This page contains our summaries of questions posed at the 8 October 2021 APFF Federal Roundtable held in Montreal, Quebec together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Olivier Bergeron, Marie-Claude Routhier, and Jean Lafrenière). We use our own titles, and footnotes are (depending on how routine they are) either excluded or moved to the body of the answer. Links to the final responses released by CRA under its severed letter program are also provided.

The 8 October 2021 APFF Financial Strategies and Instruments Roundtable is provided on a separate page.

Q.1 24-month hold re a (s. 7(2) or EBP) trust holding the employer’s shares

A discretionary trust for present and future employees of ABC Inc. that had held shares of ABC Inc. since January 1, 2021, will add Mr. X as a discretionary beneficiary when he is hired on January 1, 2022 (without any change to its shareholdings). The questioner suggested that where there was a s. 7(2) trust such as this (which was deemed by s. 110.6(16) to be a personal trust for qualified small business corporation share (QSBC) purposes and which could allocate taxable capital gains pursuant to ss. 104(21) and (21.2)), s. 7(2) deemed shares to be acquired by the employee when the trust commenced to hold shares for the employee.to hold shares for the employee. 2012-0439271E5 indicated that generally an individual need not be a beneficiary of a personal trust for the 24-month holding period in order to claim the capital gains deduction (CGD), provided that such trust itself satisfied that holding period (see also Pellerin).

How then should the 24-month holding period calculation be applied for QSBC purposes in this situation?

CRA Preliminary Response

In general, where contributions are made by a corporation to a trust established for the benefit of the corporation's employees and those contributions are used by the trust to subscribe for shares of the corporation, the trust plan thereby established will be subject to either section 7 or the employee benefit plan ("EBP") rules. If both the section 7 rules and the EBP rules apply to the same trust plan, the section 7 rules take precedence, as the courts have concluded that the section 7 regime is more specific than the EBP rules.

In Transalta Corporation v. The Queen, the Tax Court of Canada held that a discretionary arrangement was not an agreement to issue or sell shares for the purposes of section 7 since no legal rights or obligations were created. According to the Court, the meaning of the words "agreed" and "agreement" in section 7 refers to a legally enforceable undertaking, that is, the granting of legal rights to employees and the creation of corresponding obligations for the employer. The Canada Revenue Agency ("CRA") applies that principle in determining whether or not an arrangement comes within the application of section 7. Thus, the question of whether, in a particular situation, an arrangement constitutes an agreement to issue shares for the purposes of section 7 is one of fact and law that can only be resolved after a review of all the relevant facts and documents.

That said, a trust plan providing that the allocation and distribution of the corporation's shares to its employees, who are beneficiaries of the trust, will be made on an entirely discretionary basis would not be governed by s. 7. Indeed, such a discretionary plan does not imply a legally enforceable commitment, since neither the corporation nor the trust is obliged to transfer shares to a given beneficiary and no employee-beneficiary has an enforceable right to the shares unless and until the trustees of the trust have exercised their discretion in the employee’s favour.

In that regard, it is important to note that subsection 7(2) does not serve to deem the existence of an agreement to issue or sell shares for the purposes of section 7 where such an agreement does not, in fact, exist. That subsection has no relevance, and therefore no application, in the absence of an agreement to issue or sell shares within the meaning of section 7. That subsection cannot apply to a discretionary trust in which the employee beneficiaries are not entitled to a specified number of shares that have been specifically allocated to them pursuant to a legally enforceable undertaking constituting an agreement to issue or sell shares for the purposes of section 7.

In the situation described, the Trust is a discretionary trust and all current and future employees of ABC Inc. are potential beneficiaries of the Trust. We understand that under the Trust's governing instrument, the trustees would have full discretion to determine the share of income and capital of the beneficiaries, and that such discretion would include the ability to distribute all of the income or capital of the Trust to one or more beneficiaries, to the exclusion of others. We further understand that such discretion could be exercised from time to time by the trustees and would generally only be exercised at the time of (or shortly before) making a distribution.

Thus, based on our understanding of the situation described, when he becomes a discretionary beneficiary of the Trust on January 1, 2022, Mr. X will not be entitled to a specified number of Shares under an enforceable obligation. Instead, the trustees will only allocate Shares to Mr. X at the time of (or shortly before) making a distribution and only if they decide to exercise their discretion in his favour, which may never happen, or may occur several years after the Trust has acquired the Shares. Such a discretionary plan would not involve a legally enforceable obligation and would therefore not be governed by section 7.

Since section 7 would be inapplicable, the tax treatment resulting from the trust plan put in place would be governed by the rules applicable to EBPs. In particular, the fair market value ("FMV") (determined at the time of the distribution) of the Shares distributed by the Trust to each employee beneficiary in favour of whom the trustees exercised their discretion would be required to be included in computing that employee's income by virtue of paragraph 6(1)(g). Thus, the full value of the Shares distributed to Mr. X would be included in computing his income as employment income, as to which the CGD would obviously be inapplicable. Furthermore, Mr. X would only be considered to own the Shares so received from the date of the distribution.

Finally, it should be noted that in McNeeley v. The Queen, currently under appeal to the Federal Court of Appeal, the Tax Court of Canada considered a discretionary trust plan similar to the one in the situation described and concluded that the EBP rules applied.

Official Response

7 October 2021 APFF Roundtable Q. 1, 2021-0900891C6 F - Tax treatment of employee share trust

Q.2 AMT recovery strategies

Scenario 2.1: Interspousal loan

On June 15, 2021, Mr. X lent $100,000 to his spouse, Ms. X (also aged 30), at the 1% prescribed rate of interest. She then lent that amount as an unsecured loan (without a guarantee) to his wholly-owned personal holding company at a 5% rate of interest.

Would the 5% interest earned by Ms. X constitute a “reasonable return” and thus be excluded under s. (g)(ii) of “excluded amount”?
If not, would the answer change if the holding company was equally owned by her and Mr. X?
If the interest at 5% was not a “reasonable return,” would the total interest amount be split income, or would the portion that represented a reasonable return be excluded from split income?

Scenario 2.2 Loan from minor to parent

A family trust allocates and distributes to Child Y (the 15 years old child of Mr. Y and Ms. Y) $400,000 of the capital gain realized by it on the sale of shares of Yco (a related business in which Ms. Y was actively involved). Child Y lends the $400,000 at 5% interest to Ms. Y, who invests that sum in the stock market.

Would the interest income of Child Y be split income?
Would this change if Ms. Y instead invested the amount borrowed from Child Y in a holding company?

Scenario 2.3 Unreasonable salary

An operating company (Zco) employs the spouse (Ms. Z) of its sole shareholder (Mr. Z). As the salary amount ($100,000) might be unreasonable in relation to the work performed, Zco does not deduct it in computing income. Is her salary split income to her, and would this change if Zco instead was a wholly-owned holding company of Mr. Z?

CRA Preliminary Response

General comments

Ms. X is the "specified individual" as defined in subsection 120.4(1). Mr. X and Ms. X are connected by marriage or common-law partnership and are related persons under paragraph 251(2)(a). Mr. X is a "source individual" in respect of Ms. X as defined in subsection 120.4(1).

The amount of interest income on the $100,000 loan from Ms. X to the holding company would constitute "split income" to Ms. X within the meaning of paragraph (d) of the definition of "split income" in subsection 120.4(1) and would be subject to the tax on split income ("TOSI") pursuant to subsection 120.4(2), unless that amount was an "excluded amount" within the meaning of that expression as defined in subsection 120.4(1).

We understand from the statement of facts in Scenario 2.1 that the amount of interest paid to Ms. X by the holding company is from a "related business" in respect of Ms. X, as that term is defined in subsection 120.4(1).

Finally, we understand that the issues relate specifically to the reasonableness of the amount of interest income to Ms. X for purposes of the "reasonable return" exclusion described in paragraph (g)(ii) of the definition of "excluded amount" in subsection 120.4(1).

2.1(a)

The term "reasonable return" in respect of a specified individual is defined in subsection 120.4(1). It is an amount derived directly or indirectly from a related business in respect of the individual that, inter alia, must be reasonable having regard to the factors described in subparagraphs 120.4(1)(b)(i) to 120.4(1)(b)(v) of that expression in relation to the relative contributions of the specified individual and of each source individual in respect of the related business.

Whether an amount constitutes a reasonable return for the purposes of the exception described in subparagraph (g)(ii) of the definition of "excluded amount" in subsection 120.4(1) is a question of fact that can only be resolved in light of the facts and circumstances of a particular situation. Since the statement of facts in this question only very briefly describes a given hypothetical situation, it is impossible for us to determine whether Ms. X could benefit from this exception in respect of the amount of interest income calculated at the rate of 5% on the debt of the holding company.

For example, in question number 3 of the Society of Trust and Estate Practitioners Roundtable of June 15, 2021, the CRA stated that the question of whether a rate of interest equal to an arm's length rate of interest is a reasonable return, where the specified individual has not performed any work or contributed any property or assumed any risk in respect of the related business, can only be determined in light of a statement of the facts and circumstances of a particular situation.

In addition, as noted in the document "Guidance on the application of the split income rules for adults", the CRA does not intend to generally substitute its judgment of what would be considered a reasonable amount unless there has not been a good faith attempt to determine a reasonable amount based on the Reasonableness Criteria.

That said, in a context such as that described in Scenario 2.1, where the principal of the loan would come from funds owned by Mr. X and the loan would be made by Ms. X to Mr. X's holding company for the purpose of generating sufficient interest income to minimize the impact of the AMT on Ms. X, it is difficult to see how the factors enumerated in the definition of "reasonable return" in 120.4(1) could be satisfied.

2.1(b)

This is the same scenario as in question 2.1(a) above, except that Mr. X and Ms. X are equal shareholders in the holding corporation. The following comments are in addition to the comments in question (a) above, in the context of Mr. X and Ms. X holding shares of the share stock of the holding company.

