15 June 2022 STEP Roundtable

This sets out the questions that were posed, and provides summaries of the responses given, at the 2022 STEP CRA Roundtable, which was held as a webinar on 15 June 2022. Various of the titles shown are our own. The webinar 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 Disproportionate s. 104(21.2) designation?

Subsection 104(21) permits a trust to designate, in respect of a beneficiary under the trust, a portion of its net taxable capital gains[1] (“NTCG”). Where the designation is made, the amount designated is deemed, for the purposes of sections 3 and 111 (except as they apply for the purposes of determining whether a beneficiary is entitled to claim a capital gains exemption under section 110.6),[2] to be a taxable capital gain (“TCG”) for the year of the beneficiary from the disposition of capital property.

Given that a designation made pursuant to subsection 104(21) is not for the purposes of section 110.6, in order for a beneficiary under the trust to claim the lifetime capital gains exemption (“LCGE”) in respect of the TCG designated to them under subsection 104(21), a separate designation pursuant to subsection 104(21.2) must be made.

Consider the following facts:

1) A trust (“the Trust”) is an inter vivos, discretionary personal trust, resident in Canada;

2) There are 2 adult beneficiaries under the Trust (“Beneficiary A”; “Beneficiary B”), each of whom are resident in Canada;

3) Only Beneficiary B has access to their LCGE;

4) The Trust realizes two capital gains during the year, resulting in total NTCG to the Trust in the amount of $1,000,000, broken down as follows:

a) a $300,000 “regular” TCG, from the disposition of the shares of a publicly traded corporation; and

b) a $700,000 TCG resulting from the sale of qualified small business corporation shares[3] (“QSBCS”); and

5) The trust indenture permits the trustees to allocate and designate the NTCGs as follows:

a) The $300,000 TCG to Beneficiary A; and

b) The $700,000 QSBCS TCG to Beneficiary B (so that Beneficiary B may use their LCGE to offset as much of the gain as possible).[4]

Does the formula in subsection 104(21.2) permit the trustees to allocate the NTCGs in the desired manner, or does the interaction of subsections 104(21) and 104(21.2) require a proration, such that the entire $700,000 QSBCS TCG cannot be designated to Beneficiary B?

CRA Preliminary Response

In order to designate those net taxable capital gains to a beneficiary under s. 104(21): the beneficiary is resident in Canada; the designation is made in the trust’s return of income for the particular taxation year; the amount is included in income of the beneficiary for that taxation year under s.104(13)(a), s. 104(14) or s. 105; and the total of all amounts designated by the trust in respect of each beneficiary under the trust for the particular taxation year is not greater that the trust’s net taxable capital gains for the particular taxation year (i.e., the trust cannot designate more than its net taxable capital gains).

Because the trust meets those conditions, it is able to designate the $300,000 of net taxable capital gains in respect of Beneficiary A and to designate the net taxable capital gains of $700,000 in respect of Beneficiary B.

S. 104(21.2) provides that, where a designation is made under s. 104(21) in respect of the net taxable capital gains for a taxation year (the “designation year”), a separate designation under s. 104(21.2) must be made, which is not an optional designation. The s. 104(21.2) designation is the catalyst that effectively allows the beneficiary to claim the lifetime capital gains exemption under s. 110.6 in respect of the disposition by the trust of QSBCS property, or qualified farm or fishing property, because s. 104(21.2) deems the beneficiary to have disposed of those properties.

Under s. 104(21.2), the trust must designate an amount in respect of its eligible taxable capital gains, if any, for the designation year in respect of the beneficiary as determined by the applicable formulas – the QSBCS formula under s. 104(21.2)(b)(ii)(B) is (A×B×F)÷(D×E). The other formula deals with the QFP gains, and differs by only a single Element from the first formula.

Focusing on the QSBCS formula, I am going to give a conceptual overview of what the Elements of the formula are doing. The written response provides more detail for each of the Elements.

The brief answer is that a proportionate amount of the QSBCS gain is designated to each of Beneficiary A and Beneficiary B. The trust cannot designate the entire $700,000 QSBCS gain to Beneficiary B.

Element A is based on a lesser-of determination, and the trust’s eligible taxable capital gains is one of the two factors in that “lesser of”. (Eligible taxable capital gains is defined in s. 108(1), and it requires a walkthrough of its own, and a determination of amounts under s. 110.6, such as the annual gains limit and cumulative gains limit – but conceptually, in our example, the trust’s eligible taxable capital gains are the QSBCS gains of $700,000.)

The key pair of Elements to look at next is B and D. If you consider that as a fraction, B divided by D, it produces the proportion of what is shared between the two different beneficiaries or the multiple beneficiaries because it compares the amount designated under s. 104(21) to each beneficiary or to each particular beneficiary – the B Element – to the total of all the s. 104(21) designations to all of the beneficiaries – the D Element. When we apply the numbers from the example, we are going to see that only Element B is different for the two beneficiaries. All of the other amounts in the formula are the same.

Finally, the fraction F over E is relevant only where the trust has both QSBCS and QFP gains. The fraction basically splits up the first number, the eligible taxable gains, between the two formulas. If you only have one type of gain, that fraction, F/E, produces a result of one.

What do the calculations look like? For Beneficiary A, we know that the trust’s eligible taxable capital gains, or Element A, is the $700,000 of the QSBCS gain and we also know that Beneficiary A is being designated $300,000 of net taxable capital gains under s. 104(21). The total of what is being designated between both beneficiaries is the $1,000,000. Finally, the last component produces a result of one.

