Income Tax Severed Letters - 2023-11-01

Principal Issues: 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 STEP Canada / CRA Roundtable, 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?
In this still CRA’s position and what information would be required to support the claim?

Position: Yes, the CRA's position has not changed.

Reasons: Any unused net capital loss can be carried forward and applied against taxable capital gains in a taxation year that is open for reassessment.
If a particular taxation is not open for reassessment, subsection 152(4.2) provides the Minister with the discretion to reassess a taxpayer that is an individual (other than a trust) or a graduated rate estate after the normal reassessment period (as defined in subsection 152(3.1)) in order to give the taxpayer a refund or to reduce Part I taxes payable. Subsection 152(4.2) of the Act permits the Minister to adjust an individual's income tax return after the normal reassessment period in respect of a taxation year if an application for an adjustment is made by the individual within ten calendar years after the end of that taxation year.
Therefore, a net capital loss may be applied to a particular taxation year that is not open for reassessment if the request to amend the income tax return of the particular year to take into consideration the net capital loss is made within 10 calendar years after the end of the particular taxation year.

Principal Issues: Does subsection 204.2(1) of the Income Tax Regulations apply to a contingent beneficiary?

Position: The definition of beneficiary for the purposes of section 204.2 of the Regulations is based on its ordinary meaning. A beneficiary, in the ordinary sense, would include a beneficiary whose interest is contingent. However, such a determination is ultimately a question of fact and law.

Reasons: Question of the relevant facts and law.

Principal Issues: Will section 94 apply to a trust for a particular taxation year if the only contributor to the trust is a connected contributor and the only beneficiary resident in Canada under the trust is a registered charity resident in Canada?

Position: No.

Reasons: An exempt person defined in subsection 94(1) is excluded from the definition of resident beneficiary in subsection 94(1).

Principal Issues: Can a corporation controlled by a trust be related to a corporation controlled by the trustees of that trust.

Position: Yes.

Reasons: The two corporations may be related to each other by virtue of subparagraph 251(2)(c)(i).

Principal Issues: 1.How would any taxable benefit relating to the use of the property be computed? 2. To whom is the taxable benefit assessed and what is the nature? 3. Is it subject to non-resident withholding tax?

Position: 1. The amount of the benefit to a shareholder (taxpayer) is the amount that the shareholder would have to pay, in similar circumstances, to get the same benefit from a corporation in which the taxpayer is not a shareholder. 2. The non-resident shareholder is deemed to receive a dividend from a corporation resident in Canada. 3. Yes.

Reasons: Interpretation of the Act and previous positions.

Principal Issues: 1. Where a trust has realized a capital gain and has paid only the net taxable capital gain to a beneficiary that is a Canadian corporation, and has designated such payment under subsection 104(21), what amount will be added to the corporation’s capital dividend account? 2. Is the answer different if the entire capital gain is paid to the corporate beneficiary in the particular tax year? 3. When is such amount added to the capital dividend account?

Position: 1. No amount is added to the corporation’s capital dividend account. 2. Yes. One-half of the capital gain (the non-taxable portion of the capital gain distributed to the corporate beneficiary) will be added to the corporation’s capital dividend account. 3. The addition to the capital dividend account will be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation.

Reasons: The wording of the provisions in the definition of capital dividend account in subsection 89(1).

Principal Issues: (A) What is the process for making a written application to extend the 36 month period for property to become vested indefeasibly with the surviving spouse or common-law partner, or a testamentary spousal or common-law partner trust? (B) What are some of the considerations that the legal representative should consider and document when asking for an extension?

Position: (A) There is no prescribed form for making a request. The legal representative should send a letter that clearly indicates they 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. (B) A written application should include details that provide the director of the legal representative’s tax services office with a clear picture of the reason for the extension request.

Principal Issues: 1) Do paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act apply to the income earned on damage awards paid to a minor child in respect of the death of their parents?
2) Is there an income inclusion to the recipient of an annuity payment, where the annuity contract was purchased with the proceeds of a damage award paid to a minor child, in respect of the death of their parents?

Position: 1) It depends, question of fact.
2) Yes, except in certain circumstances.

Reasons: 1) If the amount received by the child was awarded as damages for mental injuries suffered by the child, then paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act would apply. Where the amount received by the child, was not awarded as damages for mental injuries suffered by the child, paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act would not apply and the investment income earned would be taxable.
2) An annuity contract purchased by a taxpayer or a taxpayer's representative with proceeds of a lump sum award received for damages for personal injury or death will be an annuity contract for purposes of the Income Tax Act and will, except where the lump-sum award is organized as a structured settlement or in circumstances where paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act apply, give rise to income in the taxpayer's hands.