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

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.

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

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 93

See Also

Gill v. The Queen, 2012 DTC 1261 [at 3764], 2012 TCC 302

The taxpayer received $75,175 as a redemption of his deceased US-resident sister's individual retirement income account. Hogan J. found that this amount was required to to be included in the taxpayer's income under s. 56(1)(a)(i)(C.1). The self-represented taxpayer argued that the words "without limiting the generality of the foregoing" meant that the items listed in clauses (A)-(C.1) should be taxed only if they constitute superannuation or pension benefits as those terms are generally understood. Hogan J. rejected this argument because, inter alia, "interpreting clause (C.1) as including lump-sum payments from IRAs does not restrict the ambit of subparagraph 56(1)(a)(i); rather, it expands it" (para. 36).

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions "including without limitation" is expansive 159

Brilla v. The Queen, 98 DTC 1502 (TCC)

Bowman TCJ. indicated in obiter dicta that capital withdrawals by the taxpayer from a 401(k) plan would not be taxable in Canada.

Walker v. The Queen, 95 DTC 753 (TCC)

In order to give effect to an equalization of net family properties for purposes of the Family Law Act (Ontario), it was agreed that the taxpayer would receive one-half of the gross proceeds of the military pension of her former husband each month, with the result that the gross proceeds actually paid to her former husband each month would be received by him, as to one-half, as agent for or in trust for the taxpayer. On this basis, one-half of the monthly pensions was included in the taxpayer's income and the other one-half in the income of her former husband (who had been added as a third party to the proceedings).

Kaiser v. The Queen, 95 DTC 13 (TCC)

In response to a submission that s. 56(1)(a)(i)(C.1) was intended only to prevent a Canadian resident with an IRA in the United States from collapsing it and removing the funds to Canada free of Canadian tax, and was not intended to apply to a Canadian resident who was a designated beneficiary of an IRA which had belonged to someone else, Rowe D.J.T.C.C. noted (p. 19) that "the use of the word 'under' would not seem to be necessary if it were intended to be restricted to withdrawal only by the original contributor of the retirement arrangement".

Administrative Policy

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.

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).

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.

16 January 1996 T.I. 952921 (Tax Window Files "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 T.I. 942712 (C.T.O. "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 - Articles of Treaties - Article 18 50

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

See Also

McKenzie v. The Queen, 2017 TCC 56 (Informal Procedure)

distribution from custodial US IRA was taxable

In the course of rejecting a succession of spurious arguments that an amount received by a Canadian resident-U.S. citizen from her deceased mother’s IRA was not taxable to her under s. 56(1)(a)(i)(C.1), D’Auray J discussed the types of IRAs referenced by Reg. 6903, and found that the IRA at issue came within this description notwithstanding that it was a custodial arrangement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 6803 an IRA which is a custodial arrangement is included 205

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) 21

Administrative Policy

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.

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."

The Queen v. Jasper, 94 DTC 6519 (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 109

The Queen v. Sigglekow, 85 DTC 5471 (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.

See Also

Welch v. The Queen, 2012 DTC 1288 [at 3892], 2012 TCC 350 (Informal Procedure)

The taxpayer and her former spouse attempted to arrange their spousal support agreement so that her spouse would not deduct support amounts from income, and the taxpayer would not include the amounts in income. Webb J. found that this attempt failed. Paragraph 56(1)(b) does not give taxpayers the option not to deduct support amounts from the payer's income, nor to exclude the amount from the recipient's income.

Blais v. MNR, 92 DTC 1497 (TCC)

A taxpayer was ordered in 1984 to retain arrears of alimentary allowance that had accumulated from March 1983 onward to be applied against an amount owing to him by his estranged wife. In finding that the alimentary allowance was not "paid" by him for purposes of s. 60(b), and was not "received" by her for purposes of s. 56(1)(b), Garon J. stated (p. 1499):

"... The verb 'pay' in the context of that paragraph means a transfer of money, a handing over of funds ... [and] the expression 'received' involves the idea of being put in possession of something."

Words and Phrases
receive
Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt payment references funds transfer 94
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(b) 94

Morley-Clarke v. Jones, [1985] BTC 460 (C.A.)