Boiling all of that down, we can see that Beneficiary A is designated 30% of the total of the QSBCS gains, for a designation of $210,000. The second beneficiary (Beneficiary B) is being designated $700,000 of the $1,000,000 under s. 104(21). This results in Beneficiary B being designated 70% of the $700,000 of the QSBCS gains, or $490,000.

The only other thing to note is that the $700,000 of the QSBCS gains was in excess of an individual’s capital gains deduction or their lifetime capital gains exemption. Even though Beneficiary B here is allocated only $490,000 of the QSBCS gains, they still have to consider the conditions in s. 110.6 in respect of their gains and whether they can make a claim or use the capital gains deduction. For example, they have to consider how much of their capital gains deduction they have remaining.

Official Response

15 June 2022 Roundtable, 2021-0922021C6 - STEP 2022 - Q1 - 104(21.2) Designation

Q.2 Late s. 104(4)(a)(ii.1) election

In the 2021 STEP CRA Roundtable[5] , it was noted that an alter ego trust can effectively elect to have the 21 year deemed disposition rule apply, rather than having the deemed disposition occur upon the death of the taxpayer who created the trust. To do so, the alter ego trust must make an election in its tax return for its first taxation year, pursuant to subparagraph 104(4)(a)(ii.1).

One consequence of the election is that the property transferred to the alter ego trust will be deemed to be disposed of by the taxpayer at fair market value and not the adjusted cost base pursuant to subparagraph 73(1)(a)(ii), because the condition in paragraph 73(1.02)(c) will not be satisfied.

Given the above, we have two questions:

A. Will CRA accept a late election under subparagraph 104(4)(a)(ii.1)?

B. Can this election be made by other trusts to which a subsection 73(1) rollover would otherwise apply, such as a spouse or common-law partner trust, or a joint spouse or common-law partner trust?[6]

CRA Preliminary Response

(a) Late election

To determine whether to accept an election that is provided for in a particular provision of the Act, we need to look to the specific language used in that provision. The Act contains a number of provisions that require certain elections to be filed “with” the return of income, while other provisions require certain elections to be filed by the “filing due date” as that term is defined in s. 248(1). The election in s. 104(4)(a)(ii.1) has to made by the trust in its return of income for its first taxation year.

The courts have established that the meaning of words “in the taxpayer’s return of income” are clear and unambiguous, and therefore require that the election must be made in the return of income. For instance, in a 2005 Federal Court of Appeal case, Rezek, the court noted in paras. 113-15 that where an election is required to be filed in the taxpayer’s return of income for the year, such an election would not be considered late-filed if the election was filed with a return of income for that year that was late filed. The courts have also held that, where an election that is required to be filed with the return of income for the year is not filed with the return, the election would be late.

Therefore, CRA will accept an election filed under s. 104(4)(a)(ii.1) only if it is made in the trust’s return of income filed for its first taxation year, regardless of whether the return is filed by the required filings deadlines specified in s. 150(1)(c). Where the election is not filed with the trust’s return of income for its first taxation year, but rather is filed later, that election would be late, and could not be accepted. As that subparagraph is not a prescribed provision listed in s. 600 of the Regulations, the Minister has no discretion under s. 220(3.2) to accept a late filed election made under that provision.

(b) Non-AET trusts

The question asks whether a spousal trust, a common-law partner trust or a joint spouse or joint common-law-partner trust can similarly elect out of s. 104(4)(a), and the quick answer is no. The written response requires a more detailed examination of the subparagraphs and clauses, which is not provided here.

S. 248(1) defines an “alter ego trust” for purposes of the Act, and that definition indicates that that s. 104(4)(a) should be read without reference to the provisions that describe a spouse or common-law spousal trust or a joint spouse or joint common-law partner trust. In other words, an alter ego trust is described by looking at s. 104(4)(a)(ii.1) (where you can elect out) in conjunction with the clause that describes the conditions for being an alter ego trust. The key is that s. 104(4)(a)(ii.1) refers only to the clause that describes provisions for being an alter ego trust. Therefore, the election to not be a type of trust listed in s. 104(4)(a) cannot be made by those other types of trusts, and the first deemed disposition for those trusts would occur on the death or the later death referred to in the applicable provisions in s. 104(4)(a).

Official Response

15 June 2022 Roundtable, 2022-0926761C6 - STEP 2022 - Q2 - 104(4)(a)(ii.1) Election

Q.3 Late electing contributor/ trust elections

a) Electing Contributor

The definition of “electing contributor” in subsection 94(1) is relevant in applying the rules in subsections 94(16) and 94(17). Subsection 94(16) provides rules for attributing the income of a trust that is deemed to be resident in Canada under subsection 94(3) to its electing contributors. The provision applies on an electing contributor-by-electing contributor basis. Subsection 94(17) provides rules regarding certain liabilities in respect of joint contributions where there is an electing contributor who is a joint contributor in respect of a contribution to the trust.

Can the election described in the definition of electing contributor in subsection 94(1) be late-filed?

b) Electing Trust

The definition of “electing trust” in subsection 94(1) is relevant in determining whether property held in the “non-resident portion”, as defined in subsection 94(1), of a deemed resident trust is considered to be held in a separate trust.

Paragraph 94(3)(f) provides rules that generally have the effect, on an elective basis, of excluding from the taxable base of a deemed resident trust for Canadian tax purposes any income relating to property that has been contributed to the trust otherwise than by a “resident contributor” to the trust or, if there is a current “resident beneficiary” under the trust, a “connected contributor” to the trust (i.e., property that is part of the non-resident portion of the trust). Resident contributor, resident beneficiary, and connected contributor are all defined in subsection 94(1). In effect, this is accomplished by deeming there to be a second trust in addition to the electing trust. The additional trust is deemed to hold the property that forms the trust’s non-resident portion. This has the effect of removing from the taxable base of the trust any income derived from that property.