As noted above, in determining whether an amount is a reasonable return in respect of the specified individual, consideration must be given to, for example, the work performed, property contributed and risks assumed by the specified individual and each source individual in respect of the specified individual's related business and the total of all amounts that were paid or became payable, directly or indirectly, by any person or partnership to, or for the benefit of, any of them in respect of the business. Those factors contribute to determining the reasonableness of the amount for a specified individual, taking into account the return paid to the individual and to each source individual in consideration of the contribution of each of them in support of or in respect of the business.

For example, in this question 2.1(b) where each of Mr. X and Ms. X has an equal interest in the capital stock of the holding company that operates the related business, the dividends received by Mr. X and Ms. X should also be considered in relation to Mr. X's and Ms. X's contributions to the related business, in order to determine whether the amount of interest income is otherwise a reasonable amount to Ms. X.

2.1(c)

The exception described in subparagraph (g)(ii) of the definition of "excluded amount" in subsection 120.4(1) applies to an amount that is a reasonable return to the specified individual. In its document entitled "Technical Backgrounder on Measures to Address Income Sprinkling", in the section dealing with the concept of excluded business, the Department of Finance Canada states: "However, even if an individual aged 25 or older does not meet the regular, continuous and substantial threshold, the TOSI will apply to amounts derived from a related business only to the extent that they are unreasonable (i.e., only the unreasonable excess will be subject to the TOSI).” Accordingly, only the amount that constitutes a reasonable return would be an "excluded amount" within the meaning of the definition in subsection 120.4(1).

For example, if it is established that the reasonable return amount is an interest rate of 3% on the holding corporation's claim for Ms. X, the amount corresponding to interest at 2% would not be an "excluded amount" and would be subject to TSOI.

2.2

Assuming that the $400,000 was validly allocated and distributed to Child Y by the family trust and that a true loan, within the meaning of the applicable private law, existed between Ms. Y and Child Y, Child Y's interest income from the $400,000 loan to Ms. Y would not constitute "split income" within the meaning of that expression as defined in subsection 120. That interest income to Child Y is not an amount described in paragraphs 120.4(1)(a) to 120.4(1)(e) of the definition of "split income".

There may, however, be abusive situations where the CRA would consider the use of the general anti-avoidance rule ("GAAR") in subsection 245(2). The CRA may be concerned about planning that has as its primary purpose the avoidance of TOSI liability.

For example, in the context of question 2.2(b), the CRA could be concerned about such planning if it were found that the transactions were put in place to circumvent the application of the TOSI provisions. However, that is a question of fact that must be resolved in light of all the circumstances and particulars of a specific situation.

Furthermore, it should be noted that the $400,000 allocated and distributed to Child Y by the family trust could, depending on the facts of the situation, constitute "split income" to Child Y within the meaning of subsection 120.4(1).

2.3

Split income" as defined in subsection 120.4(1) does not include remuneration paid by a corporation to a specified individual in the form of salary.

However, planning contemplating the payment of an unreasonable amount of salary, particularly in circumstances similar to those described in scenario 2.3, could be considered abusive by the CRA. Depending on the facts and circumstances of a specific case, in addition to section 67, the CRA could also consider the potential application of the transfer or benefit provisions to a taxpayer and the potential application of the GAAR.

Official Response

7 October 2021 APFF Roundtable Q. 2, 2021-0900901C6 F - TOSI and scenarios to recuperate the AMT

Q.3 Business or property source of trust rental income

A personal trust resident in Canada (the “Trust”) has a stand-alone operation of renting out Canadian residential and commercial buildings owned by it. Its services include taking care of electricity, heating and water, and maintenance services. For the commercial buildings, it also offers cleaning and security services. Is the Trust considered to carry on a business where all the property management services are provided by an external manager dealing at arm’s length with it and its beneficiaries?

CRA Preliminary Response

Generally, a personal trust may carry on a business as long as this does not contravene its governing document.

In this case, the Trust hired an outside manager dealing at arm's length with the Trust, its trustees and beneficiaries. The management of the real estate was delegated to it. We understand, however, that it is the Trust itself that provides its tenants with basic services, as well as certain cleaning and security services in the case of commercial rental properties, and that the manager ensures that those services are provided to the tenants. In such a case, even though in general the Trust and the Manager deal with each other at arm's length, it seems reasonable to consider that the Manager, in providing its management and services, is acting on behalf of the Trust.

Paragraph 2 of IT-434R explains the impact of such a delegation of the management of real property on the nature of the income from that real property as follows:

2. The delegation by the owner of real property of its management and supervision to an agent will not, in itself, alter the nature of the rental income. If the renting of the property would have constituted a business when carried on by the owner himself, it will still be a business when undertaken by an agent on the owner's behalf.

In other words, having an external manager responsible for providing some of the services offered does not in itself change the nature of the income earned by the Trust.

Furthermore, to determine whether or not the Trust is carrying on a business, it is relevant to refer to paragraph 4 of that same Bulletin. It provides a general explanation of the principles recognized by the jurisprudence regarding the leasing of real property by an individual. It reads as follows:

4. Where it is not part of, or incidental to, an existing business, the renting of real property by an individual is not, in itself, indicative of a business operation. It will be regarded as a business operation only when the landlord supplies or makes available to tenants services of one kind or another to such an extent that the rental operation has gone beyond the mere rental of real property. Accordingly, where the nature of a particular rental operation must be determined, it is the number and kinds of services supplied that will have to be ascertained. The size or number of properties being rented, the extent to which their management or supervision occupies the owner's time, whether the accommodation is rented bare or provided with appliances or even partly or completely furnished - none of these are factors to be taken into account in determining if the operation is a business.

For information purposes, the following paragraphs of the same Bulletin list the basic services (e.g. heating, parking, laundry room, etc.) that are generally considered to be an inherent part of the rental activity. It is also explained that where additional services are provided, it is possible that the landlord is carrying on a business rather than simply renting out real estate. In that regard, Interpretation Bulletin IT-434R refers, for example, to cleaning and protective services in respect of rented accommodation.

In the situation described, it would therefore be possible to consider that the Trust is carrying on a business because of the number and nature of the services offered. However, that remains a question of fact and it would be necessary to examine all the facts relating to a particular situation to be able to conclude on this subject. It is not possible to make a determination in the hypothetical situation as described. That being said, the fact that the Trust entrusts an external manager with the responsibility of providing some of the services it offers as a landlord will not in itself have any impact on the nature of its income.

Official Response

7 October 2021 APFF Roundtable Q. 3, 2021-0900911C6 F - Entreprise exploitée par une fiducie

Q.4 Avoidance of CCPC status

A Corporation which will generate investment income is incorporated outside Canada (and, thus, is not a Canadian corporation, as per s. 89(1) and, therefore, is not a Canadian-controlled private corporation under s. 125(7)), but has its central management and control in Canada. It is not subject to the refundable tax on CCPC’s investment income under s. 123.3, and is entitled to the deduction under s. 123.4(2).

What is the CRA position on the above situation, particularly as regarding any s. 245(2) application?

CRA Preliminary Response

The potential application of GAAR under subsection 245(2) requires an analysis of all the facts and circumstances of a particular situation. Since the statement in this question only briefly describes a hypothetical situation, the CRA cannot make a precise or definitive statement on its potential application. That said, we can make the following general comments.

The Supreme Court of Canada established that three conditions must be satisfied for the GAAR in subsection 245(2) to apply. First, there must be a tax benefit that results from a "transaction or series of transactions of which that transaction is a part" within the meaning of subsections 245(1) and 245(2). Second, the transaction that generated the tax benefit must be an avoidance transaction within the meaning of subsection 245(3) - i.e., the transaction must not have been undertaken for bona fide purposes - the obtaining of the tax benefit not being a bona fide purpose for purposes of the rule. Finally, the avoidance transaction mCRAust be abusive within the meaning of subsection 245(4).

In the circumstances, the incorporation of the Corporation under the corporate laws of a foreign jurisdiction is a transaction that would provide a tax benefit consisting of the avoidance of the refundable tax on investment income of a CCPC under section 123.3, and the general tax deduction under subsection 123.4(2).

However, without further details, it is difficult to determine whether such a transaction constitutes an avoidance transaction. If the purpose of such a transaction were to avoid CCPC status in order to defeat the purpose and intent of various anti-avoidance rules applicable to investment income, including section 123.3 and subsection 123.4(2), the CRA would consider, depending on the circumstances, application of the GAAR under subsection 245(2).

Official Response

7 October 2021 APFF Roundtable Q. 4, 2021-0900921C6 F - Mind and management et statut de SPCC

Q.5 Whether Pt. IV and safe income exclusions can be doubled up

Following the introduction of the eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) accounts, the payment of an eligible dividend does not trigger a non-eligible dividend refund. 9711005 indicated, before the bifurcation of RDTOH into two accounts, that it was not possible to use both the Part IV tax exception to s. 55(2) and the safe income exclusion.

Suppose that Holdco holds all the shares of Opco having attributable safe income of $1,000,000 and a fair market value of $5,000,000, and that Opco has a general rate income pool (GRIP) of $1,000,000 and a NERDTOH balance of $70,000. Before Holdco’s sale of the Opco shares, Opco first pays a $1,000,000 dividend (designated as an eligible dividend), and then pays a non-eligible dividend of $182,608 and receives a refund respecting the non-eligible dividend of $70,000. Holdco is subject to Part IV tax on that dividend.

Would Holdco be able to take advantage of both the $1,000,000 safe income exclusion and of the Part IV tax exclusion regarding the dividend of $182,608, given that the $1,000,000 dividend is not subject to Part IV tax?

CRA Preliminary Response

By virtue of paragraph 129(1)(a), Opco will not have a dividend refund arising from the payment of the $1,000,000 dividend that is designated by Opco as an eligible dividend. Consequently, pursuant to paragraph 186(1)(b), no Part IV tax will be payable by Holdco on that $1,000,000 dividend.

Furthermore, since that dividend does not exceed the income earned or realized by Opco that could reasonably be considered to contribute to the capital gain that would have been realized on a disposition at FMV, immediately before the dividend, of the share on which the dividend was received, that dividend would not be subject to subsection 55(2).