In 1980 the taxpayer obtained a retrospective consent order providing that a 1969 court order be varied to provide that her former husband should make maintenance payments directly to her son rather than to herself "as from 18 April 1969". The Court accepted the submission of Revenue that "a payment made under an order with retrospective effect does not and cannot fall due at any earlier date than the date when the order is made and the obligation attaches to the payer." The order accordingly did not have the effect of retrospectively converting the character of the pre-1980 payments which she had received from her income into her son's income.

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.

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)

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 (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.

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."

See Also

Short v. The Queen, 99 DTC 1146 (TCC)

The taxpayer was assigned by his father an annuity paying $5,500 of interest annually and with an original term of 20 years. The taxpayer later surrendered the annuity to the issuer at a gain.

In finding that the lump sum received by the taxpayer was not taxable under s. 56(1)(d) (with the result that the taxpayer was subject to capital gains treatment) Mogan TCJ. stated (at p. 1148) that "in the workaday world, an annuity is an amount payable yearly" and that the definition of annuity in s. 248(1) only expanded this meaning "to include intervals longer or shorter than a year", and did not cover a large once-and-for all payment.

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 - Articles of Treaties - Article 18 capital portion of s. 56(1)(d) is not excluded as an annuity under Canada-Turkey Treaty/RRSP annuity payments are pensions 382
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 44

20 May 1994 T.I. 940504 (C.T.O. "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.

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.

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).

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.

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

The taxpayer withdrew $105,000 from her RRSP to treat a herniated disc. Hogan J. affirmed the Minister's decision to impute income on the withdrawal. There is no mechanism in the Act to exclude RRSP withdrawals from income on medical or other sympathetic grounds.

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

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.

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

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.

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.

See Also

Lewis v. The Queen, 2013 DTC 1117 [at 620], 2013 TCC 137 (Informal Procedure)

The taxpayer was unsuccessful in arguing that the March 2010 Budget's amendment to s. 56(1)(n) should not be applied retroactively to 1 January 2010, even though the legislation so requires (her stipend from McGill University for her post-doctoral fellowship was thus no longer an amount received under a qualifying educational program, because her program of study would not lead to a degree). Parliament clearly has the power to legislate retroactively. The taxpayer also argued "on fairness grounds" that the amendment should not be applied until October 2010 when McGill began to withhold income from the stipend payments. The Tax Court has no jurisdiction to suspend legislation on fairness grounds - although Boyle J indicated that the taxpayer "may wish" to pursue interest relief with CRA.

It was unnecessary to evaluate the Minister's submission that the stipend was not only not a scholarship but was employment income. Boyle J stated in obiter dicta (at para. 17):

It does not necessarily follow that because post-doctoral research is not a qualifying educational program that amounts paid to post-doctoral fellows is employment income. If the Government seeks to tax post-doctoral fellows' income as employment income, that will have to await a different case.

Caropreso v. The Queen, 2012 DTC 1190 [at 3488], 2012 TCC 212 (Informal Procedure)

The taxpayer sought an exemption under s. 56(1)(n) in respect of income from the Ontario Health Research Institute ("OHRI") in connection with a postdoctoral fellowship at the University of Ottawa. The facts were essentially the same as in Huang, which had been decided against the taxpayer, except that the Minister made the further argument that, as the taxpayer's payment from the University was employment income, s. 56(1)(n) was not available to the taxpayer to begin with.

Woods J. agreed and denied the taxpayer's appeal. She stated (at para. 20):

If the payments are received by virtue of employment, this takes precedence. However, in making this determination, it is relevant to consider the dominant characteristic of the payments, whether it is compensation for work or student assistance.

In the circumstances, the dominant characteristic of the payments was compensation for work. The taxpayer's activities with the OHRI were more in the nature of research than education, and the OHRI exercised a degree of control over the taxpayer's activities in the manner of an employer.

