Canada (National Revenue) v Cameco Corporation, 2019 FCA 67, aff’g 2017 FC 763, held that the CRA, on an audit, cannot compel a taxpayer to submit to oral questioning. Of course, a refusal to answer oral questions can lead to the Minister drawing an adverse inference. (Does the Minister ever do otherwise?) Ashvin Singh, “CRA Cannot Require Oral Interviews” Canadian Tax Focus 9:2 (May 2019).
Amanda Laren, in “Gap in Subsections 40(3.3) and (3.4) for Wound-Up Trust?” Canadian Tax Focus 9:2 (May 2019), notes that
Subsections 40(3.3) and (3.4) stipulate whether the two parties remain affiliated after the transferor is dissolved or wound up, but only if the transferor is a corporation or a partnership. Thus, if a trust distributes property to an affiliated beneficiary and winds up immediately after the distribution, it is unclear whether these suspended-loss rules apply.
The ability to use 15(2) and 20(1)(j) for income averaging has been impaired by the TOSI rules. What’s worse, if an individual includes an amount in income under 15(2) that is split income, he or she will not be entitled to a deduction under 20(1)(j) upon repaying the loan.
Although individual taxpayers who are already paying tax at the highest marginal rate may overlook the TOSI regime, this outcome suggests that TOSI may affect high-rate taxpayers as well. As long as one’s shareholder loan could be caught as split income, whether a person is already paying the high rate of tax is irrelevant—the paragraph 20(1)(j) deduction may not be available if a strict reading of the Act is enforced.
Martin Lee, “Shareholder Loans: TOSI Prevents Deduction on Repayment” Canadian Tax Focus 9:2 (May 2019)
Although the CRA doesn’t mention Delle Donne v R, 2015 TCC 150 (discussed here), it recently considered when a victim of a ponzi scheme can write off a bad debt in respect of interest previously included in income. See 2017-0691941I7 (French only). The CRA takes the position that it will generally accept that a claim for a bad debt under paragraph 20(1)(p) of the Income Tax Act (Canada) can be made in the year in which charges are laid with respect to the scheme. The CRA acknowledges, however, that a taxpayer might make the claim in an earlier year, depending on the circumstances.
In Crean v Canada (Attorney General), 2019 BCSC 146, two brothers entered into an agreement they drafted that provided for one brother to sell his one-half of Opco’s shares to the other brother (the owner of the remaining one-half). The agreement specified that the seller would be entitled to realize a capital gain on his sale of the Opco shares.
Unfortunately, the brothers’ accountant recommended that the buyer use a Buyco to acquire the departing brother’s shares so that section 84.1 applied. The brothers applied for rectification of their agreement, which the Court granted. The Court held that rectification was not available only for clerical errors. Rectification was available where
1) there was a prior agreement whose terms are definite and ascertainable;
2) the agreement was still in effect at the time that the instrument was executed;
3) the instrument fails to record the agreement accurately; and
4) the instrument, if rectified, would carry out the parties’ prior agreement.
Hirji and Ruslam, “Rectification: It’s All About Intention” Tax for the Owner-Manager 19:2 (April 2019)
Postscript 2019 05 15 For a summary of other cases involving rectification or rescission, see Rami Pandher, “Rectification: Where Are We Now?” and Lauzanne Bernard-Normand, “Involving the CRA in Rectification and Declaratory Proceedings”, both in Canadian Tax Focus 9:2 (May 2019)
Section 212.1 of the Income Tax Act (Canada) is an anti-avoidance rule that applies in circumstances similar to those for section 84.1. With section 212.1, however, only PUC (and not ACB) is relevant as far as the subject shares are concerned.
In 2018, Finance introduced look-through rules so that a trust in effect is ignored for the purposes of section 212.1 (see subsections (5) to (7)). The look-through means that a pipeline with a trust with non-resident beneficiaries can be problematic.
The concerns extend to inter vivos trusts as well.
Demner and Lamothe, “Section 212.1 Lookthrough Rules Create Issues for Trusts with Non-Resident Beneficiaries” Tax for the Owner-Manager 19:2 (April 2019)
The CRA has issued a pipeline ruling where the ACB of the shares being used to extract funds from a corporation is derived from a deemed disposition pursuant to the 21-year rule. Eric Hamelin, “Pipeline Transactions and the 21-Year Rule”, Tax for the Owner-Manager 19:2 (April 2019).
The foregoing article also provides a useful introduction to the risks of a pipeline and its mechanics. It also identifies some limitations of the comfort provided by the CRA in the ruling.
In technical interpretation 2018-0777361E5 (November 7, 2018), the CRA considered whether shares of a private corporation (Investco) were “excluded shares”. The parent who held voting preference shares had died. The preference shares represented more than 10% of all votes and value in the issued shares of the corporation. The deceased’s three children, all of whom were over the age of 25, held the Common Shares of Investco. Each child’s Common Shares represented more than 10% of the votes and value of the issued shares. Investco carried on an investment “business”, the capital of which was derived from a business that it had carried on and sold decades previously. Investco proposed to wind-up, which would result in the redemption of its issued shares and the deemed payment of dividends to the shareholders of the corporation.
The CRA took the position that the Common Shares were excluded shares but not the freeze shares because the ownership test in respect of those shares had not been met (presumably because the beneficiaries of the estate were not the owners of the shares, the estate was).
Would the result have been different if the estate had distributed the freeze shares to the children before the winding-up?
See Marlene Cepparo, “Estate’s Deemed Dividends: Not in “Excluded Shares” TOSI Exception” Canadian Tax Hightlights 27:2 (February 2019).
Sampson v R, 2018 BCSC 1503, is a detailed decision relating to the residence of a taxpayer for provincial income tax purposes. The taxpayer was found to be resident in both BC and Alberta, but his “principal” place of residence was BC so that he was subject to provincial income tax there rather than in Alberta.
Unfortunately, taxpayers sometimes play fast and loose with the legalities surrounding family trusts. Sometimes trustees purport to make allocations of income from a trust to its beneficiaries. The beneficiaries treat the amounts allocated as income for the purposes of the Income Tax Act (Canada) (the “Act”). The allocated amounts, however, somehow end up in the hands of other individuals, often the parents of the beneficiaries in question. The parents are often also the trustees of the trust who made the allocations (fiduciary obligations be damned).