8 October 2021 APFF Financial Strategies and Instruments Roundtable
Email this ContentThis page contains our summaries of questions posed at the 8 October 2021 APFF Financial Strategies and Instruments 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 Mélanie Beaulieu and Nathalie Boyer).
We use our own titles, and footnotes are (depending on how routine they are) either excluded or moved to the body of the answer (but are included in our translations of the official responses). Links to the final responses released by CRA under its severed letter program are also provided.
The (regular) 7 October 2021 APFF Roundtable is provided on a separate page.
Q.1 Exclusions from s. 20(1)(bb)
CRA has indicated that s. 20(1)(bb) is to be interpreted restrictively as an exception to the general rule of the non-deductibility of capital expenditures.
- What is a "commission," and how is it determined that an advisor compensation payment constitutes a commission?
- Does CRA still maintain its position in 9017855, that where a fee is paid to the taxpayer’s securities dealer or investment advisor allowing the taxpayer to make a specified number of trades with no additional charge until the threshold was exceeded, the taxpayer must determine the fair market value ("FMV") of the advice, administration and management services received, and only the excess is considered commissions that are therefore not deductible under s. 20(1)(bb)?
- Does the principal business of a person or partnership carrying on a financial services business and providing insurance, investment and lending services include the provision of services in respect of the administration or management of shares or securities even if the provision of such services represent less than 50% of its total activities?
- The historical CRA position has been that fees paid to an investment dealer are not deductible under s. 20(1)(bb) since the principal business of an investment dealer is not advising as to the advisability of buying or selling shares or securities. Does this position reflect industry changes?
CRA Preliminary Response
1(a)
In computing the income from a business or property, commissions are not deductible pursuant to paragraph 20(1)(bb). Since the term "commission" is not defined in the Income Tax Act, reference must be made to the principles of interpretation in order to give it a definition that is consistent with the intention of Parliament in the context of paragraph 20(1)(bb).
In Canada Trustco Mortgages v. Canada, the Supreme Court of Canada described the general principles of statutory interpretation as follows:
The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.” [Emphasis added]
In Rio Tinto Alcan Inc. v. The Queen, the Tax Court of Canada and the Federal Court of Appeal interpreted the term "commissions" for the purposes of paragraph 20(1)(bb) as an amount calculated on a percentage basis. Although the comments of these two Courts were made in obiter dicta, it is our view that the courts would adopt the same interpretation if the question were put directly to them.
The fact that a commission is an amount calculated by reference to a percentage does not mean that any form of percentage-based remuneration satisfies that definition or that any form of remuneration determined otherwise than by reference to a percentage is deductible pursuant to paragraph 20(1)(bb).
For example, in the context of a discount brokerage, we understand that the clients generally receive services that allow them to trade on platforms themselves without necessarily receiving specific advice. According to our understanding, the amounts paid to discount brokerage firms would in fact be selling expenses, which should be added to the cost of the securities or deducted from the proceeds of disposition when the securities are sold, since they generally do not satisfy the conditions for the application of paragraph 20(1)(bb). In short, even if those fees were not considered commissions, because they were not expressed as a percentage, they would not be automatically deductible under paragraph 20(1)(bb).
1(b)
In Technical Interpretation 9017855, the CRA was also of the view that in order for an amount paid to a securities dealer to be deductible pursuant to paragraph 20(1)(bb), the principal business of the securities dealer should at a minimum include the provision of services in respect of the administration or management of securities. We were also of the view that it is a question of fact whether the principal business of an investment dealer includes the provision of services in respect of the administration or management of securities.
In such circumstances, it is the CRA's view, based on the Rio Tinto Alcan decisions, that it is not appropriate to determine the FMV of advisory, administrative or management services. We are also of the view that such fees would be fully deductible pursuant to paragraph 20(1)(bb) provided that they are reasonable in relation to the services received and that they are in respect of the administration or management of shares or securities.
1(c)
We are of the view that the term "includes" in clause 20(1)(bb)(i)(B) allows for the determination of a person's principal business to be based on the other services offered by the person. While services in respect of the administration or management of shares or securities must be part of the person's principal business, other activities may also be carried on in the same business.
Accordingly, the principal business of a person carrying on a financial services business and offering insurance, investment and lending services is, inter alia, providing services in respect of the administration or management of shares or securities even if the activities relating to those investment services alone represent, by themselves, less than 50% of the person's total activities.
We are also of the view that a person licensed by one of the Canadian Securities Administrators to advise on the advisability of buying or selling certain shares or securities or to provide services in respect of the administration or management of shares or securities may be presumed to satisfy the "principal business" condition.
1(d)
Whether the principal business of a securities dealer is to advise on the advisability of purchasing or selling shares or securities is a question of fact that must be analyzed in light of the circumstances of each situation.
However, it is our view that it is reasonable to assume that the principal business of a person licensed as a securities dealer is to advise on the advisability of purchasing or selling shares or securities or to provide services in respect of the administration or management of shares or securities.
Official Response
Q.2 Gift of part interest in policy to charity
An individual resident in Quebec owns a policy on that individual’s life. The coverage is $1 million, the cash surrender value (“CSV”) is $250,000 and the adjusted cost basis ("ACB") of the policy is $150,000. The individual wishes to donate half of the individual’s interest in the policy to a registered charity, so that the charity would be entitled to $500,000 of coverage with a cash surrender value of $125,000.
Is there a required inclusion under s. 148(7) of a policy gain of $50,000 (50% of the CSV minus 50% of the ACB)?
If, instead, the individual only disposed of one-half of the coverage, would there be a policy gain?