Huang v. The Queen, 2012 DTC 1120 [at 3103], 2012 TCC 81 (Informal Procedure)

The taxpayers were postdoctoral students who received research fellowships in 2009 from Parkinson Society Canada ("PSC") to conduct research under a University of Ottawa professor. Woods J. ruled that these amounts were indeed fellowship amounts under s. 56(1)(n) rather than grants under s. 56(1)(o). Evidence was sparse, but did show that PSC differentiated between grants and fellowships. Woods J. accepted PSC's characterization of the amounts as being from a fellowship.

She went on to conclude that the amounts were deductible under the fellowship exemption in s. 56(3) then in force. (The definition of "qualifying educational program" in s. 118.6(1) has since been amended to exclude programs that do not confer a degree.)

Chabaud c. La Reine, 2012 DTC 1076 [at 2856], 2011 TCC 438 (Informal Procedure)

Archambault J. found that "bursary" amounts that the taxpayer received from the University of Laval in connection with his postdoctoral fellowship at that university were employment income rather than amounts described under s. 56(1)(n), because his work was in the nature of "employment" under Quebec civil law. Under art. 2085 of the Civil Code, "a contract of employment is a contract by which a person, the employee, undertakes for a limited period to do work for remuneration, according to the instructions and under the direction or control of another person, the employer." The relative independence of research fellows as employees was irrelevant given that they were ultimately accountable to their supervisors. Archambault J. stated (at para. 72):

Having more independence does not necessarily mean that there is no relationship of subordination. The existence of a relationship of subordination does not depend on the right of direction and control being exercised, but on the existence of the right to exercise such control.

None of the amounts received by the taxpayer was a "bursary," namely "an amount granted either as financial aid, or in recognition of the student's excellence" (para. 79) given that they were paid for services, and the taxpayer no longer was a student (but, rather, was analogous to an articling student or medical resident). In addition, none of the amounts received was a "fellowship," namely, "assistance or a grant given to a person to enable the person to acquire new knowledge" (para. 89) as the goal of the University instead was to remunerate him for services he rendered. Furthermore (and in response to Savage), s. 56(1)(n) was amended to provide "that scholarships and bursaries paid by an employer to its employee are entirely taxable" (para. 93), so that it would not have assisted the taxpayer if the amounts received had been bursaries or fellowships.

Words and Phrases
fellowship bursary

Mbarga v. The Queen, 2005 DTC 1447, 2005 TCC 595 (Informal Procedure)

An amount paid by Alberta Human Resources and Employment directly to the University of Calgary to enable the taxpayer to take a technology program constituted a "bursary" ("an endowment given to a student") and also was "received" by the taxpayer given that "the law is clear that 'receipt' includes constructive receipt" (p. 1448), i.e., the enjoyment of advantages without necessarily having them in one's hands.

Words and Phrases
receive bursary

Simser v. The Queen, 2003 DTC 617, 2003 TCC 366

A $2,000 bursary received by the taxpayer, who was profoundly deaf, in the form of a "special opportunities grant for students with permanent disabilities" under the terms of the Canada Student Financial Administration Act constituted a bursary within the meaning of s. 56(1)(n).

Administrative Policy

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.

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).

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).

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).

20 June 1994 Internal T.I. 7-940939 -

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 T.I. 932658 (C.T.O. "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.

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

See Also

Huang v. The Queen, 2012 DTC 1120 [at 3103], 2012 TCC 81 (Informal Procedure)

See the summary of this decision under s. 56(1)(n).

Chabaud c. La Reine, 2012 DTC 1076 [at 2856], 2011 TCC 438 (Informal Procedure)

Archambault J. found that "bursary" amounts that the taxpayer received from the University of Laval in connection with his postdoctoral fellowship at that university were not research "grants" (which had been judicially defined as financial assistance) because they instead represented consideration for (employment) services rendered by the taxpayer.

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

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).

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.

Paragraph 56(1)(r) - Financial assistance

Administrative Policy

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 143

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.)

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."

Administrative Policy

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?

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)(r) federal assistance to those with disabilities 144

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 81
Tax Topics - Income Tax Regulations - Regulation 233 - Subsection 233(2) potential exclusion of payments in kind 245

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 86

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.

Administrative Policy

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

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

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)

Amounts that had been earned for work done by the taxpayer and that were paid at his direction to the nephew of his common-law spouse 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 (his common-law spouse) 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. Because Kirsten did not provide services and the taxpayer did, the Winter doctrine had no application.

