividends of $5,000 and $14,800 were declared and paid on the Class G and Class F shares, respectively. The $14,800 then was lent by her to the taxpayer.

The articles of Melru left the amount of dividends to be declared on the Class F and G shares largely in the discretion of the director, except that: dividends on the Class G shares could not exceed a return of prime + 1% on their redemption price; and after dividends of $0.01 per share were paid on the Class F share, dividends of $0.01 per share were required to be declared on the common shares before further dividends on the Class F shares could be declared.

After noting that the only relevant distinction with the facts in McClurg was that, here, the wife of the taxpayer had made no contribution to the corporation (other than paying the consideration for her shares), and before going on to find that s. 56(2) did not apply to attribute any portion of the dividend income to the taxpayer, Iacobucci C.J. stated (at p. 6304):

"I am not aware of any principle of corporate law that requires in addition that a so-called 'legitimate contribution' be made by a shareholder to entitle him or her to dividend income and it is well accepted that tax law embraces corporate law principles unless such principles are specifically set aside by the taxing statute."

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Provincial Law		55

Jones v. The Queen, 96 DTC 6016 (FCA)

The sale of a property by a corporation ("Ascot") owned by the taxpayer to the taxpayer's father for less than the property's fair market value did not result in the application of s. 56(2) to the taxpayer given that he genuinely believed that the property was sold at fair market value. The word "desire" in s. 56(2) established a subjective test of what it was that the taxpayer wanted to achieve.

Words and Phrases

desire

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Resolving Ambiguity		77

Smith v. The Queen, 93 DTC 5351, [1993] 2 CTC 257 (FCA)

benefit concurred in by taxpayer was not taxable under s. 56(2) as it was taxable to the recipient

At a time that the taxpayer was an officer, director, and 49% shareholder of an incorporated Ford dealership ("Holiday 77"), Holiday 77 transferred a substantial portion of its business assets to a new corporation ("Holiday 80") whose shares were owned as to 20% by the taxpayer and as to the remaining 80% by Ford Motor Company of Canada. During the several weeks following the transfer, while Holiday 77 was exclusively managed by Ford Credit Canada Ltd., and prior to the appointment of a receiver of Holiday 77, Holiday 80 under the taxpayer's managment entered into various transactions whose effect was to reduce liabilities of Holiday 77 (so that effectively assets of Holiday 80 were misappropriated in favour of Holidcay 77).

Mahoney J.A. analysed the potential effect of s. 56(2) on the basis that the taxpayer was the taxpayer referred to therein, Holiday 77 ws the other person on whom benefits were conferred and Holday 80 was the source of the benefits. He found that because the amounts were clearly subject to tax in Holiday 77's hands, s. 56(2) could not be invoked by the Minister in reassessing the taxpayer. Before reaching this conclusion, he indicated his agreement with a statement by the trial judge that "the concurrence or participation of the taxpayer to the conferring of the benefit need not be active. It may well be passive or implicit and can be inferred from all the circumstances ... " and that this condition was satisfied here given that the taxpayer's exercised control over Holiday 80.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii)		39

Dixon v. Deputy Attorney General of Canada, 91 DTC 5584 (Ont HCJ.)

An allegation of the Crown that a corporation had knowingly sold land at a substantial undervalue to a corporation half-owned by its president, if established would indicate the conferral of a benefit under s. 56(2) on the president because a direct payment of the benefit to him would have been included in his income under s. 6(1)(a).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 232 - Subsection 232(1) - Solicitor-Client Privilege		160
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c)	common directing mind	77

The Queen v. Fairey, 91 DTC 5230 (FCTD)

The taxpayer's employer, the Cancer Control Agency of British Columbia, was required by statute to deduct an amount from the taxpayer's monthly salary and pay the amount over to a pension fund operated under the provisions of that statute. Muldoon J. found that the taxpayer had concurred in such payment for purposes of s. 56(2) "because in order to accept the employment, the employee must accept the mandatory conditions of employment" (p. 5234) including, in this case, the pension arrangements.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		72

Mcclurg v. Canada, 91 DTC 5001, [1990] 3 S.C.R. 1020

Mr. McClurg and Mr. Ellis each owned 400 voting and participating Class A shares and 37,500 Class C non-voting preference shares in a trucking company and Mrs.McClurg and Mrs. Ellis each owned 100 non-voting Class B shares which had a paid-up capital of $1.00 per share and were participating where so authorized by unanimous consent of the directors (who were their husbands). Each of the three categories of shares was entitled to receive dividends exclusive of the other classes.

Messrs. McClurg and Ellis declared annual dividends of $20,000 on the Class B shares, but none on the Class A's. S.56(2) did not apply to redistribute $8,000 (= $10,000 x 400/500) of the $10,000 dividend received by Mrs. McClurg to her husband. Dickson, C.J. stated:

"The purpose of s. 56(2) is to ensure that payments which otherwise would have been received by the taxpayer are not diverted to a third party as an anti-avoidance technique. This purpose is not frustrated because, in the corporate law context, until a dividend is declared, the profits belong to a corporation as a juridical person ... Had a dividend not been declared and paid to a third party, it would not otherwise have been received by the taxpayer."

In addition, having regard to the commercial realities of the particular transaction, Mrs. McClurg had played a vital role in the financing of the formation of the company and the payments to her therefore "represented a legitimate quid pro quo and were not simply an attempt to avoid the payment of taxes".

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Resolving Ambiguity		66

Winter v. The Queen, 90 DTC 6681 (FCA)

s. 56(2) inapplicable if actual transferee was taxable on the amount

An individual ("Outerbridge") had a company controlled by him ("Littlefield") sell shares of another corporation ("Harvey") to his son-in-law for a sale price that was less than their fair market value. The difference between the fair market value of the shares of Harvey and their sale price was included in Outerbridge's income pursuant to s. 56(2).

Marceau J.A. found that although "when the doctrine of 'constructive receipt' is not clearly involved, because the taxpayer had no entitlement to the payment being made or the property being transferred, it is fair to infer that subsection 56(2) may receive application only if the benefit conferred is not directly taxable in the hands of the transferee" (p. 6684), in this case it was clear that the son-in-law (who held 0.01% of the shares of Littlefield) entered into the transaction qua son-in-law and not qua shareholder of Littlefield, so that the son-in-law could not have been assessed with respect to the transaction under s. 15(1). Accordingly, s. 15(1) did not override s. 56(2).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	s. 56(2) applied to taxpayer rather than 15(1) to son-in-law as de minimis shareholder	74
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2)	specific provisions applied before GAAR	104

R. v. Century 21 Ramos Realty Inc., 87 DTC 5158, [1987] 1 CTC 340 (Ont.C.A.)

S.56(2) applied when a mortgage owing to a company owned by the individual accused ("Ramos") was discharged and replaced by a mortgage owing to a second company ("409668") owned by Ramos. The entry made by 409688's accountant ("Mr. Mosey") on the books of 409668 was: Dr. Accounts receivable - $75,000; Cr. Amount due to shareholder - $75,000. "It was only in April, 1980, when Ramos informed Mr. Mosey that the mortgage was owned by him personally and the financial statement of 409668 was finalized, that Ramos had irrevocably made the mortgage his own. The appropriation of the mortgage occurred, therefore, in 1980."

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Charter (Constitution Act, 1982) - Subsection 15(1)		47
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	benefit based on actual rather than subjective value	93

Boardman v. The Queen, 85 DTC 5628, [1986] 1 CTC 103 (FCTD)

The Saskatchewan Court of Queen's Bench pursuant to s. 22 of the Married Women's Property Act (Sask.) directed the Registrar of Land Titles to transfer title to two houses, then held by a company ("Saskan") which was owned by the taxpayer, to the taxpayer's divorced wife. Although counsel for the taxpayer had objected to an order for transfer of the property, he had asked that if such a transfer order were to be made it should be directed to the Registrar. In addition, the taxpayer had taken no action to have Saskan object to the transfer of the houses, and for these two reasons he had concurred in the transfer. There was a "benefit" to him because his property might have been ordered to be transferred instead of that of Saskan. S.56(2) accordingly included the value of the equities of redemption of the houses in his income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1)		69
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4)		34

The Queen v. Hoffman, 85 DTC 5508, [1985] 2 CTC 347 (FCTD)

The defendant's Canadian employer deducted amounts from his salary and remitted them to its U.S. parent pursuant to an agreement between the parent and the I.R.S. which provided inter alia for obligatory social security contributions by U.S.-citizen employees of the parent's foreign affiliates. Rouleau, J. held that the "defendant's silence, over the course of several years, as to the contractual arrangement between [the U.S. parent] and the U.S. government constituted concurrence in the transfer of the withheld amounts, notwithstanding the fact that the defendant was not a party to the contract." The remitted social security payments accordingly were included in his income by virtue of s. 56(2) (as well as by virtue of s. 5(1)).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax		49
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		67
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(m)		27
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc.		19

De Groote v. The Queen, 85 DTC 5008, [1985] 1 CTC 687, [1984] CTC 687 (FCTD)

S.56(2) did not apply to a payment of dividends since the payor corporation, instead of paying the dividends to the beneficial owner of shares pursuant to the direction of the registered owner, paid the dividends to the registered owner who then made payment to the beneficial owner.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4)		94
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a)	no longer beneficial shareholder	76

The Queen v. Chrapko, 84 DTC 6544, [1984] CTC 594 (FCTD), rev'd 88 DTC 6487, [1988] 2 CTC 342 (FCA)

The Ontario Jockey Club deducted from each pay cheque that it paid to a race track cashier the amount of cash shortages due to errors made by him. Since under the collective agreement, the appellant cashier "'was entitled only to salary at the calculated rate less cash shortages, the amounts of such shortages cannot be regarded as payments or transfers of property made with the concurrence of the Appellant to his employer. They were never his to pay or transfer in the first place.'"

