20 June 2023 STEP Roundtable

This sets out the questions that were posed, and provides summaries of the oral responses given, at the 2023 STEP CRA Roundtable, which was held in Toronto on June 20, 2023. Various of the titles shown are our own. The Roundtable was hosted by: Michael Cadesky, FCPA, FCA, FTIHK, CTA, TEP (Emeritus), Toronto: Cadesky Tax; and Kim G. C. Moody, FCPA, FCA, TEP, Calgary: Moodys Tax Law LLP.

CRA Panelists:

Steve Fron, CPA, CA, TEP, Oshawa: Manager, Trust Section Il, Income Tax Rulings Directorate
Marina Panourgias, CPA, CA, TEP, Toronto: Manager, Trust Section I, Income Tax Rulings Directorate

Q.1 - Bequeathed personal-use property

Personal use property (“PUP”) is property held primarily for the personal use or enjoyment of an individual.

An individual dies with various personal possessions (e.g., furniture, artwork of nominal value, etc.) that are PUP to the individual, and the individual paid less than $1,000 for each property. Per paragraph 46(1)(a), the minimum adjusted cost base of an item of PUP is $1,000. Assume post death none of this PUP is used by a beneficiary for personal use or enjoyment. (For example, it is moved into storage and later sold to an auction house).

Assume these properties fetch less than $1,000 per item.

In this case, can the estate claim capital losses when the properties are sold by the estate?

Preliminary Response

Fron: “Personal-use property” is defined in s. 54 and, on a disposition of PUP on death, s. 46(1) deems the ACB to be the greater of $1,000 and the amount otherwise determined. S. 46(1) also does the same to proceeds of disposition – the greater of $1,000 or the amount otherwise determined. There is a special rule in s. 40(2(g)(iii) that deems any capital loss from the disposition of PUP to be nil. At the 2011 STEP CRA Roundtable, CRA noted that a deceased person and their estate are distinct taxpayers. Therefore, the determination of whether a property owned by the estate is personal use property must be made on its own facts and merits.

Accordingly, if a property was not used by the beneficiaries of the estate, or persons related to them, during the period following the death and before its sale, the property would not meet the definition of PUP. Even sticking with the PUP examples in the question—furniture or art work of nominal value—on the surface, it might seem that, if those items are not PUP of the estate, the capital losses might be available to the estate.

However, that is not necessarily the result based on the Act. Essentially, we need to look at what happens on death and what the adjusted cost base of the property is to the estate. Where s. 70(5)(a) applies to a property on the death of an individual, s. 70(5)(b) applies to any person who acquires the property as a consequence of the death. The property is deemed to have been acquired at the time of death at a cost equal to its FMV immediately before death. Notably, s. 70(5)(b) does not refer to the deceased’s deemed proceeds of disposition of $1,000 pursuant to s. 46(1)(b).

The estate’s ACB is the FMV immediately before death. We determine if the personal possessions are PUP of the estate and consequently whether s. 46(1) applies to the estate’s disposition of the personal possessions. If the personal possessions are not PUP of the estate, the capital loss realized on the sale of the property by the estate would not be deemed to be nil pursuant to s. 40(2(g)(iii). Accordingly, provided the property is not acquired by a person affiliated with the estate, the capital loss realized on the sale of the personal possessions by the estate would be deductible where the estate also has capital gains.

Bear in mind that the estate’s capital gain or capital loss on the disposition is based on the estate’s ACB being that FMV immediately before death. Alternatively, if the personal possessions are PUP of the estate, s. 46(1) could apply to modify the estate’s ACB and proceeds of disposition for purposes of computing any capital gain or loss on the disposition of the property.

Official Response

20 June 2023 STEP Roundtable Q. 1, 2023-0961341C6 - Personal-Use Property

Q.2 - Capital loss processed under s. 152(4.2)

On administering an estate, the executors discover share certificates of public corporations that have become worthless (now bankrupt). A review of tax returns of the deceased reveals that capital losses were never claimed on these assets.

In 2012, at the CRA STEP Roundtable,[1] CRA stated that a net capital loss might be available provided the capital loss of a particular year exceeded capital gains of that year and a request is made within 10 years.

What is the basis for the 10-year time period?

Is this still CRA’s position and what information would be required to support the claim?

Preliminary Response

Fron: The 10- year limit comes directly from s. 152(4.2).

2012-0442961C6 (STEP 2012 Q. 7) still represents CRA’s position. The situation was that a capital loss had occurred in the same year that a capital gain had been realized and the fact situation did not include any information that would cause CRA to look at the application of any net capital loss in later years. For this question, our intention is just to provide more detail on how that 10- year limit applies, and gives a little more context to the response we gave in 2012.

Before jumping into the numbers in the example, a few basics about capital losses and net capital losses should be noted. 2012-0442961C6 noted that a capital loss may be incurred at the time of a disposition or deemed disposition of a capital property. S. 111(8) defines a “net capital loss.” For our purposes, we can say that it is allowable capital losses minus taxable capital gains. The formula actually looks to the amounts determined in s. 3(b). A net capital loss exists independently of whether or not it is reported in the tax return in the taxation year in which it was incurred. S. 111(1)(b) provides that any unused net capital loss balance can be carried back three years or carried forward indefinitely until it has generally been applied completely against taxable capital gains in a taxation year that is open for reassessment.

That is where s. 152(4.2) comes in. It provides the Minister with the discretion to reassess the return of income of a taxpayer that is an individual, other than a trust or a graduated rate estate, after the normal reassessment period for a taxation year has expired in order to give the taxpayer a refund or reduce Part I taxes payable. An application to request that the Minister exercise this discretion to amend an income tax return for a particular taxation year must be made in writing on or before the day that is 10 calendar years after the end of the particular taxation year. This relief is generally provided when the Minister is satisfied that the request for adjustment would have been processed if it had been made within the normal reassessment period. Relief may be available if no notice of determination was issued with respect to the net capital loss of a particular taxation year. The 10-year limit applies to the year in which the loss was incurred or the allowable capital loss is being applied against taxable capital gains in that year, or to a subsequent year in which the net capital loss is being applied. In both cases, the taxation year must otherwise not be open for reassessment.

Let us turn to the example. Since the request under s. 152(4.2) is made in 2023, the Minister has the discretion to provide relief for taxation years not open to reassessment that end in the period 2013 to 2023. As the 2008 taxation year does not fall within that 10-year period, no reduction of Part I taxes can be assessed or applied to any of the allowable capital loss in that year. However, the net capital loss carryforward balance is $6,500, due to the definition of “net capital loss” in s. 111(8). Similarly, because the 2011 taxation year does not fall within the 10-year period, no reduction of Part I taxes can be assessed to recognize an application of a net capital loss carryover.

However, some good news, the Minister does have the discretion to allow the reassessment of the 2015 taxation year to provide a reduction of Part I taxes payable for the year as a result of applying the $6,500 net capital loss carryover against the $7,000 of taxable capital gains.

Official Response

20 June 2023 STEP Roundtable Q. 2, 2023-0961311C6 - Worthless Property

Q.3 - S. 150(1.2)(b)(i) tainting by gold coin or dividend receivable

Pursuant to paragraph 150(1.2)(b), subsection 150(1.1) can apply to a trust for a particular tax year where the trust holds assets with a FMV that does not exceed $50,000 throughout the year, if the only assets held by the trust throughout the year are one or more of:

(i) money,

(ii) a debt obligation described in paragraph (a) of the definition fully exempt interest in subsection 212(3),

(iii) a share, debt obligation or right listed on a designated stock exchange,

(iv) a share of the capital stock of a mutual fund corporation,

(v) a unit of a mutual fund trust,

(vi) an interest in a related segregated fund trust (within the meaning assigned by paragraph 138.1(1)(a)), and

(vii) an interest as a beneficiary under a trust, all the units of which are listed on a designated stock exchange.