Can the election described in the definition of electing trust in subsection 94(1) be late-filed?

CRA Preliminary Response

(a) Late electing contributor election

The term “electing contributor” and all the other relevant definitions are defined in s. 94(1).

An electing contributor in respect of a trust is a person that is a resident contributor to the trust (i.e., basically a person resident in Canada who has contributed property to the trust) and that has elected to have s. 94(16) apply in respect of both the contributor and the trust.

The election is made in respect of a particular year of the contributor – which we will call the “initial year” because it is the initial year that the election is to take effect, and it will continue to apply for all subsequent taxation years. In order for the election to be effective for that initial year and for all subsequent years, the election must be filed in writing on or before the contributor’s filing due date for that initial year. The filing due date for a taxation year for a taxpayer is defined in s. 248(1), and is basically the day on or before the taxpayer’s income tax return is required to be filed for the year under Part 1 of the Act or the day that the return would be required to be filed if Part 1 tax were payable by that taxpayer for the year.

For example, consider a situation where the resident contributor is an individual, and that individual has an April 30^th filing due date for the individual’s personal income tax return. If the individual contributor would like to be an electing contributor in respect of the trust for the individual's 2022 taxation year and all subsequent years, the contributor’s initial year is 2022 and the election would need to be filed on or before April 30^th 2023, being the due date of the individual’s 2022 income tax return. (April 30^th 2023 is a Sunday, so the deadline would be May 1^st.) Even if the contributor in this example filed the individual's personal income tax return after the due date of May 1^st 2023, the election must still be filed on or before that day. The Minister does have discretion to allow a taxpayer to late-file or amend certain elections that are required to be made under a prescribed provision, and those prescribed provisions are listed in s. 600 of the Income Tax Regulations - but the definition of electing contributor is not a prescribed provision, so that the Minister would not have the discretion to accept a late-filed election in this case.

In summary, there is no provision that would permit a contributor to be an electing contributor for an initial year and all subsequent years if the election is filed after the contributor’s filing due date for the initial year. This does not preclude a contributor from filing this election for subsequent taxation years, assuming all of the conditions are met. Going back to our example, if the individual contributor missed the filing due date to make the election effective for the 2022 taxation year, that individual could still potentially have the election apply for the 2023 taxation year and all subsequent years if the election were filed on or before the contributor’s filing due date for the 2023 taxation year.

(b) Late electing trust election

One of the conditions that must be met for a trust to be an electing trust is that the trust filed the relevant election in writing with the trust’s return of income for its first taxation year throughout which the trust is deemed to be resident in Canada under s. 94(3), and in which it holds property that is at any time of the year part of its non-resident portion.

The election for an electing contributor must be filed on or before the contributor’s filing due date for the first year that the election is to take effect, but the election for an electing trust must be included with the trust’s income tax return for the particular year described. That is similar to the provision discussed in the previous question.

The courts have established that the meaning of the words “in the taxpayer’s return of income” are clear and unambiguous and therefore require that the election must be made in the original return of income. As long as the election to be an electing trust is filed with the trust’s income tax return for the trust’s first taxation year throughout which it is deemed to be resident in Canada and in which it holds property that is part of its non-resident portion, the election would not be considered to be filed late even if the trust return for that year is filed late. The key is that the election must be filed with the return. Where the election is not included with the income tax return filed, the election is considered late. The Minister does not have the discretion to allow a taxpayer to late-file this election since the definition of electing trust is not a prescribed provision that is listed in s. 600 of the Income Tax Regulations. Unless the election to be an electing trust is filed with the trust’s return for that first taxation year throughout which the trust is deemed to be resident in Canada and in which it holds property that is part of its non-resident’s portion, there is no ability to have the election be effective for that year.

Official Response

15 June 2022 Roundtable, 2022-0924801C6 - STEP 2022 – Q3 - Electing Contributor and Electing Trust

Q.4 S. 159(5) security

The tax payable by a deceased individual related to certain income and gains (rights and things per subsection 70(2), and deemed dispositions per subsections 70(5) and 70(5.2)) may be, pursuant to subsection 159(5), paid in 10 annual instalments provided the taxpayer’s legal representative so elects and furnishes the Minister with security acceptable to the Minister.

Can the CRA comment on what is acceptable security and what the recommended process should be to provide for such an arrangement?

CRA Preliminary Response

The process to make the election to defer the payment of tax under s. 159(5) and furnish acceptable security is initiated with election form T2075. The CRA requires that form T2075 be filed twice – this is noted at the top of the form. It should be filed on its own at the Tax Services Office in the area where the deceased taxpayer resided prior to death, and another copy of the form should be filed with the deceased taxpayer’s relevant tax return. The election will then be forwarded to a collections officer, and that collections officer will contact the legal representative of the deceased taxpayer’s estate to provide the relevant direction on the requirement to provide adequate security and to facilitate the process.

As for what is acceptable security, the Collections Directorate recently published updated IC98-1R8 on CRA’s tax collection policies. This Information Circular includes additional information on what constitutes acceptable security as well as the hallmarks of acceptable security. The Information Circular provides that some types of security that may be accepted includes bank letters of guarantee, or standby letters of credit provided by Schedule I or Schedule II financial institutions. It also includes mortgages, and it also provides that other forms of security can be accepted in certain circumstances, but the acceptability of other forms of security would be determined on a case by case basis. It also notes that acceptable security must be liquid, equivalent or near-equivalent to cash and realizable on demand without defences or claims from third parties. See the Circular for more detail.

The information and guidelines provided in the Information Circular are not meant to be exhaustive. Legal representatives will have the opportunity to discuss arrangements or security as part of the process for the election.