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Rules - Rule 420 [Amendment of Pleadings]		38
Tax Topics - Income Tax Act - Section 67		71

Barbeau v. The Queen, 81 DTC 5379, 84 DTC 6148, [1981] CTC 496 (FCTD)

Commissions paid by a company to a "technical and financial advis[ory]" company owned by the taxpayer's family were taxable to him. The commissions were referable to the skill of the taxpayer (who remained an employee of the company) in purchasing lumber, the level of his salary paid to him by the company appeared to indicate that it was reduced by the commissions paid to the family company, no services were performed by the family company in addition to those performed by the taxpayer, and the taxpayer was unable to prove the existence of any contract whereby the company hired the family company to purchase lumber.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 177 - Subparagraph 177(b)(iv)		87

Champ v. The Queen, 83 DTC 5029, [1983] CTC 1 (FCTD)

The Class "A" voting shares of a company, which shares were owned by the taxpayer, had the same rights attached to them as the Class "B" voting shares which were owned by his wife. It was held that since the Class "A" and "B" voting shares were entitled to share in dividends rateably, there had been a transfer of property under S.56(2) from the taxpayer to his wife when the company, which was controlled by the taxpayer, declared and paid dividends on the wife's shares but not on the husband's.

Cox v. The Queen, 82 DTC 6287, [1982] CTC 322 (FCTD)

Where executors of an estate conveyed land to the taxpayer and his wife jointly in satisfaction of a quantum meruit claim which the taxpayer had brought against the executors for the value of services performed by him, the full value of those services constituted income to the taxpayer notwithstanding the form of conveyance.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments		86

Fraser Companies, Ltd. v. The Queen, 81 DTC 5051, [1981] CTC 61 (FCTD)

Substantial interest-free loans were made by a New Brunswick pulp company to a subsidiary that was exempt from taxation by virtue of its status as a "foreign business corporation". Interest income earned on the loaned money by the subsidiary was not attributed to the parent because:

S.56(2) applies only to a "payment or transfer" of property, not to a loan;
even if S.56(2) applied to loans, it does not attribute the income generated by the borrowed moneys to the lender;
commercial contracts, by their nature, do not result in the conferral of a "benefit";
the funds loaned by the parent were not obtained from a taxable source but, rather, from a tax-free capital disposition.

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Rules - Rule 413(1)(a)		69
Tax Topics - General Concepts - Tax Avoidance		42
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4)		22
Tax Topics - Statutory Interpretation - Interpretation Act - Section 14		74

Murphy v. The Queen, 80 DTC 6314, [1980] CTC 386 (FCTD)

S.56(2), unlike S.74(1) does not refer to property being transferred "either directly or indirectly by means of a trust or by any other means whatever". Doubts accordingly were expressed as to whether the language of S.56(2) was broad enough to cover, as contended by the Crown, a variation approved pursuant to the Variation of Trusts Act (Ontario) whereby the plaintiff's vested right to receive income from a trust was foregone, and a discretionary trust was created whose beneficiaries included the plaintiff's wife. The Crown had contended that there had been a transfer of property to the wife instead of simply to the discretionary trust.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property	included right to be included in class of discretionary beneficiaries	46
Tax Topics - Income Tax Act - Section 74.1 - Subsection 74.1(1)		95

McClain Industries of Canada Inc. v. The Queen, 78 DTC 6356, [1978] CTC 511 (FCTD)

When the vendor shareholders of a company agreed to assign unpaid accrued management commissions to the purchaser, the amounts of the commissions which previously had been owed to them by the company were included in their income pursuant to s. 56(2).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e)		99

Perrault v. The Queen, 78 DTC 6272, [1978] CTC 395 (FCA)

It was indicated, obiter, that it was doubtful that s. 56(2) could be applied to the payment of a dividend which was included in the income of the recipient under the statutory predecessor of s. 82(1)(a), before making a deduction under the predecessor of s. 112(1).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)		114
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)		32
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2)	business continued "on a reduced scale"	54

Nelson v. The Queen, 74 DTC 6266, [1974] CTC 360 (FCA)

Although it was the intention of the four related shareholders of a company that father hold 100 voting participating shares and each of his three sons hold 100 non-voting participating shares, at the time of the payment by the company of a $1,000 dividend to each of the four shareholders the three sons (due, in part, to an oversight of the company's solicitor) held one voting participating share of the company. It was held that "each of the four shareholders was entitled to the $1,000.00 actually paid to him by the company either because the 96 shares issued to the appellant as part of the consideration for the partnership property were held by the appellant on a resulting trust for the members of the partnership in equal shares, or because the agreement between them called for them to have equal equity shareholdings in the company and to share equally in any divisions of the profits of the company". S.56(2) accordingly did not apply to include approximately 97% of the dividend in the income of father.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Effective Date		187

The Queen v. Quinn, 73 DTC 5215, [1973] CTC 258 (FCTD)

Under a contract with the Canadian Scholarship Trust Fund it was agreed that interest on funds deposited by the taxpayer would be transferred to the Trustee on the maturity of the plan, to be applied to the education costs of the taxpayer's son if certain conditions were met, or otherwise for the benefit of other beneficiaries. Since the transfer of accrued interest did not occur until the maturity or termination of the plan, s. 56(2) did not apply to attribute accrued interest to the taxpayer in a year prior to maturity.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c)		87
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)		96

Administrative Policy

1 June 2021 External T.I. 2020-0865201E5 F - Sale of property for POD less than FMV

sale of 2 properties by 50-50 corp at a knowing undervalue to the respective shareholders’ own corporations could engage s. 56(2)

Messrs. X and Y (unrelated individuals), who each wholly-owned operating corporations ("ACo" and "BCo"), also equally owned XYZCo, which built 12 commercial condominiums for sale, two of which were sold to ACo and BCo at a mutually agreed price ($150,000) that they knew to be below fair market value. CRA noted:

In light of the CRA presumption that shareholders of a closely held corporation act in concert to control it and if it emerged that X and Y negotiated on behalf of both the vendor and the purchaser, it could be argued that the sales occurred at the direction of or with the concurrence of each of X and Y.
Given the undervalue, it could be argued that they desired to confer a benefit on their respective corporations.
Had XYZCo sold the condominiums to X and Y directly, s. 15(1) could have applied.
Accordingly, s. 56(2) could apply to the sales to ACo and BCo.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c)	sale of 2 properties by 50-50 corp at a knowing undervalue to the respective shareholders’ own corporations likely was non-arm’s length	212

8 June 2018 Internal T.I. 2017-0683021I7 - Assignment of capital interest in a trust

potential application of s. 56(2) to income distribution to non-qualifying transferee of trust interest

As a discretionary irrevocable personal family trust, which had non-resident beneficiaries (Y and Y’s spouse (Z)), was approaching the 21-year deemed realization date, its trustees resolved to distribute an equal share of the Trust’s assets to each of Y and Z to the complete exclusion of any other beneficiary (the “vesting”). After the vesting, Y and Z assigned their respective capital interests in the Trust under s. 85(1) to an unlimited liability company (“ULC”).

CRA found that ULC did not become a beneficiary under the Trust as the Trust indenture defined “Beneficiary” to mean Y, Y’s spouse (Z) and Y’s issue, and the trustees were not empowered to vary the Trust or to add new beneficiaries. This meant that taxable dividends paid by the Trust to ULC were includible in the income of Y and Z under s. 104(13), i.e., were subject to Part XIII tax under s. 212(1)(c).

If Y and Z argued that s. 104(13) did not apply to them because no amount was payable to them in the year, CRA would apply s. 56(2) or (alternatively) s. 105(1) to include the dividend amounts in their income – but without any s. 104(6) deduction to the Trust.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13)	purported drop-down of trust interests to an excluded beneficiary resulted in s. 104(13) inclusions to transferors	343
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(5)	purported drop down of trust interests by non-resident beneficiaries to ULC was ineffective so that s. 107(2.1) applied to subsequent purported asset distribution to ULC	192
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1)	potential application of s. 105(1) to income distribution to non-qualifying transferee of trust interest	273
Tax Topics - Income Tax Act - Section 248 - Subsection 248(25) - Paragraph 248(25)(a)	para. (a) refers to beneficiary in ordinary sense - and does not include assignee	62

28 October 2016 External T.I. 2016-0654331E5 F - Transfer of rights to income

s. 56(2) could apply to shareholder of purchaser of lands if vendor did not pay FMV consideration for retaining rights to rents

Upon a sale by A of leased land to a non-arm’s length corporation (Corporation A) in which A did not hold any shares, A and Corporation A agreed to a redistribution of income in which Corporation A undertook to pay to A all the related rental income. Would s. 56(2) apply? After finding that the rentals received by Corporation A would be included in its income under s. 56(4) (so that the amount otherwise included in the income of A under s. 9 would be excluded from A’s income), CRA went on to state:

[A] shareholder of Corporation A could have been directed to give the right to income to A at a value less than its fair market value. …[T] he shareholder may have desired to benefit A. Thus, all the criteria for taxation of the shareholder of Corporation A under subsection 56(2) may be satisfied if the right to income was not disposed of for consideration equal to its fair market value.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income	where rental lands purchased subject to obligation to pay the rents to vendor, rents did not have quality of income to purchaser under s. 9	165
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense	where rental lands purchased subject to obligation to pay the rents to vendor, no income inclusion and deduction of the rents by the purchaser under ss. 9 and 18(1)(a)	89
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4)	where rental lands purchased subject to obligation to pay the rents to NAL vendor, s. 56(4) trumps s. 9 to include rents in purchaser’s income	169

6 December 2016 External T.I. 2016-0666841E5 F - Sale of property for POD less than FMV

potential application to immediate shareholder re benefit on indirect shareholder

Opco’s shares are held as to 40%, 40% and 20% by Holdco A, Holdco B and Holdco C, which are wholly owned by three individual shareholders (A, B and C), who deal with each other at arm’s length. “None of the shareholders controls Opco in any manner whatsoever.” Opco disposes of a condo to B's child for proceeds equal to half of its fair market value.