A. “Money” is not a defined term in the Act. Trusts are often settled with property such as a collectible gold or silver coin, a gold or silver bar, or other items. Can the CRA advise whether they would consider settlement items such as gold or silver coins and bars to be “money” for the purposes of paragraph 150(1.2)(b)?

B. For publicly traded securities, there is often a delay between when a dividend is declared to when it is paid. In the interim, there is a dividend receivable which may be held in a trust. Would the CRA treat a dividend receivable as a property listed in paragraph 150(1.2)(b)?

Preliminary Response

Panourgias: Generally, an income tax return is required to be filed for a trust or estate within 90 days of the end of the taxation year unless certain exceptions are applicable, which are found in s. 150(1.1) of the Act - but with the introduction of the new trust reporting rules, new s. 150(1.2) operates in a manner that limits the application of those exceptions. Basically, the exceptions in s. 150(1.1) are not available to an express trust resident in Canada or for civil law purposes a trust, other than a trust established by law or by judgment, that is resident in Canada unless the trust comes within one of the exceptions described in ss. 150(1.2)(a) to (o).

At issue here is the exception in s. 150(1.2)(b). It applies where a trust holds assets with a total FMV that does not exceed $50,000 throughout the year if the only assets held by the trust throughout the year are the assets described in that provision (see the written response).

The first of these is money. The term “money” is not defined in the Act, so we need to look to the ordinary meaning of the term for guidance. Black’s Law Dictionary defines money as “the medium of exchange authorized or adopted by a government as part of its currency.” The Oxford English Dictionary defines money as “any generally accepted medium of exchange which enables a society to trade goods without the need for barter.”

In our view, collectible gold or silver coins, and gold or silver bars do not fit within the ordinary meaning of “money.” These assets would generally not serve as a medium of exchange in a financial transaction in the same manner as the Canadian dollar, for example. We have previously taken the view that gold coins are likely to be commodity purchases.

Therefore, if a trust is in possession of a collectible gold or silver coin or gold or silver bar, it would not be able to satisfy the exception in s. 150(1.2)(b). The trust would be required to file an income tax return each year, unless it actually satisfied one of the other s. 150(1.2) exceptions.

Regarding the question about dividends receivable, the assets listed in s. 150(1.2)(b) do not explicitly include dividend receivables. Given the types of assets that are listed in those subparagraphs, it cannot reasonably be argued that a dividend receivable would be treated as one of those properties. So if a trust holds an asset that is not listed in one of those subparagraphs, such as a dividend receivable, the exception in 150(1.2)(b) would not be applicable.

Official Response

20 June 2023 STEP Roundtable Q. 3, 2023-0968091C6 - Trust Reporting – Definition of Money and Treatment of Dividend Receivable

Q.4 - Trust reporting for contingent beneficiaries

Pursuant to paragraph 204.2(1)(a) of the Regulations, a trustee of a trust (unless the trust is subject to one of the exceptions in subsection 150(1.2)) is to report information about each beneficiary of the trust, subject to subsection 204.2(2) of the Regulations.

The term “beneficiary” has not been defined for purposes of section 204.2 of the Regulations.

Many family trusts include a “disaster clause” to provide for the situation where all of the primary beneficiaries of the trust have died or ceased to exist. For example, a family trust may include as primary beneficiaries the parents and all of the issue of a particular family, but in the event none of those persons are alive, the trust may provide that the assets of the trust are to go to extended family members (“contingent beneficiaries”). In most situations, it is considered very unlikely that the “disaster clause” will apply, especially where there are many primary beneficiaries. As a result, the trustees of the trust may not even know the identity of the contingent beneficiaries, or it may be considered an imprudent exercise of the trustees’ fiduciary duty to advise these contingent beneficiaries of their contingent interests in the trust.

A. Can the CRA confirm that the trustees are obligated to identify these contingent beneficiaries and provide the information needed to comply with subsection 204.2(1) of the Regulations?

B. If the trustees know the identity of the contingent beneficiaries, are they obligated to inform the contingent beneficiaries of their interests in the trust so as to collect the required information to comply with subsection 204.2(1) of the Regulations?

Preliminary Response

Panourgias: For taxation years ending on or after December 31^st of this year, generally where a trust is required to file an income tax return under s. 150(1), new s. 204.2(1) of the Regulations requires that additional information is to be filed in respect of the trust unless the trust meets one of the exceptions mentioned in the previous question, which are described in ss. 150(1.2)(a) to (o). The information required to be provided by the new regulation generally includes the name, address, date of birth, jurisdiction of residence and taxpayer identification for each person who in the year is a trustee, a beneficiary, or settlor of the trust, or a person who has the ability, through the terms of the trust or a related agreement, to exert influence over the decisions regarding the appointment of income or capital of the trust.

The regulation refers to the definition of settlor in s. 17(15) for this purpose, but the term “beneficiary” has not been defined for the purposes of s. 204.2 of the Regulations. It is our view that the definition of “beneficiary” for this purpose would be based on its ordinary meaning. Generally, CRA is of the view that the determination of who is a beneficiary of a particular trust requires finding of fact based on all the relevant information, including the terms of the trust and the settlor’s intent in establishing the trust.

Very generally, a beneficiary of a trust is a person, other than the protector, who has the right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person’s right to the income or capital of the trust is immediate, future, contingent, absolute or conditional on the exercise of the discretion of any person. So in our view, a beneficiary in the ordinary sense would include a beneficiary whose interest is contingent. Such a determination is ultimately dependent on specific facts, terms of the trust, as well as the relevant trust deed.

Now in respect of the part of the question that you raised, which notes that information on the contingent beneficiaries might not be available, s. 204.2(2) of the Regulations generally provides that the requirement to provide the specified information in respect of beneficiaries of the trust would be met if the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with a reasonable effort by the person making the return at the time of filing. Where the person’s identity is not known or ascertainable, then sufficiently detailed information is required to be included in the return so that it can be determined with certainty whether a particular person is a beneficiary of the trust.

Where the identity of each beneficiary in the ordinary sense is known or ascertainable with reasonable effort, the required information listed in s. 204.2(1) of the Regulations is required to be provided. Where those efforts are unable to identify each beneficiary, it is still necessary to provide sufficiently detailed information so that, again, it can be determined with certainty whether any particular person is a beneficiary of the trust.

In the circumstances described in this question, the only exception to providing required information would be in respect of a trust that is described in any of ss. 150(1.2)(a) to (o). It is also relevant to note that new s. 150(1.4) provides that, for greater certainty, ss. 150(1) to (1.3) do not require the disclosure of information that is subject to solicitor-client privilege.

Regarding the second question, regarding whether a trustee is obligated to inform the contingent beneficiaries of their interest in the trust, or to obtain the information in order to comply with the regulations, the rules in s. 204.2 of the Regulations do not address this question, nor do they prescribe how the information is to be obtained. S. 237(2)(a) of the Act provides that, for purposes of the Act and the Regulations, any person making an information return must make a reasonable effort to obtain the business number, social insurance number or trust account number of another person or partnership from that person or partnership where it is required on an information return. Although the Act does not dictate the manner in which the required information is to be obtained, it does require a reasonable effort to be made in order to obtain that information.