CRA Preliminary Response
The two situations described in the statement of the question refer to the disposition by an individual of a portion of the individual’s interest in a life insurance policy to a registered charity in order to either share the insurance coverage and cash surrender value of the policy equally with the donee charity or to share only the coverage with the charity. It is not explained, however, how the individual would dispose of part of the individual’s interest.
Although there is no reference in the question to a claim for a charitable donation tax credit by the individual, it seems reasonable to believe that the described transactions are contemplated in a context where it is the individual's intention that the assignment of a portion of the individual’s interest in a life insurance policy would be recognized as a charitable donation.
In order for an individual's gift of a life insurance policy to a registered charity to qualify for a donation tax credit, the policy must generally have been fully assigned to the donee and the donee must have been listed as a beneficiary of the policy.
In that context, the donor will wish to ensure that a new policy is not created and that the portion of the policy the individual wishes to donate has been fully assigned in order to qualify for a donation tax credit. The donor will also wish to ensure that the value of any advantage received in connection with the gift can be verified so that an amount can be recognized as a qualifying amount of a gift.
It is therefore not possible to infer how the donor will proceed and what precise terms would apply to such an assignment so that it would satisfy those conditions and be legally valid. It is also very difficult to infer what rights would actually be assigned and what fraction of an interest in the policy might represent those rights.
In this context, it is impossible for us to comment on the application of section 148 to such an assignment. Indeed, tax law is an accessory right whose effects are based on the rights and obligations arising from the applicable private law. Insofar as a life insurance policy is a contract that is composed of a set of rights and obligations, which are linked, it would be necessary to determine, inter alia, whether the gift of a portion of the policy can be made without resulting, for the purposes of the applicable private law, in a disposition of the entire interest in the policy rather than just a portion of it. On the other hand, where a gift to a person of a portion of an interest in a policy is intended to establish a type of arrangement commonly referred to as a life insurance interest sharing strategy (and assuming that such a sharing is possible without resulting in a disposition of the entire interest in the policy), in addition, it would be necessary to determine whether it is possible to determine what fraction of the whole represents the portion assigned to the donee and also whether, as a result of the assignment, the donor and donee would be joint policyholders or, rather, each would own a separate policy.
The determination of the tax consequences of such transactions is a question of fact and law that can only be resolved after a full review of all the relevant legal documents and facts surrounding each situation. A review of the law applicable to these transactions in terms of insurance and contract law should also be undertaken in order to remove any uncertainty as to the validity and effect of the transactions contemplated.
The tax consequences of the two situations described could therefore only be determined in the context of an audit or an advance ruling request (submitted in accordance with the procedures set out in Information Circular IC 70-6R11) in respect of proposed transactions.
Official Response
7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 2, 2021-0895981C6 F - Don d’une partie d’un intérêt dans une police d’assurance-vie en faveur d’un organisme de bienfaisance enregistré
Q.3 Superficial loss rule and spousal RRSP
Mr. A sold 1,000 shares of a listed company in a non-registered account on September 1, 2021 at a capital loss of $20,000. The RRSP of his spouse, Ms. B (who dealt with a different brokerage firm) acquired 1,200 shares of the same company on September 7, 2021 After Mr. A subsequently learned of this, Mr. A’s advisor suggested that, to avoid a superficial loss to Mr. A, Ms. B’s RRSP sell the shares no later than September 28, 2021 (due to the 2 business day delay for settlement).
Does CRA agree that such sale would avoid the superficial loss rule, and would the answer change if the shares so sold by the RRSP were reacquired by it on October 1, 2021?
CRA Preliminary Response
3(a)
Subparagraph 40(2)(g)(i) provides that a taxpayer's loss from the disposition of property is nil to the extent that it is a "superficial loss.
As noted in the statement of the question, the concept of "superficial loss" is defined in section 54 as the taxpayer’s loss from the disposition of a particular property where
(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and
(b) at the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,
Consequently, subparagraph 40(2)(g)(i) does not apply in the present situation since Mr. A's loss is not a "superficial loss" as defined in section 54. Indeed, the RRSP trust under which Ms. B is the annuitant (a majority interest beneficiary) is a person affiliated with Mr. A who acquired a substituted property to Mr. A's property. However, the RRSP trust does not own the substituted property or have the right to acquire it at the end of the period provided for in paragraph (a) of the definition of "superficial loss" in section 54.
3(b)
The CRA's conclusions would be different in the situation where the trust governed by Ms. B's RRSP reacquired, on October 1, 2021, the shares that it disposed of on September 28, 2021. In that situation, subparagraph 40(2)(g)(i) would apply in respect of Mr. A, since the two conditions set out in paragraphs (a) and (b) of the definition of "superficial loss" in section 54 would be satisfied.
By reacquiring the shares on October 1, 2021, the trust governed by Ms. B's RRSP, a person affiliated with Mr. A, would have acquired a substituted property during the period ending 30 days after Mr. A disposed of the shares (i.e., on September 1, 2021) and at the end of that period would still own them. The calculation of the period must take into account subsection 27(5) of the Interpretation Act, which specifies that where a time is expressed to begin after or to be from a specified day, the time does not include that day. In the situation presented, since the day of disposition would be September 1, 2021 and that day does not count, the last day of the period ending 30 days after that disposition would fall on October 1, 2021.
Consequently, in this situation, a person affiliated with Mr. A would have acquired a substituted property during the 30-day period after that disposition and would still own it at the end of that period. In these circumstances, subparagraph 40(2)(g)(i) would apply to Mr. A, with the result that his capital loss would be deemed to be nil.
Assuming that Ms. B's RRSP trust had instead reacquired the shares on October 2, 2021, immediately after the period that ends 30 days after Mr. A's disposition of the shares, subparagraph 40(2)(g)(i) would not apply in that situation. Indeed, the two conditions set out in paragraphs (a) and (b) of the definition of "superficial loss" in section 54 would not be satisfied in that situation.