Official Response

15 June 2022 Roundtable, 2022-0929911C6 - STEP 2022 - Q4 - Death and Tax Payment over 10 Years

Q.5 Debt forgiveness on merger

A Canadian resident trust makes a loan (the “Loan”) to a beneficiary. The beneficiary uses the Loan proceeds for investment. Later the trust distributes the Loan as an in specie capital or income distribution to the beneficiary.

Is the distribution of the Loan to the beneficiary a settlement of debt? If so, do the debt forgiveness rules under section 80 apply to the beneficiary for the “forgiven amount”?

If the beneficiary used the loan proceeds for personal purposes (e.g. to buy a principal residence), is the answer different?

CRA Preliminary Response

For the purpose of our response, we have made a few assumptions that: the trust qualifies as a personal trust within the meaning of that term in s. 248(1); both the trust’s and the beneficiary’s taxation years end on December 31; the beneficiary of the trust is resident in Canada for purposes of the Act; the in specie or income distribution, as the case may be, is legally effective and is made to a capital or income beneficiary of the trust, as the case may be, in accordance with the terms of the trust indenture, the loan is a bona fide loan made by the trust to the beneficiary and is capital in nature at the time of the distribution; and the amount of principal and fair market value of the loan is equal to the capital or income distribution, as the case may be.

The meaning of “settlement or extinguishment of an obligation” is not defined in the Act. The determination of whether an obligation is settled or extinguished, whether there is a payment, and whether there is a forgiven amount resulting from its settlement or the extinguishment, is a mixed question of fact and law and can only be determined on a case-by-case basis. Generally, where the qualities of creditor and debtor are united in the same person, the obligation would be extinguished under the doctrine of merger under the common law, or confusion under Article 1683 of the Civil Code of Quebec, and thus would generally constitute a “settlement” of the obligation for purposes of s. 80, so that there is a settlement in the present question.

For the purposes of our response, we understand that the result of the distribution of the loan to the beneficiary is that the loan is extinguished in accordance with the applicable law as to either merger or confusion, and that the settlement of the loan in such a manner does not constitute a payment by the beneficiary in satisfaction of the principal of the loan within the meaning of the applicable law. The forgiven amount defined in s. 80(1) applies to a commercial obligation issued by a debtor. A commercial obligation issued by a debtor means a commercial debt obligation issued by the debtor or a distress preferred share issued by the debtor. A commercial debt obligation is a debt obligation for which an amount relating to interest paid or payable on the debt obligation, if any, is or would be deductible in computing the debtor’s income, taxable income or taxable income earned in Canada.

In the present question, if the proceeds from the loan are used by the beneficiary for investment purposes that meet the criteria for interest deductibility, the loan would qualify as a commercial debt obligation and would be a commercial obligation. If the proceeds of the loan are used by the beneficiary for personal use, such as to buy a personal residence, the loan would not be considered a commercial debt obligation, so that the definition of “forgiven amount” would not apply to the settlement of that loan.

Therefore, we now only need to deal with the first situation. When a commercial obligation is settled, it must be determined whether it gives rise to a forgiven amount. A forgiven amount at any time is determined by the formula A – B, under that definition in s. 80(1). Element A of the formula is the lesser of the amount for which the obligation was issued and the principal amount of the obligation. Element B of the formula is a little more involved because it is the total of the amounts described in paragraphs (a)-(l) for the Element.

Paragraph (a) of B includes any amount paid at the time the obligation is settled in satisfaction of its principal amount. In the current situation, since the extinguishment of the loan does not constitute a payment in satisfaction of the principal amount of the obligation, it would not constitute an amount described in paragraph (a). It simply would not fit into any of the other items that are described in paragraphs (b) to (l). Therefore, the settlement of the loan without any payment would give rise to a forgiven amount equal to element A in the formula.

However, in some specific situations, when a commercial obligation is extinguished under the doctrine of merger or confusion, and it does not constitute a payment under the applicable law, the CRA considers that those situations will not give rise to a forgiven amount for purposes of s. 80. Based on the facts and assumptions as we understand them, we are of the view that the CRA’s position would apply to extinguishment of the loan described in the present question.

We should also point out that the taxpayer could structure the transactions in such a way that the legal documentation clearly demonstrates the payment of a loan so the transactions do not raise uncertainty as to the application of s. 80 in similar situations.

Official Response

15 June 2022 Roundtable, 2022-0928231C6 - STEP 2022 - Q5 - Trust and Debt Forgiveness

Q.6 Trustee changes and control

Assume a Canadian corporation is wholly owned by a trust. Assume also that the trust document provides that the trustees of the trust can exercise discretionary power in the distribution of income and capital from the trust such that paragraph 256(7)(i) will not apply to deem there not to have been an acquisition of control if there is change to the trustees of the trust. Is there an acquisition of control (giving rise to a loss restriction event for the Canadian corporation) in the following circumstances?

(a) The trust has one trustee, A, who resigns. B, who is related to A, takes over as trustee.

(b) The same circumstances as (a) except that A and B are not related.

(c) The trust has two trustees, D and E. The trust document requires unanimous decision making. E resigns and is replaced by F. E and F are related.

(d) The trust has two trustees, D and E. The trust document requires unanimous decision making. E resigns and is replaced by G. E is not related to G.

(e) The trust has three trustees, H, I and J. The trust requires majority decision making. J resigns and is replaced by K. Each of H, I, J and K are not related.