After discussing the potential application of ss. 15(1.4)(c) and 246(1), CRA stated:

In order to respond to a question on subsection 56(2), it would be necessary to know who gave the instructions or with whose concurrence the disposition of the condominium unit occurred. Since Holdco B would have been taxed on the benefit under subsection 15(1) if it had received it directly, subsection 56(2) could also apply in respect of Holdco B if the conditions for its application were satisfied. On the other hand, if the benefit had been granted by Opco in accordance with B's instructions or with B’s concurrence…all these facts should be examined to determine whether B should have included an amount in B’s income if Opco had made the transfer directly to B. If that were the case, subsection 56(2) would apply.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1.4) - Paragraph 15(1.4)(c)	application to Holdco shareholder of Opco where Opco conferrred a benefit on child of Holdco's shareholder	210
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1)	s. 246(1) applicable to indirect shareholder benefit if direct shareholder influenced the benefit conferral	205

14 March 2016 External T.I. 2016-0626781E5 - Neuman Type Situation

s. 56(2) likely non-applicable where spouse subscribes nominal consideration for Opco shares and receives a large discretionary dividend

The only issued and outstanding share of Opco (which has retained earnings of $500,000) is 1 Class A common share, with a fair market value of $1,000,000 owned by Mr. A. Opco issues to Mrs. A, for nominal consideration, 1 non-voting Class B preferred share, which is redeemable and retractable “for the fair market value for which it is issued” and entitled to discretionary dividends as and when declared.

In Scenario 1, Opco immediately declares and pays out a $100,000 dividend on the Class B preferred share, which would have the effect of reducing the FMV of Opco and the 1 Class A common share by the same amount.

In Scenario 2, Opco does not declare and pay the $100,000 dividend until after it has earns an additional $100,000 of income, and the FMV of Opco after the dividend is at least $1,000,000.

What would be the consequences for Opco and its shareholders of such issuance and dividend? CRA responded:

Consistent with… Neuman….generally, subsection 56(2) will not apply to arrangements involving the payment of dividends by a corporation, provided that the applicable taxpayer does not have a pre-existing entitlement to the dividends and provided that proper consideration was given for the shares when issued. …

While we have considered the application of subsection 245(2) in respect of the Neuman type income splitting arrangements in the past and have taken the position that GAAR does not apply, we have also specifically stated that this comment regarding the non-application of GAAR relates only to the Neuman case.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	s. 15(1) might apply where spouse subscribes nominal consideration for Opco shares and receives a large discretionary dividend	226
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1)	Kieboom treated as entailing disposition of right to receive dividends	340
Tax Topics - Income Tax Act - Section 73 - Subsection 73(1)	spousal rollover for Kieboom disposition of economic interest	82

24 June 2015 External T.I. 2015-0575911E5 F - Benefit to shareholder or conferred on a person

benefit conferred on spouse of individual shareholder of parent

Corporation A, is wholly owned by Holdco, which has equal unrelated Shareholders 1, 2, 3 and 4. Corporation A disposes of a capital property to the spouse (who is not herself a shareholder) of Shareholder 4 at a price which is determined to be less than the property's fair market value. What are the consequences? After discussing the potential application of s. 15(1.4)(c), CRA stated (TaxInterpretations translation):

Alternatively…the difference between the fair market value of property transferred and the consideration received by Corporation A could be included in computing the income of Holdco pursuant to subsection 56(2) to the extent that it was possible to demonstrate that a payment or transfer of property (the capital property) was made by Corporation A pursuant to the direction of, or with the concurrence of, Holdco, to the spouse of Shareholder 4…and was desired by Holdco to be conferred on the spouse...and to the extent that a payment or transfer of property would be included in the income of Holdco if such payment or transfer had been made by Corporation A to Holdco. [F]or example, it could be argued that a payment or transfer of property from Corporation A in favour of Holdco would be required to be included in computing the income of Holdco by inter alia subsection 15(1). Furthermore…it appears possible that the difference….could be included in computing the income of Shareholder 4.

See summaries under s. 15(1.4)(c) and s. 246(1).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1.4) - Paragraph 15(1.4)(c)	benefit only conferred on one shareholder (the husband) if wife of one of four sibling shareholders receives benefit	333
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1)	benefit conferred on spouse of individual shareholder of parent	153

S2-F3-C1 - Payments from Employer to Employee

directed employment payment

1.8 A payment from an employer that is deemed [by s. 6(3)] to be employment income is included in an employee's income…[when] the amount is paid or transferred to another person for the benefit of the employee or such other person, at either the employee's direction or with the employee's agreement (see subsection 56(2))

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		120
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3.1)		184
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3)		75
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(f)		184

10 April 2014 External T.I. 2013-0514321E5 - Donated vacation

donated vacation/no double taxation

Employees, who are otherwise entitled to convert their vacation leave to cash, may donate a portion of their annual vacation entitlements for use by other employees ("donees") who have exhausted their vacation entitlements due to personal or family hardship. CRA stated:

[W]here a donor directs or concurs that his or her vacation be transferred to a donee, subsection 56(2) of the Act will apply to include the vacation amount in the income of the donor to the extent that it would have been if the donor had converted his or her vacation to cash. The amount should be included in the income of the donor in the year the donee takes the vacation….

After finding that the donated vacations likely would not be an employment benefit to the donees, CRA went on to state:

[I]t is the practice of the Canada Revenue Agency not to assess the same income twice. Accordingly, even if it is determined that paragraph 6(1)(a)… does apply [to the donee], the amount would not be required to be included in the donee's income as long as it was included in the donor's income under subsection 56(2)… .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)	donated vacation/no double taxation	170

13 March 2014 External T.I. 2013-0510791E5 - Non-cash long-service award and cash donation

employee-directed cash donation in lieu of long-service award

Will an employee realize a taxable benefit upon foregoing the receipt of a non-cash gift valued over $500 in recognition of long service and directing the employer to make a cash gift of a specified amount to a specified registered charity? CRA stated:

[W]here a taxpayer directs that an amount to be received from an office or employment be paid directly to a charity, subsection 56(2)… will apply to include that amount in the income of that taxpayer to the extent that it would have been if it were received by the taxpayer. … Therefore, in light of the fact that the first $500 of a non-cash long-service award would have been non-taxable if it were received by the employee, it is our view that only the amount of the donation that exceeds $500 would be required to be included in the employee's income.

11 March 2014 Internal T.I. 2013-0513221I7 F - Stock options

s. 56(2) benefit where corporation implicitly consented to consultant's options being issued by client directly to its shareholder

Publico determined to grant stock options to its directors and consultants, as a result of which a private corporation ("Corporation") was entitled to receive a grant of options. However, such options instead were granted directly to Mrs. Y, the sole shareholder of Corporation, who subsequently exercised and sold the acquired Publico shares, reporting a capital gain.

After finding that s. 56(4) applied to Corporation, CRA found in the alternative that s. 56(2) also would apply on the basis that the issuance of the common shares of Publico on exercise would be a payment for s. 56(2) purposes, and passive or implicit consent of Corporation to the conferral of the benefit could be inferred given that it did not stand on its right to receive the stock option benefit, which would have been included in its business income.

Such income inclusion to Corporation did not detract from there also being a taxable benefit to Mrs. Y under s. 15 (or 6(1)(a), if it was received by virtue of employment).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	double income inclusion under s. 56(2) or (4) to consulting corporation, and under s. 15(1) to its shareholder, where consultant's options issued directly by client to shareholder	113
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4)	implicit transfer by corporation when stock options earned by it were issued directly by its client to its shareholder	175
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)	s. 248(28) does not prevent a double income inclusion to corporation under s. 56 and shareholder under s. 15	226
Tax Topics - Income Tax Act - Section 9 - Timing	no s. 9(1) income inclusion from consultant being granted stock options until exercise	226
Tax Topics - General Concepts - Fair Market Value - Options	stock options with no in-the-money value could have nil FMV	134
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1)	s. 15 benefit due to shareholder receipt of stock options earned by corporation added to the ACB of the exercised shares	165

27 February 2014 External T.I. 2013-0506401E5 - Loan from a partnership to an individual

bona fide loan not a transfer

A partnership between Holdco1 as the 99.9% LP and Holdco2 as the 0.1% GP (owned by an arm's length individual) makes a $2 million non-interest-bearing demand loan to the taxpayer, the individual shareholder of Holdco1. CRA stated:

[J]urisprudence has established that subsection 56(2) will not generally be applicable in a situation involving a bone fide loan between persons because such a loan does not constitute a "payment of transfer of property"… .[I]f, when the loan is made by a lender, it is apparent that the borrower will not be able to repay the loan and/or provide reasonable security for repayment…there would be a decrease in the value of the lender and the provisions of subsection 56(2) may apply depending on the circumstances... .

[However] subsection 15(2) appears to be applicable…subject to the exceptions outlined in subsections 15(2.2) to 15(2.6)... .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2)	partnership to partner shareholder loan	89

15 November 2013 Internal T.I. 2013-0478621I7 F - Transfer of intangibles - TP adjustments

secondary adjustment re group sale with Canco not charging for intangibles

Pursuant to a sales agreement between Canco, its immediate non-resident parent (Parent) and the ultimate U.S. parent of Canco (Pubco), as vendors, and an arm's length purchaser (Acquireco1), for the sale of Division 1 for a sum of U.S.$XX, Canco disposed of assets of Division 1 to a subsidiary of Acquireco1 for their book value. The Montreal TSO took the view that the Division 1 assets included intangible assets whose value was not reflected in this selling price. Similar transactions occurred for the sale of Division 2 to Acquireco2.