Official Response

20 June 2023 STEP Roundtable Q. 4, 2023-0968111C6 - Trust Reporting – Definition of Beneficiary

Q.5 - Calculating s. 94(8) recovery limit

A trust to which section 94 applies is subject to Part I tax on its worldwide income. To facilitate the collection of taxes owing by these non-resident trusts, paragraph 94(3)(d) provides that:

(d) each person that at any time in the particular taxation year is a resident contributor to the trust (other than an electing contributor in respect of the trust at the specified time) or a resident beneficiary under the trust

(i) has jointly and severally, or solidarily, with the trust and with each other such person, the rights and obligations of the trust in respect of the particular taxation year under Divisions I and J, and

(ii) is subject to Part XV in respect of those rights and obligations;

However, when the conditions in subsection 94(7) are satisfied, the maximum amount recoverable pursuant to paragraph 94(3)(d) from a person in respect of a trust is the person’s recovery limit which is calculated in subsection 94(8). Therefore, depending on the elements within the recovery limit calculation, a person who is jointly and severally or solidarily liable for the taxes owing by the trust may ultimately be liable for the entire amount owed by the trust, but could be liable for a lesser amount.

Please consider the following scenario:

• A factually non-resident, inter vivos, personal trust has one resident beneficiary under the trust for the trust’s 2020, 2021 and 2022 taxation years, and section 94 therefore applies in each year;
• There are no resident contributors to the trust;
• The trust earns income only in its 2020 taxation year;
• The trust makes a capital distribution of cash in the amount of $100,000 to the beneficiary on December 30th, 2022;
• No other distribution of property occurs during the 2020, 2021 or 2022 taxation years of the trust;
• The taxes owing by the trust in respect of its 2020 taxation year have yet to be paid; and
• When the property, $100,000, is distributed there is a resulting disposition of part of the beneficiary’s capital interest in the trust.

Would the resident beneficiary be liable for the taxes payable by the trust in respect of the trust’s 2020 taxation year given the beneficiary did not receive any distributions from the trust in that year? Would distributions of property from the trust to the beneficiary in subsequent taxation years affect the Minister’s ability to collect in respect of the trust’s 2020 taxation year?

Preliminary Response

S. 94(3) applies to a non-resident trust in a particular taxation year. The trust is deemed to be resident in Canada for the purposes outlined in s. 94(3)(a) throughout that year. Those purposes include for the purposes of s. 2 and for the purposes of computing the trust’s income for a particular taxation year. Here there is a situation where the deemed resident trust has taxable income for 2020 and, for whatever reason, the trustee decides to wait to make a distribution to the beneficiary until two years later. The rights and obligations pursuant to s. 94(3)(e) are in respect of a particular taxation year of the trust. Therefore, the shared liability for the tax payable by the trust will cease only when the trust’s liability for that year’s tax is extinguished. In the scenario provided, the particular year is the 2020 taxation year. And as noted, when the conditions of s. 94(7) are met in respect of a particular taxation year of the trust, 2020, s. 94(8) establishes the recovery limit for a person who is jointly, severally or solidarily liable for the taxes owing by the trust. The conditions in s. 94(7) can be tested at any particular time and may be repeated at any time. In this scenario, s. 94(3) applies to the trust in the 2020 year, and also in the 2021 and 2022 years. But note that it does not matter if s. 94(3) does not apply to the trust in 2021 and 2022, whenever the particular time might be, as long as s. 94(3) applied to the trust in the particular year, or 2020.

The recovery limit in s. 94(8) is also calculated at the particular time, and the calculation is in respect of the same particular year, 2020. For illustration, let us pick two particular times, and take a look and see what happens. The first date is January 1, 2021, which is just one day after the trust’s 2020 taxation year, and the second date is December 31, 2022, (i.e., one day after which is the day after the date on which the trust made the distribution to the beneficiary. Generally speaking, the conditions in ss. 94(7)(a) and (b) are satisfied at both particular times because the resident beneficiary is liable under a provision referred to in s. 94(3) solely because that person is a resident beneficiary under the trust, and they contributed nothing to the trust. There is also a purpose test in s. 94(7)(c) which also must be satisfied for the 2020 year, but we have assumed that it has been met. Since the conditions in s. 94(7) are met, the recovery limit in s. 94(8) will apply to determine the maximum amount recoverable from the resident beneficiary in respect of the trust’s 2020 taxation year for both points in time.

The recovery limit is fairly involved, having five pieces to it. What matters for the current question is paragraph (a), which totals various amounts which were, for example, paid or payable to, or received or receivable or enjoyed by, the particular person, the resident beneficiary in this example, or a specified party in respect of a particular person.

Paragraph (b) is not relevant here, but it looks to the total of all contributions made to the trust before the particular time by the particular person. Ss. 94(8)(c) to (e) deduct certain amounts, but none of them are relevant to our situation.

For the scenario provided, the formula produces a nil result for the particular time that is January 1, 2021, and produces an amount of $100,000 for December 31, 2022. Accordingly, on January 1, 2021, although the resident beneficiary is jointly and severally, or solidarily, liable for the taxes owing by the trust in respect of the trust’s 2020 taxation year, the Minister could not collect an amount from the resident beneficiary as of that date. The Minister could, however, assess the resident beneficiary for an amount not exceeding $100,000 on December 31, 2022.

In summary, if 94(3) applied to a non-resident trust for a particular year and taxes are still owing, and an amount is paid or payable or received or receivable by or enjoyed by the beneficiary in a later year, as long as the conditions in s. 94(7) are satisfied in respect of the particular taxation year, the recovery limit of each person who was subject to s. 94(3)(d) in respect of the trust’s year can be calculated at any time in a later taxation year. Any outstanding taxes payable in respect of the particular taxation year of the trust may be assessed pursuant to s. 94(3)(d) subject to the recovery limit.

Official Response

20 June 2023 STEP Roundtable Q. 5, 2023-0959801C6 - Subsection 94(8) Recovery Limit

Q.6 - Registered charity beneficiary of NR trust

A long-term Canadian resident becomes a non-resident and within 60 months, for reasons not related to Canadian tax, settles a non-resident trust for non-resident family members. Assume there are no beneficiaries resident in Canada other than by virtue of a general provision in the trust document that states that beneficiaries include as a class registered charities as defined in subsection 248(1).[2] Such charities may benefit at any time. By virtue solely of a registered charity being a beneficiary, does the trust then become a deemed resident trust per section 94?

Preliminary Response

Fron: S. 94(3)(a) will deem a trust to reside in Canada throughout a particular taxation year of the trust when the following conditions in the preamble in s. 94(3) are satisfied at a specified time in respect of the trust’s particular year:

• the trust is factually non-resident;
• the trust is not an exempt foreign trust as defined in s. 94(1); and
• there is a resident contributor to the trust or a resident beneficiary under the trust.

For the purposes of our response, the specified time would be the end of the trust’s taxation year. We assume the trust is factually non-resident and it is not an exempt foreign trust. In this situation, there is no resident contributor to the trust, so the only determination that is relevant is whether there is a resident beneficiary under the trust.

Very generally, the definition of “resident beneficiary” in s. 94(1) looks to whether, at the specified time, a person that is a beneficiary under the trust is (a) resident in Canada; and (b) that there is a connected contributor to the trust.