With respect to the ineligible dividend of $182,608 paid by Opco, Opco will, pursuant to paragraph 129(1)(a), be entitled to a dividend refund of its NERDTOH balance of $70,000. On this basis, Holdco will be liable for $70,000 of Part IV tax. Consequently, all of such dividend received by Holdco would be subject to Part IV tax and would not be subject to subsection 55(2) by virtue of the exclusion provided for in the preamble to subsection 55(2) to the extent that such Part IV tax is not refunded by reason of the payment of a dividend by Holdco where such payment forms part of the series referred to in subsection 55(2.1).

Official Response

7 October 2021 APFF Roundtable Q. 5, 2021-0900951C6 F - Safe income and Part IV tax

Q.6 Whether TOSI deductible from minimum tax

It is understood that, as it read until June 25, 2013, the additional tax computed under s. 120.2(3)(b) reduced the individual's tax for a particular year on the split income subject to the tax on split income (“TOSI”), but that the Act was since amended to no longer reduce the tax for the particular year by the split income subject to TOSI for that year.

Line 113 of the T691 Alternative Minimum Tax form provides for the deduction of TOSI from the federal tax applicable for a year, which has the result of the split income for the year being transformed into a minimum tax carryover for deduction from tax (other than TOSI) for a future year.

Does CRA agree that the minimum tax for a prior year cannot be deducted from TOSI in a particular year?
Has the T691 remained unchanged as between the versions prior to and subsequent to June 25, 2013, regarding the computation of additional tax under s. 120.2(3)?
Does CRA permit the reduction of tax otherwise payable by the amount of split income for a particular year, as indicated on Form T691 (which seems to be contrary to s. 120.2(3))?

CRA Preliminary Response

6(a)

Generally, the preamble to subsection 120.2(1) states that the portion of the total of the individual’s additional taxes that is deductible from the individual's tax payable under Part I, is determined without reference to, inter alia, subsection 120.4(2) (i.e., without reference to TOSI). That deduction is generally equal to the portion of the individual’s additional taxes determined under subsection 120.2(3) for the seven taxation years immediately preceding the particular year that was not deducted in computing the individual’s tax payable under Part I for those preceding years.

In view of the foregoing, we are of the view that additional tax assessed for a particular prior year in respect of the minimum tax provided for in section 127.5 may not be deducted from the TOSI in a particular taxation year.

6(b)

We confirm that Part 7 of Form T691 applicable to the calculation of the additional tax under subsection 120.2(3) remained unchanged following the amendment to the Income Tax Act on June 26, 2013, which modified paragraph 120.2(3)(b) to remove the reference to subsection 120.4(2).

Form T691 will be amended at the beginning of 2022, for the 2021 taxation year, to delete lines 113 and 114 in accordance with paragraph 120.2(3)(b).

6(c)

Generally, subsection 120.2(3) provides that the amount of additional tax that an individual may deduct for a taxation year under subsection 120.2(1) is the amount by which the applicable minimum tax for that year exceeds an amount adjusted under, inter alia, paragraph 120.2(3)(b). The latter amount corresponds to among other things the amount which, in the absence of section 120, would be that tax payable under Part I of the Income Tax Act for the taxation year if the individual were not entitled to any deduction under sections 126, 127 and 127.4. The terms of paragraph 120.2(3)(b) therefore do not allow a reduction of the tax payable by the amount of TOSI for a particular year.

The CRA does not have a general administrative policy on the implications of a correction to a CRA form that may result in a reassessment for prior taxation years. Rather, those situations are considered on a case-by-case basis. With respect to the amendment to Form T691, the CRA will correct the application of subsections 120.2(1) and 120.2(3), but will not issue reassessments for taxation years prior to 2021 changing the amount of tax payable that relates to that correction. System changes are being implemented so that additional tax amounts are computed using line 113 of Form T691 for taxation years prior to 2021 only and the unused additional tax balance resulting from line 113 for those years is available for the 2021 and subsequent taxation years.

Official Response

7 October 2021 APFF Roundtable Q. 6, 2021-0900961C6 - APFF Q.6 - Minimum Tax Carryover and TOSI

Q.7 Meaning of financial dependence

In Keybrand Food, the Federal Court of Appeal concluded that “financial dependence” of one party on another is relevant to determining whether they deal at arm’s length, stating that “the degree of financial dependence of Vidabode on Keybrand and BWS in December 2010 was a significant factor pointing towards a finding that Keybrand and Vidabode were not dealing with each other at arm’s length.”

Could CRA elaborate on what it considers to be financial dependence?
Would CRA consider a company to be financially dependent on a funder if a company receives, from an unrelated third party a loan without which it would not have been able to operate, where (i) the loan is repayable on demand, or (ii) has a term of 10 years?
Is financial dependence of one party on another sufficient in itself to create a non-arm’s length relationship?

CRA Preliminary Response

7(a)

The concept of financial dependence has been examined by the courts on various occasions in different contexts. That concept is relevant, in particular, to determine whether unrelated persons are not dealing with each other at arm's length at a particular time within the meaning of paragraph 251(1)(c) or whether a corporation is "controlled directly or indirectly in any manner whatever" by another person or group of persons (control in fact) within the meaning of subsections 256(5.1) and 256(5.11).

In general, financial dependence arises from the commercial, financial and contractual relationships between the parties concerned. For example, the following factual elements have been considered by the courts in determining whether a party is financially dependent on another party: all or substantially all of the income earned by one party came from the other party; one party was the sole customer or supplier of the other party; the sole customer or supplier would be very difficult to replace; the integration of the activities of one party with those of the other party; the involvement or control of one party in the financing of the other party; and the contractual and commercial arrangements between the parties did not reflect terms and conditions normally agreed upon by independent parties according to commercial practices of the industry.

Where the concept of financial dependence is relevant in a specific case, the CRA generally relies on the relevant jurisprudence in the context of the issue under analysis to determine whether such dependence exists.

7(b)

The question of whether a party is financially dependent on another party is a question of fact that can only be resolved after a full examination of all the relevant facts, actions, circumstances and documents surrounding a particular situation. Given the very limited facts presented in question 7(b), we cannot make a determination without first examining all the facts and circumstances relevant to the situation in this question.

7(c)

The question of whether financial dependence of one party on another is sufficient in itself to create a relationship of dependence between them can only be determined after an analysis of the facts and circumstances of a particular situation and considering the context of the legislative provision invoked.

As stated in Income Tax Folio S1-F5-C1:

Paragraph 251(1)(c) provides that it is a question of fact whether unrelated persons (other than persons described in ¶1.30) are dealing with each other at arm's length at a particular time. Sometimes unrelated persons may deal with each other at arm's length and sometimes they may not, depending on the circumstances. General criteria can be provided to determine whether there is an arm's-length relationship between unrelated persons for a given transaction. However, it must be recognized that all-encompassing guidelines to cover every situation cannot be provided. Each particular transaction or series of transactions must be examined on its own merits. The following paragraphs set forth the CRA's general guidelines with some specific comments about certain relationships.

Folio S1-F5-C1 lists the criteria generally applied by the courts to determine whether a transaction was conducted at arm's length:

The following criteria have generally been used by the courts in determining whether parties to a transaction are not dealing at arm's length:

whether there is a common mind which directs the bargaining for both parties to a transaction;

whether the parties to a transaction act in concert without separate interests; and

whether there is de facto control.

It is not required that all three tests be satisfied in every case. In any particular case, any one or more of the criteria may be of greater or lesser importance in the determination whether the parties are dealing at arm’s length (Canada v. Remai, 2009 FCA 340, 2009 DTC 5188 (FCA), at par. 32).

As noted by the Federal Court of Appeal in Keybrand and Aeronautic, the financial dependence of one party on the other could, depending on the facts and circumstances of the situation, demonstrate that the parties are not dealing with each other at arm's length at a particular time in respect of a particular transaction.

If the facts and circumstances of a specific case demonstrate that the financial dependence of one party on another is such that it is possible for the CRA to conclude that a transaction or series of transactions was entered into between persons not dealing with each other at arm's length under any of the criteria listed in paragraph 1.38 of Folio S1-F5-C1, then such dependence may be sufficient to conclude that the parties are not dealing at arm's length.

Official Response

7 October 2021 APFF Roundtable Q. 7, 2021-0900971C6 F - Economic dependence

Q.8 Use of IT-426R cost recovery method where LP is the share vendor

Where a limited partnership with resident and non-resident partners sells shares subject to an earnout, it is difficult to comply with paras. 2(e) and (f) of IT-426R respecting use of the cost-recovery method given that the limited partners generally will not have access to the sale contract and they do not have an obligation to themselves declare the capital gain on their own returns in a capacity of vendor. If the conditions in paras. 2(a) to (d) of the Bulletin are satisfied, can a limited partnership utilize the cost recovery method in these circumstances?

CRA Preliminary Response

The conditions of application provided in paragraph 2 of IT-426R were not designed for limited partners of a limited partnership in a situation as described above.

Consequently, the cost recovery method could not be used by a limited partnership in such a situation.

Official Response

7 October 2021 APFF Roundtable Q. 8, 2021-0900981C6 F - Cost Recovery Method in IT-426R (Archived)

Q.9 Pt. IV tax exclusion where the recipient on-pays an eligible dividend not generating a dividend refund

Suppose that Holdco has eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) both of nil, and a general rate income pool (“GRIP”) of $1,000,000, and that its wholly-owned subsidiary, Opco, has ERDTOH, NERDTOH and GRIP of nil, $383,333 and $2,000,000, respectively. There is no safe income attributable to the Opco shares held by Holdco. Opco pays a non-eligible dividend of $1,000,000 to Holdco, and Holdco then pays a $1,000,000 dividend.

On the payment of the Opco dividend, it generates a dividend refund of $383,333, which results in Pt. IV tax payable by Holdco of the same amount, which is added to Holdco’s NERDTOH account.

When Holdco in turn pays an eligible dividend of $1,000,000, no dividend refund is generated.