However, the Income Tax Act contains a general anti-avoidance rule. Nevertheless, the CRA does not comment on its potential application in the absence of an analysis of all the facts and circumstances relating to a particular situation.
Official Response
Q.4 Gift deduction where corporate share sale and business income in same year
Where a corporation realizes both business income and a capital gain in the year in which it makes a gift, the mechanism for calculating the corporation's tax liability for that year under s. 123.4 results in the gift not reducing the tax payable on the taxable capital gain, which is taxed at a higher rate. Therefore, where the corporation makes a gift following the sale of its business, a sale at the end of the year appears to be disadvantageous compared to the sale occurring at the beginning of the year (at which point, the corporation will have earned little or no business for the year).
Could CRA allow the donation deduction from the taxable capital gain realized on the sale of a business where the donation occurs in the same year as the sale and business income is also realized in the same year?
CRA Preliminary Response
Pursuant to paragraph 110.1(1)(a), a corporation may be entitled to a charitable donations deduction in computing taxable income for a taxation year where it makes a gift to a qualified donee.
A corporation's taxable income is generally subject to tax at the rate determined under subsection 123(1).
In addition, subsection 123.4(2) provides that a corporation may deduct from its tax otherwise payable under Part I for a taxation year the product obtained by multiplying its general rate reduction percentage for the year by its “full rate taxable income” for the year as defined in subsection 123.4(1).
Where a corporation is a CCPC, full rate taxable income is determined under paragraph (b) of that definition in subsection 123.4(1). For such a corporation, full rate taxable income is its taxable income subject to tax under subsection 123(1) reduced by, inter alia, its aggregate investment income as defined in subsection 129(4).
Aggregate investment income includes, inter alia, the eligible portion of taxable capital gains.
There is no provision in the Income Tax Act as currently drafted that allows a charitable deduction to be taken into account in computing a corporation's aggregate investment income. The CRA is responsible for the administration of the Income Tax Act as passed by Parliament and cannot go beyond the provisions included therein.
Official Response
Q.5 HBP where living separate and apart
Mr. X and Ms. Y, who had been common-law spouses for six years while living in the residence owned by Mr. X, decided to separate, but continued to both live in the family home although they consider themselves to have separated on June 1, 2021. They slept in separate rooms, had no common social activities, did not present themselves as a couple. Ms. Y wishes to withdraw $35,000 from her RRSPs on September 15, 2021 as an HBP withdrawal in order to purchase a new property. on which she has made an accepted offer to purchase.
(a) CRA has a recognized, e.g., in 2016-0674821C6, that it is possible for two individuals to live in the same household while separated. Will the conditions in s. 146.01(2.1)(a)(i) be met so as to allow Ms. Y to make an HBP withdrawal from her RRSP, while living separate and apart from Mr. X in the same house, if all the other HBP conditions are met?
(b) If Mr. X and Ms. Y, were instead married but again living separate and apart, while living in the same house as described above, would the answer change?
(c) and (d) Would the answers to the above change if Mr. X and Ms. Y were instead joint owners of the family home, including the situation where Ms. Y used the funds withdrawn by her to purchase Mr. X's undivided share of the family home?
CRA Preliminary Response
An individual who wishes to participate in an HBP must satisfy the conditions set out in the definition "regular eligible amount" in subsection 146.01(1).
One of those conditions, set out in paragraph (e) of the definition of "regular eligible amount" in subsection 146.01(1), is that the individual did not, at the time of the withdrawal from the individual's RRSP, have an owner-occupied home in the period that began at the beginning of the fourth preceding calendar year that ended before the date of withdrawal, and that ended on the 31st day before the date of withdrawal.
Another of those conditions, set out in paragraph (f) of the same definition, is that the individual's spouse or common-law partner did not, during the same period, have an owner-occupied home that was inhabited by the individual during their marriage or common-law partnership. The CRA is of the view that if the individual does not have a spouse or common-law partner at the time of the withdrawal from the individual's RRSP, that condition does not apply.
The concept of "common-law partner" is defined in subsection 248(1). This definition deems persons who at any time are cohabiting in a conjugal relationship to be so living at a particular time after that time unless they were living separate and apart at the particular time for a period of at least 90 days that includes the particular time because of a breakdown of their conjugal relationship. Once that 90-day period has elapsed, the effective date of the change in family status is the date on which the two persons began to live apart. For that purpose, the CRA's long-standing position is that two individuals can live separate and apart while remaining in the same household. That being the case, the question of whether two individuals are living separate and apart for the purposes of the Income Tax Act is a question of fact that can only be resolved after a full review of all the facts, actions, circumstances and documentation relevant to the particular situation.
In the situation described, if at the relevant time, on the facts, Mr. X and Ms. Y had been living separate and apart because of a breakdown of their conjugal relationship for at least 90 days, they would no longer be common-law partners for the purposes of the Income Tax Act from the date they began living separate and apart. If, therefore, at the time of the withdrawal of an amount from her RRSP on September 15, 2021, Ms. Y did not have a spouse or common-law partner, the condition in paragraph (f) of the definition of "regular eligible amount" in subsection 146.01(1) would not apply. In addition, since she would not have been an owner-occupant of a home during the period beginning January 1, 2017 and ending 31 days before the date of the withdrawal on September 15, 2021, the condition set out in paragraph (e) of the definition "regular eligible amount" in subsection 146.01(1) would be satisfied. Consequently, if the other conditions set out in that definition were satisfied, Ms. Y would be able to participate in the HBP, without regard to the rules in subsection 146.01(2.1).