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

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 53

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 71

Smith v. The Queen, 93 DTC 5351 (FCA)

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 entered into various transactions whose effect was to reduce liabilities of Holiday 77.

Mahoney J.A. 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 ... ."

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).

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) 70

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".

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

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 70
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) 96

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 - Constitution Act, 1982 - Subsection 15(1) 45
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) benefit based on actual rather than subjective value 91

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.

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)).

De Groote v. The Queen, 85 DTC 5008, [1985] 1 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.

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.'"

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.

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 84

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:

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

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.

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).

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).

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 185

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.

See Also

Gainor v. The Queen, 2011 DTC 1317 [at 1798], 2011 TCC 442

The taxpayer had been a director of corporation ("Canam") which had been struck from the corporate registry. Unaware of Canam's dissolution, CIBC maintained a corporate account for Canam, over which the taxpayer had sole signing authority. The taxpayer deposited a fraudulently altered cheque into the account in the amount of $350,000, and $118,000 of the money disbursed was not later recovered by CIBC. It was unclear whether the fraud had been perpetrated by the taxpayer or by an associate, Mr. Craine, who died before a proper investigation could be conducted. Hogan J. found that s. 56(2) did not attribute as income to the taxpayer the $102,000 portion of the $118,000 that the taxpayer disbursed for the benefit of Mr. Craine. He stated (at para. 49):

The funds never belonged to Canam. Caman's bank account was simply used as an instrument to perpetrate the fraud against the CIBC. ... A corporate asset was not transferred by Canam to Mr. Craine on the direction of the Appellant. The evidence suggests that both men participated in the scheme.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income 162

Delso Restoration Ltd. v. The Queen, 2011 DTC 1315 [at 1786], 2011 TCC 435

The corporate taxpayer was held entirely by the two individual taxpayers, who were alleged by the Minister to have had it pay for renovations on their home and landscaping for a parent. They argued (citing Outerbridge and Smith) that these pleaded allegations did not establish a sufficient basis for assessments under s. 56(2) because the transferees were the renovation and landscaping contractors, and s. 56(2) can only apply where the benefits conferred are not taxable in the hands of the transferee. Jorré J. rejected this argument. The Outerbridge and Smith doctrine applied only where s. 56(2) otherwise would be applied to include a taxable benefit that had already been included in the income of the actual recipient of the taxable benefit (para. 46), and did not apply (para. 41):

[w]here the recipient of the payment or the transferred property is simply receiving payment in return for adequate consideration (the supply of goods or services)... .

D'Andrea v. The Queen, 2011 DTC 1234 [at 1356], 2011 TCC 298

The taxpayer was a manager of a corporation, which held real estate. He arranged to sell the property to a corporation ("Newco") that was owned equally by a numbered corporation that he wholly owned and a third party purchaser. The $1.8 million transfer price, funded entirely by the third party, represented only 50% of the property's value. The taxpayer was convicted of fraud for the transaction.

V.A. Miller J. found that the transfer of the property to Newco resulted in the inclusion in the taxpayer's income of half the value of the property, as the transfer had been made pursuant to the taxpayer's directions. Half of the value of the property was for the benefit of the taxpayer's numbered corporation, and that amount would have been included in income pursuant to s. 15(1) if it had been received by the taxpayer directly.

However, the Minister's reassessment was statue-barred.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) fraud conviction did not establish neglectful reporting 183

Sochatsky v. The Queen, 2011 DTC 1065 [at 346], 2011 TCC 41

The taxpayer was a director, shareholder and employee of a corporation. He resigned from his directorship and employment in 2001. In that year, the corporation declared a $3.7 million bonus, withheld and remitted source deductions from this amount and recorded a loan to it from the taxpayer for the remaining amount of the bonus. In 2002, the taxpayer directed that $350,000 be paid to each of two corporations controlled by the taxpayer or his wife (purportedly for management services notwithstanding that these corporations were not organized until 2002), and the balance to him.