CRA Preliminary Response

First, some background on s. 256(7)(i). It applies in circumstances in which a trust at a particular time controls a particular corporation and the trustee or other legal representative (the “trustee”) having ownership or control of the trust property, e.g. the shares of the particular corporation being held by the trust, where the ownership or control of that property changes. S. 256(7)(i) deems control of the corporation not to have been acquired solely because of the change, provided that the two additional conditions are met. The first condition requires that the change in trustees not be part of a series of transactions or events under which the beneficial ownership of the trust property changes. The second condition requires that no amount of the income or capital of the trust to be distributed at or after the change in trustees be subject to a discretionary power.

Those conditions are not met, so what about where s. 256(7)(i) does not apply? CRA’s response to a similar question at the STEP 2011 Q.17 continues to apply. Specifically, based on the decision in MNR v. Consolidated Holding Company (1972), where the majority of the voting shares of the corporation are held by a trust, it is the trustees of the trust who have legal ownership of the shares, who have the right to vote those shares, and who therefore control the corporation. Where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts including the terms of the trust documents.

However, in the absence of evidence to the contrary, we would consider there to be a presumption that all of the trustees would constitute a group that controls the corporation. Given that view, we would generally take the position that there would be an acquisition of control in situations (b), (d) and (e) of the question. For situations (a) and (c), s. 256(7)(a)(i)(A) may apply to deem there to be no acquisition of control where the shares are acquired by a person related to the former trustee provided that the replacement trustee is appointed concurrently with the resignation of the former trustee.

Official Response

15 June 2022 Roundtable, 2022-0928191C6 - STEP 2022 – Q6 - Acquisition of control

Q.7 S. 88(1)(d.3) application re AET

Paragraph 88(1)(d.3) states that “for the purposes of paragraphs 88(1)(c), (d) and (d.2), where at any time control of a corporation is last acquired by an acquirer because of an acquisition of shares of the capital stock of the corporation as a consequence of the death of an individual, the acquirer is deemed to have last acquired control of the corporation immediately after the death from a person who dealt at arm's length with the acquirer”.

In 2010, the CRA issued an advance tax ruling described in document 2009-0350491R3 dealing with the availability of a section 88 bump to a series of transactions involving property owned by a subsidiary of an alter ego trust immediately after the death of the settlor. It was stated that among the reasons for granting the ruling was that the parent corporation seeking the bump, another subsidiary of the alter ego trust, acquired control of the subsidiary as a consequence of the death of the settlor of the alter ego trust because the shares of the subsidiary were acquired by the parent corporation pursuant to the terms governing the alter ego trust which imposed an equitable obligation on the trustees to transfer the shares of the subsidiary to the parent on the death of the settlor.

1. Does this continue to be CRA’s position and as a consequence the provisions of paragraph 88(1)(d.3) would apply to the parent in these circumstances?

2. Does the deemed reacquisition, pursuant to subsection 104(4), of the shares of a corporation wholly-owned by an alter ego trust on the death of the settlor of the alter ego trust result in an acquisition of control of the corporation by the alter ego trust as “a consequence of the death of an individual” for purposes of paragraph 88(1)(d.3)?

CRA Preliminary Response

(a) 2009 ruling

2009-0350491R3 basically involved the shares of a subsidiary corporation of an alter ego trust being acquired by another as the consequence of the death of the settlor pursuant to the terms of the alter ego trust.

CRA has not modified its views on the application of s. 88(1)(d.3) in the circumstances described in that document.

(b) Application to s. 104(4) disposition

Where s. 104(4) applies to deem a trust to have disposed of and reacquired shares of the capital stock of a wholly owned corporation, the deemed re-acquisition of the shares pursuant to s. 104(4) would not, in itself, result in an acquisition of control of the corporation. Even though the shares are deemed to be re-acquired by the trust at fair market value for tax purposes, the shares continue to be legally owned by the trust, so there is no transfer of the legal ownership of those shares, in the circumstances, that would result in acquisition of control.

Official Response

15 June 2022 Roundtable, 2022-0928291C6 - STEP 2022 - Q7 - paragraph 88(1)(d.3)

Q.8 TOSI and multiple businesses

Suppose that husband and wife reside in Canada and own a number of corporations each of which has its own business and full-time staff. They work on a full-time basis for the various companies, but do not work for any particular company at least 20 hours a week. In this circumstance, would dividends above a reasonable amount be subject to tax on split income (“TOSI”)? Assume the shares of the corporations do not qualify as excluded shares.

CRA Preliminary Response

This response involves a number of terms that are defined in s. 120.4(1). The first of those is “related business.” For the purposes of this response, we assume that each business described is a “related business” in respect of both “specified individuals.”

Under the TOSI rules, TOSI will apply to tax the split income of a specified individual at the highest marginal tax rate unless the amount is an excluded amount. Subparagraph (e)(ii) of “excluded amount” provides that, in respect of an individual for a taxation year, if the individual has attained the age of 17 before the year, an amount that is derived directly or indirectly from an excluded business of the individual for the year is an excluded amount.

Generally, a business is an excluded business of the specified individual for a taxation year if the specified individual is actively engaged on a regular, continuous and substantial basis in the activities of the business, in either the taxation year or any of the five prior taxation years of the specified individual. S. 120.4(1.1)(a) sets out a bright line test, which provides that a specified individual would be deemed to be actively engaged on a regular, continuous and substantial basis in the activities of a particular business in a taxation year of the individual if the individual works in the business at least an average of 20 hours per week during the portion of the year in which the business operates. This test is applied on a business-by-business basis.

In the provided scenario, since neither spouse works more than 20 hours in any business carried on by any of the particular corporations that they own, the requirements of the bright line test would not be met. It remains a question of fact as to whether either spouse would be considered to be actively engaged on a regular, continuous and substantial basis in the activities of each business.