Although there is no safe income for the shares held by Holdco, s. 55(2) does not apply to the dividend received by Holdco because as part of the same series it was subject to non-refunded Pt. IV tax as a consequence of the payment of the dividend. Does CRA agree?

CRA Preliminary Response

Yes, based on the facts presented in the question, the CRA agrees with your understanding of the situation. Opco will, by virtue of paragraph 129(1)(a), be entitled to a dividend refund of its NERDTOH balance of $383,333. Considering that, Holdco will therefore be liable for Part IV tax of $383,333. Consequently, the entirety of that dividend received by Holdco would be subject to Part IV tax and may not be subject to subsection 55(2) by virtue of the exclusion provided for in the preamble to subsection 55(2) to the extent that such Part IV tax is not refunded by reason of the payment of a dividend by Holdco where such payment forms part of the series referred to in subsection 55(2.1).

Official Response

7 October 2021 APFF Roundtable Q. 9, 2021-0901101C6 F - Part IV tax exception vs eligible and non-eligible

Q.10 Advance concurrence to excessive dividend elections

Vendors may proceed with a preliminary reorganization before a share sale and agree in advance that elections will be made in the event of there having been excessive eligible dividend or capital dividend designations.

Will CRA accept an advance concurrence to the making of the election under s. 185.1(3) in the context of an excessive eligible dividend designation, or to an election under s. 184(3) in the context of an excessive capital dividend, where the shareholder concerned has no involvement at the time the election is made?
Does CRA require the filing of T5 slips where the election is made on an excessive capital dividend, or of amended T5 slips where an excessive eligible dividend is concerned?

CRA Preliminary Response

10(a)

Subsection 185.1(2) allows a corporation to make an election to treat all or part of the amount of an excessive eligible dividend designation as a separate ordinary dividend, so as to eliminate or reduce the Part III.1 tax otherwise payable. The corporation must file the election on or before the 90th day after the date of mailing of the notice of assessment of the Part III.1 tax. For the election to be valid, subsection 185.1(3) requires, inter alia, that it be made with the concurrence of the corporation and certain of its shareholders. If the election is made within 30 months of the dividend payment, the concurrence of all shareholders who received, or were entitled to receive, the original dividend and whose addresses were known to the corporation must be obtained. If the election is made after the expiry of the 30 months, the concurrence of all the shareholders who received or were entitled to receive the original dividend must be obtained, regardless of whether the corporation knew their address.

Subsection 184(3) allows a corporation to make an election, in prescribed manner, on or before the day that is 90 days after the day of sending of the notice of assessment in respect of the tax payable pursuant to subsection 184(2), to deem the excess portion of a capital dividend or a capital gains dividend to be a separate taxable dividend. For the election to be valid, subsection 184(4) requires, inter alia, that it be made with the concurrence of the corporation and certain of its shareholders. If the election is made within 30 months after the day the original dividend became payable, the concurrence of all shareholders who received or were entitled to receive all or part of the original dividend and whose addresses were known to the corporation must be obtained. If the election is made after the expiry of the 30 months, the concurrence of all shareholders who received or were entitled to receive all or part of the original dividend must be obtained, irrespective of whether the company knew their address.

In a context similar to that described in the statement of this question, the CRA generally accepts that shareholders may give their concurrence in advance, through undertakings under the various sale agreements, to the making of elections under subsections 184(3) and 185.1(3).

10(b)

When a subsection 184(3) election is filed, additional T5 slips must usually be filed. However, since in such circumstances the number of shareholders is generally small and their respective returns have generally been assessed at the time the 184(3) election is filed, the CRA will not request the preparation of T5 slips in respect of that election unless the circumstances make that procedure practical.

However, if an excessive capital dividend is identified in the year it is paid or payable, the corporation will be required to file additional T5 slips by the last day of February of the following year, as the shareholder will not have to file the shareholder’s tax return until the following year.

Where a corporation files an election under subsection 185.1(2), the CRA requires the corporation to provide, inter alia, at the time of the election, either the revised amounts of the eligible dividends and separate ordinary taxable dividends to each shareholder, or copies of T5 slips.

Official Response

7 October 2021 APFF Roundtable Q. 10, 2021-0901001C6 - Application of subsection 184(3) and 185.1(3)

Q.11 Application of s. 98(3) where wind-up followed by s. 85(1) drop-down

Mr. A and Mr. B carried on business in a general partnership (AB SENC), whose most important asset (as to 85% of the total value) was goodwill, and also had bank accounts, accounts receivable and prepaid expenses. The partnership is wound up in reliance on s. 98(3) so that each receives a pro rata portion of the assets. Mr. A transfers his pro rata portion on a s. 85(1) rollover basis to a newly-incorporated wholly-owned corporation (A Inc.) and A Inc. then purchases the pro rata portion of the assets held by Mr. B.

Would s. 98(3) apply given that the AB operations are continued by A Inc.?
Would s. 98(5) oust the application of s. 98(3) given that Mr. A would indirectly continue the AB operations through AB Inc.?
Can s. 98(5) really be applied in this case since goodwill is difficult to share unless the concept of a share of an asset is applied as found in s. 98(3)?
Would CRA accept that s. 98(5) applies?

CRA Preliminary Response

Subsection 98(3) generally applies where a Canadian partnership has ceased to exist and all the partnership property has been distributed to persons who were members of the partnership immediately before that time so that immediately after that time each such person has, in each such property, an undivided interest, or for civil law an undivided right that is equal to the person’s undivided interest or right, when so expressed, in each other such property, if each such person has jointly so elected in respect of the property in prescribed form and within the time referred to in subsection 96(4).

By virtue of subsection 98(4), subsection 98(3) does not apply where subsection 98(5) applies.

Subsection 98(5) is a provision of automatic application and generally applies where a Canadian partnership has ceased to exist and within 3 months after the particular time one, but not more than one, of the persons who were, immediately before the particular time, members of the partnership (the “proprietor”) carries on alone the business that was the business of the partnership and continues to use, in the course of the business, any property that was, immediately before the particular time, partnership property and that was received by the proprietor as proceeds of disposition of the proprietor’s interest in the partnership

Thus, in order for subsection 98(5) to apply, it is necessary, inter alia, that the person carrying on the business of the partnership was a member of the partnership immediately before the time at which the partnership ceases to exist and that person continues to use, in the course of the business, property that was owned by the partnership immediately before that time.

The facts of the particular situation do not state when AB ceased to exist. Whether a partnership ceases to exist is a question of law and fact. One must rely on the partnership agreement and the applicable private law to determine whether and when a partnership ceases to exist.

In the situation where A Inc. would not be a partner of AB immediately before the time at which AB would cease to exist, we are of the view that subsection 98(5) could not apply.

Furthermore, the provisions of subsection 98(3) could apply in the hypothetical situation described above with respect to the distribution to Mr. A and Mr. B of an undivided interest in each of AB's properties, provided that the conditions set out therein are satisfied.

In conclusion, although the wording of this question does not allow us to reach a definitive conclusion, the application of the provisions of paragraph 13(7)(e) should be considered in relation to Mr. B's disposition of his undivided interest in each of AB's former assets to A Inc.

Official Response

7 October 2021 APFF Roundtable Q. 11, 2021-0901011C6 F - Application of subsection 98(3)

Q.12 Characterization of 3rd-party rents for portion of manufacturing facility

[As there was no response, this question has not been summarized.]

CRA Preliminary Response

A written response will be sent to the APFF after the conference as soon as possible.

Q.13 Sale of a cottage held under an indivision agreement

A and B, who are spouses, acquired a cottage in co-ownership for $400,000 in 2010. The purchase contract and their undivided ownership agreement do not state the undivided share of each so that, pursuant to Article 1015 of the Civil Code, they were therefore presumed to each own 50% of the cottage. The $100,000 down payment was paid solely by A, whereas the balance of$300,000 was funded with a $300,000 hypothec loan from a financial institution.

At the time of purchase, they entered into an undivided agreement providing that, as between them, each was responsible for repaying half of the hypothec loan, so that each was responsible for 50% of any payments made to the lender.

They sold the cottage in April 2021 for $700,000, with the hypothec loan paid off in full prior to the sale (50% each)

In the first situation: the undivided agreement does not contain any specific clause concerning the sharing of the price in the event of a sale of the cottage. In the absence of such an agreement, the sale price of the cottage was to be divided equally ($350,000 each), and the adjusted cost base also was to be equally allocated ($200,000 each).

In the second situation, the undivided agreement provided that if the cottage was sold, the net sale price would instead be divided on the basis that A would have a priority right to receive $100,000 (the down payment), plus a predetermined return and that each was to receive 50% of the balance.

(a) In the first situation, since the down payment was fully paid by A, A will be considered to have made a gift of $50,000 to B at the time of purchase (50% × $100,000). Would this gift be subject to the s. 74.2(1) attribution rule regarding the capital gain?

Instead, could the ACB of each be allocated as follows:

A : $250,000 ($100,000 + (50 % × $300,000))

B : $150,000 (50 % × $300 ,000)

b) In the second situation, in CRA's opinion, pursuant to Art. 1015 C.C.Q. of the Civil Code, will each be required to report the following proceeds of disposition and ACB in 2021

A (50 %) : $350,000 - $200,000

B (50 %) : $350,000 - $200,000

Is it then reasonable to conclude that the $100,000 priority payment to A actually includes the repayment by B of a loan made to B by A at the time of purchase, being 50% of the $100,000 down payment, or $50,000? Alternatively, would the return paid to A on 50% of the down payment be considered fully taxable income to A in 2021 (interest income)?

CRA Preliminary Response

Tax law is an accessory law whose effects are based on the rights and obligations arising from the applicable private law, in particular as regards the effects of contracts. Tax law is therefore generally only involved in determining the tax consequences of the effects of contractual transactions.

In the two situations described, the tax treatment will depend on the analysis that can be made of the transactions carried out and their legal effects for the parties, according to the applicable private law, in this case Quebec civil law. We have assumed that those legal transactions are governed by the law applicable in the province of Quebec, i.e. by the Civil Code of Quebec.