Jorré J. found that as the full amount of the bonus was received by the taxpayer in 2001 (in light inter alia of his lending the amount of the bonus net of source deductions back to the corporation), the full amount of the bonus was income to the taxpayer under s. 5(1) in 2001. Accordingly, s. 56(2) could have no application when $700,000 of this amount was directed by him to be paid to the two other corporations in 2002.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt bonus booked as loan back/constructive receipt 127
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 182

GlaxoSmithKline Inc. v. The Queen, 2008 DTC 3957, 2008 TCC 324

The taxpayer purchased the active pharmaceutical ingredient of a drug that was marketed by it in Canada from an affiliated non-resident corporation for approximately five times the amount that was paid by Canadian generic drug manufacturers for the (chemically identical) ingredient.

In finding that the taxpayer had conferred a taxable benefit on its U.K. parent as a result of paying in excess of a reasonable price for the purchased ingredient (with a reasonable price being based on the highest prices paid by generic manufacturers for the same ingredient, plus an upward adjustment for the fact that the taxpayer purchased the ingredient in granulated form). Rip A.C.J. rejected submissions of the taxpayer that the U.K. parent did not know that the taxpayer was purchasing the ingredient for more than other companies in Canada were paying, and that there was no benefit to the affiliate because the amount charged by the affiliate to the taxpayer was not substantially in excess of the cost of the ingredients to the affiliate (which, in turn, was based, in part, on costs paid to other group companies).

Laflamme v. The Queen, 2008 DTC 482, 2008 TCC 255

In the context of estate freeze transactions, a trust that the taxpayer had established for the benefit of his children transferred a portion of the Class A shares of a corporation that was controlled by him ("335") to his son's holding company ("2165") in consideration for shares of 2165. Although the taxpayer held Class D shares of 335 with only a nominal redemption value, they were convertible (before his death) into a very large number of Class A shares. The position of the Minister was that the Class A shares had substantially lower fair market value than that attributed to it by the terms of the sale to 2165 given the potential dilutive effect of a conversion by the taxpayer of the Class D shares, so that an s. 56(2) benefit was assessable on the taxpayer. In rejecting this position, Lamarre, J. stated (at para. 37) that:

"If the intent in the instant case had been to sell the Class A shares to a third party, the Appellant, who controlled 332 Canada, would have had no problem waiving the conversion right attached to his Class D shares so that the Class A shares could be given their full value. Common sense would dictate this."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares 196

Ceco Operations Ltd. v. The Queen, 2006 DTC 3006, 2006 TCC 256

The taxpayer transferred assets of a business to a partnership in what was intended to be an s. 97(2) rollover transactions in consideration for cash, promissory notes and assumption of debt ("boot") totalling an amount less than the cost amount of the transferred assets, and a Class "F" partnership interest stipulated to have a value equal to the balance of the purchase price. The partnership used cash (derived in part from a third party who had subscribed for ¾ of the equity in the partnership) to subscribe for preferred shares of a sister company of the taxpayer ("Holdings"), with Holdings in turn using the proceeds to subscribe for preferred shares of holding companies ("Holdcos") for the various indirect individual shareholders of the taxpayer. A "back-flow preventor" clause in the Partnership Agreement provided that in the event that the partnership received any payments in respect of preferred securities held by the partnership, the partnership would make distributions to the holders of Class F units equalling such payments received.

In finding that s. 56(2) did not apply to deem the amounts paid by the Partnership for the preferred shares to be boot received by the taxpayer, Bonner J. noted that the Crown had admitted in the pleading that the total value of the (actual) boot and Class F units received by the taxpayer on the transfer of the business assets was equal to the price for which the business assets were sold to the partnership so that "there was no room for the additional consideration of which the Appellant is said to have diverted to Holdings".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 95
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 266
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) partnership subscription for taxpayer affiliate pref shares not boot 259

Speer v. The Queen, 99 DTC 157 (TCC)

S.56(2) did not apply to an arrangement under which fees earned by companies as a result of a tax plan concocted by tax partners at Coopers & Lybrand were paid as dividends to family members or family trusts in respect of partners of the firm.