After finding that s. 247(2) should be applied "if appropriate" to Canco as if it should have received a higher sale price, CRA turned to the question of a secondary adjustment respecting Parent through the application of s. 56(2) (TaxInterpretations translation):

In this instance, taking as established that the payments or transfers of property were made pursuant to the direction of or with the concurrence of Parent, for its benefit or as a benefit it desired to confer on Pubco, the conditions of subsection 56(2) could be satisfied for the disposition of Division 1 and Division 2. In effect, if each payment or transfer of property had been made by Canco in favour of Parent, the value of the advantage could be included in the computation of the income of Parent in accordance with subsection 15(1). Hence, the combined application of subsections 56(2), 212(2) and paragraph 214(3)(a) would support an adjustment to Parent for Part XIII tax in these circumstances.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2)	group sale with Canco not charging for intangibles should engage s. 247(2)	149
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4)	s. 69(4) inapplicable where grandchild Canco undercharges for asset sale, enhancing sales proceeds received by ultimate U.S. parent	176

19 August 2013 External T.I. 2013-0488011E5 - Real Estate Referral Fees

If a real estate agent directed the real estate brokerage to pay a portion of the commission to the home purchaser as a referral fee, how would the fee be treated?

CRA indicated that the referral fee is probably not a windfall, gift, or other voluntary payment, as it is paid pursuant to an agreement between the home purchaser and agent; and whether it is income to the purchaser from a source is a question of fact.

Regardless of its treatment in the hands of the home purchaser, it is included in the agent's income pursuant to s. 56(2). CRA stated:

[I]t is the practice of the Canada Revenue Agency not to assess the same income twice. Accordingly, a brokerage would not be required to issue a T4A slip to a home purchaser under the circumstances described as long as the amount was included in the agent's income under subsection 56(2).

14 February 2013 Internal T.I. 2011-0424341I7 F - Amounts forwarded to trustee/beneficiary

s. 56(2) did not apply to trustee/beneficiary of discretionary trust who directed income to her children and did not exercise discretion in her own favour

The financial advisor of Mother settled a discretionary trust of which Mother and her friend (Y) were the trustees (with decisions to be made unanimously), and she, her issue and certain corporations (including Holdco) were the beneficiaries. Under an estate freeze, Trust was issued Class A shares of a corporation that became a small business corporation. Y had no real involvement in Trust decisions. Mother determined to make annual income distributions to her adult children, and then required them to repay most of those amounts to her in repayment of amounts for their personal expenses (e.g., rent) which she had paid on their behalf.

In finding that s. 56(2) did not apply to attribute dividends received on the Class A shares by the Trust to mother having regard to the fourth condition enumerated in Neuman that “the payment would have been included in the reassessed taxpayer’s income if it had been received by him or her,” CRA stated:

Mother (or Y) did not exercise her fiduciary powers in her favour. Thus, Mother did not have a pre-established right. Since no designation was made in her favour, she was not entitled to claim anything from the Trustees. Therefore, this last condition is not satisfied.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)	s. 75(2) not applicable to dividends on common shares issued to discretionary family trust on estate freeze	237
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13)	income was received by children beneficiaries as agent for their mother	263
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) - Paragraph 104(6)(b)	Quebec discretionary trust with two named trustees but, in fact, only one trustee, would not be entitled to s. 104(6)(b) deductions	155

9 January 2013 External T.I. 2010-0384221E5 F - Paiements indirects

payments rquired to be made by a collective agreement were not intended as redirected income

In finding that where a company was required under a collective agreement respecting self-employed workers which required it to pay certain fees as a contribution to a group insurance fund, s. 56(2) did not apply as there appeared to be “no intention to redirect income that would otherwise have been included in the computation of” the company’s income.

6 December 2012 External T.I. 2012-0461711E5 F - Paiements indirects / Indirect payments

56(2) inapplicable to incorporated artist respecting producer paying mandatory contributions to the fund for the artist’s union

A producer who retains the services of an incorporated performing artist is required to pay a percentage of the fees otherwise payable by it to the artist’s Corporation (respecting the services performed by the artist as an employee of the Corporation) directly to the benefits plan (the “CSA”) for the Union des Artistes (UDA). In finding that s. 56(2) would not apply to include the amount of such producer contributions in the income of the artist, CRA stated:

[I]f the Corporation or the Taxpayer does not control the payment of the producer's mandatory contributions to the CSA, subsection 56(2) would not have the effect of including that contribution in the computation of their income. In that event, a T4A slip would not be issued by the producer to the Corporation or the Taxpayer respecting the mandatory contribution.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Regulations - Regulation 200 - Subsection 200(1)	no T4A slip to be issued by producer paying mandatory contributions to the fund for the union of the artist whose corporation receives fees from the producer	197

30 October 2012 Ontario CTF Roundtable, 2012-0462891C6 - Application of 56(2) to discretionary trust

sole trustee as discretionary beneficiary

In response to a query as to whether, in the context of a fully discretionary trust where the sole trustee is also a discretionary beneficiary of the trust, s. 56(2) will apply to the trustee in respect of distributions made in favour of discretionary beneficiaries related to the trustee where no similar distribution is made to the trustee in the trustee's capacity as a discretionary beneficiary, CRA stated:

While the Supreme Court [in McClurg] has held that subsection 56(2) will not apply to the payment of dividends, this rule is not directly transferrable to the situation you have described. Whether subsection 56(2) applies will depend on a review of the facts and circumstances of each case.

20 November 2012 Internal T.I. 2011-0416761I7 - Non-Resident, Part XIII Tax

repayment of advance after FX change

Although the facts are unclear, a possible approximation is that a partnership with Canadian partners, of which USco was the controlling shareholder, advanced a foreign currency loan to a non-resident sister (Forco), with Forco, after making a voluntary disclosure, repaying the advance at a time that the Canadian dollar had appreciated, so that in Canadian dollar terms there was not a full deduction under s. 227(6.1) . The TSO's position was that there would be a taxable conferral of a benefit, giving rise to Part XIII tax under s. 214(3)(a), if the Partnership paid this withholding tax liability. The Directorate stated:

On the basis that USCo has, in fact, directed that [the Partnership] transfer property to Forco for the benefit of USco and such amount, if paid directly to USCo, would have been included in USco's income under subsection 15(1) of the Act as a shareholder benefit, subsection 56(2) of the Act may apply.

However, it recommended, in light of the circumstances, that Part XIII tax not be imposed on the amount of the payment of the outstanding withholding tax liability by the Partnership.

25 September 2012 BC Tax Conference Roundtable, 2012-0457551C6 - Application of 56(2) to discretionary trust

trustee as discretionary beneficiary

CRA concluded that it could not "confirm, as requested, that subsection 56(2) will not apply in every case where the sole trustee (who is also a beneficiary) of a fully discretionary trust makes distributions in favour of other beneficiaries related to the trustee, but no similar distribution is made to the trustee." In its summary, CRA stated:

...we would not automatically apply ss 56(2) in all situations...however we have seen several instances where elaborate arrangements are made to divert professional or business income where 56(2) would apply; also McClurg's outcome should be contained to similar situations...involving shares - not transferrable to trust situation where relationship between trustees & beneficiaries are different from those involving directors and shares.

Income Tax Technical News, No. 16, 8 March 1999

RC now accepts that s. 56(2) "does not apply in the Neuman-type situations" and, further, has concluded that GAAR would not apply.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Reasonable Expectation of Profit		8
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h)		4
Tax Topics - Income Tax Act - Section 18 - Subsection 18(4)		4
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c)		49
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(c) - Subparagraph 251(2)(c)(i)		5
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit		38
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit		8
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2)		4
Tax Topics - Treaties - Income Tax Conventions - Article 4		5

14 April 2009 External T.I. 2007-0238221E5 F - Rights of musician-Transfer

s. 56(2) not applicable where copyright or royalty interests transferred at FMV

As part of a general response respecting the transfer of rights by a musician to a corporation, CRA stated:

As illustrated by … IT-335R2 [para. 8] …the sale of a property for consideration less than its fair market value could result in the application of subsection 56(2). On the other hand, the sale of copyright or royalty interests for consideration equal to their fair market value will generally not trigger subsection 56(2).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4)	s. 56(4) generally will apply where royalty is transferred without assignment of copyright, with exception of SOCAN royalty	165
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1)	right to royalties from SOCAN constituted eligible property	109
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business	royalty income generated from an active business is itself active business income	122

16 December 2008 External T.I. 2008-0279741E5 F - Renonciation au capital d'une fiducie

s. 56(2) inapplicable to renunciation of capital interest in a trust

CRA indicated that the renunciation of a capital interest in a discretionary family trust would not give rise to the application of s. 56(2), stating (per its summary) that "the capital interest (the renounced property) would not have been included in the individual's income.”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)	settlor’s valid renunciation of capital interest (but not income interest) prior to trustees’ exercise of discretion to distribute a capital gain would avoid application of s. 75(2)(a)(i)	199
Tax Topics - Income Tax Act - Section 248 - Subsection 248(9) - Disclaimer	legally impossible for a beneficiary of a discretionary trust to partially renounce income from a specific trust property	262
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (i)	non-disposition distribution of non-taxable portion of trust capital gains avoids a gain under s. 107(2.1)	375
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition	settlor’s renunciation of capital interest (but not income interest) prior to trustees’ exercise of discretion to distribute a capital gain would generate nil proceeds and not engage s. 56(2) or (4)	194
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b)	s. 69(1) does not apply to a renunciation of trust capital interest since no disposition "to" any person	44
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4)	s. 56(4) inapplicable to disclaimer of capital interest in a trust	43

4 January 2006 Internal T.I. 2005-0115801I7 F - Convention de retraite

contributions to purported RCA that provided excessive benefits to employee/ultimate shareholders were included in the direct shareholders’ income under s. 56(2)

A closely-held corporation that was dividending out all the profits of its business also established a purported retirement compensation arrangement (RCA) trust for two employees who, indirectly, were the corporation’s two shareholders, and made contributions to the trust that were funded by loans from the trust. After finding that the arrangement did not qualify as an RCA because the benefits were not reasonable, the Directorate went on to find that s. 56(2) should be applied to include the amounts of the contributions to the trust in the income of the shareholders, as a benefit they had concurred in being conferred on the purported RCA trust and that would have been taxable to them under s. 15(1) if paid to them directly.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Retirement Compensation Arrangement	arrangement was not an RCA because the benefits were not reasonable	110
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(r)	excessive benefits would have resulted in denial under ss. 18(1)(o.2) and 20(1)(r) had the arrangement qualified as an RCA	206
Tax Topics - Income Tax Act - Section 67	Petro-Canada applied re determining reasonableness	264
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement	contributions to a purported RCA that contemplated excessive benefits also were not in relation to an SDA because the contributions instead were indirect shareholder appropriations	108

1998 Strategy Institute Round Table, No. 981310

S.56(2) will not apply where: the freezor exchanges common shares of an investment holding company ("Holdco") under s. 86(1) for redeemable retractable preference shares of Holdco having a fair market value redemption price equal to the fair market value of the common shares for which they were exchanged; a trust for adult children subscribes for new common shares; some of the freeze preference shares are redeemed each year in lieu of paying dividends on the freeze shares; and in each year dividends, which do not impair the redemption value of the outstanding preference shares, are paid on the common shares to the trust.