The issues of whether interest holders are equal and whether an unequal down payment constitutes a gift, loan or other transfer are questions of law and fact, on which the CRA does not provide an interpretation. It is not the CRA's role to undertake the legal analysis that would be required in respect of the transactions described. Those issues could potentially only be determined in the context of an audit or advance ruling request (submitted in accordance with the terms of Information Circular IC 70-6R11) in respect of proposed transactions.

We can, however, make certain assumptions in order to provide general comments on the applicable tax treatment that may be useful in these hypothetical situations.

Assumptions

As a preliminary matter, we have assumed that the undivided interests in the cottage are not depreciable property to either A or B. We also have assumed that A and B are Canadian residents and common-law partners throughout the period described.

In the first and second situations, it seems reasonable to assume that the presumption set out in article 1015 C.C.Q., in the absence of any indication of fact to the contrary, could be applicable, so that the shares of the interest holders A and B in the cottage would in fact be equal. Indeed, even in the second situation, the fact that the undivided co-ownership agreement refers to an amount that should be paid first to A from the proceeds of the sale as a "return" seems to indicate the existence of a loan rather than different shares in the immovable.

In the first situation, in the absence of any indication that A had made a loan to spouse B, it seems plausible that the $100,000 down payment ("down payment") made by A at the time of the purchase of the cottage would be a gift to the spouse for half of that amount. In the second situation, as discussed above, the reference to a return on the down payment originally paid by A seems to indicate the presence of a loan.

For the purposes of our comments, we have therefore assumed that, in the first situation, A paid the down payment for himself and his spouse, donating half of it to B.

We have also assumed that in the second situation A has made the down payment for himself and his spouse, lending B half of that amount.

Finally, in the second situation, we have assumed that the return on the loan for half the amount of the down payment is interest.

Our Comments

The term ACB is defined in section 54. Paragraph (b) of that definition provides that the ACB of a property that is not depreciable property is equal to the cost of the property to the individual, adjusted in accordance with section 53.

The term "cost" is not defined in the Income Tax Act. Where a property is acquired in undivided ownership, it is the CRA's view that the cost of the property to a taxpayer is the cost of the taxpayer's undivided share of the property.

Where a taxpayer's outlay is paid for by a gift, money or loan that the taxpayer has otherwise received (or is considered to have received), that outlay forms part of the cost of the taxpayer's undivided share in the property.

Given the assumptions we have made, it would not be possible to determine the ACB of each spouse's undivided share by considering that the down payment is fully included in the acquisition cost of A's undivided share.

In both situations, the capital gain realized by A and B should therefore correspond to the excess of the proceeds of disposition of their undivided interest in the property over the ACB of that property, it being understood that, since they have equal undivided interests, their proceeds of disposition and ACB will be equal.

The second step would be to consider the application of the attribution rule in subsection 74.2(1) since A, at the time of the acquisition of the immovable, transferred or loaned property to his spouse, namely an amount of $50,000 and, at the time of the sale of the cottage, B will realize a capital gain on the property substituted for that amount.

Subsection 74.2(1) provides, inter alia, that where an individual has lent or transferred property, either directly or indirectly, to a person who is the individual's spouse or common-law partner, the taxable capital gain (or allowable capital loss) realized by the recipient spouse on the disposition of the loaned or transferred property or property substituted therefor is deemed to be the individual's taxable capital gain or allowable capital loss.

In the second situation, where a loan is involved, subsection 74.2(1) would also apply, notwithstanding A's priority right to receive the sum of $100,000 (in consideration of the down payment made by A), plus a predetermined return. Subsection 74.5(2) provides that subsections 74.1(1) and 74.1(2) and section 74.2 do not apply to any loan for which the interest is calculated at a rate equal to or greater than the lesser of the following rates

the prescribed rate;
the rate that would, having regard to all the circumstances, have been agreed on between parties dealing with each other at arm’s length;

on the date the loan is made (paragraph 74.5(2)(a)), provided that all such interest is paid not later than 30 days after the end of each calendar year in which it became due (paragraphs 74.5(2)(b) and (c)).

It seems clear that the interest on the loan made in the second situation would not have been paid within the time limits set out in paragraph 74.5(2)(c) for all the years preceding the year of the disposition. Subsection 74.5(2) would therefore not apply.

Thus, in the first and second situations, and subject to the application of subsection 74.5(11), the attribution rule in subsection 74.2(1) would apply and one quarter of the taxable capital gain realized by spouse B, corresponding to the proportion of the amount donated or loaned by A to B over the cost to B of acquiring his or her undivided share of the immovable (i.e., $50,000/$200,000), would be attributable to A.

Finally, in the second situation, the interest paid to A from the proceeds of the sale of the cottage, in respect of the loan made to B for the down payment, would be taxable to A under paragraph 12(1)(c).

Q.14 Meaning of “any consideration received ... for the disposition” in s. 118.1(13)(c)

Essentially, s. 118.1(18) provides that debt obligations and shares of a private corporation are non-qualifying securities (“NQS”), as to which s. 118.1(13) provides that the gift is deemed not to have been made until the qualified donee disposes of the NQS, provided that the disposition is made within 60 months of the initial donation to the qualified donee. The gift is deemed to have been made by the taxpayer at the time of the disposition of the NQS by the qualified donee and the amount of the gift is deemed to be the lesser of the FMV of any consideration received by the qualified donee for the disposition of the NQS and the FMV of the property at the time of its donation to the qualified donee. In this regard, the Act does not specify whether the "FMV of any consideration … received by the donee for the disposition” of the NQS refers to the specific concept of "proceeds of disposition" provided for in s. 54 or, more generally, to any consideration received in connection with such disposition, including the portion of such consideration that would constitute a deemed dividend under s. 84(3), in the event of a redemption of shares.

Can CRA confirm that the "FMV of any consideration received by the donee for the disposition” of the NQS is not limited to the specific concept of "proceeds of disposition" under s. 54?

CRA Preliminary Response

Paragraph 118.1(13)(a) provides that, where an individual makes a gift of a NQS at a particular time and the gift is not an excepted gift, the gift is deemed not to have been made for the purposes of section 118.1 (other than for the purposes of subsection 118.1(6) in computing the individual's proceeds of disposition of the NQS). The gift will be eligible for later recognition under paragraph 118.1(13)(b) if the NQS ceases to be a NQS within 60 months after the particular time or, under paragraph 118.1(13)(c), if the qualified donee disposes of the NQS within that time. If the qualified donee does not dispose of the NQS within 60 months and the NQS does not cease to be a NQS within that period, the gift will simply not be recognized for purposes of the Income Tax Act.

If paragraph 118.1(13)(c) applies, then the FMV of the gifted property will be deemed to be equal to the lesser of the FMV of any consideration (other than a NQS of any person) received by the qualified donee for the disposition and the FMV of the NQS at the particular time.

Subsection 118.1(18) defines what constitutes a NQS for the purposes of section 118.1. That definition includes a share (other than a share listed on a designated stock exchange) of the capital stock of a corporation with which the individual does not deal at arm's length.

The word "consideration" is not defined in the Income Tax Act. The jurisprudence indicates that "consideration" is a broad term, which can encompass either a right, interest, profit or benefit to one party, or a waiver, disadvantage, loss or liability to the other party. Thus, generally speaking, and in the absence of any indication to the contrary from the context, the notion of "consideration" is broad enough to encompass any amount, good or service received upon the disposition of property.

The CRA is of the view that the word "consideration" in the phrase "fair market value of any consideration … received by the donee for the disposition … of the security" in paragraph 118.1(13)(c) must be given the broad meaning generally accepted in the jurisprudence. Thus, for the purposes of paragraph 118.1(13)(c), the expression "consideration received for the disposition" is not limited to "proceeds of disposition" as defined in section 54.

Consequently, the CRA is of the view that for the purposes of paragraph 118.1(13)(c), the consideration received by the qualified donee for the disposition of a NQS may include the portion of such consideration that is a deemed dividend received by the qualified donee pursuant to subsection 84(3) on a redemption of shares.

That said, the FMV of the donated property as determined pursuant to paragraph 118.1(13)(c) does not necessarily represent the eligible amount of the gift for the purposes of the definition of "total charitable gifts" in subsection 118.1(1). In determining the eligible amount of the gift, the rules in subsections 248(30) to 248(41) must also be taken into account. The eligible amount of the gift in a particular situation can only be determined in light of all the facts and circumstances of the particular situation.

Finally, it should be noted that, depending on the facts and circumstances of a particular situation, subsection 129(1.2) could apply in a situation where shares of a private corporation were redeemed by the corporation after they had been donated. Subsection 129(1.2) is a specific anti-avoidance rule under which, for the purposes of subsection 129(1), a dividend paid on a share of the capital stock of a corporation is deemed not to be a taxable dividend if the shareholder acquired the share or a share substituted for it in a transaction, or as part of a series of transactions, one of the main purposes of which was to enable the corporation to obtain a dividend refund ("DR"). The corporation is not entitled to its DR where subsection 129(1.2) applies.

Official Response

7 October 2021 APFF Roundtable Q. 14, 2021-0901041C6 F - Meaning of Any consideration received by Donee

Q.15 Computing s. 40(2)(g) gain where prior vacant land holding

At the time of sale, the taxpayer may designate the property (residence and land) as a principal residence for the years 2000 to 2020. The capital gain attributable to the land prior to the construction of the residence, i.e. the 10-year period from 1990 to 1999, would then be taxable. Thus, assuming the appreciation in value attributable to the land is $500,000 at the time of sale, $350,000 (21/30 * $500,000) would be exempt and the remaining $150,000 would be taxable as a capital gain. These rules have the effect of spreading the increase in value of the land on a straight-line basis over the number of years of ownership, which may result in a much higher capital gain being taxed than if the gain had been taxed based on the actual value in 2000.

(a) Is the above calculation of the exempt gain amount, based on the years designated as the principal residence, correct?