Ferrel v. The Queen, 97 DTC 1565 (TCC)

The taxpayer was the sole trustee of the family trust that, by utilizing his services, provided management services to corporations in which the trust had direct or indirect interests. Preferred beneficiary elections were made by the trust to allocate the income of the trust to the two income beneficiaries (who were children of the taxpayer).

After stating (at p. 1569) that "in the absence of sham, there is nothing in law to prevent an individual from agreeing to provide his professional or management services to a client through the medium of a corporation or some other third party entity like a trust", Mogan TCJ. found that s. 56(2) did not apply to include the management fees in the income of the taxpayer because that income was taxable in the hands of the income beneficiaries.

Gilvesy v. The Queen, 96 DTC 1417 (TCC)

After facing bank pressure to have a corporation owned by him ("Enterprises") sell a property, the taxpayer arranged to have Enterprises sell the property to a corporation associated with a friend of his ("MGD"). At the request of the taxpayer, the friend then caused MGD to grant an option to the taxpayer's wife to purchase the property from MGD for an exercise price based on MGD's purchase price plus interest at the prime rate to the date of exercise.

There was no inclusion in the taxpayer's income notwithstanding that the property was sold a few months later and at a gain of approximately 50% that accrued to the taxpayer's wife, because the property had been sold to MGD for its fair market value, with the result that the option had nominal value.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other 51

Paxton v. The Queen, 95 DTC 179 (TCC), rev'd 97 DTC 5012 (FCA)

rev'd on other grounds 97 DTC 5012 (FCA)

S.56(2) did not apply to transactions whereby the taxpayer, after agreeing with a third party to transfer his shares, or cause his shares to be transferred, to the third party, transferred his shares on a rollover basis pursuant to former s. 73(5) to his children, who then transferred the shares to the third party. O'Connor TCJ. referred to the submission of the taxpayer's counsel that the transfers of shares to the taxpayer's children were made for adequate consideration.

Placements T.S. Inc. v. The Queen, 94 DTC 1302 (TCC)

A property over which the taxpayer had a right of first refusal was purchased for $500,000 from the arm's length owner by companies with whom the taxpayer did not deal at arm's length and then resold by them to the taxpayer for $1,200,000. The taxpayer in turn, sold the property to an arm's length purchaser for $1,200,000. In finding that s. 56(2) was not applicable, Lamarre Proulx TCJ. noted (p. 1309) that "the legal effects of transactions must be respected unless fraud is proven or the provisions of Part XVI of the Act regarding tax avoidance are alleged" (which was not the case here) and that under the relevant transactions, the taxpayer was never legally entitled to a capital gain.

Béliveau v. MNR, 91 DTC 669 (TCC)

When a corporation in which the taxpayer and his brother each had a 25% shareholding ("Brasserie") had its operating permit cancelled by the local municipality, Brasserie ceased operations, commenced an action against the municipality claiming $300,000 in damages, was loaned $35,000 by a corporation wholly owned by the taxpayer and his brother ("Pavillon"), and used this sum to pay off indebtedness of Brasserie which the taxpayer and his brother had guaranteed several years previously. In allowing the taxpayer's appeal from assessments pursuant to ss.15(1) and 56(2) for the year in which Pavillon made the loan to Brasserie, Couture C.J.TC found that no benefit was received until a subsequent taxation year when (following the dismissal of the action against the municipality) Brasserie was wound up without repaying Pavillon.

Simon-Carves of Canada Ltd. v. MNR, 89 DTC 98 (TCC)

The direction by the U.K. shareholder of the taxpayer to pay off the liabilities of a U.S. affiliate of such shareholder gave rise to Part XIII tax on the amount of such liabilities under the combined operation of ss.56(2), 15(1) and 214(3)(a).

Administrative Policy

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. 9 159
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) 83
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 157

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 200
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 193

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 214
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) Kieboom treated as entailing disposition of right to receive dividends 316
Tax Topics - Income Tax Act - Section 73 - Subsection 73(1) spousal rollover for Kieboom disposition of economic interest 68

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 303
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) benefit conferred on spouse of individual shareholder of parent 137

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))

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 162

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

stock options for corporate consultant's service issued 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. 55(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) stock options for corporate consultant's service issued directly to its shareholder 104
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) stock options for corporate consultant's service issued directly to its shareholder 169

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 63

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 (Publico), 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):

The consent or participation of a taxpayer in the conferral of a benefit can occur in a passive or implicit manner, and can be inferred from the particular circumstances... .

