Words and Phrases - "payable"
4 June 2024 STEP Roundtable Q. 10, 2024-1010241C6 - Update on trust / estate issues
CRA referred to an unreported 2023 Tax Court of Canada decision (which has not been appealed), which concerned a family trust that realized a substantial capital gain on the disposition of small business corporation shares, paid $100,000 to each of two minor beneficiaries in the same taxation year, and claimed the deduction therefor pursuant to s. 104(6)(b) – notwithstanding that the trust deed prohibited any distributions to designated persons in respect of the father. CRA denied the s. 104(6)(b) deduction for the two payments, and considered that they should be included in the minors’ income pursuant to s. 105(1) rather than s. 104(13).
Hogan J found that if an amount cannot be paid under the terms of a trust it cannot be considered to be payable, so that the denial of the deductions was confirmed.
CRA considers that this decision is consistent with its position in 2005-0159081I7, including that in determining whether an amount is payable for the purposes of s. 104(6), it must first be determined whether the amount is payable under the provincial law, i.e., without regard to any ITA provision.
7 October 2020 APFF Roundtable Q. 17, 2020-0845821C6 F - Part IV tax and trust
A personal trust wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco") with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which immediately on-pays that amount to Holdco.
CRA indicated that since a s. 104(19) designation by a trust cannot be effective until the trust’s year end, if by the effective time of the deemed dividend payment as a result of the designation (December 31, 20X1), the above trust had disposed of Opco to a third party, whether Opco was connected for Pt. IV tax purposes would be tested at that time, so that there would be no exemption from Pt. IV tax under s. 186(1)(a).
However, a similar timing issue would not arise if, for some reason, Holdco ceased, after the receipt by it of the $5,000 from the Trust (September 20, 20X1) and before the trust year end (December 31, 20X1), to be a trust beneficiary, but with Opco continuing to be connected on December 31, 20X1 with Holdco pursuant to s. 186(4)(a) by virtue of common control as described in s. 186(2). In this regard, CRA stated:
[I]t must be determined [for s. 104(13) purposes] whether all or part of the income of the trust has become payable to the beneficiary. That determination must first be made in light of the ordinary meaning given to the term "payable" under the applicable private law.
… [I]t should be noted that subsection 104(24) does not alter the ordinary meaning of the term "payable" nor does it specify when an amount becomes payable. Rather, subsection 104(24) provides that, for the purposes of those provisions, an amount otherwise payable under the applicable private law is deemed not to have become payable to a recipient in a taxation year. However, this deeming rule does not apply if the amount was paid to the beneficiary in the year or if the beneficiary was entitled in the year to enforce payment of it. …
[A] taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13)” ... .
[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) | various applications of proposition that an s. 104(19) designation is not effective until the trust’s year end | 761 |
| Tax Topics - Income Tax Act - Section 186 - Subsection 186(2) | s. 104(13), unlike s. 104(19), can apply contemporaneously with a trust dividend distribution, and ss. 186(2) and 251(1)(b) can apply synergistically | 440 |
The Queen v. National Trustco, 98 DTC 6409, [1998] 4 CTC 26 (FCA)
The respondent was liable under s. 224(4) for its failure to respond to s. 224(1) demands (made both before and after the maturity of the GIC in which the trust was invested) in respect of proceeds of an RRSP where the annuitant had instructed the respondent on maturity of the GIC held in the plan to pay the proceeds directly to him immediately after the expiry of the time covered by the last of such demands. In finding that s. 224(1) was not restricted to debtor/creditor relationships, Isaac C.J., for the majority, stated (at para. 46) that "the ordinary meaning of the word 'liable' in a legal context is to denote the fact that a person is responsible at law" and further stated (at paras. 57, 63):
The tax debtor had a contractual right, enforceable in law, to have the net proceeds paid to him. The respondent had a corresponding contractual obligation to make the payment requested. In my respectful view, this legal obligation was sufficient to bring the respondent within the scope of the phrase “a person liable to make a payment” to the tax debtor within the meaning of subsection 224(1). ...
[T[he proceeds of the RRSP were payable to the tax debtor at the time he requested payment following the maturity of the GIC.
In his concurring reasons, McDonald JA stated (at para. 4):
The only reason the respondent falls within the confines of subsection 224(1) is because the tax debtor instructed the trustee to pay the proceeds of his RRSP directly to him and because this instruction occurred within 90 days of the respondent receiving Revenue Canada’s demand letter. The respondent, therefore, became a person liable to make a payment to the tax debtor. If the terms of the trust forbid the tax debtor from cashing out the trust, the respondent would not fall within the confines of subsection 224(1). Similarly, if there had been no request for payment made by the tax debtor the respondent would not be required to make a payment as subsection 224(1) would not apply.