(b) If so, can CRA accept an alternative method of taxing the taxpayer on the actual gain on the land at the time the house was built in 2000, in order to exempt the actual gain on the land from that time until the sale of the residence?

CRA Preliminary Response

Paragraph 40(2)(b) generally allows an individual to reduce the gain otherwise determined from the disposition of a property that was the individual's principal residence at any time after the acquisition date by the number of years that the property was the individual's principal residence.

According to that paragraph, the amount that may reduce an individual's otherwise determined gain is calculated according to, inter alia, the formula B/C.

Element B refers to the number one plus the number of taxation years that end after the acquisition date for which the property was the individual's principal residence and during which the individual was resident in Canada. Element C refers to the total number of years after the acquisition date during which the individual owned the property.

Section 54 defines "principal residence" as, inter alia, a housing unit owned, whether jointly with another person or otherwise, in the year by an individual and ordinarily inhabited by the individual, the individual's spouse or common-law partner or former spouse or common-law partner, or a child of the individual. Paragraph (e) of that definition provides that an individual's principal residence for a taxation year is deemed to include the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. However, where the total area of the subjacent land and of that portion exceeds ½ hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.

In a situation where an individual acquires land in one taxation year and constructs a housing unit thereon in a subsequent year, the CRA's long-standing position is set out in paragraph 2.29 of Income Tax Folio S1-F3-C2 , namely that in such a situation the property cannot be designated as the individual's principal residence for the years preceding the year in which the individual, the individual's spouse or common-law partner, the individual's former spouse or common-law partner, or the individual's child begins to ordinarily inhabit the dwelling.

Consequently, the years in which land is vacant are not included in the description of B in the formula in paragraph 40(2)(b), whereas all years from the year in which the individual acquired the vacant land are included in the description of C in that same formula. It is possible, therefore, that on the subsequent disposition of the property, where the property is land that has been vacant for some of the years, that the principal residence exemption will eliminate only a portion of the gain otherwise determined.

There is no provision in the Income Tax Act that allows for a different calculation of the amount that may reduce the gain otherwise determined for purposes of the principal residence exemption in this situation. The CRA is responsible for administering the Income Tax Act as passed by Parliament and cannot go beyond the provisions included therein.

Official Response

7 October 2021 APFF Roundtable Q. 15, 2021-0901051C6 F - Exemption pour résidence principale

Q.16 Whether nominee must apply for s. 116 certificate/disclosure of nominee agreements

Any nominee agreement [“contrat de prête nom”] entered into on or after May 17, 2019, or any nominee agreement entered into before that date having tax consequences after May 17, 2019, must be disclosed to the Quebec Revenue Agency ("QRA").

a) What is CRA's current policy regarding the disclosure of a nominee agreement?

b) In the case of a disposition of taxable Canadian property by a non-resident acting solely as nominee and with no interest in the property, is that nominee required to request a s. 116 certificate, where the beneficial owner is a resident of Canada?

c) When a taxpayer makes a disclosure of a nominee contract in Quebec, does CRA recommend that the taxpayer send a copy of the TP 1079.PN form filed with the ARQ or a letter containing similar information to CRA in order to update their file with CRA and avoid any potential consequences resulting from non-disclosure?

CRA Preliminary Response

16(a)

Article 1451 of the C.C.Q. allows parties to modify or even annul the provisions contained in an ostensible contract, called an apparent contract, by means of a secret contract called a counter letter.

Failure to disclose to the CRA the terms or existence of a counter letter could be considered neglect, carelessness, wilful default, or fraud, and the CRA could assess at any time pursuant to subparagraph 152(4)(a)(i). In addition, reporting the tax obligations arising from the apparent contract rather than the actual agreement contained in the counter letter or failing to disclose the existence of the counter letter could result in the application of the penalty under subsection 163(2) if the taxpayer does so knowingly or in circumstances amounting to gross negligence.

To avoid the application of these provisions, in accordance with the CRA's long-standing position, the parties to a counter letter must therefore disclose its existence and determine the implications, of any nature, under the Income Tax Act in light of the true legal relationship it reflects.

Under the principles set out by the Supreme Court of Canada in Shell Canada Ltd. v. Canada, unless it can be concluded that a transaction or series of transactions is a sham or that the transaction is contrary to a provision of the Income Tax Act, the CRA must respect the true legal relationship between the parties. Generally, the CRA will recognize the legal effect of a counter letter for tax purposes to the extent that:

the counter-letter has effective legal effects and does not contravene any legislation;
the counter-letter is not a sham;
the counter-letter is entered into before or at the same time as the apparent contract and is not an ex post facto arrangement;
the terms of the counter letter are disclosed to the CRA and the relevant documents in that regard are provided to the CRA in a timely manner; and
the facts of the particular situation are consistent with the legal relationship of the parties as described in the counter letter.

Finally, it should be noted that the 2021 Federal Budget proposes to consult on new mandatory disclosure rules under the Income Tax Act, but does not contain any specific measures regarding counter letters. However, it is possible that a transaction to which the counter letter is relevant may constitute a "reportable transaction" or an "avoidance transaction" within the meaning of the 2021 Federal Budget and may fall under the new rules to be introduced.

16(b)

As stated in question (a), the legal relationship between the parties is determinative in tax matters and that applies in particular to the legal relationship arising from the disposition of taxable Canadian property for the purposes of section 116.

Subsection 116(1) provides that a vendor who is not resident in Canada and who proposes to dispose of taxable Canadian property within the meaning of subsection 248(1) may notify the CRA prior to the disposition of the property or must do so within 10 days of the disposition by virtue of the terms of subsection 116(3).

In this situation, the CRA recognizes that the beneficial vendor is resident in Canada. Consequently, subsections 116(1) and 116(3), which apply to dispositions of taxable Canadian property by a non-resident, will generally not apply. That is because the vendor is resident in Canada, whereas the nominee is not legally the owner of the property being disposed of.

It should also be noted that, in certain cases, the CRA could issue a letter to the taxpayer confirming that it is not necessary to withhold tax or to obtain a certificate of compliance under section 116, thereby recognizing the legal effect of a counter letter, provided the conditions set out in question (a) are satisfied.

Finally, subsection 116(5) provides that in certain circumstances the purchaser may be liable for a tax equal to 25% of the cost of the property acquired on behalf of a non-resident vendor. However, the purchaser may be relieved of that obligation if, after reasonable inquiry, the purchaser had no reason to believe that the vendor was not resident in Canada. The purchaser must therefore be diligent in confirming the vendor's residency status.

16(c)

It is important to remember that tax law is an ancillary law that applies to the true legal effects of transactions between parties. The parties must file on the basis of their actual legal relationship and, in order to determine the tax consequences of any kind under the Income Tax Act, only those actual legal relationships must be considered.

Any taxpayer party to a counter letter must therefore, on that basis, determine the tax consequences of the counter letter and disclose its existence to the CRA. While there is no specific form of disclosure of a counter letter in the Income Tax Act, the onus is on the taxpayer to explain why the tax consequences it has determined do not correspond to the apparent contract and to provide all relevant documentation in a timely manner, including when filing the relevant tax returns.

Since an apparent contract does not reflect the true legal relationship between the parties, the parties should pay particular attention to making a clear demonstration of the true legal relationship between them at the outset, with all relevant supporting documentation. That demonstration must be made at the time of the return, regardless of its nature, so that the CRA is able to determine any tax consequences arising from the true legal relationships established under the counter letter, including the application of subparagraph 152(4)(a)(i) and subsection 163(2), in light of the circumstances.

Official Response

7 October 2021 APFF Roundtable Q. 16, 2021-0901061C6 F - 2021 APFF Q.16 - Disclosure of a counter letter

Q.17 TOSI: (f)(ii) and (e)(i) of "excluded amount"

Situation A

Mr. X held all the preferred shares of Opco Inc. representing more than 50% of the voting rights. Opco paid a $10,000 capital dividend on its common shares held by a discretionary family trust ("Trust") whose beneficiaries were Mr. X's three children, including Child A, aged 20. Child A used that sum to subscribe for Opco preferred shares.

Was Child A's subscription a contribution of arm’s length capital within the meaning of s. (f)(ii) of the definition of "excluded amount" definition in s. 120.4(1)?

Situation B

The only class of shares of Investco was owned 95% by Mr. X and 5% by his spouse, Ms. Y. Investco wholly owned Opco, and also held $100,000 in a non-income producing bank account, which was derived from a dividend received from Opco out of the profits generated by it in operating its business. Mr. X has always been an active, regular, ongoing and significant participant in the activities of Opco, but Ms. Y has had no involvement in that business. During the fiscal year ending December 31, 20X1, Opco disposed of its business and all its assets to a third party, and then was wound up into Investco on December 31, 20X1 (which was Investco’s year end).

a) In 20X2, Investco pays a $10,000 dividend: $9,500 to Mr. X and $500 to Ms. Y. Given the absence in 20X2 of a source individual in respect of Ms. Y engaged in the operation of the business sold by Opco, does the dividend received by Ms. Y qualify as an excluded amount under s. (e)(i) of the definition of "excluded amount" in s. 120.4(1)?

(b) In 20X3, Investco (which carries on an investment business in which Mr. X is actively involved, and Ms. Y not at all) invests $90,000 in ABC Stock Inc. Investco receives a $500 dividend (its only income for 20X3) on the ABC Inc. shares during the year and reinvests the entire amount by purchasing new shares in the capital of ABC Inc.

Before the end of 20X3, Investco sells shares of ABC Inc. (at no gain or loss) for $10,000 and pays a dividend of $10,000: $9,500 to Mr. X; and $500 to Ms. Y. Does the dividend received by Ms. Y qualify as an excluded amount under s. (e)(i) of the definition?

CRA Preliminary Response

Situation A

Generally, an amount that is a reasonable return in respect of the arm’s length capital contributions of an individual who has attained the age of 17 years but not the age of 24 years, is an excluded amount under subparagraph (f)(ii) of the definition of "excluded amount" in subsection 120.4(1) and is, therefore, not subject to TOSI.