However, the key here is actually in the preamble of the definition because it contains a couple of exclusions. It says, “other than a person that is, at that time, a successor beneficiary or an exempt person”. An “exempt person” is the important term in this case. If it is met, you do not even have to worry about whether the beneficiary is resident in Canada or whether there is a connected contributor.

An “exempt person” in s. 94(1) includes at any time, a person whose taxable income for the taxation year that includes that time is exempt from tax under Part I because of s. 149(1). S. 149(1)(f) refers to a registered charity.

Because the registered charity is an exempt person, it would not be a resident beneficiary. Since there are no other beneficiaries under the trust who are resident in Canada, there is no resident beneficiary at the end of a trust’s particular taxation year, and s. 94 will not apply to the trust.

Official Response

20 June 2023 STEP Roundtable Q. 6, 2023-0959571C6 - Non-Resident Trust and Canadian Charity

Q.7 - Resident portion trust

Assume a trust is initially constituted as a non-resident trust where property is contributed only from a non-resident person who has never been a Canadian resident. Sometime later, the trust becomes a deemed resident trust by receiving one or more contributions of property from a Canadian resident person. Assume that the trust makes a valid election to have paragraph 94(3)(f) apply to the trust.

Q.7A

Assume that each of these transfers is not an “arm’s length transfer” as defined in subsection 94(1). We are interested in the CRA’s views in general as to how the “resident portion” as defined in subsection 94(1) is calculated in the following situations:

(1) A Canadian resident beneficiary uses a residential property owned by the trust and pays certain bills of the trust in respect of the property (i.e., the beneficiary does not pay the trust directly).

(2) A loan is made to a Canadian resident beneficiary. Assume the loan can be considered debt.

(3) The loan above is subsequently repaid in full.

Preliminary Response

Panourgias: For the purposes of this question, it is assumed that none of the transfers described is an “arm’s length transfer,” which is one of the defined terms in 94(1).

In respect of the first scenario, the payment of a bill of the deemed resident trust by a beneficiary would constitute a contribution to the trust. This is confirmed by the application of s. 94(2)(a), which generally provides that a person is deemed to have transferred property to a trust where the person transfers property to a third party and, by reason of that transfer, the liability or potential liability of the trust decreases at that time. Because the beneficiary has made a contribution to the trust, the beneficiary would be a contributor to the trust. Because the beneficiary is resident in Canada, and a contributor to the trust, that beneficiary would now be a resident contributor to the trust.

Turning to the impact of this contribution on the calculation of the resident and non-resident portion, the answer can be found in the definition of “resident portion,” and particularly s. (a)(ii)(A)(II) of that definition, which provides that the trust must select property that will be allocated to the resident portion that has a FMV that is at least equal to the absolute value of the decrease in the liability or potential liability of the trust. The property selected cannot be property that would already otherwise be in the resident portion.

If the trust does not make the selection, then the Minister may select the appropriate property. In the event that absolute value of the decrease in the liability or potential liability of the trust is actually greater than the FMV of all of the property of the non-resident portion, all the property in the non-resident portion would need to be transferred over to the resident portion.

In respect of the second scenario, where a loan is made by the trust to a Canadian resident beneficiary (and for this scenario it has been assumed that the loan can be considered to be debt), while the debt owing involves a transfer of property to the beneficiary in the form of the loan of funds, s. 94(2)(g)(iv) provides that, for greater certainty, the transaction also involves the acquisition of the debt owing by the trust. Very generally, where a person issues a debt, they are deemed to have transferred the debt owing. In this scenario, the acquisition by the trust of the debt owing by a beneficiary is deemed to be a transfer of property from the beneficiary to the trust at the time of the acquisition.

Similar to the first scenario, since the beneficiary has made a contribution to the trust, and the beneficiary is a resident of Canada, that beneficiary would be considered to be a resident contributor to the trust. Paragraph (a) of the definition of “resident portion” generally includes all the trust property that is property in respect of which a contribution has been made at or before the particular time to the trust by a contributor who is, at the particular time, a resident contributor. The result is that the debt owing from the beneficiary will be included in the resident portion.

In respect of the last scenario, where that loan is repaid, the loan repayment would be considered to be a transfer of property from the beneficiary to the trust, so the repayment of the loan would be a contribution to the trust. Similar to the previous scenario, the beneficiary would be a resident contributor to the trust, and paragraph (a) of the definition of “resident portion” would be applicable. The cash proceeds from the loan repayment would be included in the resident portion. In this scenario, even though the proceeds from the loan repayment are included in the resident portion, once the debt owing ceases to exist, it is expected that the debt owing will no longer be included in the resident portion.

Q.7B

Assume that 49% of the shares of a corporation not resident in Canada (a “foreign corporation”) owned by the trust are included in the resident portion but the trust holds 100% of the shares in all. Is that foreign corporation a “controlled foreign affiliate” as defined in subsection 95(1) and if so, how would foreign accrual property income (“FAPI”) be calculated?

Preliminary Response

Panourgias: S. 94(3)(f)(viii) provides that the resident portion trust and the non-resident portion trust are at all times deemed to be affiliated with each other and to not deal with each other at arm’s length. S. 94(3)(a)(x) provides that a deemed resident trust is deemed to be resident in Canada throughout the particular tax year for purposes of determining whether a foreign affiliate of the taxpayer is a controlled foreign affiliate of the taxpayer.

Subparagraphs (b)(i) and (ii) of the definition of “controlled foreign affiliate” in s. 94(1) provide that a controlled foreign affiliate at any time of a taxpayer resident in Canada can include a foreign affiliate of the taxpayer that would, at that time, be controlled by the taxpayer if the taxpayer owned all shares of the capital stock of the foreign affiliate that are owned at that time by the taxpayer, as well as those that are owned by persons who do not deal at arm’s length with the taxpayer.

In this scenario, the foreign corporation would be a foreign affiliate of the resident portion trust. Because the resident portion trust and the non-resident portion trust are deemed not to deal with each other at arm’s length, and those two trusts own all of the shares, the foreign affiliate would be considered to be controlled by the resident portion trust. The foreign corporation would be a controlled foreign affiliate of the resident portion trust.

In respect of the last part of the question, which relates to the calculation of FAPI in this situation, “FAPI” is defined in respect of a particular foreign affiliate. It is calculated first at the entity level – and nothing in this scenario would alter the nature of that calculation – and then the Canadian income inclusion under s. 91(1) is then determined on a share-by-share basis – again nothing in this scenario would alter the nature of that calculation.

If the foreign affiliate only has common shares outstanding, and the investment is a direct one, then identifying the participating percentage should be straightforward but, in more complex entity structures, consideration may need to be given to s. 5904 of the Regulations. If the FAPI of a foreign affiliate is $5000 or less, then the participating percentage is nil.

Note that, if the investment is structured in a manner designed to minimize the FAPI inclusion, there are various anti-avoidance provisions that could be relevant in determining Canadian income tax results.

Official Response

20 June 2023 STEP Roundtable Q. 7, 2023-0959581C6 - Deemed Resident Trust and the Resident Portion

Q.8 - Consolidated Holding and s. 251(2)(c)(i)

In general, a trust is not related to another person because the definition of “related persons” in subsection 251(2) does not specifically refer to a trust. However, specific provisions of the Act provide that a trust is related to a person for certain purposes. One example is paragraph 55(5)(e).

