Income Tax Severed Letters - 2017-10-11

Principal Issues: What are the income tax implications associated with the distribution of property from a discretionary trust to a Canadian resident corporation the shares of which are held by a new discretionary trust in order to avoid the 21-year deemed disposition in paragraph 104(4)(b)?

Position: CRA will typically apply GAAR in this situation.

Reasons: The transaction described circumvents the anti-avoidance rule in subsection 104(5.8) in a manner that frustrates the object, spirit and purpose of that provision, paragraph 104(4)(b) and the scheme of the Act as a whole.

Principal Issues: In the situation provided, 1) Whether a resident contributor to a U.S grantor trust can claim the foreign tax credit in respect of the foreign taxes paid by the contributor where the income of the trust is designated pursuant to subsection 104(22). 2) Whether the contributor can claim the foreign tax credit where the contributor elects to have subsection 94(16) apply and the trust designates the income under paragraph 94(16)(c). 3) Whether the contributor can deduct an amount under subsection 20(11) in respect of the foreign taxes paid, where the trust designates the income under subsection 104(22), or the contributor elects to have subsection 94(16) apply. 4) Whether the contributor can deduct an amount under subsection 20(12) in respect of the foreign taxes paid, where the trust designates the income under subsection 104(22), or the contributor elects to have subsection 94(16) apply.

Position: 1) Yes; a designation under subsection 104(22) is not necessary to obtain this result. 2) Yes. 3) A deduction is available under subsection 20(11) where the trust distributes its income to Mr. X in the year. No deduction under subsection 20(11) is available where Mr. X elects to have subsection 94(16) apply. 4) A deduction under subsection 20(12) is available in both situations.

Reasons: 1) Paragraph 94(3)(a) does not refer to subsection 108(5); accordingly the amount paid or made payable by the U.S. trust is foreign source income to the beneficiary for purposes of section 126, without the subsection 104(22) designation. 2) Paragraph 94(16)(c) provides that the amount designated is foreign source income to the electing contributor for purposes of section 126. 3) Where income is distributed to Mr. X, see reasons in 1). Where the contributor elects to have subsection 94(16) apply, paragraph 94(16)(b) deems the amount determined in paragraph (a) to be from a source in Canada. The designation under paragraph 94(16)(c) applies for purposes of paragraphs 94(16)(c), (d) and section 126 only and does not extend to subsections 20(11) and (12). This option does not satisfy the condition in subsection 20(11) that the income is from a source outside Canada. 4) As the Canadian resident individual includes a distribution from the trust in their income under subsection 104(13), and subsection 108(5) deems the income to be income from a property that is an interest in the trust, the "in respect of" condition in subsection 20(12) is satisfied. The same result occurs where the individual includes an amount in income pursuant to subsection 94(16).

Principal Issues: Whether cost amount needs to be "used" to trigger the application of GAAR.

Position: If there is a purpose to significantly increase cost amount, the CRA would seek to apply GAAR and the use is irrelevant.

Reasons: The scheme of new 55(2) is to address increase in cost amount that was not subject to tax, whether or not that cost amount has been used in the series.

Principal Issues: Whether the Canada-US Tax Convention (“Convention”) provides relief from double taxation in circumstances where a Canadian resident is the sole member of a disregarded U.S. LLC carrying on business in the U.S. with its mind and management residing in Canada?

Position: No, the Convention does not contain a mechanism to allow the U.S. income tax imposed on the member of the LLC to be credited against the income tax payable in Canada by the LLC.

Reasons: Article XXIV of the Convention provides that a deduction from income tax payable in Canada for U.S. income tax paid is subject to the provisions of the Income Tax Act.

Principal Issues: Is the position in ITTN 11 regarding payments made by a trust for the benefit of a minor beneficiary still valid?

Position: Perhaps not.

Reasons: The Directorate intends to review the administrative position in ITTN 11 to determine whether it is still valid and may update it as appropriate.

Principal Issues: Is the stated reporting method in the T3 Guide in respect of amounts attributed pursuant to subsection 75(2) correct?

Position: Yes.

Reasons: Consistent with the law.

Principal Issues: Update on the CRA's dedicated phone line for tax professionals.

Position: The CRA’s Income Tax Rulings Directorate is introducing a new dedicated telephone service (DTS) for income tax service providers by July of 2017. The DTS will assist people in the business of preparing income tax returns by providing access to experienced CRA staff who can help with more complex technical issues.

Reasons: Introduction of the DTS will provide those in the business of preparing income tax returns greater access to CRA information to the benefit of the many clients they serve.