5(b)
The Income Tax Act does not define the term spouse. In Quebec, it is therefore necessary to rely on the civil law. Under civil law, spouses are persons who are united by marriage. Consequently, it is our view that for the purposes of the Income Tax Act, persons connected by marriage remain spouses until the marriage ties are legally dissolved. According to Article 516 of the Civil Code of Québec, marriage is dissolved by the death of one of the spouses or by divorce. In the situation described, assuming that Mr. X and Ms. Y were married but separated, but not divorced, Ms. Y would have a spouse when she made a withdrawal from her RRSP on September 15, 2021. In the absence of subsection 146.01(2.1), paragraph (f) of the definition of "regular eligible amount" in subsection 146.01(1) would normally prevent Ms. Y from participating in the HBP.
Paragraph 146.01(2.1)(a), however, provides a deeming rule that deems an individual and the individual's spouse or common-law partner not to own a home as owner-occupants during a period that ends before a particular time for the purposes of the definition "regular eligible amount" in subsection 146.01(1) if certain conditions are satisfied.
Among those conditions, under subparagraph 146.01(2.1)(a)(i), an individual, and a spouse or common-law partner of the individual, must, at the particular time, be as follows:
(A) is living separate and apart … because of a breakdown of their marriage or common-law partnership,
(B) has been living separate and apart … for a period of at least 90 days, and
(C) began living separate and apart … in the calendar year that includes the particular time or any time in the four preceding calendar years.
In addition, subparagraph 146.01(2.1)(a)(ii) requires that the individual not have a spouse or common-law partner, other than a spouse or common-law partner referred to in subparagraph 146.01(2.1)(a)(i), who would otherwise be precluded from having a "regular eligible amount" because of the application of paragraph (f) of the definition of "regular eligible amount" in subsection 146.01(1).
Subparagraph 146.01(2.1)(a)(iii) provides an additional condition where the individual who wishes to participate in the HBP has an owner-occupied home at the particular time. That subparagraph does not apply where the individual does not have an owner-occupied home at the particular time.
The CRA's long-standing position that it is possible for two individuals to live separate and apart while residing in the same residence is also applicable for the purposes of subparagraph 146.01(2.1)(a)(i). That determination remains a question of fact.
In the situation described, if, according to the facts, Mr. X and Ms. Y had been living separate and apart due to a breakdown in their relationship since June 1, 2021, the conditions set out in subparagraphs 146.01(2.1)(a)(i) and 146.01(2.1)(a)(ii) could be satisfied at the time of the withdrawal on September 15, 2021, and the condition in subparagraph 146.01(2.1)(a)(iii) would not be applicable. Consequently, Mr. X and Ms. Y would be deemed not to have an owner-occupied home during the relevant period for the purposes of the definition of "regular eligible amount" in subsection 146.01(1) under the deeming rule in paragraph 146.01(2.1)(a). That would allow Ms. Y to satisfy the condition set out in paragraph (f) of the definition of "regular eligible amount" in subsection 146.01(1). Consequently, if the other conditions set out in that definition were satisfied, Ms. Y would be able to participate in the HBP by virtue of the rules set out in subsection 146.01(2.1).
5(c) and (d)
On the assumption that Mr. X and Mrs. Y were co-owners of the family home, paragraph (e) of the definition of "regular eligible amount" in subsection 146.01(1) would usually prevent Mrs. Y from participating in the HBP, subject to the provisions of subsection 146.01(2.1), regardless of whether Mr. X and Mrs. Y were common-law spouses or married during their life together.
Where the individual who wishes to participate in the HBP is an owner-occupant at the particular time, the condition in subparagraph 146.01(2.1)(a)(iii) must be satisfied, in addition to the conditions in subparagraphs 146.01(2.1)(a)(i) and (ii), as described above, in order for the deeming rule in paragraph 146.01(2.1)(a) to apply. That condition may be satisfied in either of the following cases:
(A) the home owned by the individual as an owner-occupant at the particular time is not the qualifying home in respect of which the individual wishes to participate in the HBP and the taxpayer will dispose of the home no later than the end of the second calendar year after the calendar year that includes the particular time; or
(B) the home owned by the individual as an owner-occupant is the qualifying home in respect of which the individual wishes to participate in the HBP and the individual acquires the spouse's or common-law partner's right in the home.
In the situation described, if Mr. X and Ms. Y were co-owners of the family residence, Ms. Y wished to participate in the HBP to acquire a new residence and, according to the facts, Mr. X and Ms. Y had been living separate and apart due to a breakdown in their relationship since June 1, 2021, the conditions set out in clauses 146.01(2.1)(a)(i), (ii) and (iii) could be satisfied, provided that Ms. Y disposed of her rights in the family home within the time limit set out in clause 146.01(2.1)(a)(iii)(A). This would allow Ms. Y to satisfy the condition set out in paragraph (e) of the definition of "regular eligible amount" in subsection 146.01(1).
Similarly, if Mr. X and Ms. Y were co-owners of the family home, and Ms. Y wished to participate in the HBP in acquiring Mr. X's rights as co-owner of the family home so as to become the sole owner, and Mr. X and Ms. Y had been living separate and apart due to a breakdown in their relationship since June 1, 2021, the conditions set out in subparagraphs 146.01(2.1)(a)(i), (ii), and (iii) could be satisfied, allowing Ms. Y to satisfy the condition set out in paragraph (e) of the definition "regular eligible amount" in subsection 146.01(1). In such a situation, paragraph 146.01(2.1)(b) would apply so that Ms. Y would be deemed, for the purposes of paragraphs (c) and (d) of the definition of "regular eligible amount", to have acquired a qualifying home on the day on which she acquired Mr. X's interest in the family home.