CRA has previously stated that, based on the decision in M.N.R v. Consolidated Holding Company Limited, where the majority of the voting shares of a corporation are held by a trust, it is the trustees of the trust who have the legal ownership of the shares, who have the right to vote those shares, and who, therefore, control the corporation. Thus, if a trust owns a controlling interest in a corporation, the trustees of the trust would be viewed as controlling the corporation.

Assume one corporation is controlled by A and B, as trustees of a trust and another corporation is controlled by A and B in their own right (not as trustees). In this situation, would the two corporations be related persons within the meaning of subsection 251(2)?

Preliminary Response

Panourgias: The definition of “related person” is in s. 251(2), and there is no explicit reference to a trust in that definition. Even so, a trust or the trustees of a trust can be related to a corporation in certain circumstances. We have outlined our view of these circumstances in S1-F5-C1 (“Related Persons and Dealing at Arm’s Length”).

One of the circumstances outlined in the Folio is where the trust owns the majority of the voting shares of a corporation, such that the trustees control the corporation. In that case, the trust and the corporation would be related persons by virtue of s. 251 (2)(b)(i).

S. 104(1) provides that a reference to the trust is to be read to include a reference to the trustee, unless the context requires otherwise. Where this rule applies, the control of the particular corporation by a trust may also result in the trustee being related to the particular corporation.

In 2022-0928191C6 (STEP 2022 Q. 6), we noted that it is the trustees who have the legal ownership of the shares, and who have the right to vote with those shares, and therefore control the corporation.

Although the definition of “related persons” in s. 251(2) does not explicitly refer to a trust, it is our view that, in applying that definition, the fact that the trustees are the legal owners of any shares held by the trust should be taken into consideration.

In the circumstances described in this question, assuming that A and B under the terms of the trust control one corporation, and A and B as a group control the other corporation, it is our view that the two corporations would be related to each other, by virtue of s. 251(2)(c)(i), which provides that two corporations are related to each other if they are controlled by the same group of persons.

Official Response

20 June 2023 STEP Roundtable Q. 8, 2023-0961291C6 - Trust and Related

Q.9 - S. 20(1)(ww) deduction for TOSI taxable capital gain

Where an individual has split income in a particular taxation year, that individual is subject to the tax on split income (“TOSI”) under subsection 120.4(2). However, the amount of split income is also included in the individual’s income under Division B of Part I. The mechanism for avoiding the double taxation of split income is found in paragraph 20(1)(ww) which provides a deduction, in computing an individual’s income from a business or property, for an amount equal to the amount of the individual’s split income.

Suppose an individual recognizes a capital gain of $200,000 in a particular taxation year, of which the taxable capital gain of $100,000 is included in the individual’s split income. Suppose the same individual has realized a capital loss of $200,000 in the same taxation year from an unrelated transaction. Does the CRA agree that, in these circumstances, the individual would not be precluded from claiming a deduction under paragraph 20(1)(ww) for the taxable capital gain included in split income?

Preliminary Response

Fron: Yes, the individual does get the deduction under s. 20(1)(ww).

The Department of Finance Explanatory Notes indicate that the purpose of paragraph (ww) is to ensure that individual’s split income is excluded from the individual’s income that is otherwise subject to tax. Accordingly, in the circumstances described, CRA would not challenge the deduction under paragraph (ww) for any portion of an individual’s split income that relates to the taxable capital gain.

Official Response

20 June 2023 STEP Roundtable Q. 9, 2023-0961301C6 - Paragraph 20(1)(ww)

Q.10 - Shareholder use of non-resident corporation's Canadian cottage

A non-resident of Canada wishes to purchase real estate in Canada for personal use (a vacation home). In determining how to purchase the real estate, for reasons having nothing to do with Canadian tax, the non-resident decides to use a non-resident corporation of which the non-resident is a shareholder.

Assume that the vacation home is available for use by the non-resident shareholder or the shareholder’s family members during the year. Assume further that the family members (i) are not shareholders of the corporation; and (ii) do not deal at arm’s length with the non-resident shareholder.

In these circumstances, assuming that no rent is paid to the corporation for the use of the vacation home, how would any taxable benefit relating to the use of the property be computed? To whom is the taxable benefit assessed and what is the nature? Is it subject to non-resident withholding tax?

Preliminary Response

Fron: Our response remains that s. 15(1) applies when a non-resident corporation confers a benefit, in the form of making available, to its non-resident shareholder or to an individual who does not deal at arm’s length with a non-resident shareholder such as a family member, a property located in Canada.

S. 15(7) confirms that s. 15(1) applies in computing the income of a shareholder of a corporation for purposes of Part I, whether or not a corporation was resident in Canada, or carried on business in Canada. S. 15(1.4)(c) provides that, for the purposes of s. 15(1), a benefit conferred by a corporation on an individual is a benefit conferred on a shareholder of the corporation if the individual does not deal at arm’s length with the shareholder.

The amount or value of a benefit conferred on a non-resident shareholder by the non-resident corporation, that would have to be included in computing the income of the shareholder pursuant to s. 15(1) if Part I were applicable, will be deemed, pursuant to s. 214(3)(a) to be a dividend paid to the non-resident shareholder by a corporation resident in Canada. Consequently, this deemed dividend will be subject to Part XIII withholding pursuant to s. 212(2), but the rate may be reduced under the applicable treaty.

The fact that the property in question is acquired by the corporation for reasons not related to any Canadian tax is not relevant to the calculation of the amount of the benefit.

Our position on the calculation of the shareholder benefit from the personal use of corporate property is described in paragraph 11 of IT-432R2 (“Benefits conferred on shareholders”). It states, in part:

The calculation of the amount or value of the benefit is usually based on the fair market rent for the property minus any consideration paid to the corporation by the shareholder for the use of the property. The fair market rent may not, however, always be appropriate for measuring the benefit, particularly where it does not provide for a reasonable return on the value or cost of the property.

The amount or value of the benefit is generally equal to the price that the shareholder would have to pay in similar circumstances to get the same benefit from a corporation in which they were not a shareholder. In cases where the fair market rent does not provide a reasonable return on the value of the property, or is not otherwise appropriate to measure the benefit, the amount of the benefit is to be determined using the imputed rent approach.

The written response notes some cases to consider: Youngman, Fingold and Arpeg Holdings.

The determination of the appropriate method to be used, and its application, depends on the specific circumstances of each case. Generally, the imputed rent approach determines the amount or value of the shareholder benefit by multiplying what would generally be a normal rate of return for the non-resident corporation by the greater of the cost or the fair market value of the property, and adding operating costs other than interest paid on liabilities connected with the property.

Any consideration paid for the use to the corporation by the non-resident shareholder, or the individual not dealing at arm’s length with them, for the use of the property is deducted from the imputed rent. In computing the imputed rent, it should be noted that an interest-free loan by the shareholder to the corporation, that is used by the corporation to fund the acquisition of the property, may be deducted from the amount on which the rate of return was applied.

It is the responsibility of the non-resident corporation to determine the method that is most appropriate, based on the facts, and to withhold and remit to the Receiver General any tax that may be payable under Part XIII based on the value or amount of the benefit so determined.

Official Response

20 June 2023 STEP Roundtable Q. 10, 2023-0965831C6 - Non-Resident Corporations Owning Canadian Real Estate

Q.11 - Late-filed s. 216 election

Where a non-resident owns Canadian real estate which is rented, a 25% withholding tax applies on the gross rental income. However, an election may be made to pay tax at the non-resident’s tax rate (graduated rates for an individual for example). This election under section 216 must be made by filing a special income tax form T1159 within either 6 months or 24 months of the end of the year (6 months if form NR6 is filed to reduce withholding tax remittances).