Whether an individual has been actively engaged in the activities on a regular, continuous and substantial basis in a particular year will depend on the circumstances, including the nature of the individual’s involvement in the business (e.g. the work and energy that the individual devotes to the business) and the nature of the business itself. The more the individual is involved in the management or current activity of the business, the more likely it is that the individual will be considered to participate in the business on a regular, continuous and substantial basis. Also, the more an individual’s contributions are integral to the success of the business, the more substantial they would be.

Making the determination of whether an individual is considered to be actively engaged on a regular, continuous and substantial basis in the activities of a business would depend on the facts and circumstances specific to each particular situation. In this question, we have not been provided with sufficient facts to determine whether each business would be considered an excluded business of each spouse for the year.

Where none of the safe harbour exclusions apply, whether TOSI should apply is generally determined on the basis of whether the amount received is a reasonable return according to the specific factors applicable in the circumstances. Those factors include: the work performed; the property contributed in support of the business; the risks assumed by the specified individual or related individual; prior amounts received by them in respect of the business; and any other factor that may be relevant.

Official Response

15 June 2022 Roundtable, 2022-0928251C6 - STEP 2022 - Q8 - TOSI and multiple businesses

Q.9 Life estate - s. 43.1

If a taxpayer transfers a remainder interest in real property to another person and retains a life estate in the property, subsection 43.1(1) will apply to the disposition as long as all conditions therein are satisfied. If, upon the death of an individual, the life estate to which subsection 43.1(1) applied is terminated:

• the holder of the life estate immediately before the death is, generally speaking, deemed pursuant to paragraph 43.1(2)(a) to have disposed of the life estate for proceeds of disposition (“POD”) equal to the holder’s adjusted cost base (“ACB”); and
• the ACB of the property to the holder of the remainder interest is increased pursuant to paragraph 43.1(2)(b), if the individual who held the life estate was not dealing at arm’s length with the holder of the remainder interest in the real property.

Questions

a) What provisions of the Act apply if, rather than transferring a remainder interest in a principal residence (the “Residence”) directly to an adult child (the “Child”), a parent (“Parent”) transfers the remainder interest to a personal trust under which the Child is a beneficiary?

b) If Parent later moves out of the Residence to live in an assisted-living residence and the Residence is sold prior to the death of Parent what provisions of the Act then apply? Does the ACB of the life estate stay with Parent, with no adjustment available to the trust? Alternatively, is the life estate considered to be a gift from Parent to the trust at the time of Parent’s relocation, thereby resulting in an increase in the ACB of the remainder interest to the trust?

Consider the following example:

• Parent transfers a remainder interest in the Residence to a personal, inter vivos trust (the “Trust”) and retains a life estate in the property;
• The Child is the only beneficiary under the Trust;
• At the time of the transfer of the remainder interest:
  • the Residence has a fair market value (“FMV”) of $250,000;
  • the life estate has a FMV of $50,000; and
  • the remainder interest has a FMV of $200,000;
• Assume all conditions in the definition of “principal residence” contained in subsection 54(1) are satisfied and that Parent has never claimed the principal residence exemption on any other property;
• Parent later moves out of the Residence and willingly disposes of the life estate to the Trust to enable the sale of the Residence to a third party;
• The Residence is immediately sold to an arm’s length third party; and
• At the time of the sale, the Residence has a FMV of $400,000.

c) Does the answer change if Parent continues to live in the Residence while the remainder interest is held by the Trust and the Residence is not sold until after Parent’s death? Is the trust considered not to deal at arm’s length with Parent such that paragraph 43.1(2)(b) will apply?

CRA Preliminary Response

(a) s. 43.1

When Parent transfers the remainder interest in the residence to the trust, there is a disposition because para. (c) of “disposition” in s. 248(1) includes any transfer of property to a trust (other than a transfer described in paras. (f) or (k), which do not apply).

At the point when the transfer of a remainder interest occurs in respect of the life estate, s. 43.1(1) provides that, notwithstanding any other provision of the Act (and apart from some exceptions listed in that subsection that do not apply) the provision applies any time a taxpayer disposes of a remainder interest in real property to another person and the taxpayer retains a life estate in the property.

When s. 43.1(1) applies, the taxpayer who disposes of the remainder interest in the real property is deemed under para. (a) to have disposed of the life estate in the property for proceeds of disposition equal to its fair market value at that time and, under para. (b), to have re-acquired a life estate immediately after that time for a cost equal to proceeds of disposition.

Therefore, when Parent disposes of the remainder interest in the Residence to the trust and retains a life estate, Parent will be deemed to have disposed of the life estate for proceeds of disposition equal to $50,000, and will have re-acquired the life estate at a cost of $50,000.

What about the remainder interest? Pursuant to s. 251(1)(a), Parent is deemed not to deal with Child at arm’s length. Accordingly, Parent and the trust are deemed, pursuant to s. 251(1)(b), not to deal with each other at arm’s length, because Child is beneficially interested in the trust.

When a taxpayer has disposed of anything to a person with whom the taxpayer was not dealing at arm’s length for no proceeds or proceeds below fair market value, or to any person by way of gift, s. 69(1)(b)(i) or (ii) will apply to the disposition. (Whether property is disposed of for no proceeds or by way of gift is a question of fact and law, which we will not get into.)

Regardless of whether s. 69(1)(b)(i) or (ii) applies to Parent, Parent will be deemed to have received proceeds of disposition equal to the fair market value of the remainder interest at the time of its disposition to the trust, which in the above example is $200,000. Where the trust receives the remainder interest by way of gift, the trust will be deemed under s. 69(1)(c) to have acquired the remainder interest at a cost equal to its fair market value, i.e., $200,000.

In the case of the “principal residence” as defined by s. 54, provided the conditions therein are satisfied, the capital gain realized by Parent on the deemed disposition of the life estate and on the disposition of the remainder interest to the trust would be sheltered by the principal residence exemption.