As for the condition set out in paragraph (f) of the same definition, the comments set out in response to questions 5(a) or 5(b) would apply, depending on whether Mr. X and Ms. Y were common-law partners or married during their life together.
Consequently, in either of the situations described in questions 5(c) and 5(d), if Mr. X and Ms. Y were, as a factual matter, separated due to a breakdown in their relationship from June 1, 2021, Ms. X would be eligible to participate in the HBP if the other conditions set out in the definition of "regular eligible amount" in subsection 146.01(1) were satisfied.
Official Response
Q.6 Extended estate administration and s. 104(18)
The will of Mr. X, a resident of Quebec, left all of his property in equal shares, to his two children, aged 10 and 15. His will included an extended administration clause that resulted in an extension of the executor’s duties and authority beyond the normal end of the administration of the estate, until all the legacies were delivered in accordance with the terms of the will (which was directed to occur on the children attaining 25). The will provided that, in the meantime, all income generated on each child’s share was to be used in the executor’s discretion for the support or maintenance of that child, with discretion to encroach on capital in the child’s favour.
It would appear that - given that this extended-administration clause specifically sets out each child's share of the estate, that each child has a vested right to the income earned on the child’s share, that the will does not give the executor the discretion to determine each child's share of the income or capital, but only allows the executor to determine the time of payment prior to the age of final distribution of the capital - the conditions of s. 104(18) I.T.A. would be met, thereby allowing the income earned on their respective share of the estate to be taxed on each child’s personal income tax return while under 21, even though there would be no income distribution to them. Does CRA agree?
CRA Preliminary Response
The term "trust" is defined in subsection 248(1). It has the same meaning as in subsection 104(1) and, unless the context otherwise requires, includes an estate. As defined in subsection 248(1), subsection 104(1) provides that a reference in the Income Tax Act to a trust or estate is to be read to include a reference to the trustee, executor, administrator, liquidator, heir or other legal representative having ownership or control of the trust property (which includes an estate).
In the case of an estate, it is generally the CRA's view that provided there is an estate under the applicable private law, the estate is a trust for purposes of the Income Tax Act.
In the situation described, the characterization of the arrangement created under the extended administration clause in the will for purposes of the Income Tax Act is therefore dependent on its characterization under civil law. Thus, if for civil law purposes this arrangement effectively extends the administration of the estate, it will be considered a trust for purposes of the Income Tax Act. Such a determination is a question of fact and law that can only be determined by the CRA in the context of an audit, or an advance ruling request (submitted in accordance with IC 70-6R11) in respect of proposed transactions.
However, we are able to provide the following general comments, assuming that the extended administration clause included in the will in the situation described results in an extension of the executor's duties and authority beyond the "normal" end of the administration of the estate, until the legacies are transferred in accordance with the terms of the will. Under this assumption, a clause providing for an extension of the administration, and not an autonomous non-trust arrangement for administration, would have the effect of continuing the existence of the estate which, therefore, will still be considered a trust for purposes of the Income Tax Act.
Our comments are, however, subject to a review of the provisions of the will as a whole and the applicable law and may not be fully applicable in any particular situation.
Subsection 104(18) deems income of a trust resident in Canada to have become payable in a taxation year to a beneficiary who is under 21 years of age at the end of the year where all of the conditions set out in the subsection are satisfied, even though the income was not actually paid to the beneficiary in the year and the beneficiary was not entitled in the year to enforce its payment.
In order for subsection 104(18) to apply, the entitlement of the beneficiary who is under 21 years of age to the beneficiary’s share of the unpaid income must be vested otherwise than because of the exercise by any person of, or the failure of any person to exercise, any discretionary power, and the right to which must not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years). In the case of an estate, the conditions of subsection 104(18) may be satisfied even if the will contains provisions giving the executor discretion as to the timing of the payment of income or capital to a beneficiary under 21 years of age, provided that the executor has no discretion as to the determination of the amount of income to which such a beneficiary is entitled.
In the situation described, it appears that the executor would have discretion as to the timing of the payment of income or capital to a beneficiary under the age of 21, or to a third party for the benefit of such a beneficiary, but would have no discretion as to the determination of the amount of income to which such beneficiary is entitled.
Consequently, subject to a consideration of the provisions of the will as a whole and the applicable law, it is possible that the conditions of subsection 104(18) could be satisfied in respect of the child or children of the deceased who are beneficiaries of the estate and who have not attained 21 years of age at the end of a particular taxation year. The application of subsection 104(18) would, for any taxation year to which that subsection applies, cause the portion of the amount that would, but for subsections 104(6) and 104(12), be income of the estate for the year to be deemed for the purposes of subsections 104(6) and 104(13) to have become payable in the year to the relevant beneficiary or beneficiaries to whom the entitlement to that portion would have accrued.
Official Response
Q.7 S. 7(1.3) and funding option exercise through short sale
The Employee held a stock option referred to in s. 7(1) (the “Option”) on the shares of the individual’s employer. Prior to exercising the option, the Employee made a short sale of identical securities borrowed from a third party (the "Lender") and used the short sale proceeds to fund the Option exercise – and then used the shares acquired on exercise to cover the short position.
The Employee had previously made an election under s. 39(4). At the time of the short sale, the Employee held other identical shares of the Employer that had been acquired in prior years. Other than the above transactions, Employee held no other securities of Employer during the period beginning on the day of the short sale and ending on the day the shares were delivered to Lender.
Could s. 7(1.31) and, consequently, s. 47(3), apply where the Employee delivered the shares acquired on exercise to the Lender within 30 days following the short sale?