In this instance, taking as established that the payments or transfers of property or payments 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 Publico, the conditions of subsection 56(2) could be satisfied for the disposition of Division 1 and 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… .

S. 247(12) did not prevail over s. 56(2) as its effective date was subsequent to the transactions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) group sale with Canco not charging for intangibles 140
Tax Topics - Income Tax Act - Section 69 - Subsection 69(4) must engage direct parent 146

10 July 2013 Internal T.I. 2013-0475501I7 F - Amounts returned to trustee/beneficiary

distributions to children immediately paid to father

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) as "neither Father nor Y had exercised their discretion [as trustees] in favour of Father."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) distributions to children immediately paid to father 166
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distributions to children immediately paid to father 166
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) distributions to children immediately paid to father 164
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) distributions to children immediately paid to father 138

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).

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

dues paid to incorporated artist's union

A producer who retains the services of an incorporated performing artist is required under the terms of the collective agreement with the Union des Artistes (UDA) to both withhold dues from the remuneration due to the Corporation of the artist and remit them to the UDA and also to pay additional dues directly to the UDA. CRA concluded on the that s. 56(2) did not apply to the additional dues paid to the UDA as the Corporation did not have any control over those payments.

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.

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 T.I. 963032 (C.T.O. "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. 7-951631 -

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

2 June 1995 T.I. 950375 ("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) 27

2 November 1994 Memorandum 942044 (C.T.O. "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 T.I. 940246 (C.T.O. "Non-Capital 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.

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

See Also

Huang v. The Queen, 2012 DTC 1120 [at 3103], 2012 TCC 81 (Informal Procedure)

The taxpayers were postdoctoral students. Woods J. found that amounts received in 2009 under a research fellowship from Parkinson Society Canada ("PSC") were indeed "fellowships" within the meaning of s. 56(1)(n).

Woods J. then found that the taxpayers were entitled to the s. 56(3) fellowship exemption. She focused on three legislative requirements:

  1. The taxpayers were enrolled in a qualifying educational program at the University of Ottawa. Under the postdoctoral program, which was designed to train the taxpayers to be professors, they were required to do "full-time research for the purposes of advancing their education" (para. 34).
  2. The funding was received in connection with the enrolment. It was clear that "PSC did not provide the funding to the appellants in a vacuum" (para. 35).
  3. The taxpayers were full-time students at the University. The Oxford definition of "student" is "a person who is engaged in or addicted to study," and the legislation does not indicate a more specialized meaning (para. 40).

(The definition of "qualifying educational program" in s. 118.6(1) has since been amended to exclude programs that do not confer a degree.)

Words and Phrases
student

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.

Subsection 56(4) - Transfer of rights to income

Cases

Shaw v. The Queen, 89 DTC 5194 (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.

Words and Phrases
rent

De Groote v. The Queen, 85 DTC 5008, [1985] 1 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.

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.

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 143

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) 60

See Also

Howard v. Commissioner of Taxation, [2014] HCA 21

agreement assigned rights to proceeds of law suit rather than entitlement under law suit

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants. Around the time of launching the action, he and the two other directors entered into a "litigation agreement" with Disctronics which provided (para. 101):

In consideration of [Disctronics'] promises [to pay all costs and disbursements] the directors…assign absolutely unto… [Disctronics], any award of damages (whether on revenue or capital account)… made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings… .

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. After finding that the taxpayer had not become entitled to his share of the award as constructive trustee for Disctronics, Hayne and Crennan JJ. then turned to the effect of the litigation agreement, stating that "the better construction of the litigation agreement is that it provided for the assignment of any proceeds of the action, not for the assignment of the appellant's rights under any judgment obtained in the proceedings" (para. 104). As thus "the litigation agreement provided for the assignment of future income, dissociated from the proprietary interest which produced the income, the proceeds of the action, when received….were income in the hands of the appellant [Booth [1987] HCA 61; (1987) 164 CLR 159 at 167 per Mason CJ.]" (para. 102).