For more detail about the principal residence exemption, see Folio S1-F3-C2.

(b) Life interest termination before death

Parent decides to give up Parent’s life estate. S. 43.1(2) will only apply to the termination of a life estate if s. 43.1(1) applied to the life estate, which it did, and such termination of the life estate is caused by the death of the individual.

In this case, Parent moves out of the Residence, and the Residence is immediately sold by the trust, so that this test is not met. The same analysis in respect of s. 69(1) applies to the disposition of the life estate when Parent moves out.

Whether Parent has disposed of the life estate to the trust for no proceeds, or proceeds less than fair market value, or by way of gift, s. 69(1)(b) will apply to the disposition and will deem Parent to have received proceeds of disposition equal to the fair market value of the life estate at the time of its disposition to the trust.

If the life estate was disposed of to the trust by way of an inter vivos gift, s. 69(1)(c) would deem the trust to have acquired the life estate at a cost equal to that fair market value. Where the fair market value of the life estate has increased from the initial transfer, Parent may realize a further gain in respect of the life estate when Parent moves. Alternatively, where the fair market value of the life estate has decreased, and Parent incurs a loss on the subsequent disposition of Parent’s life estate, the loss would be denied by s. 40(2)(g)(iii), since the loss is from the disposition of “personal use property” as defined in s. 54.

(c) Sale after death

Parent stays in the Residence, and it is not sold by the trust until after Parent’s death. In this case, the analysis in the part of the question related to s. 43.1(2) applies. Paragraph (a) will apply, and Parent will be deemed to have disposed of the life estate immediately before Parent’s death for proceeds of disposition equal to the ACB of the life estate immediately before that death. That ACB was what was created on the initial transfer, where s. 43.1(1)(b) applied.

Since Parent and the trust are deemed not to deal with each other at arm’s length, s. 43.1(2)(b) will also apply to the termination of the life estate. That means that an amount will be added to the ACB of the Residence equal to the lesser of the ACB of the life estate in the property immediately before the death (we can think of this as the “upper cap”); and the amount, if any, by which the fair market value of the property immediately after the death exceeds the ACB to the trust of the remainder interest immediately before the death. This comes into play if the fair market value of the Residence as a whole has decreased since the initial transfer of the remainder interest.

Nothing in the facts provided suggest that the trust could claim the principal residence exemption in this situation. Very generally, regarding whether a trust can claim the principal residence exemption, refer to s. 2.65-2.68 of the Folio on the principal residence exemption.

Official Response

15 June 2022 Roundtable, 2022-0929391C6 - STEP 2022 - Q9 - Section 43.1 - Life Estate

Q.10 Year-end of wound-up trust

When a trust winds up and ceases to exist, does the taxation year of the trust end at that time or does its taxation year continue until the time of its normal year-end? For an inter vivos trust the normal taxation year-end would be December 31 and for a graduated rate estate (GRE) (in its first 36 months) that year-end would be the end of the fiscal period adopted.

The Act is specific in certain provisions in deeming a year-end to arise (e.g. for alter ego, spousal and joint spousal trusts, a testamentary trust that ceases to be a GRE, and when a trust becomes or ceases to be resident in Canada). The Act is silent on this point in the general case.

The T3 Guide states that when a GRE winds up, a taxation year-end occurs on the date of the final distribution of its assets.

Can CRA explain the rationale for this?

CRA Preliminary Response

The taxation year is important, because it is typically the basis for the filing due date for the return and the balance due date of any taxes payable. S. 249(1) defines a taxation year for purposes of the Act, and it applies except as otherwise provided.

We noted, in our response to Q.3 of STEP 2018, that s. 249(1)(b) defines the taxation year of a GRE to be the period for which the accounts of the estate are made up for purposes of assessment under the Act. That paragraph, when combined with s. 249(5), causes the taxation year to cease when the period of accounts ends.

In the year of wind-up, the last period for which the accounts of the Trust would have been made up for a trust other than a GRE, would not be relevant to paragraph (c), which defines “taxation year,” in any other case, to be a calendar year. In the year of wind-up, the last period for which the accounts of the Trust would have been made up would presumably end on the final distribution of the trust property.

As for the other types of trust, s. 249(1)(c) applies to a trust other than a GRE. Paragraph (c) defines “taxation year,” in any other case, to be a calendar year.

Official Response

15 June 2022 Roundtable, 2022-0929361C6 - STEP 2022 - Q10 - Taxation Year-end of a GRE

Q.11 Joint spousal or common-law partner trust

At the 2021 STEP CRA Roundtable, the CRA confirmed that a joint spousal or common-law partner trust may be created with a contribution of jointly-owned property by an individual and the individual’s spouse or common-law partner. We have two questions.

a) Once the joint spousal or common-law partner trust is created, can further contributions be made by the spouses or common-law partners at any time, in any form? For example, we assume the contributions are not limited to the initial settlement or to only jointly-owned property.

b) How is income computed in respect of the contributed property where subsection 75(2) is applicable? For example, assume that subsequent to the initial contribution by Spouse A and Spouse B, they contribute portfolios X and Y, respectively, to a joint spousal trust. Assume both Spouse A and Spouse B are discretionary capital beneficiaries such that subsection 75(2) applies to both of them.

CRA Preliminary Response

(a) Subsequent contributions

Where a joint spousal or common law partner trust is created by the contribution of jointly owned property by an individual and the individual’s spouse or common law partner, contributions are not limited only to the initial settlement of the trust, and subsequent contributions are not limited only to jointly owned property.