The term "reasonable return" as defined in subsection 120.4(1) generally means the amount that is derived directly or indirectly from a related business, taking into account the relative contributions made to the business by the specified individual and each source individual. However, for the purposes of subparagraph (f)(ii) of the definition of "excluded amount" in subsection 120.4(1), only the specified individual's arm’s length capital contributions are taken into account in determining whether an amount constitutes a reasonable return.

The term "arm's length capital" is defined in subsection 120.4(1) as follows:

“arm’s length capital, of a specified individual, means property of the individual if the property, or property for which it is a substitute, was not

(a) acquired as income from, or a taxable capital gain or profit from the disposition of, another property that was derived directly or indirectly from a related business in respect of the specified individual;

(b) borrowed by the specified individual under a loan or other indebtedness; or

(c) transferred, directly or indirectly by any means whatever, to the specified individual from a person who was related to the specified individual (other than as a consequence of the death of a person).”

Thus, for property to qualify as "arm’s length capital" of a specified individual, that property, or property for which the particular property is a substitute, must not have been acquired by the specified individual in any of the ways described in paragraphs (a) to (c) of the definition of "arm’s length capital" in subsection 120.4(1).

The CRA is of the view that the $10,000 received by Child A as a capital dividend is not arm’s length capital of Child A since it is property transferred indirectly (i.e., through the Trust) by Opco, a person related to Child A. Since Mr. X controls Opco, Opco is related to Mr. X by virtue of subparagraph 251(2)(b)(i). Furthermore, Mr. X and Child A are related to each other by blood relationship and are related persons by virtue of paragraphs 251(2)(a) and 251(6)(a). Consequently, Opco and Child A are related persons by virtue of subparagraph 251(2)(b)(iii).

Thus, Child A's subscription for shares of the capital stock of Opco with the proceeds of the capital dividend received from Opco (through the Trust) would not be considered an arm’s length capital contribution within the meaning of subparagraph (f)(ii) of the definition of "excluded amount" in subsection 120.4(1).

Depending on the circumstances, however, Child A may be able to benefit from the specified individual's safe harbour capital return exclusion in subparagraph (f)(i) of the definition of "excluded amount" in subsection 120.4(1). The term "safe harbour capital return" of a specified individual is defined in subsection 120.4(1) as the return, not exceeding the product of multiplying the highest prescribed rate for a quarter of the relevant taxation year by the FMV of property contributed by the specified individual in support of a related business. In the case of Child A, that safe harbour capital return would be calculated by reference to the amount of the subscription to the shares of the capital stock of Opco and the appropriate prescribed rate.

Situation B

CRA's response to question (a) of Situation B

Subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1) provides that an excluded amount in respect of an individual for a taxation year is an amount that is the individual's income for the year from, or the individual’s taxable capital gain or profit for the year from the disposition of, a property and that, if the individual has attained 17 years of age before the year, is not derived, directly or indirectly, from a related business in respect of the individual for the year.

For the purposes of this question, we have assumed that Investco does not carry on a business in the year 20X2.

The dividend received by Ms. Y would be considered to arise directly or indirectly from a related business (the former Opco business) in respect of Ms. Y notwithstanding that the dividend was paid in a year subsequent to the year in which the Opco business was disposed of. However, the dividend would not be considered to arise, directly or indirectly, from a related business in respect of Ms. Y for the year 20X2 since the former Opco business was not carried on in that year, in accordance with the CRA's position issued in response to Question 9 of the 2018 Canadian Tax Foundation Annual Conference Roundtable. Consequently, the dividend received by Ms. Y could qualify as an excluded amount pursuant to subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1).

CRA's response to question (b) of Situation B

In this question, since the former business of Opco is not carried on in the 20X3 taxation year, it is not a related business in respect of Ms. Y for that year, as appears from the CRA's position noted above.

As stated in the current question, Investco carries on an investment business in 20X3 and Mr. X is actively involved in that business. Thus, Investco's business is a related business in respect of Ms. Y for the 20X3 taxation year.

As noted above, Investco invested $90,000 in its business. Thus, when Investco sells a portion of the property used in the operation of that business in order to pay the dividend declared to its shareholders, it is the CRA's view that the dividend must be considered to have arisen, directly or indirectly, from Investco's business.

Consequently, the dividend received by Ms. Y would be considered to have arisen directly or indirectly from the business of Investco, a related corporation in respect of Ms. Y. Thus, the dividend received by Ms. Y cannot qualify as an excluded amount pursuant to subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1).

On the other hand, if it were shown that Investco does not carry on a business, the dividend received by Ms. Y from Investco would not be considered to be derived directly or indirectly from a related business in respect of Ms. Y and could qualify as an excluded amount pursuant to subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1).

Whether a taxpayer's activities are sufficient to constitute a business remains a question of fact that, in each particular situation, can only be resolved after an examination of all relevant facts and circumstances.

In closing, the various exclusions, including the one in subparagraph (e)(i) of the definition of "excluded amount" in subsection 120.4(1), are not intended to apply in all circumstances. Where the exclusions do not apply in a particular situation, the general logic is that, in such circumstances, the most appropriate test for determining whether income from a related business in respect of a particular individual should be excluded from the split income calculation should be based on the general test of whether the amount is a "reasonable return" having regard to the specific criteria applicable in the circumstances, including the work performed, the property contributed, the risks assumed, the total amounts paid or payable, and any other relevant factors.

Official Response

7 October 2021 APFF Roundtable Q. 17, 2021-0901071C6 - Application of section 120.4

Q.18 S. 120.4(1.1)(b)(ii) post-death continuity rule

As a result of an estate freeze, a discretionary family trust (the "Trust") held all the Class C non-voting and participating shares of Opco having an FMV of $1,500,000, and Mr. X held 1,000,000 Class E non-cumulative preferred shares with a nominal ACB and paid-up capital and a redemption value of $1,000,000. Mr. X also held all the voting shares.

Mr. X's spouse, Ms. X, and their 20 year old child, Child X, were beneficiaries of the Trust. Ms. X and Child X had no involvement in the business of Opco, whereas Mr. X was actively, regularly, continuously and substantially engaged in that business for the previous five years, so that it was an "excluded business" to him.

Situation A

Mr. X died on December 30, 2021, and his will provided for a specific bequest of all of the voting shares and 500,000 Class E shares of Opco to Ms. X, and of the other 500,000 Class E shares to a testamentary trust for the benefit of Child X ("Trust X"). The will provided that: Trust X was to provide an annual income of $30,000 to Child X until age 35, and for Trust X to redeem Class E shares if the dividends thereon were insufficient to fund such payments; and the Trust capital was to be distributed to Child X on turning 36.

Accordingly, Child X receives the remaining 100,000 Class E shares on turning 36 – whereupon Child X requests their redemption, thereby resulting in the receipt of a deemed dividend of $100,000.

Ms. X continues to hold all of the voting shares and a number of Class E shares having a FMV of at least 10% of the FMV of all the Opco shares, and the Trust has not yet been wound up.

Are the following amounts received by Child X "excluded amounts" under s. 120.4(1.1)(b)(ii): (a) the dividends of $30,000; and (b) the $100,000 deemed dividend?

Situation B

The Deed of Trust for the Trust contained a designation clause providing that, upon the death of Mr. X, the beneficiaries of the Trust would be whichever of Ms. X and Child X was expressly designated by Mr. X in his will. Mr. X died on December 30, 2021, and his will provided for a bequest of all the voting shares and 1,000,000 Class E shares of Opco, to Ms. X.

The will provided that: Trust X was to provide an annual income of $30,000 to Child X until age 35, and for Trust X to redeem Class E shares if the dividends thereon were insufficient to fund such payments; and that the Trust capital was to be distributed to Child X on turning 36.

Ms. X continues to hold all of the voting shares and a number of Class E shares having a FMV of at least 10% of the FMV of all the Opco shares.

Would the dividends of $30,000 received by Child X be excluded amounts under s. 120.4(1.1)(b)(ii)?

CRA Preliminary Response

General comments

Paragraph 120.4(1.1)(b) introduces a continuity rule in respect of, inter alia, inherited property. It applies to amounts that would, but for the application of that rule, be split income of a specified individual who attained 17 years of age before the year, in respect of property that was acquired by or on behalf of the specified individual as a consequence of the death of another person.

Subparagraph 120.4(1)(b)(ii) provides that, for the purposes of that subparagraph and the definition "excluded business" in subsection 120.4(1), if the other person was actively engaged on a regular, continuous and substantial basis in the activities of the related business throughout five preceding taxation years, the specified individual is deemed to have been actively engaged on a regular, continuous and substantial basis in the business throughout those five years.

Where subparagraph 120.4(1.1)(b)(ii) applies, the individual's income from the property acquired by or on behalf of the individual as a consequence of the death of a person will be an excluded amount to the extent that the amount, if received by the deceased person, would have been derived from an excluded business because the deceased person was actively engaged on a regular, continuous and substantial basis in the business throughout the preceding five taxation years, or was deemed by that subparagraph to be actively engaged in the business.

Paragraph 120.4(1.1)(b) provides, inter alia, that a property must be acquired by or on behalf of the specified individual as a consequence of the death of another person. Whether property is acquired by or on behalf of the specified individual because of the death of another person is a question of fact and law that can only be resolved after considering all of the relevant facts and circumstances of a particular situation.

Paragraph 248(8)(a) provides, inter alia, that a transfer, distribution or acquisition of property made under a taxpayer's will is considered to be a transfer, distribution or acquisition of property made as a consequence of the death of the taxpayer.

Situation A

CRA answers to questions (a) and (b) of Situation A

First, for the purposes of this Situation, we have assumed that Child X is the sole beneficiary of the income and capital of Trust X.