Failing timely filing, the election cannot be made.

Does CRA have an administrative approach to allow for late filing (for example a voluntary disclosure process) and what are the conditions?

Preliminary Response

Panourgias: CRA has a late-filing policy regarding s. 216 that allows non-residents a one-time opportunity to late-file their s. 216 returns and have them treated as though they were filed on time.

A late-filed s. 216 return will not be accepted under this policy where: CRA has already advised the taxpayer of their responsibilities under Part XIII in respect of rental income or timber royalties earned in Canada; CRA has already initiated action because of the failure to comply with Part XIII; or the taxpayer has submitted, and CRA has approved, Form NR6.

This policy is intended to encourage non-resident taxpayers to voluntarily come forward and correct withholding and filing deficiencies under Part XIII.

Where a taxpayer is not eligible for relief under this policy, it may be possible to get an extension, in respect of a s. 216 return, where the taxpayer can sufficiently demonstrate that circumstances of an extraordinary manner existed. If anyone is interested in finding more information on this policy, see Subsection 216(1) Late-Filing Policy on the CRA website.

Official Response

20 June 2023 STEP Roundtable Q. 11, 2023-0971841C6 - Non-Resident Owning Canadian Rental Real Estate

Q.12 - CDA addition and s. 104(21) designation

An inter vivos Canadian resident trust has realized a net taxable capital gain for a particular tax year. An amount equal to the net taxable capital gain is paid to a corporation that is a Canadian corporation, as defined in subsection 89(1), and that is a beneficiary of the trust in the particular tax year. A designation is made pursuant to subsection 104(21) in respect of the amount paid. The non-taxable portion of the trust’s capital gains is paid out to other beneficiaries.

What amount is added to the capital dividend account of the corporation and when does the addition (if any) arise?

Is the answer different if the entire capital gain is paid to the corporation in the particular tax year?

Preliminary Response

Panourgias: In the first situation, where an amount only equal to the net taxable capital gain of the trust is distributed by the trust to a Canadian private corporation, and the total amount is designated under s. 104(21), then, provided that all the requirements of s. 104(21) are met, the entire amount distributed would be treated as a taxable capital gain of the Canadian corporation from the disposition of capital property for the purposes set out in that provision.

In this situation, no amount would be added to the corporation’s capital dividend account, based on the wording of subparagraph (a)(i.1) of the definition of capital dividend account in s. 89(1).

In the second situation, where the entire amount of the capital gains of the trust is distributed by the trust to the Canadian private corporation, and a designation is made under s. 104(21) in respect of one half of the amount distributed (which is the amount of the trust’s net taxable capital gains) then, provided that the requirements of s. 104(21) are met, the amount designated would be treated as a taxable capital gain of the corporation from a disposition of capital property for the purposes set out in s. 104(21). The remainder of the amount distributed, which is the amount of the non-taxable portion of the trust’s capital gains, would be added to the corporation’s capital dividend account, net of any applicable amount of the corporation’s allowable capital losses.

This is based on the wording of subparagraphs (a)(i.1) and (ii) of the definition of “capital dividend account.” The addition to the corporation’s capital dividend account would be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation. The reason for this is that the designation under s. 104(21) cannot be made before the end of the trust’s taxation year.

Official Response

20 June 2023 STEP Roundtable Q. 12, 2023-0959591C6 - Corporate Beneficiary and CDA

Q.13 - Trust Online Verification

At present, there does not appear to be an ability to verify trust accounts online through "Represent a Client" similar to individuals and businesses. Can the CRA comment as to when it intends to provide such functionality?

Preliminary Response

Fron: We have a new platform that we brought out in February called “My Trust Account.” The initial services offered are limited, but will give those with the appropriate authorization the ability to view and update some account information for the T3 account, including address and direct deposit details, and also allows them to authorize a representative to submit documents on behalf of the trust.

There’s also a pager called “About My Trust Account”, which includes a table that identifies the authorization levels required to review or make changes to the account.

There will be further expansion to the service as early as February 2024.

To gain access to My Trust Account for a particular trust, a primary trustee must have an account on Represent a Client portal with a representative identifier (“RepID”). If the primary trustee doesn’t have a Represent a Client account, they can register online. The primary trustee’s name on the CRA trust account must match the name associated with their RepID. The primary trustee must be the first to register for My Trust Account. See the written response for more detailed instructions.

Note that information about the trust account must be provided as part of an enhanced validation process. After being confirmed as the primary trustee of the Trust account, they will receive immediate access to My Trust Account, and will be able to add additional trustees or authorized representatives. If the primary trustee experiences problems with registering online for My Trust Account, and they believe it’s because of a difference between the name used for their Client ID account and what’s on the system for the Trust Account, they can contact CRA. If it’s confirmed that they are the primary trustee, the call center agent will refer the case for further review and the trustee will be contacted once the name has been corrected, or to request further information. If the agent is unable to confirm that they are the primary trustee, the call center agent will advise them of the further steps needed.

Official Response

20 June 2023 STEP Roundtable Q. 13, 2023-0966611C6 - Trust Online Verification

Q.14 - Extensions of 36-month s. 70(6) vesting period

Very generally, subsection 70(6) provides for capital property to be transferred on a tax-deferred (“rollover”) basis for income tax purposes, if certain conditions are met. One condition is that the deceased’s property vests indefeasibly with the surviving spouse or common-law partner, or a testamentary spousal or common-law partner trust:

“...if it can be shown, within the period ending 36 months after the death of the taxpayer or, where written application therefore has been made to the Minister by the taxpayer's legal representative within that period, within such longer period as the Minister considers reasonable in the circumstances, that the property has become vested indefeasibly in the spouse or common-law partner or trust, as the case may be...”

The T4011 Guide - Preparing Returns for Deceased Persons notes that if the legal representative needs more time to meet this condition, they can make a written request to the director at their tax services office before the end of the 36-month period.

Given the above, we have the following questions:

A. What is the process for making a written request and what should be included?

B. What are some of the considerations that the legal representative should consider and document when asking for an extension?

Preliminary Response

Fron: There is no prescribed form for making the request. What we need is a letter clearly indicating that you are requesting an extension to the 36-month period for the property to vest indefeasibly in the spouse or common law partner or testamentary spousal or common law partner trust. The information that we need is the property or properties being transferred for which you require an extension of the 36-month period, the parties involved (the deceased, and the spouse, or common law partner or the spousal or common law partner testamentary trust) and their relevant tax account numbers, your contact information, and the reason for the unavoidable delay. Finally, we need an anticipated date of resolution.

The request may be submitted before the end of the 36-month period, but we do recommend that it be submitted as soon as the delay is identified, along with documentation that supports the reason for the delay.

The written application should include details that will provide the Director of the legal representative’s Tax Services Office with a clear picture of the reason for the extension request. Each situation is distinct, and will be reviewed on a case-by-case basis, based on the details provided.

CRA will consider the overall reasonableness of the extension request, and whether the duration of the extension is reasonable, based on the barriers faced by the legal representative in having the property vested indefeasibly in spouse, common law partner, or trust.