CRA Preliminary Response
The situation that you have submitted does not allow us to identify with certainty the legal relationships between the various parties involved and, consequently, the tax consequences related to this series of transactions. A detailed analysis of all the contracts and agreements would be necessary in order to definitively determine the tax consequences applicable to a particular situation. However, we are able to provide the following general comments, which may not be fully applicable in a particular situation.
Subsection 7(1.31) deals with the situation where a taxpayer acquires a security under an agreement referred to in subsection 7(1) ("Newly-acquired Security"). and the taxpayer disposes of a security identical to the Newly-acquired Security no later than 30 days after the acquisition of the Newly-acquired Security. Where all of the conditions of subsection 7(1.31) are satisfied, that subsection deems the Newly-acquired Security to be the security that was disposed of by the taxpayer. In summary, subsection 7(1.31) specifies the order of disposition of securities.
For the purposes of the average cost rule for identical properties rule in subsection 47(1), subsection 47(3) indicates, inter alia, that a security to which subsection 7(1.31) applies is deemed not to be identical to any other security acquired by the taxpayer. Consequently, the adjusted cost base ("ACB") of each of the securities to which subsection 7(1.31) applies will be calculated without reference to the ACB of any other security held by the taxpayer.
In order to determine whether subsection 7(1.31) may apply in the context of a short sale, it is necessary to understand certain tax consequences generally applicable to a short sale.
The CRA's position is that a short seller generally acquires the securities when it borrows shares for the purpose of a short sale, whether or not under a "securities lending arrangement" (as defined in subsection 260(1)). The acquisition cost to the short seller of the borrowed securities generally includes the FMV of the securities at the time the short lender transfers them to the short seller. On the short sale, it is the borrowed securities that the short seller is considered to have disposed of.
Where the short seller subsequently acquires identical securities and delivers them to the lender to cover its short position, it is the identical securities so acquired that the short seller is considered to have disposed of.
Thus, the CRA is of the view that a short seller generally makes two dispositions of securities in a short sale. Both dispositions must therefore be considered.
Generally, as stated in paragraph 18 of Interpretation Bulletin IT-479R, gains or losses on short sales of securities are considered to be on income account. However, whether the gain or loss on a particular transaction is to be taxed as income or as a capital gain or loss is a question of fact which can only be resolved after a full examination of all the facts relating to a particular situation. On the other hand, subject to subsection 39(5), it is possible that a taxpayer may be able to make an election under subsection 39(4) in respect of Canadian securities (as defined in subsection 39(6)) sold short. Indeed, for the purposes of the subsection 39(4) election, a Canadian security also includes a security described in subsection 39(6) that is sold short.
Where, in a taxation year for which an election under subsection 39(4) applies, a taxpayer makes a short sale, the two dispositions of securities (both the one that occurs at the time of the short sale and the one that occurs subsequently when the borrower delivers securities to the lender to cover its short position) are deemed to be dispositions of capital property to the short seller.
In the situation described, we are of the view that the Employee makes two dispositions that would be deemed to be dispositions of capital property. For purposes of calculating the capital gain or loss, if any, arising from these two dispositions, it would be necessary not only to determine the ACB of the Newly-acquired Security (the employer's security acquired pursuant to the exercise of the Option), which the Employee will dispose of by delivering it to the Lender, but also to determine the ACB of the security acquired by the Employee at the time of the borrowing and sold in the market on the short sale.
With respect to the first disposition, that of the security acquired on the borrowing, subsection 7(1.31) would not apply since that security would not have been acquired pursuant to an agreement referred to in subsection 7(1). Consequently, the average cost of identical properties rule in subsection 47(1) would apply to determine the ACB of the security acquired on the borrowing.
However, with respect to the second disposition, that of the Newly-acquired Security, subsection 7(1.31) could apply, provided that the Newly-acquired Security was delivered to the Lender by the borrower within the 30-day period following the day on which the Option was exercised and that the other conditions of subsection 7(1.31) were satisfied. If this were the case, the average cost of identical properties rule in subsection 47(1) would not apply to determine the ACB of the Newly-acquired Security pursuant to subsection 47(3).
Official Response
Q.8 Pipeline where sale to existing corporation rather than Newco
In order to implement pipeline planning, the estate of an individual ("Estate") generally incorporates a new corporation ("Newco") to which it sells shares of a private corporation ("Target"), with or without a tax rollover, in consideration for shares of Newco (the "Shares") or a note issued by Newco ("Note").
In accordance with CRA rulings, Newco will remain a separate legal entity for a period of at least one year before being merged with Target to form an amalgamated entity ("Amalco"). The assets of Amalco will then gradually be used to redeem the Shares or Note.
Assuming that a taxpayer's proposed transactions are similar to those described above, does CRA have concerns with the Estate selling the shares of the capital stock of Target to an existing corporation in which it does not hold any shares (the "Existing Corporation") in order to implement such a "Pipeline Transaction," if heirs of the deceased own some or all or none of the shares of Existing Corporation?
CRA Preliminary Response
While the CRA has considered the application of section 84.1 and subsection 84(2) in the context of various advance ruling requests involving the implementation of Pipeline Planning, it has never established formal requirements applicable to this type of post-mortem planning. Rather, it has recognized that the manner in which proposed transactions are structured may have an impact on the application of subsection 84(2) to proposed transactions. The CRA will therefore consider the potential application of section 84.1, subsection 84(2). or subsection 245(2), among other provisions, to Pipeline Planning on a case-by-case basis after conducting a full review of all the facts and circumstances relating to a particular situation.
With respect to the three scenarios described in the statement of the issue, the transfer of the shares held by the Estate in the capital stock of Target to the Existing Corporation rather than to Newco does not appear to raise any immediate concerns with respect to the application of subsection 84(2). However, it is still necessary to consider the application of section 84.1, subsection 245(2), as well as other relevant provisions, to the proposed transactions described in the request for an advance ruling.