29 October 1996 External T.I. 9630325 - TRUSTEE DIRECTING PAYMENT OR RIGHT TO INCOME

With respect to a testamentary trust with four trustees who are siblings and who are beneficiaries along with their spouses and children, RC found that the exercise of discretion by four trustees to direct a distribution of income to the spouse of one trustee did not result in the application of either s. 56(2) or s. 74.1(1). The trustee did not transfer property or concur in the transfer of property which would otherwise have led to an income inclusion if the property had not been transferred: the trustee had no right to the income but was only one of a class of discretionary beneficiaries.

30 October 1995 Internal T.I. 9516317 F - VALIDITÉ DES DIVIDENDES DISCRÉTIONNAIRES

Discretionary dividends were found to be valid in light of the McClurg and Neuman decisions.

2 June 1995 External T.I. 9503755 - CHARITABLE GIFT ANNUITY IN RRSP

Discussion of application of ss.56(2) and 146(8) where an annuitant wishes to use some or all of the property in his RRSP to purchase a charitable gift annuity.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8)		29

2 November 1994 Internal T.I. 9420446 - REDIRECTION OF SALARY DURING A STRIKE

Where the union and management negotiate an agreement whereby the union will supply a certain number of essential workers during a strike, with the pay that the essential workers otherwise would receive being paid to the union, s. 56(2) will apply to include the amounts paid to the union in the income of the essential workers given that it is extremely doubtful that the union would be able to redirect the salary earned by the employees without the concurrence of the employees.

28 October 1994 External T.I. 9402465 - NON-CAP. LOSSES AND CORP. DEBT

In response to a question respecting intercorporate debt between related corporations designed to permit them to utilize non-capital losses within a corporate group, RC affirmed its position at the 1981 Revenue Canada Round Table, Q. 51, and stated that where "it is apparent at the time the loan is made that the corporation receiving the funds will not be in a position to repay the loan or to provide reasonable security for repayment, the shareholder who has directed the payment may be considered to have deliberately and permanently removed value from the corporation".

17 May 1993 Memorandum (Tax Window, No. 32, p. 2, ¶2592)

Pension income equally divided between two spouses as a result of a marriage breakdown would be subject to s. 56(2) in Alberta, but not in B.C.

11 May 1994 Memorandum 932735 (C.T.O. "IAAC Payments Applied to a Loan after Bankrupt Discharged")

In the case of a wrap-around IAAC where the taxpayer does not actually receive the funds, the annuity payments would ordinarily be included in the annuitant's income under s. 56(2). However, in the case of an annuitant of an IAAC who has since declared bankruptcy and been discharged therefrom, the bankrupt may receive no further benefit from the redirection of the IAAC payments to the trust company that had financed the IAAC with a fully secured loan, in which case s. 56(2) would not apply.

92 C.R. - Q.22

RC's position that s. 56(2) ordinarily will be applicable if a waiver of dividends in a closely held corporation is undertaken for the purpose of transferring income to other shareholders, is the same whether the dividend or waiver was to be effective for the whole year or whether it applied only to a specific dividend.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)		27

92 C.R. - Q.22

RC will continue to assess a benefit in situations where a shareholder receiving a dividend on a discretionary share did not make adequate contributions to the corporation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)		54

24 February 1992 Memorandum (Tax Window, No. 13, p. 12, ¶1628)

Generally, s. 56(2) will not be applied in the case of a waived or discretionary dividend where the shareholders deal at arm's length with one another. In non-arm's length situations, RC will invoke s. 56(2) where shareholders receiving discretionary dividends did not make adequate financial or other contribution to the corporation, or where the waiver is intended to accomplish a transfer of income to other shareholders.

13 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 9, ¶1044)

Ss.56(2) and (4.1) will apply to a family mortgage plan under which a parent purchases a GIC from a financial institution at less than the going rate of interest, and the same financial institution provides a residential mortgage loan to the child at less than the going rate.

23 March 1990 T.I. (August 1990 Access Letter)

In response to a suggestion that a corporation could be purged of non-qualifying assets in order to qualify as a qualified small business corporation by issuing a special class of shares for their nominal redemption amount to Holdco and then paying a large dividend on those shares to Holdco, RC indicated that a class of shares that is entitled to receive a disproportionately large dividend in priority to other shares of the corporation would, in most cases, come under the scrutiny of s. 56(2).

14 July 1989 Inter-Divisional Memorandum (Dec. 89 Access Letter, ¶1045)

In a situation similar to McClurg, where both the husbands and the wives held shares of the corporation and the corporation declared dividends only to the wives, s. 56(2) was to be applied to the husbands, but the wives' income was to be reduced accordingly, provided that they provided waivers or the taxation years were not statute-barred.

87 C.R. - Q.72

S.56(2) applies where the board has the discretion to pay dividends on one or more classes of shares at its discretion. McClurg is being appealed.

86 C.R. -Q.40

It would be "unlikely" that s. 56(2) would apply to an income-splitting to which s. 74.4 doesn't apply by virtue of the small business corporation exception.

86 C.R. - Q.41

It is not possible to state that it is ever possible to waive dividends in favour of related shareholders without the application of s. 56(2).

85 C.R. - Q.6

Where the taxpayer is assessed under s. 56(2), the recipient's income (particularly where not statute-barred) will be reduced.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)		13

84 C.R. - Q.24

S.56(2) will ordinarily be applicable if the waiver of dividends in a closely held corporation is undertaken for the purpose of transferring income to other shareholders.

84 C.R. - Q.82

RC will accept the payment of large discretionary dividends as a special recompense to the active shareholders, provided that the non-active shareholder is dealing with them at arm's length.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 67		54

81 C.R. - Q.26

s. 56(2) would ordinarily be applicable if the waiver of dividends in a closely held corporation is undertaken for the purpose of transferring income to other shareholders, or where discretionary-dividend shares are used to accomplish the same result.

79 C.R. - Q.19

Where a waiver of dividends in a closely-held corporation is undertaken for the purpose of transferring income to the other shareholders (generally, the chief shareholder's children) and has no other bona fide purpose, s. 56(2) generally will be invoked.

IT-468R "Management or Administration Fees Paid to Non-Residents"

The portion of a management or administration fee paid to a non-resident affiliate that is in excess of a reasonable amount may be treated as a deemed dividend.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(2)		34
Tax Topics - Treaties - Income Tax Conventions - Article 7		37

IT335R2 "Indirect Payments" 12 July 2004

13. An amount to which subsection 56(2) applies could be included in the income of both the taxpayer and the person who receives the payment or the property. However, it is normally the...CRA...practice not to assess the same income twice. Accordingly, where the taxpayer agrees to the reallocation, the recipient's income will be reduced. Where the taxpayer does not agree, the CRA will also reduce the recipient's income, without requiring a waiver, provided that at the time of the assessing action, the recipient's return was not about to become statute-barred; in those cases, the CRA will seek a waiver.

Articles

Bowman, "New Wine in Old Bottles - Using Personal Trusts as Business Vehicles", Business Vehicles, Vol. III, No. 1, 1996, p. 114

"Trust-partnership structures may permit greater flexibility than a single corporation ... since management of the business can be left in the hands of one or more general partners at the partnership level, while distributions of a limited partner's income would be determined by the trustees acting under the terms of the trust. By having different individuals performing these roles ... a lower risk of reassessment under subsection 56(2)" may obtain.

Beam, Laiken, "Recent Developments on Subsection 56(2): Indirect Payments", 1995 Canadian Tax Journal, Vol. 43, No. 2, p. 447.

Subsection 56(3) - Exemption for scholarships, fellowships, bursaries and prizes

Administrative Policy

26 November 2010 External T.I. 2008-0299301E5 F - Sommes reçues par des médecins résidents

fellowships received by medical residents were not exempted under s. 56(3)

CRA found that medical residents were employees of the medical facility notwithstanding their trainee role, so that fellowships were employment income to them rather than being potentially exempted under s. 56(3).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)	medical residents were employees notwithstanding trainee role, so that fellowships were employment income	199

7 July 2006 External T.I. 2006-0190701E5 F - Bourses d'études et de perfectionnement

full exemption proposal not implemented

CRA noted that the2006 federal budget proposal to make all scholarship and bursary payments to students tax-free had not yet been enacted, and it was not in a position to provide any further details.

5 November 2003 Internal T.I. 2003-0036737 F - BOURSES D'ETUDES

$3,000 exemption unavailable where education tax credit not available in the same taxation year

Also released under document number 2003-00367370.

