In Singh v R, 2019 TCC 120, the taxpayer had been assessed as a director of a corporation for its unremitted HST. The issue considered by the Court was whether, as the taxpayer claimed, he had resigned more than two years before the date of the assessment in issue (per subsection 323(5) of the Excise Tax Act).
Some points of interest from a recent CRA technical interpretation (2017-0683021I7, June 8, 2018) respecting a reorganization involving a trust with non-resident beneficiaries:
- The trustees of a trust purported to add a ULC as a beneficiary. The CRA, however, noted that the trust deed did not provide for the addition of a company as a beneficiary and the deed referred to distributions to persons “living” from time to time. The CRA took the position that this entailed that only natural persons (ie individuals) could be beneficiaries of the trust.
- A deemed dividend is ‘phantom income’ for trust law purposes. A trust cannot allocate a deemed dividend as income and claim a 104(6) deduction unless the trust deed defines ‘income’ to include income for the purposes of the Income Tax Act (Canada).
- A power to distinguish between income and capital items does not permit recharacterizing an income receipt as a capital receipt. See Succession Terrill, 87 DTC 492 (TCC), and Munro (1992) 47 ETR 5 (QCSC).
- Under general trust principles, a stated capital increase is a capital item and should be allocated to capital beneficiaries unless ‘income’ is defined to include ‘income’ for tax purposes.
Rhonda Rudick and Reuben Abitbol “Risks of Assigning a Trust Interest” Canadian Tax Highlights 27:6 (June 2019)
An employee who works in a business on a full-time basis (ie more than an average of 20 hours per week) for five or more years will not be subject to TOSI even where the years occurred before the TOSI rules came into effect and even where the employee was not related to the source individual at the time the work was done. CRA technical interpretation 2018-0783741E5, February 27, 2019. Georgina Tollstam “Five-Year Test in TOSI’s ‘Excluded Business’ Definition” Canadian Tax Highlights 27:6 (June 2019)
[In technical interpretation 2017-0729441E5, March 26, 2019] the CRA acknowledges that its administrative position on employee discount programs is that an employee may exclude from income discounts on merchandise and commissions from personal purchases, but that administrative position does not apply to a discount on a service, such as an employer-waived commission on the acquisition of an insurance policy.
Marlene Cepparo “CRA’s Employee Discount Position Not Applicable to Services” Canadian Tax Highlights 27:6 (June 2019)
Opco wishes to redeem low-low preference shares held by a family trust, which proposes to allocate the resulting deemed dividend to a beneficiaryco (Benco). Will Part VI.1 tax apply to Opco?
If the preference shares are subject to a price adjustment clause, then, per the CRA (document number 59342 May 15, 1990), the 191(4) exception will not apply (the redemption price cannot exceed the consideration for which they were issued).
What about the substantial interest exception? It appears that, for the purposes of Part VI.1, both the trust and the Benco must meet this exception (they both receive the dividends).
If the Benco owns shares of Opco directly (ie not just through the trust) and is related to Opco, then the substantial interest exception should apply.
For the trust, the CRA agrees that a trust is related to a person if the person is related to all trustees of the trust (2009-0311891I7 and 2002-0117885).
In addition, every beneficiary must be related to every other beneficiary (other than registered charities). What if the trust instrument allows another trust to be created that will be a beneficiary? This could be problematic, even if the other trust does not yet exist, because of “beneficially interested” (248(25)) and because one of its trustees might be an unrelated person.
Austin del Rio, “Part VI.1 Tax on Dividend Paid Through Family Trust” /Tax for the Owner Manager/ 19:3 (July 2019)
Mr X owns the voting shares of Holdco that owns a rental property. His two kids own non-voting shares that on which Holdco pays dividends. Does the TOSI apply to dividends paid to the kids?
Is the rental operation a “business”? The law is unclear on what constitutes a business. A low level of activity might entail a finding that Holdco carried on a business, which would engage the TOSI rules. See Canadian Marconi v R, 1986 CanLII 42 (SCC), Ollenberger v R, 2013 FCA 74 and Spire Freezers Ltd. v R, 2001 SCC 11.
Balaji Katlai, “TOSI and Dividends from Rental Income: New Rules, Old Problems” Tax for the Owner Manager 19:3 (July 2019)
Can a corporation trigger capital gains deliberately to increase its CDA and, as a result, facilitate surplus stripping?
Using 55(2) for this purpose might problematic because of issues with the purpose test.
A share exchange might be problematic as well. Is there a disposition? Is the exchange tax-deferred because of the application of section 51 or section 86?
The CRA might apply GAAR if a taxpayer avoids tax using losses (per MacDonald, 2013 FCA 110).
Eric Hamelin, “CDAs and Surplus Stripping” Tax for the Owner Manager 19:3 (July 2019)
If a corporation triggers a capital gain, pays a capital dividend using the resulting CDA balance and then triggers a capital loss that, in effect, offsets the gain, does the GAAR apply? In Gladwin Realty Corporation v R, 2019 TCC 62, the Court held that the GAAR applied in respect of deemed gains and losses. See A Strawson and A Bateman, “CDA Extraction After Deemed Gain Followed by Deemed Loss Held To Be Abusive” Tax for the Owner Manager 19:3 (July 2019).
The authors argue, however, that this finding should not apply generally to CDA timing strategies:
With respect to CDA timing strategies more generally, the TCC noted that the Crown did not dispute that the CDA rules allow private corporations to benefit from such strategies (for example, selling securities that are in a gain position, paying a capital dividend, and then selling securities that are in a loss position). It was only the fact that the transactions involved a deliberately triggered deemed gain and deemed loss intended to facilitate a CDA timing strategy that was offensive, according to the Crown. In our view, therefore, Gladwin Realty should not be authority for a broad proposition that all CDA timing strategies are abusive.
Amit Ummat has written a good article about Glatt v Canada (National Revenue), 2019 FC 738. The taxpayer was assessed a preparer penalty. To reduce risk, the taxpayer paid the assessed amount, which was later reversed, but without interest on the ‘prepayment’. The Federal Court held that the CRA was required to pay interest on the amount the taxpayer had paid.
Sunita Doobay, “The MNR’s Audit Powers” Canadian Tax Highlights 27:3 (March 2019) reviews three important recent cases on CRA audit powers, namely Cameco, 2017 FC 763 (power to require oral interviews), BP Canada Energy Company, 2017 FCA 61 (power to compel production of tax accrual working papers), and Atlas Tube Canada ULC, 2018 FC 1086 (power to compel production of a due diligence report).
Postscript July 10, 2019 The CRA has stated that it will not appeal Cameco and that it will continue to request, but not attempt to compel, interviews with employees. The CRA has also released AD-19-02R, “Obtaining Information for Audit Purposes”, which outlines CRA audit policy after Cameco and BP Canada. John G. Bassindale and Robert G. Kreklewetz, “FCA Restricts CRA Interviews of Employees” Tax for the Owner Manager 19:3 (July 2019)
Postscript July 13, 2019 See also Kevin O’Reilley and Fred O’Riordan “Further Clarity Concerning the CRA’s Power To Compel Oral Interviews” Canadian Tax Highlights 27:6 (June 2019) and Timothy Fitzsimmons and Angelo Bertolas “CRA Guidance on Obtaining Taxpayer Information” Canadian Tax Highlights 27:6 (June 2019)