In general, section 84.1 will only apply if the Estate is not dealing at arm's length with Existing Corporation at the time of the transfer of the shares of the capital stock of Target (the "Transfer") and Target and Existing Corporation are connected within the meaning of subsection 186(4) immediately after the Transfer. In addition, the tax consequences under paragraphs 84.1(1)(a) and 84.1(1)(b) will apply only if the shares of the capital stock of Target had an increase in value prior to 1971 or a capital gains deduction was claimed by the individual or a person not dealing at arm's length with the individual in connection with a previous disposition of the shares of the capital stock of Target. In such circumstances, the amount of the increase in the ACB of the Target shares held by the Estate as a result of the application of paragraph 70(5)(a) (the "Increased ACB") will be reduced, as applicable, to the extent of the amounts provided for in subparagraphs 84.1(2)(a), 84.1(2)(a.1)(i) and 84.1(2)(a.1)(ii).
The Estate should generally be able to monetize the modified Increased ACB of Target's capital stock (the "Hard ACB") without being subject to section 84.1 and subsection 245(2).
The application of subsection 245(2) could be considered if the Pipeline Planning is structured to avoid the application of section 84.1 to the transfer of shares of the capital stock of Target to Existing Corporation contrary to the legislative intent of that provision. In addition, the application of subsection 245(2) could be considered if the Pipeline Plan results in an abuse of, or attempts to circumvent, one or more other provisions of the Income Tax Act.
Official Response
Q.9 Computing undeducted RRSP premiums
The the amount of undeducted RRSP premiums is reduced by J in the formula in s. 204.2(1.2). Paragraph (a) of J provides that taxable withdrawals in the year from an RRSP, a registered retirement income fund ("RRIF"), a specified pension plan or a pooled registered pension plan ("PRPP") reduce the individual's undeducted premiums. Thus, these withdrawals reduce the amount of the "cumulative excess amount in respect of RRSPs" as defined in s. 204.2(1.1).
(a) Do taxable RRIF withdrawals made by the individual in a particular month, that were not re-contributed to the RRSP using the s. 60(l) deduction, reduce the amount of "undeducted RRSP premiums" of the individual and, therefore, the "cumulative excess amount in respect of RRSPs."
(b) Are taxable withdrawals from a life income fund ("LIF") also covered by paragraph (a) of the description of J as taxable withdrawals from a RRIF?
(c) Would the same apply to taxable withdrawals from a Locked-In Retirement Account ("LIRA") or other locked-in RRSP, where such withdrawals are permitted by and made in accordance with the applicable pension legislation (federal or provincial)?
CRA Preliminary Response
9(a)
By virtue of subsection 204.1(2.1), an individual who, at the end of a month, has a cumulative excess amount in respect of RRSPs must, in respect of that month, pay a tax under Part X.1, equal to 1% of that cumulative excess amount. The definition "cumulative excess amount in respect of RRSPs" is found in subsection 204.2(1.1) and, at any time in a taxation year, is the amount, if any, by which the amount of the individual’s undeducted RRSP premiums at that time exceeds the amount determined under paragraph 204.2(1.1)(b). In general terms, that calculation involves the addition of several items, including "unused RRSP deduction room" as defined in subsection 248(1) at the end of the preceding taxation year and the contribution room for the year [f.n. The term "contribution room" refers to letter B in the algebraic formula for the definition of "unused RRSP deduction room" and the definition of "RRSP deduction limit". That letter also represents letter B in the calculation of the cumulative excess amount in respect of RRSPs in paragraph 204.2(1.1)(b).], plus an amount of $2,000.
The amount of "undeducted RRSP premiums" paid by an individual at any time, for the purpose of calculating the cumulative excess amount in respect of the RRSPs, is determined pursuant to the formula in subsection 204.2(1.2):
H+I-J.
The description of J in that definition, which reduces the amount of undeducted RRSP premiums paid by an individual at a particular time, is the amount, if any, by which the total of all amounts received by the individual in the year and before that time out of or under, inter alia, an RRSP or RRIF and included in computing the individual’s income for the year exceeds the amount deducted under paragraph 60(l) in computing the individual’s income for the year.
Since the tax under subsection 204.1(2.1) is calculated monthly, at the end of the month, it is our view that the particular time for computing the "cumulative excess amount in respect of RRSPs" under subsection 204.2(1.1) and of the "undeducted RRSP premiums" under subsection 204.2(1.2) is at the end of each month. Consequently, where an individual has a cumulative excess amount in respect of RRSPs, any amount withdrawn by the individual from a RRIF that is included in computing the individual's income under subsection 146.3(5) and paragraph 56(1)(t) without otherwise being deducted by the individual under paragraph 60(l) reduces the amount of undeducted RRSP premiums under subsection 204.2(1.2), thereby reducing the cumulative excess amount in respect of RRSPs for months ending after the date of withdrawal.
Finally, it should be noted that under subsection 204.3(1), an individual who is required to pay the 1% tax under subsection 204(2.1) must file a T1-OVP return no later than 90 days after the end of the taxation year. If an individual makes a withdrawal that results in the elimination of the individual's cumulative excess amount in respect of RRSPs, no tax under subsection 204.1(2.1) will be payable for any month ending after the withdrawal. However, the individual must still file Form T1-OVP and pay tax for the months in which the taxpayer had a cumulative excess amount in respect of RRSPs. Subsection 204.3(2) provides that subsection 162(1) applies. Consequently, failure to file the T1-OVP return may result in a penalty of 5% of the tax payable, plus 1% of the outstanding balance for each full month that the return is late, to a maximum of 12 months.