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 183
Tax Topics - Income Tax Act - Section 9 - Compensation Payments damages not corporate income as not received qua director 183
Tax Topics - Income Tax Act - Section 9 - Nature of Income agreement assigned rights to proceeds of law suit rather than entitlement under law suit 305

Boutilier v. The Queen, 2007 DTC 479, 2007 TCC 96

The taxpayer was found to have transferred the right to receive trailer fee income to a family corporation, but to have continued to earn the trailer fee income himself given that he continued to personally incur virtually all of the expenses associated with the earning of the trailer fees, received no remuneration for performing the services on behalf of the corporation, and continued after the incorporation to be viewed by the broker dealer as the person that would be accountable to provide the services. (Campbell J. previously accepted evidence that the provision of services was necessary to the earning of the trailer fees.)

Campbell J. also found that the comments in the Winter case that s. 56(2) could only apply respecting a benefit that was not directly taxable in the hands of the transferee, did not apply to s. 56(4).

MFC Bancorp Ltd. v. The Queen, 99 DTC 905 (TCC)

Before going on to find that s. 56(4) did not apply to royalty income derived from the taxpayer's interest as lessor in mining concessions and railway rights-of-way because that interest had been transferred by the taxpayer to a corporation in which its subsidiary had a 37% beneficial interest, McArthur TCJ. stated (at p. 912):

"Surely, the exclusionary words 'unless the income is from property' are not to be read so narrowly as to prohibit a taxpayer from benefiting from the exclusion when the income is from property which is an integral part of the taxpayer's business."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) largely overlapping boards of directors and substantial minority interest 78

Ferrel v. The Queen, 97 DTC 1565 (TCC)

The taxpayer who was the sole trustee of the family trust that, by utilizing his services, provided management services to corporations in which the trust had direct or indirect interests. S.56(4) did not apply to include the management fees paid to the trust in the income of the taxpayer because the taxpayer did not have any right in law to receive those fees.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 132

Placements T.S. Inc. v. The Queen, 94 DTC 1302 (TCC)

A property over which the taxpayer had a right of first refusal was purchased for $500,000 from the arm's length owner by companies with whom the taxpayer did not deal at arm's length and then resold by them to the taxpayer for $1,200,000. The taxpayer in turn, sold the property to an arm's length purchaser for $1,200,000. After noting that the question whether the non-exercise of a right of first refusal constitutes the transfer of a right is a question that is open to debate, Lamarre Proulx TCJ. went on to find (p. 1309) that the taxpayer was not legally entitled to the capital gain of $700,000 realized in the transactions unless the validity of the transactions was questioned, which was not done. Accordingly, s. 56(4) could not be applied.

Sazio v. MNR, 69 DTC 5001 (Ex Ct)

The taxpayer, who succeeded to the position of head coach at a football club, resigned from that position, became an employee of a company owned by him and his wife, and had the company enter into an agreement with the club pursuant to which his services would be provided to the club. The Minister based his reassessment, in part, on s. 23 of the pre-1972 Act. In finding that the fees received by the company were not income to the taxpayer, Cattanach J. noted that, with the exception of minor departures (e.g., the taxpayer in some cases was reimbursed for expenses directly by the club, and the company violated a prohibition in the services agreement against engaging in other businesses the services agreement was scrupulously adhered to by the parties and (at p. 5006) "the agreements entered into between the appellant and the Company and the Club were bona fide commercial transactions all in furtherence of the Company's legitimate objects".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 146

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. 9 159
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) 83
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 162

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

stock options for corporate consultant's service issued 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. 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 Mrs. Y. 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 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) stock options for corporate consultant's service issued directly to its shareholder 104
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) stock options for corporate consultant's service issued directly to its shareholder 164

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.

8 September 1997 External T.I. 5-970715 -

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) 19

3 December 1993 T.I. 920099 (C.T.O. "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 64

Subsection 56(4.1) - Interest free or low interest loans

Administrative Policy

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.

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(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 (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) 58