Income Tax Severed Letters - 2014-12-10

Principales Questions: Whether the CRA will generally grant relief to taxpayers with respect to the late-filed election penalty of subsection 220(3.5) where the taxpayer was not aware that the section 86.1 election exists or was not aware that an eligible distribution was made.

Position Adoptée: No.

Raisons: The Minister's discretion to waive a penalty under subsection 220(3.1) is to be exercised on a case-by-case basis following the guidelines published in IC 07-1.

Principales Questions: Whether the term "contributor" defined in subsection 251.1(3) includes a deceased person?

Position Adoptée: For the purposes of the definition of "contributor" in subsection 251.1 (3), we are of the view that, depending on the context, a deceased person may be considered to have, at a given time, made a loan or a transfer of property, either directly or indirectly, in any manner whatever, to or for the benefit of a trust. This position applies to any transfer of property made as a consequence of death of a taxpayer as well as to any loan or transfer of property made by a taxpayer, before his or her death.

Raisons: Based on a textual, contextual and purposive analysis of the definition of "contributor" in subsection 251.1(3).

Principales Questions: When a taxpayer subscribes to an annuity contract and a life-insurance policy with the same insurer, are both contracts considered to be a non-exempt life-insurance policy?

Position Adoptée: Question of facts.

Raisons: Depends on whether the contracts are interdependent and interconnected one from the other.

Principales Questions: (1) How the CRA intends to apply subparagraph 248(35)(b)(i), subsection 248(36) and paragraph 248(37)(g) where the property that is the subject of a gift made by a taxpayer to a qualified donee was acquired by reason of the death of the taxpayer's spouse or common law partner? Would the exclusion provided in paragraph 248(37)(g) apply to property acquired under subsection 70(6) if that property is donated to a qualified donee less than three years after the acquisition by the deceased? (2) On the other hand, if the property is transferred at fair market value to the deceased's spouse or common-law partner under subsection 70(5), would the donor qualify for the charitable donation credit on the increase in value between the acquisition date of the property by the surviving spouse or common-law partner and the date of the gift when the donation is made within three years after the spouse or common-law partner's death? Would the date of acquisition of the property by the deceased be taken into consideration?

Position Adoptée: (1) In the given situation, since the property that is the subject of the gift by the taxpayer was acquired by reason of the death of an individual, we are of the view that subsection 248(36) is not applicable. As the conditions provided in paragraph 248(37)(g) are met, subsection 248 (35) does not apply. (2) Donations of property acquired in circumstances referred to in subsection 70(5) are not included in the list provided in paragraph 248(37)(g). Therefore, subsection 248(35) may apply if all conditions provided therein are met. If the property that is the subject of the gift by the taxpayer was acquired during the three-year period ending at the time of the donation by a person with whom the taxpayer does not deal at arm's length, but that the property was acquired by the taxpayer by reason of the death of an individual, subsection 248(36) would not apply.

Raisons: Based on our interpretation of subparagraph 248(35)(b)(i), subsection 248(36) and paragraph 248(37)(g).

Principal Issues: The sole shareholder of a corporation receives a stock dividend. The fair market value of the shares received as the stock dividend is equal to 9/10 of the value of the common shares held by the shareholder. After the stock dividend, the common shares (with a reduced value) are exchanged pursuant to section 51 for preferred shares having a value equal to the value of the common shares. After the exchange, new common shares are issued for a nominal amount to a family trust. The stock dividend and the exchange of the common shares are done for the purpose of implementing an estate freeze.
1- Whether subsection 15(1.1) would apply with respect to the stock dividend;
2- Whether the shares issued as a result of the stock dividend would be issued as part of an arrangement the main purpose of which was to permit any increase in the value of the property of the corporation to accrue to other shares that would, at the time of their issue, be prescribed shares;
3- Whether subsection 74.4(2) would apply with respect to the shares issued as a result of the stock dividend;
4- What would be the safe income attributable to shares issued as a result of the stock dividend?
5- As an alternative, if the shares of the corporation are held equally by three shareholders and the steps implemented to freeze the value of the corporation are the same except that the new common shares are issued to three family trusts, whether subsection 15(1.1) would apply with respect to the stock dividend.

Position: 1. Generally no.
2. An arrangement may include more than one transaction. If the transactions are planned together for the purpose of achieving an estate freeze, the transactions may be considered to be part of the arrangement. The main purpose of an arrangement is a question of fact. The question of whether the new shares issued are prescribed shares is a question of fact.
3. No.
4. In the case of stock dividend consisting of shares having a high redemption amount and nominal paid-up capital, an allocation should be made of the safe income and safe income on hand formerly attributable to the common shares on which the dividend was paid, on the basis of the relative amounts of the gains inherent in the original shares and in the shares constituting the dividend.
5. If the stock dividend is paid to all shareholders of the payor pro rata in proportion to their shareholdings, generally no.

Reasons: 1. and 5. It may not reasonably be considered that one of the purposes of the payment was to significantly alter the value of the interest of a specified shareholder of the corporation.
2. Meaning of arrangement and question of fact.
3. The stock dividend does not constitute a transfer by an individual, either directly or indirectly, by means of a trust or by any other means, to a corporation for the purpose of subsection 74.4(2).
4. Longstanding position.

Principal Issues: Whether subsection 98(3) applies on the dissolution of a partnership because of the uniting of all the partnership interests in the hands of a single partner?

Position: No

Reasons: The other members do not receive any property of the partnership at the time of its dissolution.

Principal Issues: What will be the cost to a taxpayer of property acquired from a non-resident person with whom the taxpayer does not deal at arm's length?

Position: Usually the arm's length price.

Reasons: Subsection 247(8) expressly gives precedence to the arm's length standard of subsection 247(2) over the fair market value standard of subsection 69(1).

Principal Issues: In a particular situation, Mr. A and Mr. C are both related to Mr. B. However, Mr. A is not related to Mr. C. Each of Mr. A, Mr. B and Mr. C holds all of the issued and outstanding shares of the capital stock of, respectively Aco, Bco and Cco. Each of Aco, Bco and Cco holds one-third of the issued and outstanding shares of the capital stock of Dco. Aco and Cco are both related to Bco. Thus, Aco and Cco are deemed to be related to each other for the purposes of subsections 251(1) and 251(2) pursuant to subsection 251(3). But for the deeming rule in subsection 251(3), Aco and Cco would not be related to each other. Aco also holds all of the issued and outstanding shares of the capital stock of Eco. a) Whether Aco, Bco and Cco form a related group as defined in subsection 251(4); if the answer in a) is affirmative, b) whether Aco is related to Dco; and c) whether Eco is related to Dco.

Position: a) yes; b) as the related group formed by Aco, Bco and Cco is in a position to control Dco, that related group is deemed, pursuant to paragraph 251(5)(a), to be a related group that controls Dco. Thus Aco and Dco are related to each other pursuant to subparagraph 251(2)(b)(ii) and also pursuant to subparagraph 251(2)(c)(iii); and c) Eco and Aco are related to each other pursuant to subparagraph 251(2)(c)(iii).

Reasons: Question of fact and wording of the Act.