The Directorate indicated that post-secondary students who completed a program of study in August 2000 for which they received a scholarship in January 2001 could not benefit from the $3,000 deduction in computing the s. 56(3) scholarship exemption given that s. 56(3) only provided that the $3,000 exemption is available only if the scholarship or bursary is received by the taxpayer in connection with the taxpayer's enrolment in an educational program in respect of which an amount is deductible as an education tax credit in computing the taxpayer's tax payable for the year in which it is received. The scholarship received in 2001 related to a program of study for which an amount was deductible as an education tax credit in the calculation of their tax payable in 2000, but not in 2001.

Paragraph 56(3)(a)

Subparagraph 56(3)(a)(ii)

Administrative Policy

6 October 2010 External T.I. 2008-0302951E5 F - Stagiaires postdoctoraux

postdoctoral fellows are ineligible for the full scholarship exemption

In finding that scholarships awarded to postdoctoral fellows are ineligible for the full tax exemption for scholarships and fellowships, as they are ineligible for the education tax credit, CRA stated:

The CRA does not consider postdoctoral fellows to be students for purposes of the education tax credit. …

However, should the CRA accept the contention that a postdoctoral fellow receives a scholarship and can claim the education tax credit, it would still be of the view that the postdoctoral fellow could not claim the scholarship exemption unless the amount so received was sufficiently related to the qualifying educational program for which the education tax credit is claimed. In most cases, a postdoctoral fellow's income is not sufficiently related to a qualifying educational program.

Paragraph 56(3)(b)

Administrative Policy

S4-F14-C1 - Artists and Writers

Art production grants may be eligible, but not research grants

1.66 An art production grant is typically paid in respect of a specific project. The phrase art production grant is not defined in the Act; however, it generally refers to an amount that is to be used by an artist or writer in the production of a literary, dramatic, musical, or artistic work. Art production grants that are neither business nor employment income are included in an artist’s or writer’s income pursuant to subparagraph 56(1)(n)(i) subject to the exemptions under subsection 56(3). …

1.68 Subsection 56(3) exempts the first $500 of total amounts that have been included in computing a taxpayer's income under paragraph 56(1)(n) for a particular tax year. This $500 is commonly referred to as the basic scholarship exemption.

1.69 Subsection 56(3) permits an exemption in excess of $500 in certain situations. In particular, paragraph 56(3)(b), which is commonly referred to as the art production grant exemption, permits a taxpayer to exclude from income an amount relating to a scholarship, fellowship, bursary, or prize that is to be used by the taxpayer in the production of a literary, dramatic, musical, or artistic work. In order for the art production grant exemption to apply, the amount of the grant must be included in computing the taxpayer's income under paragraph 56(1)(n). Research grants, for example, are not eligible for the exemption under subsection 56(3) because they are included in income under other provisions, such as paragraph 56(1)(o).

1.70 The total scholarship exemption computed under subsection 56(3) cannot exceed the related amount used in computing a taxpayer’s income under subparagraph 56(1)(n)(i). The net amount is included in the artist’s or writer’s income in the year received.

Expenses incurred in previous year must be after notification of grant/expenses may be incurred in subsequent year

1.72 Paragraph 56(3)(b) provides that eligible expenses must be incurred in the same year in which the funds in respect of the art production grant are received in order to be deductible from the grant. In some cases, expenses related to the grant may be incurred in the year immediately before, or in the year immediately after, the year in which the grant is received. While those expenses are not deductible in the year in which they are incurred, they are considered to be deductible from the art production grant in the year the grant is received. However, expenses incurred in the year immediately before the grant is received are only deductible from the grant if they are incurred after the artist has received notification that the grant will be paid. Expenses incurred in the immediately following year may also qualify. If expenses were not deducted in the correct tax year, see How to change a return. Expenses incurred more than one year before, or more than one year after, the year in which the grant is received are not deductible from that grant.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Substance		93
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		469
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit		582
Tax Topics - Income Tax Act - Section 9 - Nature of Income		298
Tax Topics - Income Tax Act - Section 10 - Subsection 10(6)		272
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose		599
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(p)		573
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(q)		1067
Tax Topics - Income Tax Regulations - Regulation 200 - Subsection 200(2)		103
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Commodities, and commodities futures and derivatives		122
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Cultural Gifts		334
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(7.1)		724

Subsection 56(3.1) - Limitations of scholarship exemption

Paragraph 56(3.1)(b)

Administrative Policy

20 August 2014 External T.I. 2014-0529481E5 - Scholarship exemption

reduction where shortened enrolment

In response to a general inquiry, CRA noted:

[I]n the Department of Finance technical notes… example, an individual receives a bursary which suggests that it is intended to provide support for one year of study. If the individual then only enrolls in a three-week educational program, the scholarship exemption for this individual would be limited to an amount that is reasonable, in respect of the three-week program. The balance of the bursary would be taxable to the individual.

31 July 2013 External T.I. 2012-0452591E5 F - Matériel lié à un programme d'études

meaning of “materials related to the program”

What is the meaning of “materials related to the program”? CRA responded:

As described in … S1-F2-C3 … 3.94 … materials related to the program includes the cost of items that are essential for the completion of the program and are expected to have a lifespan use generally limited to the program length, such as books, lab coats, brushes and paints. However, it does not include, for example, the cost of e-book readers, personal computers, generic software or musical instruments.

Subsection 56(4) - Transfer of rights to income

Cases

Shaw v. The Queen, 89 DTC 5194, [1989] 1 CTC 386 (FCTD), aff'd 93 DTC 5213 (FCA)

The taxpayer and her husband had operated a service station in partnership and then transferred pursuant to s. 85(2) the assets of the business other than the land (which was leased under a head lease to BP Oil Ltd., which subleased the land back to the taxpayer) to a corporation owned by them. It was found that on the same incorporation transactions she had assigned to the corporation her right to receive gallonage and other rental payments from BP under the head lease as well as assigning the head lease and sublease (considered as an integrated whole). S.56(4) did not apply because there was no diversion by the taxpayer to the corporation of income to which she otherwise would have been beneficially entitled. Instead, the corporation was beneficially entitled to the BP gallonage payments as the party who had earned the income represented thereby.

In addition, the exclusion for property transfers (namely, the assignment of the rents payable and the lease) applied.

McNair J stated:

Rent is the recompense payable by the tenant to the landlord for the possession and use of the demised premises. A covenant to pay rent runs with the land, the benefit of which passes to the assignee of the lessee. …

[T]he oral sublease between the plaintiffs and [the corporation] eliminates any element of doubt that the net effect of the whole transaction was to transfer the head lease and the gallonage payment rentals to the corporation, notwithstanding that there was not express formal assignment of the head lease itself.

Words and Phrases

rent

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Effective Date		10
Tax Topics - General Concepts - Substance		35
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property		22

De Groote v. The Queen, 85 DTC 5008, [1985] 1 CTC 687, [1984] CTC 687 (FCTD)

The taxpayer sold shares to, and executed a declaration of trust in favour of, a company controlled by him and then, while still retaining the registered ownership of the shares, received dividends thereon and paid them to the controlled company. The dividends received by him were not included in his income because the dividends were declared subsequent to the date of the assignment of the shares to the controlled company, notwithstanding that the record date stipulated in the declaration of dividends by the directors was prior to the date of the assignment.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)		49
Tax Topics - Income Tax Act - Section 82 - Subsection 82(1) - Paragraph 82(1)(a)	no longer beneficial shareholder	76

Fraser Companies, Ltd. v. The Queen, 81 DTC 5051, [1981] CTC 61 (FCTD)

S.56(4) relates to the transfer or assignment of a right to an amount, not to the loaning of an amount.

Locations of other summaries		Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Rules - Rule 413(1)(a)		69
Tax Topics - General Concepts - Tax Avoidance		42
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)		126
Tax Topics - Statutory Interpretation - Interpretation Act - Section 14		74

The Queen v. Canadian-American Loan and Investment Corp. Ltd., 74 DTC 6104, [1974] CTC 101 (FCTD)

The taxpayer sublet 1/4 of the premises which were used by it in its marina business to an affiliated company ("Georgia") with accumulated losses, and assigned to Georgia the rentals accruing to the taxpayer from contracts for the storage of boats. Cattanach, J. found that the revenues which the taxpayer had purportedly transferred to Georgia related to a business of storing and handling boats, and the business income supposedly earned by Georgia accordingly did not meet the exception for income from property.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt	receipt of sums collected by affiliate	153

The Queen v. Burns, 73 DTC 5219, [1973] CTC 264 (FCTD)

Cheques received by an employee which were endorsed by him to a company owned by him were included in his income pursuant to s. 56(4).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		62

Administrative Policy

28 October 2016 External T.I. 2016-0654331E5 F - Transfer of rights to income

where rental lands purchased subject to obligation to pay the rents to NAL vendor, s. 56(4) trumps s. 9 to include rents in purchaser’s income

Upon a sale by A of leased land to a non-arm’s length corporation (Corporation A) in which A did not hold any shares, A and Corporation A agreed to a redistribution of income in which Corporation A undertook to pay to A all the related rental income. How might ss. 9(1) and 56(4) apply? After finding that the rentals received by Corporation A would probably not have the "quality of income” to it since it would not have “an absolute and unconditional right to these amounts,” CRA went on to state:

[S]ubsection 56(4) would apply to Corporation A… to include the rent amount in its income without a corresponding deduction for its payment to A.

and (quoting from IT-440R, para. 10):

where the transfer or assignment of the right to an amount that is income does not constitute a deliberate attempt to evade or avoid tax, the amount will be included only in the income of the transferor.”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income	where rental lands purchased subject to obligation to pay the rents to vendor, rents did not have quality of income to purchaser under s. 9	165
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense	where rental lands purchased subject to obligation to pay the rents to vendor, no income inclusion and deduction of the rents by the purchaser under ss. 9 and 18(1)(a)	89
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)	s. 56(2) could apply to shareholder of purchaser of lands if vendor did not pay FMV consideration for retaining rights to rents	168

11 March 2014 Internal T.I. 2013-0513221I7 F - Stock options

implicit transfer by corporation when stock options earned by it were issued directly by its client to its shareholder

Publico determined to grant stock options to its directors and consultants, as a result of which a private corporation ("Corporation") was entitled to receive a grant of options. However, such options instead were granted directly to Ms. X, the sole shareholder of Corporation, who subsequently exercised and sold the acquired Publico shares, reporting a capital gain. The option terms provided that they were non-assignable.