Official Response

20 June 2023 STEP Roundtable Q. 14, 2023-0967371C6 - s.70(6) & Application to Extend

Q.15 - S. 110.6(1.3)(a) met long after farmer's death

Subsection 110.6(1.3) provides rules for determining whether a property is considered to have been used in the course of carrying on a farming or fishing business in Canada for purposes of the definition of qualified farm or fishing property in subsection 110.6(1). Under paragraph 110.6(1.3)(a), there are two tests that have to be met.

Subparagraph 110.6(1.3)(a)(i) is an ownership test, which requires the property to be owned by one or more specified persons or partnerships (eligible entity or eligible entities hereinafter) listed in clauses 110.6(1.3)(a)(i)(A) to (D) throughout the period of at least 24 months immediately prior to determination time. Subparagraph 110.6(1.3)(a)(ii) provides two farming use tests (clauses (A) or (B)) where only one has to be met.

Under clause 110.6(1.3)(a)(ii)(A), in at least two years while the property was owned by one or more eligible entities:

1. the gross revenue of an eligible entity (i.e., the “operator”) from the farming or fishing business in which the property was principally used must exceed the income of the operator from all other sources (sub-clause 110.6(1.3)(a)(ii)(A)(1)), and

2. an eligible entity that is an individual, or the beneficiary of a personal trust (if the eligible entity is a personal trust), is actively engaged on a regular and continuous basis in the farming or fishing business in which the property is principally used. (sub-clause 110.6(1.3)(a)(ii)(A)(11)).

In a post-mortem context, does the reference in the farming-use test to eligible entities mean that in the situation where the heirs do not use the property in a farming or fishing business, a property can only meet the conditions to be considered qualified farming or fishing property for a period of up to 24 months after the taxpayer’s death, since after this time, the deceased taxpayer can no longer be an eligible entity that meets the ownership condition in subparagraph 110.6(1.3)(a)(i)? In other words, does the reference in subclauses 110.6(1.3)(a)(ii)(A)(1) and (II) to “a person referred to in subparagraph (i) or “an individual referred to in subparagraph (i)” include the ownership condition in the preamble in subparagraph 110.6(1.3)(a)(i)? Consider the following hypothetical situation:

Mr. A owns farmland and he operates a farming business as a sole proprietor for all years up to his demise. Farming has always been Mr. A’s chief source of income. According to Mr. A’s Will, the farmland is bequeathed to his daughter who does not farm. If the daughter sells the farmland within 24 months after Mr. A’s death, the tests in subparagraph 110.6(1.3)(a)(i) and clause 110.6(1.3)(a)(ii)(A) should be met. However, if the daughter sells the farmland more than 24 months after Mr. A’s death, the only “operator” in sub-clause 110.6(1.3)(a)(ii)(A)(I) would be Mr. A, but he would cease to be an eligible entity that meets the ownership condition in subparagraph 110.6(1.3)(a)(i)), because he is not a person that owned the property for 24 months immediately before determination time.

Can the CRA confirm if their interpretation is consistent with the above or if they have a different interpretation?

Preliminary Response

Fron: I note that the scope of this question does not include whether the taxpayers have met the conditions in ss. 70(9) and (9.01), and what the resulting implications would be. The question is really just about whether the property is or is not qualified farm or fishing property to the daughter when she disposes of it.

Qualified farm or fishing property, or “QFFP”, of an individual includes property that is real or immovable property that was owned by, among others, an individual, and that was used by the individual or certain qualifying persons, such as a parent, child, or spouse of the individual, in the course of carrying on a farming or fishing business in Canada.

A particular property will not be considered to have been used in the course of carrying on a farming or fishing business in Canada unless the conditions in s. 110.6(1.3) are met. This subsection is pretty involved – please refer to the written response (which we expect to release in late August) for the complete analysis.

We conclude somewhat differently than as noted in the question.

The result under s. 110.6(1.3) depends on when the property was acquired. For property acquired after June 17^th, 1987, there is an ownership condition outlined in s. 110.6(1.3)(a)(i), and the farming use conditions described in s. 110..6(1.3)(a)(i)(A), hereafter called the “farming use condition.”

Whether those conditions are met in any given situation is a question of fact. First, let us consider the ownership condition in s. 110.6(1.3)(a)(i). It requires the property to be owned throughout the period of at least 24 months immediately preceding the determination time, by one or more of the specified persons or partnerships – which include, among others, the individual, the individual’s spouse or common-law partner, the individual’s child or parent, or a personal trust from which the individual acquired the property.

The determination time (i.e. when the daughter disposes of the property) is, I emphasize, at least 24 months. I say “at least” because the eligible period of ownership is not just the 24-month period that immediately precedes the time the daughter disposes of the property. It is, rather, the period of at least 24 months preceding that time, during which one or more of the specified persons own the property.

In the scenarios that are presented – either that the daughter disposes of the property within 24 months of her father’s death or she waits for more than 24 months – in both situations, because the farm has been owned continuously by Mr. A, and thereafter by his estate and his daughter for a period of at least 24 months immediately preceding the time that the daughter disposes of the property, the ownership requirement appears to be met – that is to say, that test has been met collectively by the three of them.

In other words, to address one of the concerns in the question, the father does not need to be the person that owned the property 24 months immediately preceding the determination time in order to be the person that satisfies the ownership test.

I now move on to the farming use condition. As noted in the question, to see whether the condition will be met, we look to whether, in at least two years, while the property was owned by one or more persons referred to in subparagraph (a)(i), or one or more of the persons in the ownership test, two tests are met.

The first is a gross revenue test, based on the revenue from the farm or fishing operation, for the person who met the ownership test. The second is based on whether the property was used principally in a farming or fishing business carried on in Canada, in which an individual referred to in subparagraph (a)(i) was actively engaged on a regular and continuous basis.

For the purposes of the farming use condition, the person or individual that meets the condition does not have to be the person who owns the property at the determination time, or in the 24 months immediately preceding that time.

If we apply this to the situation in the question (i.e., the daughter either disposes of the property within the 24 months, or waits until later), in both of those scenarios, if, in at least two years when the father owned the property, it was used principally in a farming or fishing business carried on in Canada in which he was actively engaged on a regular and continuous basis, and his gross revenue from the farm or fishing business exceeded his income from all other sources, the farming use condition may be met. The fact that the father is not the person who owns the property at the determination time, nor for the 24 months immediately before that time, does not preclude him from meeting the farming use condition in s. 110.6(1.3)(a)(ii)(A).

Official Response

20 June 2023 STEP Roundtable Q. 15, 2023-0963801C6 - Interpretation of clause 110.6(1.3)(a)(ii)(A)

Q.16 - Personal damages annuity

It is well established that an amount received as an award for damages in respect of personal injury or death is not taxable to the recipient. Further, where the award is paid to a taxpayer who is under 21 years of age, and where certain conditions are met, income derived from the settlement amount may be exempt from taxation per paragraphs 81(1)(g.1) and (g.2). Assume that the parents of a child die in an accident and the child receives an award as a consequence.

A. In these circumstances, is income on the award taxable?

B. If the proceeds of the award were used to purchase an annuity, is the annuity tax-free or does the income element of the annuity need to be reported as interest income?

Preliminary Response

Panourgias: Ss. 81(1)(g.1) and (g.2) generally provide that income earned from any property acquired by or on behalf of a person, for damages in respect of physical or mental injury to that person, is exempt in computing their income until the end of the year in which that person turns 21. This exemption also applies to any income earned from property substituted for that property, any taxable capital gains from the disposition of the property or substituted property, and any income earned on the invested income that was not required to be included because of those paragraphs.