9(b), (c)
LIRA and LIF have no significance for purposes of the Income Tax Act. As stated in Information Circular 78-18R6, LIRAs and LIFs are arrangements that meet the locking-in requirements under pension standards legislation. For the purposes of the Income Tax Act, a LIRA is an arrangement that meets the requirements for an RRSP and a LIF meets the requirements for a RRIF. Consequently, for purposes of the Income Tax Act, a LIRA is simply an RRSP and a LIF is a RRIF. Therefore, the comments set out in response to question 9(a) would also apply to a LIRA or LIF, with the necessary adaptations in the case of a LIRA.
Official Response
Q.10 Whether accrued income on segregated fund is rights or things
An individual owns a segregated fund policy in a non-registered account with a life insurance company, and is the annuitant under the policy. The individual’s spouse is the successor annuitant, if alive at the individual’s death. The segregated fund policy was acquired on January 3 of the calendar year. The individual dies on December 1 of the same year, and the surviving spouse becomes the owner. At the very end of the calendar year, the life insurance company allocates the income (interest, dividends, capital gains, etc.) from the segregated fund to the policyholders based on the number of days in that calendar year that each held notional units of the segregated fund.
Do the income allocations not yet received by the taxpayer on the date of death and appearing on the T3 slips (covering 11 months in this example) constitute "rights or things" of the deceased? If not, who should be taxed on such income?
CRA Preliminary Response
Where a taxpayer had, at the date of death, rights or things, the amount of which when realized or disposed of would have been included in computing the taxpayer’s income, subsection 70(2) provides that the value of those rights or things (other than any capital property, amounts included in subsection 70(1), or property referred to in subsection 70(3.1)) at the date of death is to be added in computing the taxpayer's income for the year of death.
However, the taxpayer's legal representative may elect under subsection 70(2) to file a separate income tax return including the value of the deceased's rights or things and pay the corresponding tax for the taxation year in which the taxpayer died, as if the taxpayer were another person.
Generally, a right to receive an amount may be considered to be a right or thing of an individual within the meaning of subsection 70(2). For this to be the case, the individual would have to be legally entitled to receive the amount at the time of the individual’s death (the right would have to exist) and the value of that right would have to be determinable at that time.
Subsection 248(1) provides that, for the purposes of the Income Tax Act, the term "life insurance policy" has the meaning assigned by subsection 138(12). Under the definition of that term in subsection 138(12), a life insurance policy includes an annuity contract and a contract all or any part of the insurer’s reserves for which vary in amount depending on the fair market value of a specified group of assets (such specified group of assets being defined as a "segregated fund" in subsection 138.1(1)). Thus, for purposes of the Income Tax Act, a segregated fund policy is a life insurance policy to which the provisions of section 138.1 apply.
Paragraphs 138.1(1)(a) and 138.1(1)(b) deem a trust (a "related segregated fund trust") to be established, generally, on the day that the segregated fund is created, and the property of the segregated fund and any income that has accrued on that property is deemed to be the property and income of the related segregated fund trust. Paragraph 138.1(1)(e) deems the segregated fund policyholder to have an interest in the related segregated fund trust. That interest is capital property to the policyholder, taking into account subparagraph 39(1)(a)(iii). By virtue of paragraph 138.1(1)(f), the taxable income of the related segregated fund trust is deemed for the purposes of subsections 104(6), (13) and (24) to be an amount that has become payable in the year to the beneficiaries under the segregated fund trust and the amount therefor in respect of any particular beneficiary is equal to the amount determined by reference to the terms and conditions of the segregated fund policy. In addition, by virtue of subsection 138.1(3), the capital gains and losses of the segregated fund trust from the disposition of any property in the segregated fund are deemed to be capital gains and losses of the beneficiaries (holders) of the related segregated fund trust. The terms and conditions of the related segregated fund policy will generally determine the method and timing of allocations of income and capital gains or losses.
We understand that, regardless of the method of income allocation used by the insurer, no amount is actually paid or payable to a related segregated fund policyholder in respect of income allocations made by the insurer. Those allocations are relevant for tax purposes only, given the rule in paragraph 138.1(1)(f) and the application of subsections 104(6), 104(13) and 104(24). However, they do not create any right to receive an amount to the policyholders. The same applies to capital gains deemed to be the earnings of a related segregated fund policyholder by virtue of subsection 138.1(3).
Consequently, income and capital gains allocated to a related segregated fund policyholder in accordance with the terms of the policy and reported on a T3 slip filed in the policyholder's name for the year of death are not rights or things for the purposes of subsection 70(2), even though those allocations are in respect of related segregated fund income for the period prior to the policyholder's death.
Because of the rule in paragraph 138.1(1)(f), those income allocations are required to be included in computing the deceased holder's income for the year of death under subsection 104(13) and paragraph 12(1)(m). Similarly, the taxable portion of capital gains deemed to be those of the deceased holder pursuant to subsection 138.1(3) must be taken into account in computing the deceased holder's income for the year of death under section 3.
Official Response
Q.11 Situs of cryptocurrencies
In the U.K., HMRC's guidance states that for as long as persons are resident in the U.K., the exchange tokens they hold as beneficial owner will be located in the U.K. In other words, from HMRC's perspective, the situs of the cryptocurrencies will follow the holder's residence for all tax purposes.
In contrast, on December 31, 2020, the IRS stated that it intends to add virtual currency accounts to the reportable accounts under the FBAR rules, which are the foreign bank accounts of a U.S. taxpayer.
To the end of simplicity, could CRA adopt a principle like that of the U.K. and treat the situs of cryptocurrencies as following that of the holder's residence?
CRA Preliminary Response
The question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 is currently under review by the CRA.