CRA found that s. 56(4) applied to Corporation on the basis that the Corporation, as the consultant, was the party entitled to the options, would have recognized business income on exercise of the options and on the facts of the situation it could be considered that the rights to such amount were transferred or assigned by it to Ms. X. Furthermore, as such amount would be business income to Corporation, the closing exception did not apply.

Such income inclusion to Corporation did not detract from there also being a taxable benefit to Ms. X under s. 15 (or 6(1)(a), if it was received by virtue of employment).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	double income inclusion under s. 56(2) or (4) to consulting corporation, and under s. 15(1) to its shareholder, where consultant's options issued directly by client to shareholder	113
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)	s. 56(2) benefit where corporation implicitly consented to consultant's options being issued by client directly to its shareholder	170
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)	s. 248(28) does not prevent a double income inclusion to corporation under s. 56 and shareholder under s. 15	226
Tax Topics - Income Tax Act - Section 9 - Timing	no s. 9(1) income inclusion from consultant being granted stock options until exercise	226
Tax Topics - General Concepts - Fair Market Value - Options	stock options with no in-the-money value could have nil FMV	134
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1)	s. 15 benefit due to shareholder receipt of stock options earned by corporation added to the ACB of the exercised shares	165

10 July 2013 Internal T.I. 2013-0475501I7 F - Amounts returned to trustee/beneficiary

payment of distributed family trust income by children to father did not engage s. 56(4) as it was only potential income to him

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

After finding that the amounts returned to the father were income to him under s. 104(13), CRA went on to indicate (TaxInterpretations translation) that such amounts should not be included in his income under s. 56(4):

Since Father is both beneficiary and trustee, the income that was allocated to the Children could have been allocated to him and paid (section XXXXXXXXXX of the trust deed provides that in the exercise of his discretion the trustee may designate Father to receive income). However, neither Father nor Y exercised this discretion in favour of Father. Thus Father had only a potential right to Trust's income. Therefore, subsection 56(4) does not apply.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13)	family trust income distributed to children but repaid as reimbursement to father for family expenses was income to him, not them	221
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24)	distributions to children immediately paid to father	184
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6)	distributions to children immediately paid to father were deductible even though received by children as his agents	179
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1)	payment of income distributions by children to father not a benefit under the trust	232

14 April 2009 External T.I. 2007-0238221E5 F - Rights of musician-Transfer

s. 56(4) generally will apply where royalty is transferred without assignment of copyright, with exception of SOCAN royalty

As part of a general response respecting the transfer of rights by a musician to a corporation, CRA stated:

[I]n … F2002-0149781R3, the CRA took the position that subsection 56(4) would apply to the transfer to a corporation by an individual of royalty entitlements arising from contracts with a publisher, on the basis that the related copyright, no longer held by the individual, was not also transferred to the particular corporation. In this regard, the entering into of the publishing contract entailed the irrevocable assignment by the individual to the publisher of all copyright covered by the publishing contracts.

That said, the CRA took the position in … F2002-0149781R3 of not applying subsection 56(4) to the transfer of royalty rights under an agreement with the Society of Composers, Authors and Music Publishers of Canada (formerly the Society of Composers, Authors and Publishers of Canada Limited and hereinafter "SOCAN") in light of the particulars of such agreement.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)	s. 56(2) not applicable where copyright or royalty interests transferred at FMV	75
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1)	right to royalties from SOCAN constituted eligible property	109
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Investment Business	royalty income generated from an active business is itself active business income	122

16 December 2008 External T.I. 2008-0279741E5 F - Renonciation au capital d'une fiducie

s. 56(4) inapplicable to disclaimer of capital interest in a trust

CRA indicated that the renunciation of a capital interest in a discretionary family trust would not give rise to the application of s. 56(4), stating (per its summary) that "the individual renounced the entire property and not only the right to income.”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)	settlor’s valid renunciation of capital interest (but not income interest) prior to trustees’ exercise of discretion to distribute a capital gain would avoid application of s. 75(2)(a)(i)	199
Tax Topics - Income Tax Act - Section 248 - Subsection 248(9) - Disclaimer	legally impossible for a beneficiary of a discretionary trust to partially renounce income from a specific trust property	262
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (i)	non-disposition distribution of non-taxable portion of trust capital gains avoids a gain under s. 107(2.1)	375
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition	settlor’s renunciation of capital interest (but not income interest) prior to trustees’ exercise of discretion to distribute a capital gain would generate nil proceeds and not engage s. 56(2) or (4)	194
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b)	s. 69(1) does not apply to a renunciation of trust capital interest since no disposition "to" any person	44
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)	s. 56(2) inapplicable to renunciation of capital interest in a trust	45

16 February 2004 External T.I. 2003-0054091E5 F - Rollover for Contractors

s. 56(4) not applied where construction lien holdbacks are transferred on s. 85(1) rollover basis to transferee, which includes them when they become receivable

Mr. X who, in computing income from his construction business, used the percentage-of-completion method and excluded contract holdbacks each year, transferred that business on a rollover basis to a "Newco with which he does not deal at arm's length. After indicating that the construction lien holdbacks were eligible property that could be transferred at a nominal agreed amount under s. 85(1), CRA stated:

[T]he CRA's general position is not to apply subsection 56(4) to a situation similar to the Particular Situation where the transferee of the contract holdback amounts includes them in income from a business in the taxation year in which final certification of completion or expiry of the lien period under the relevant provincial legislation occurs.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1) - Paragraph 85(1.1)(a)	construction lien holdbacks are eligible property that can be transferred at a nominal agreed amount	124

29 April 2003 External T.I. 2003-00646

Allocations made to the spouse of a retired partner pursuant to s. 96(1.1) would, depending on the circumstances, also be included in the income of the retired partner under s. 56(2) or (4). S.248(28) would not prevent this result.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)		38
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.1)		38

8 September 1997 External T.I. 9707155 - INCORPORATION OF B.C. REAL ESTATE SALESPEOPLE?

Where self-employed BC real estate sales people purportedly incorporate their proprietorships, with the Superintendent of real estate allowing the licensing of the corporation in order to sell real estate but with a requirement that the individual realtor remain personally liable for any damages resulting from a sale, then the question as to whether s. 56(4) apply will turn on the factual determination whether it is the individual or the corporation who is carrying on the real estate sales business.

3 February 1994 External T.I. 5-923647

Although s. 56(4) could apply in some circumstances to a contractor transferring unapproved billings and unapproved holdbacks to a controlled corporation, RC generally will not apply this provision where the recipient of the transfer includes such amounts in its income as business income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1)		21

3 December 1993 External T.I. 9200995 F - Transfer of Farm Inventory to a Corporation

Where a farmer, who is guaranteed under the Gross Revenue Insurance Program ("GRIP") to receive a price of $4 per bushel of wheat, transfers his wheat inventory to a corporation at a time that he was already entitled to receive a GRIP amount, s. 56(4) would apply to include this amount in his income in the year of transfer.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Fair Market Value - Other		66
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1)		51
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Account Receivable		43

Subsection 56(4.1) - Interest free or low interest loans

Administrative Policy

25 March 2009 External T.I. 2008-0300401E5 F - Fiducie en faveur de soi-même - prêt sans intérêt

s. 56(4.1) inapplicable to NIB loan made by individual to his alter ego trust

Mr. X makes a non-interest bearing loan to an alter ego trust that was established for him. The terms of the loan were established independently of those for the Trust Indenture. In finding that s. 56(4.1) would be unlikely to apply, CRA stated:

[T]he intention test in paragraph 56(4.1)(b) requires that it can reasonably be considered that one of the main reasons for making the loan was to reduce or avoid tax by causing income from the loaned property, or property substituted therefor, whose acquisition the loan enabled or assisted, to be included in the income of another individual (other than a trust). That condition of application cannot be satisfied in the hypothetical situation submitted considering that Mr. X must be entitled to receive all the income from the trust during his lifetime.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)	Howson applied to find that non-interest bearing loan by individual to his alter ego trust not subject to s. 75(2)/no contribution if individual pays trust taxes following a s. 104(13.1) election	181
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13.1)	s. 104(13.1) election generally available where no s. 75(2) application, which is not engaged by the individual’s payment of trust-level taxes	357
Tax Topics - General Concepts - Payment & Receipt	individual pays trust taxes when he receives trust distributions net of such taxes	34

92 C.R. - Q.7

Re application of s. 56(4.1) to "immigrant's trust".

91 C.R. - Q.5

s. 56(4.1) will apply to any income derived by a non-resident trust established for the benefit of an immigrant where the non-resident trust is exempted from the application of s. 94(1) by virtue of s. 94(1)(b)(i)(A)(III), it was established for the purpose of reducing the Canadian tax liability of the immigrant, and the trust will derive all of its income from assets that are sold to the trust by the immigrant for fair market value consideration in the form of a non-interest bearing promissory note payable on demand.

8 May 1990 T.I. (October 1990 Access Letter, ¶1461)

Where an individual makes an interest-free loan to his son-in-law who invests the money in a private corporation controlled by him by way of loan or a purchase of shares, the interest or dividends will be attributed to the lender even after repayment of the loan until such time as the son-in-law disposes of his investment in the corporation.