Redclay Holdings Ltd. v. The Queen, 96 DTC 1207, [1996] 2 CTC 2347 (TCC)
Part of the consideration given by the taxpayer for the purchase by it of a partnership interest was the assumption by it of a portion of the obligations of the vendor under a debenture of the partnership containing a specific covenant to pay interest on the principal amount thereof and on accumulated unpaid interest but containing a stipulation that payments of accumulated interest, current interest and principal were payable only out of 50% of the net cash flow of the partnership. In finding that the taxpayer was not entitled to any interest deduction on the debenture for the subsequent three taxation years (in which the partnership did not have any net cash flow, as defined), Rip J. noted that the word "payable" means "a sum of money that is to be paid or is falling due" or "a sum of money when someone is obliged to pay it" (p. 1218) and that here, because the obligation to pay interest was contingent on a condition being satisfied (the earning of net cash flow), it could not be said that there was a liability in those taxation years for payment of an ascertained amount of interest.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 78 - Subsection 78(1) | 83 |
Collins v. The Queen, 2009 DTC 286, 2009 TCC 56, rev'd supra
The taxpayers owed approximately $2.7 million on mortgage loans including substantial amounts of interest that previously had been agreed to be deferred and added to the amount of the mortgage. The mortgage loan was restructured so that the taxpayers became obligated to make annual minimum interest payments of $20,000 for each of the first 15 years following the restructuring and had the right at any time within the 15-year period to discharge all amounts on the loan by the payment of the sum of $100,000 plus all of the unpaid interest payments of $20,000 per annum. The restructuring of the loan was stated to be in the form of a refinancing of a portion of the previous mortgage debt on the terms indicated above, with a statement that these amendments did not have the effect of discharging or novating the previous mortgage obligation. For the taxation years in question following the restructuring, the taxpayers sought to deduct unpaid interest amounts that continued to be added to the original amount of the mortgage loan, namely, $154,373, $160,254 and $168,782. In finding that these amounts were not deductible by the taxpayers in computing their income, so that the taxpayers were only entitled to deduct the $20,00 annual interest payments actually made by them, V.A. Miller, J. found that these deferred interest amounts were not "payable". She stated (at para. 29):
"I interpret the word 'payable' in paragraph 20(1)(c) to mean that the interest must be 'required to be paid' or 'due' as opposed to owing. Interest is 'payable' when there is an obligation to pay in the present as opposed to an obligation to pay in the future'."
She also indicated (at para. 38) that the amount of such interest that the taxpayer sought to deduct was not "reasonable", stating, (at para. 38):
"How could the amount of 'interest' be 'a reasonable amount in respect thereof' when it was not an amount that was paid nor was it an amount that had to be paid in the years under appeal?"
J.L. Guay Ltée v. MNR, 71 DTC 5423, [1971] CTC 686 (FCTD), aff'd 73 DTC 5374, [1973] CTC 506 (FCA), aff'd 75 DTC 5094, [1975] CTC 97 (SCC)
A general building contractor in accordance with the terms of its contracts with its subcontractors withheld 10% of the amounts invoiced on a monthly basis to it by its subcontractors. The amounts withheld became due 35 days after a completion certificate was issued by the architect. Since it was far from certain that the withheld amounts would be paid in full (or even in part) to the subcontractors, they were not deductible in the year of withholding.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense | 91 | |
| Tax Topics - Statutory Interpretation - Certainty | 62 |
The Queen v. Timagami Financial Services Ltd., 82 DTC 6268, [1982] CTC 314 (FCA)
Where the consideration for sale of goodwill is to be paid to the vendor over a series of years, then 1/2 of the amounts so paid are included as eligible capital amounts in computing the vendor's income in the years of payment as opposed to the earlier year of sale: in the year of sale, the amounts to be paid in subsequent years were not then "payable".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) | 44 |
The Queen v. Bank of Nova Scotia, 81 DTC 5115, [1981] CTC 162 (FCA)
The right to claim the tax credit arises in the year that the income in the foreign country is earned. To hold that the amount of the credit is not established until the date that the foreign business-income tax is required to be paid could result in the taxpayer being required to file its tax return before the amount of the credit could be accurately ascertained. In light of the above and generally accepted accounting practice, the amount of foreign business-income tax was translated, for the purpose of calculating the credit, at the weighted exchange rate that prevailed in the year that the foreign business income was earned, rather than the exchange rate that prevailed at the date of payment of the foreign tax over a year later.