Given that the Class E shares of the capital stock of Opco were acquired by Trust X pursuant to the terms of Mr. X's will, that acquisition is considered to be an acquisition made as a consequence of Mr. X's death by virtue of paragraph 248(8)(a). Since Child X is Trust X's sole beneficiary, Trust X's acquisition of the Class E shares of the capital stock of Opco was therefore made on behalf of Child X. Furthermore, upon the distribution of the capital by Trust X to Child X in the calendar year of turning 36 years old - as provided for in Mr. X's will - Child X will acquire, inter alia, the Class E shares of the capital stock of Opco. That acquisition will also be considered an acquisition of property made as a consequence of Mr. X's death. Consequently, the deeming rule in subparagraph 120.4(1.1)(b)(ii) will apply in respect of Child X. Child X will therefore be deemed to have been actively, regularly, continuously and substantially engaged in the business of Opco and Opco's business will be an excluded business for Child X. All dividends paid (or deemed to be paid) by Opco on the Class E shares of its capital stock and received (or deemed to be received) by Child X directly or indirectly through Trust X, will then be excluded amounts for Child X pursuant to subparagraph (e)(ii) of the definition of "excluded amount" in subsection 120.4(1).

Situation B

CRA response to the question from Situation B

The Class C shares of the capital stock of Opco held by the Trust were not acquired by the Trust on behalf of Child X as a consequence of the death of another person, as the Trust already held such shares at the time of Mr. X's death. Consequently, the deeming rule in subparagraph 120.4(1.1)(b)(ii) cannot apply and the business of Opco will not be an excluded business in respect of Child X. All dividends paid (or deemed to be paid) by Opco on the Class C shares of its capital stock and indirectly received (or deemed to be received) by Child X, through the Trust, will not be excluded amounts to Child X pursuant to subparagraph (e)(ii) of the definition of "excluded amount" in subsection 120.4(1).

Furthermore, upon the distribution of capital by the Trust to Child X in the calendar year of turning 36 - as provided for in Mr. X's will - Child X will acquire, inter alia, Class C shares of the capital stock of Opco. That acquisition will be considered to be an acquisition of property made as a consequence of Mr. X's death and from that time on, the conditions for the application of the deeming rule in subparagraph 120.4(1.1)(b)(ii) will be satisfied and Child X will be deemed to have been actively involved on a regular, continuous and substantial basis in the business of Opco. Opco's business will therefore be an excluded business in respect of Child X. Thus, from the time Child X holds Class C shares of the capital stock of Opco, the income from those shares will be an excluded amount to Child X within the meaning of subparagraph (e)(ii) of the definition of "excluded amount" in subsection 120.4(1).

Official Response

7 October 2021 APFF Roundtable Q. 18, 2021-0901091C6 - TOSI continuity rule for inherited property

Q.19 Ruling service fee remissions

The service fees charged by CRA in connection with an advance (including supplementary) income tax ruling (an "Advance Income Tax Ruling") as well as a pre-advance ruling consultation ("Pre-advance Consultation") are governed by the Service Fees Act, s. 7 of which provides for an obligation to refund a portion of the service fees charged ("Remission") when a performance standard is not met

a) How will this be done?

b) Will the fees applicable to an Advance Ruling and Advance Consultation be revised in the near future?

CRA Preliminary Response

19(a)

The objective of the Income Tax Rulings Directorate ("ITRD") is to issue an Advance Income Tax Ruling or to hold an Advance Consultation teleconference within an agreed-upon time frame.

The service standard for an Advance Ruling is to issue the ruling within 90 working days after the ITRD has received from the applicant all of the information listed in Appendix A - Advance Ruling Request Checklist of Information Circular IC70-6R11. The service standard for an Advance Ruling Consultation is to hold a teleconference within 15 business days of the date the ITRD confirms to the applicant that the advance ruling request meets the requirements of IC 70-6.

Where a preliminary analysis of the Advance Ruling/Advance Consultation request determines that the 90 and 15 business day service standards cannot be met, the ITRD will inform the applicant that the target service date will need to be adjusted. In such circumstances, a mutually agreed service target date will be established with the applicant in relation to the request.

The Remission will be made when the Advance Ruling/Preliminary Consultation is made/held after the service target date applicable to the request, in accordance with Appendix H - Remissions of Information Circular IC 70-6.

The amount of the Remission will be calculated on an incremental basis as a percentage discount on the rate applicable to the hours worked subsequent to the service target date, and then applied to reduce the amount billed to the requestor.

The Remission will be applicable, where required, to Advance Ruling and Pre-ruling Consultation requests received by the ITRD after April 1, 2021.

Further information on the application and calculation of the Remission can be found in Annex H - Rebates of Information Circular IC 70-6.

19(b)

The CRA has always charged for services related to the issuance of an Advance Ruling and the setting up of an Advance Consultation ("File"). The CRA is now proposing to amend the fee schedule applicable to a File to better reflect the costs associated with it.

When the CRA last updated the fee schedule in 2000, the fee for ITRD services was $100 per hour for the first 10 hours worked on a File, and $155 per hour for each subsequent hour worked on the File. As of 2019, those amounts are increased annually in accordance with the Consumer Price Index ("CPI") pursuant to section 17 of the Service Fees Act. As a result, the fee applicable to a File is currently $104.04 per hour for the first 10 hours and $161.26 per hour for each subsequent hour.

Over the next two years, the ITRD will change the fee for a File. From April 1, 2022, the rate will be $221.24 per hour worked on a File and will increase to $281.22 per hour from April 1, 2023. The new amounts payable in respect of a File will also be increased annually in line with the CPI.

The changes to the fee structure for services rendered by the ITRD were published in the Canada Gazette, Part II on July 21, 2021 (SOR /2021-173).

Official Response

7 October 2021 APFF Roundtable Q. 19, 2021-0901121C6 F - APFF – ITR Remissions

Q.20 Internal evaluation of CRA

Can CRA provide information on the results of the recent internal evaluation?

CRA Preliminary Response

The recent internal evaluation of the ITRD was undertaken to assess the extent to which its program is achieving its intended results and to identify options for improving the services it provides. During this process, the CRA's Audit, Evaluation and Risk Branch interviewed ITRD staff, representatives of the tax community, officers of similar programs in other jurisdictions, and users of ITRD services. Its report entitled "Evaluation - Income Tax Rulings Directorate" was released in June and contains two recommendations to better enable the ITRD to achieve its objectives.

The CRA would like to thank all those who responded to the evaluation team's requests for feedback. The results of the evaluation are an important source of information and will help to improve the ITRD's services.

The results of the evaluation showed that although users of the ITRD's services are generally satisfied with its staff and the quality of the interpretative positions issued, the speed with which those positions are issued is a concern. This is also a concern for the ITRD, as delays in responding to requests may lead some people not to use the ITRD's services. To address this, the ITRD is currently reviewing its service model and priorities to identify options to reduce the processing time for requests for advance tax rulings and technical interpretations. Further information will be provided as the process moves forward.

It was also recommended that the ITRD change its performance measurement practices to be more transparent and responsive to client expectations. In response to that recommendation, the ITRD will take steps to increase the visibility of the results of its advance ruling and interpretation services. To that end, the ITRD will use Information Circular IC70-6R to communicate the results of its services for this and future years. Thus, starting next year, that publication will provide information on the ITRD's current service offerings and the frequency with which the ITRD met its advance income tax ruling and technical interpretation targets for the previous year.

Similarly, the ITRD will reinstate the practice of sending post-consultation surveys after issuing an advance ruling or technical tax interpretation. That will allow for the monitoring of new service requirements. The ITRD plans to implement that practice next spring. However, it may be delayed if clients express a desire not to receive those surveys while they are still dealing with the impact of the pandemic on their work.

Official Response

7 October 2021 APFF Roundtable Q. 20, 2021-0910491C6 F - ITRD internal evaluation process

You are here

8 October 2021 APFF Roundtable

Q.1 24-month hold re a (s. 7(2) or EBP) trust holding the employer’s shares

CRA Preliminary Response

Official Response

Q.2 AMT recovery strategies

Scenario 2.1: Interspousal loan

Scenario 2.2 Loan from minor to parent

Scenario 2.3 Unreasonable salary

CRA Preliminary Response

General comments

2.1(a)

2.1(b)

2.1(c)

2.2

2.3

Official Response

Q.3 Business or property source of trust rental income

CRA Preliminary Response

Official Response

Q.4 Avoidance of CCPC status

CRA Preliminary Response

Official Response

Q.5 Whether Pt. IV and safe income exclusions can be doubled up

CRA Preliminary Response

Official Response

Q.6 Whether TOSI deductible from minimum tax

CRA Preliminary Response

6(a)

6(b)

6(c)

Official Response

Q.7 Meaning of financial dependence

CRA Preliminary Response

7(a)

7(b)

7(c)

Official Response

Q.8 Use of IT-426R cost recovery method where LP is the share vendor

CRA Preliminary Response

Official Response

Q.9 Pt. IV tax exclusion where the recipient on-pays an eligible dividend not generating a dividend refund

CRA Preliminary Response

Official Response

Q.10 Advance concurrence to excessive dividend elections

CRA Preliminary Response

10(a)

10(b)

Official Response

Q.11 Application of s. 98(3) where wind-up followed by s. 85(1) drop-down

CRA Preliminary Response

Official Response

Q.12 Characterization of 3rd-party rents for portion of manufacturing facility

CRA Preliminary Response

Q.13 Sale of a cottage held under an indivision agreement

CRA Preliminary Response

Assumptions

Our Comments

Q.14 Meaning of “any consideration received ... for the disposition” in s. 118.1(13)(c)

CRA Preliminary Response

Official Response

Q.15 Computing s. 40(2)(g) gain where prior vacant land holding

CRA Preliminary Response

Official Response

Q.16 Whether nominee must apply for s. 116 certificate/disclosure of nominee agreements

CRA Preliminary Response

16(a)

16(b)

16(c)

Official Response

Q.17 TOSI: (f)(ii) and (e)(i) of "excluded amount"

Situation A

Situation B

CRA Preliminary Response

Situation A

Situation B

CRA's response to question (a) of Situation B

CRA's response to question (b) of Situation B

Official Response

Q.18 S. 120.4(1.1)(b)(ii) post-death continuity rule