In the present question, the child is awarded, and receives, an amount in respect of the death of their parents, but it is a question of fact as to whether the amount awarded is for damages in respect of the child’s mental injury. If the amount received by the child is awarded as damages in respect of mental injury suffered by the child, then ss. 81(1)(g.1) and (g.2) could apply in respect of the income earned on that property. Conversely, where the amount received is not awarded as damages in respect of mental injury suffered by the child, these provisions would not apply and the investment income would be taxable.

Regarding the second part of the question, an annuity contract purchased by a taxpayer or taxpayer’s representative with proceeds of a lump-sum award received for damages for personal injury or death would be an annuity contract for all purposes of the Act. This would give rise to income in the taxpayer’s hands in respect of the interest element of the annuity payments, with certain exceptions.

There are two potential exceptions in this case. The first is in circumstances where ss. 81(1)(g.1) and (g.2) apply, discussed above. The second is where the lump-sum award was organized as a structured settlement. A structured settlement is basically a means of paying or settling a claim for damages, usually against a casualty insurer, in such a way that the amounts paid to the claimant as a result of the settlement are free from tax in the claimant’s hands.

There are specific criteria that must be satisfied in order to create such an arrangement. These are provided in paragraph 5 of IT-365R2. As a consequence of meeting the conditions outlined in paragraph 5 of the Bulletin, the casualty insurer would be the owner of an annuity contract and would be required to report the interest element inherent in the annuity contract in its income.

In CRA’s view, the payments received by the claimant would represent non-taxable payments for damages.

Official Response

20 June 2023 STEP Roundtable Q. 16, 2023-0961321C6 - Damages in Respect of Personal Injury or Death

Q.17 - T1142 reporting following administration of non-resident estate

Foreign reporting is required for a distribution from a foreign trust (Form T1142). But no reporting is required per section 233.6 for a distribution from an estate that arose as a consequence of death of an individual.

At the 2007 CRA STEP Roundtable (Question 8), CRA stated that reporting would be required if the estate has been administered and the assets are now held in a testamentary trust.

Since providing that answer, the Tax Court of Canada considered this issue in Hess 2011 TCC 360. The Tax Court determined in that case that reporting was not required.

Does the 2007 answer still reflect CRA’s current position? If so, can CRA provide some general guidance as to when an estate would be administered such that property is now held in a testamentary trust which is not an estate?

Preliminary Response

Panourgias: The response to 2017 STEP Q.8 continues to reflect CRA’s position.

Form T1142 does not have to be filed by a person who receives a distribution from a non-resident estate during the period of administration of the estate. However, once the estate has been administered, the Canadian beneficiary of any ongoing non-resident testamentary trust is required to file Form T1142 in any year where a distribution is received from a trust, or where a Canadian beneficiary becomes indebted to the trust.

In Hess, the Tax Court concluded that no evidence had been provided to allow it to determine whether the estate had been administered, so there was no reasonable basis for the Tax Court to conclude that the testamentary trust was not an estate.

The determination of whether an estate can be administered is a matter of estate law. Generally speaking, we understand that an estate is considered to be fully administered when the assets in the estate have been distributed and, if applicable, a clearance certificate is requested.

Official Response

20 June 2023 STEP Roundtable Q. 17, 2023-0959621C6 - Foreign Reporting, Estate,

Q.18 - Foreign tax credit verification

The CRA appears to be engaged in substantive pre or post-assessing review of foreign tax credit (FTC) claims made by individual taxpayers.

Unfortunately, there are often timing issues with being able to provide sufficient evidence to the CRA to substantiate such a claim. For example, the US returns of a US citizen resident in Canada (who is required to file a US personal income tax return (“US tax return”) with US source income that generates US taxes payable) will often not show up in the US “transcript” system for quite some time after the filing of a Canadian personal income tax return (“Canadian tax return”). This may lead to the CRA denying the FTC claim until such time that the US transcript is available. In those circumstances, taxpayers and their advisors are forced to file amendments to such assessed returns or to timely file a notice of objection to protect the taxpayer’s rights.

Consider an example for the taxation year 2020 of a Canadian Taxpayer X, a US citizen resident in Canada. In Mr. X’s situation, his Canadian tax return was timely filed by April 30, 2021 with significant FTC claims for US tax paid for 2020. His US tax return was filed much later in the year (because of various US filing extensions that were available to Mr. X) by October 15, 2021 with the IRS. The amount of US tax paid for 2020 on his filed US tax return matched the appropriate FTC claim on his 2020 filed Canadian tax return.

In this example, the US transcripts were not available until late in 2022. This resulted in the CRA denying the FTC claim on the 2020 filed Canadian tax return. And to protect the taxpayer’s rights, a timely filed notice of objection (NOO) was filed to be initially dealt with by CRA Appeals.

However, some of our members have recently been in discussions with CRA Appeals who have informed our members that they are fast tracking NOOs for FTC claims to “confirm” the assessments, with “direction” to file an amendment when the information is available. This is what happened with Mr. X above. It would appear that the Minister’s assumption is that in the absence of substantive audit level evidence, no foreign taxes are paid in respect of the year. This approach appears counter to our system of self-reporting with FTC claimed based upon filing of foreign jurisdiction tax returns as evidence.

As a consequence, multi-year delays may arise in the proper processing of FTC claims.

Given the above, would the CRA consider acceptance of the filing of foreign tax returns (with filing confirmation) and proper calculation of FTC as appropriate support?

Preliminary Response

Panourgias: CRA tries to conduct its review activities fairly and tries to maintain a balance between the need to review tax returns and avoiding an undue burden on taxpayers. That said, a review is not an audit. In most cases, it is a routine check to ensure that the information provided is correct.

While some returns are chosen at random, the majority are selected through a risk-based scoring system. This system incorporates multiple factors to identify the highest potential for inaccuracy – as you can probably guess, foreign tax credits have a high score.

Before a taxpayer is asked for supporting documents to confirm an individual’s eligibility for a claim or deduction, CRA first refers to the taxpayer’s information on file. If more information is needed, or an unresolvable discrepancy appears, CRA sends a request for information or supporting documents to substantiate the taxpayer’s claim.

Individuals who receive a request for information and need more time should contact CRA at the number provided in the request letter as soon as possible in order to request an extension.

Regarding the question posed: the foreign tax return and the proper calculation of the foreign tax credit alone are not sufficient support. Before an amount of foreign tax can be used in the calculation of the foreign tax credit, the Act provides that the amount must be paid by the taxpayer for the year, and it is CRA’s longstanding position that the foreign tax credit is dependent on a confirmed final tax liability with the foreign tax authority. The supporting documents requested by CRA are proof of that confirmed final tax liability.

Although the foreign tax return and the proper calculation of the foreign tax credit are not, by themselves, sufficient support, they are still required to be submitted along with the other requested documents and proof of the final tax liability.

CRA does understand that a notice of assessment, transcript, or other official document from the tax authority, indicating the final foreign tax liability, is not always available. In those cases, CRA will generally accept proof of payment of tax, or receipt of refund, from the foreign tax authority. Proof of payment can include bank statements, cancelled cheques, or official receipts, provided that they clearly indicate that the payment was made to (or received from) the applicable tax authority, the amount of the payment, the tax year to which it relates, and the date that the amount was paid or received.

Official Response

20 June 2023 STEP Roundtable Q. 18, 2023-0966631C6 - Foreign Tax Credit Verification and Delays