89 C.R. - Q.47

"The provisions of subsection 56(4.1) will not normally apply where there is a bona fide sale of property (instead of property being loaned) by one individual to another non-arm's length individual in order to reduce the seller's income taxes and the seller receives a mortgage, agreement for sale or similar money purchase obligation as security for the loan of the unpaid purchased price."

88 C.R. - "Finance and Leasing" - "Interest" - "Loans to Non-Arm's Length Parties"

A loan by a parent to an adult child on an interest-free basis to assist the child in acquiring a home to be used as a principal residence normally is not subject to s. 56(4.1).

Articles

Joseph Frankovic, "Income Splitting and Attribution", Tax Topics, Wolters Kluwer, No. 2250, April 23, 2015

Although the attribution rules do not apply to transfers of property to adult family members other than a spouse, subsection 56(4.1) can apply where an individual (creditor) lends property to a non-arm's length individual, including an adult (debtor). Unlike the other attribution rules, this provision has a purpose element to it, in that it can apply only if it can be considered that one of the main reasons for the loan was to reduce or avoid tax by causing income from the loaned property or substituted property to be included in the income of the debtor.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c)		170
Tax Topics - Income Tax Act - Section 74.3 - Subsection 74.3(1)		227

Emes, "Planning for Immigration to Canada from Countries other than the United States", 1993 Corporate Management Tax Conference Report, c. 13.

Discussion of immigrant trusts.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 74.4 - Subsection 74.4(2)		4

Brahmst, "Subsection 56(4.1) - An Update", Canadian Current Tax, January 1992, p. P47.

Subsection 56(6)

Administrative Policy

14 May 2013 External T.I. 2013-0484971E5 F - PUGE - décès du conjoint

deceased had spouse at the end of her terminal year

A taxpayer ("Ms. A") died on October 1 of Year 1. Mr. A, her surviving spouse, did not have a new spouse at the end of the year. Ms. A and Mr. A were the parents of a child under the age of six and were paid $1,299 and $300, respectively, as universal child care benefits (“UCCB”) in Year 1. A separate rights and things return was filed for Ms. A for that year.

CRA indicated that it concurred with the correspondent’s analysis of s. 56(6), which included a statement that “since Ms. A had a spouse at the end of her taxation year, that is, at the time of her death, and Mr. A was the spouse with the lowest income, Mr. A should report the UCCB amount of $900, received by Ms. A, by virtue of paragraph 56(6)(b).”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(9.1)	deceased’s income did not include income on her rights and things return	64

Subsection 56(9.1)

Administrative Policy

14 May 2013 External T.I. 2013-0484971E5 F - PUGE - décès du conjoint

deceased’s income did not include income on her rights and things return

A taxpayer ("Ms. A") died on October 1 of Year 1. Mr. A, her surviving spouse, did not have a new spouse at the end of the year. A separate rights and things return was filed for Ms. A for that year.

CRA concurred that the income of Ms. A under s. 56(9.1) did not include income on her rights and things return.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(6)	deceased had spouse at the end of her terminal year	138

Subsection 56(12) - Foreign retirement arrangement

Cases

Serra v. Canada, 98 DTC 6602 (FCA)

Marceau J.A. stated (at pp. 6603-4) that "the argument of counsel for the applicants, which in a nutshell would insert the adjective 'absolute' before the word 'discretion' ... so that the slightest general earmarking of a support payment would mean that it could no longer be characterized as a taxable allowance, is untenable ..."

The Queen v. Arsenault, 96 DTC 6131, [1999] 4 CTC 174 (FCA)

The taxpayer met the requirements of s. 60(b) where, notwithstanding the requirements of a separation agreement stipulating that he was to pay maintenance of $400 per month to a separated spouse and $100 per month for each their three children, he instead provided her with monthly cheques of $690 (later $760) made payable to the landlord, which were accepted by her.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(b)		60

Administrative Policy

29 January 2018 External T.I. 2017-0682301E5 - Deemed Distribution and Withdrawal from IRA

deemed ITA inclusion on deemed distribution from IRA on renouncing U.S. citizenship or relinquishing green card

Where a U.S. long-term resident relinquishes her green card (or a U.S. citizen renounced citizenship) after having become a Canadian resident, there would be a deemed taxable distribution to her of the amount in her IRA for Code purposes – which by virtue of ss. 56(1)(a)(i)(C.1) and 56(12) would be deemed to be included in her income at that time for ITA purposes as well. This generally would accommodate a s. 126(1) foreign tax credit.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) - Clause 56(1)(a)(i)(C.1)	the deemed U.S. income inclusion from an IRA on renouncing U.S. citizenship or relinquishing a green card also is recognized for ITA purposes	365
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1)	deemed Code taxability of IRA on renouncing U.S. citizenship generally would generate an FTC to deemed Cdn-resident recipient	125

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt	bonus booked as loan back/constructive receipt	131
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)	amount booked as loaned-back bonus was remuneration	186

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Substance		99
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)		270
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2)	partnership subscription for taxpayer affiliate pref shares not boot	263

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2)	damages not received as constructive trustee as not received qua director	191
Tax Topics - Income Tax Act - Section 9 - Compensation Payments	damages not corporate income as not received qua director	191
Tax Topics - Income Tax Act - Section 9 - Nature of Income	agreement assigned rights to proceeds of law suit rather than entitlement under law suit	344

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Section 56

Table of Contents

Subsection 56(1) - Amounts to be included in income for year

Paragraph 56(1)(a) - Pension benefits, unemployment insurance benefits, etc.

Cases

Woods v. The Queen, 2010 DTC 1095 [at 2996], 2010 TCC 106, aff'd 2011 DTC 5049 [at 5681], 2011 FCA 90

Watts v. The Queen, 2004 DTC 3111, 2004 TCC 535 (Informal Procedure)

Subparagraph 56(1)(a)(i)

Cases

Burchill v. Canada, 2010 DTC 5096 [at 6922], 2010 FCA 145

See Also

Eyckelhoff v. The Queen, 2020 TCC 130 (Informal Procedure)

Rasmussen v. The Queen, 2019 TCC 124 (Informal Procedure)

Mammone v. The Queen, 2018 TCC 24, rev'd 2019 FCA 45

Gill v. The Queen, 2012 DTC 1261 [at 3764], 2012 TCC 302

Brilla v. The Queen, 98 DTC 1502 (TCC)

Walker v. The Queen, 95 DTC 753 (TCC)

Kaiser v. The Queen, 95 DTC 13, [1994] 2 CTC 2385 (TCC)

Administrative Policy

Background

Proposed transactions

Rulings

3 March 2004 External T.I. 2003-004715

20 November 1991 T.I. (Tax Window, No. 13, p. 9, ¶1601)

7 March 1991 T.I. (Tax Window, No. 1, p. 21, ¶1151)

8 September 89 T.I. (February 1990 Access Letter, ¶1097)

88 C.R. - Q.5

Clause 56(1)(a)(i)(C.1)

See Also

McKenzie v. The Queen, 2017 TCC 56 (Informal Procedure)

Administrative Policy

Subparagraph 56(1)(a)(ii)

Cases

Doyle v. The Queen, 83 DTC 5383, [1983] CTC 339 (FCTD)

Lawson v. The Queen, 82 DTC 6331, [1982] CTC 368 (FCTD)

Administrative Policy

29 April 1991 T.I. (Tax Window, No. 2, p. 21, ¶1217)

Subparagraph 56(1)(a)(iii)

See Also

Scott v. The Queen, 2017 TCC 224

Paragraph 56(1)(a.1)

Administrative Policy

Paragraph 56(1)(b) - Support

Cases

Tossell v. Canada, 2005 DTC 5365, 2005 FCA 223

The Queen v. Jasper, 94 DTC 6519, [1994] 2 CTC 309 (FCTD)

The Queen v. Sigglekow, 85 DTC 5471, [1985] 2 CTC 251 (FCTD)

The Queen v. Sills, 85 DTC 5096, [1985] 1 CTC 49 (FCA)

See Also

Welch v. The Queen, 2012 DTC 1288 [at 3892], 2012 TCC 350 (Informal Procedure)

Blais v. MNR, 92 DTC 1497 (TCC)

Morley-Clarke v. Jones, [1985] BTC 460 (C.A.)

The Queen v. Sills, 85 DTC 5096, [1985] 1 CTC 49 (FCA)

Administrative Policy

Articles

Durnford, Toope, "Spousal Support in Family Law and Alimony in the Law of Taxation", Canadian Tax Journal, 1994, Vol. 42, No. 1, p. 1.

Paragraph 56(1)(c)

Cases

James v. The Queen, 85 DTC 5172, [1985] 1 CTC (FCTD)

Paragraph 56(1)(d) - Annuity payments

Cases

The Queen v. Rumack, 92 DTC 6142, [1992] 1 CTC 57 (FCA)

Wilder v. Minister of National Revenue, 52 DTC 1014, [1951] CTC 304, [1952] 1 S.C.R. 123

See Also

Short v. The Queen, 99 DTC 1146, [1999] 4 CTC 2085 (TCC)

Administrative Policy

29 January 1993 T.I. 9200395 (Tax Window, No. 27, p. 1, ¶2360)

22 January 1993 T.I. 9203635 (Tax Window, No. 27, p. 1, ¶2360)

29 October 1992 T.I. 922997 (September 1993 Access Letter, p. 414, ¶C56-252)

21 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 28, ¶1099)

ATR-40 (18 March 1991) "Structured Settlements"

80 C.R. - Q.26

Paragraph 56(1)(h) - Registered retirement savings plan, etc.

See Also

Maass-Howard v. The Queen, 2013 DTC 1009 [at 59], 2012 TCC 307, briefly aff'd 2013 DTC 5167 [at 6429], 2013 FCA 234

Paragraph 56(1)(l.1) - Idem [Legal expenses]

Cases

Scharf v. Freure Homes Ltd., 95 DTC 5074 (Ont. Ct. J. (G.D.))

Administrative Policy