With respect to contributions to the joint spousal or common law partner trust made subsequently to the initial contribution in this situation, a transfer of property held solely by one of the spouses or partners, or a transfer of property held jointly by both spouses or partners, would be eligible for the rollover in s. 73(1).

(b) S. 75(2)

Generally, where s. 75(2) applies in respect of property that was transferred to the trust by a particular person, any income or loss from the property or properties substituted for it, and any taxable capital gains or allowable capital losses in respect of property or properties substituted for it, is attributable to that person while the person is resident in Canada.

Any amount attributable under s. 75(2) is determined in respect of a particular property or property substituted for that property. In the situation described, where Spouse A transfers the investments of portfolio X to a joint spousal trust, any income or loss from the investments in portfolio X, or property substituted for those investments, would be deemed to be the income or loss of Spouse A, and any taxable capital gain or allowable capital loss from the disposition of the investments in portfolio X or property substituted for those investments will be deemed to be the taxable capital gain or allowable capital loss of Spouse A. Those amounts will continue to be attributable to Spouse A as long as the investment in portfolio X that were transferred by Spouse A, or property substituted for those investments, continues to be held by the trust, and while Spouse A is resident in Canada.

The implications would be the same for Spouse B and portfolio Y.

S. 75(2) does not apply to second-generation income, because this income is not earned on property that was contributed to the trust, or property substituted for that property. For example, if property received by the trust from a person is cash, and that cash is deposited by the trust into a bank account, the interest on the initial deposit would attribute to that person; but any interest earned on the interest left to accumulate in the bank account would not attribute.

Official Response

15 June 2022 Roundtable, 2022-0929331C6 - STEP 2022 – Q11 – Joint Spousal or Common-law Partner Trust

Q.12 Sale to alter ego trust

A transfer of capital property to an alter ego trust by the settlor occurs at cost absent an election for the transfer to occur at fair market value.

Given such, consider the following short fact pattern. A settlor settled an alter ego trust (the “Trust”) a few years ago. The trust agreement provides that the settlor is not entitled to receive or otherwise obtain the use of any of the capital of the Trust during their lifetime. The Trust has cash. The settlor later transfers appreciated non-depreciable capital property (the “Transferred Property”) to the Trust in exchange for cash. The acquisition of property by the Trust is consistent with the terms of the Trust. Does CRA agree that the Transferred Property will be deemed to have been disposed of by the settlor for proceeds equal to their adjusted cost base to the settlor (absent an election to the contrary) even though the settlor received payment?

If the settlor later gifts the cash, say to an adult child, does this alter the answer?

CRA Preliminary Response

(a) S. 73(1) application

S. 73(1) sets out the rules for determining the taxpayer’s proceeds of disposition, and the transferee’s cost of acquisition in certain situations, including when capital property is transferred from an individual to an alter-ego trust, provided that all the relevant requirements of that provision have been met.

The term “transfer” has a broad meaning, and it encompasses virtually any means by which ownership or title to property is conveyed from one person to another. This includes the sale of a property, whether or not that sale was made for fair market value proceeds.

Assuming that the requirements of s. 73(1) are otherwise met in the situation described in this question, and assuming that the trust agreement allows for such a sale, the proceeds of disposition of the non-depreciable capital property sold to the alter-ego trust by the settlor would be deemed to be equal to the adjusted cost base of that property to the settlor immediately before the transfer, and the trust would be deemed to have acquired that property for the same amount.

(b) Gift of proceeds

Provided the sale of the property to the alter ego trust is complete, our response would not change if the settlor subsequently gifted the cash to an adult child.

Official Response

15 June 2022 Roundtable, 2022-0929321C6 - STEP 2022 – Q12 – Sale to Alter Ego Trust

Q.13 S. 164(6) carryback

Subsection 164(6) allows capital losses of a graduated rate estate in its first taxation year to be considered capital losses of the deceased, where all required conditions are met. Such conditions include that the estate is a graduated rate estate (“GRE”), an election is filed, and the legal representative amends the deceased’s final T1 return of income.

a) In amending the deceased’s final T1 return of income, is the filing of a T1 Adjustment Request sufficient?

b) Assume a refund results from the application of the election under subsection 164(6). When does interest begin to accrue on the refund?

CRA Preliminary Response

(a) Amended return

Subsection 164(6) does in fact allow the legal representative administering the GRE of a deceased taxpayer to elect to have all or part of the GRE’s capital losses, to the extent that they exceed its capital gains, that are realized in the GRE’s first taxation year, be deemed to be capital losses of the deceased.

To make the election, s. 164(6)(e) requires the legal representative to file an amended final T1 return of income for the deceased taxpayer to give effect to the election made under s. 164(6)(c). Filing a T1 adjustment request is not sufficient. When filing the amended T1 return, the legal representative must clearly identify the amended return as a s. 164(6) election return.

There is some additional useful information, on pp. 32-33 of the 2021 T3 Guide, about the election from the perspective of the GRE, and of the T1 taxpayer.

Our colleagues in the Individual Returns Directorate of the Assessment, Benefit and Service Branch [ABSB] note that, while the s. 70(1) final return can be filed via the EFILE platform, elections and elective returns for deceased taxpayers cannot be electronically filed.

All elections and elective returns for deceased taxpayers, including the s. 164(6) election, are processed by dedicated teams in the ABSB.

(b) Refund interest

Any refund arising from the s. 164(6) election will be paid out to the deceased’s legal representative or the estate executor in respect of the final T1 return of the deceased taxpayer.

Given that the election shifts the losses available to be deducted from the GRE to the final T1 return, it does not give rise to a refund in respect of the GRE itself. The portion of any overpayment of the tax payable by a deceased taxpayer for a taxation year that arose as a consequence of the deduction of losses relating to an election under s. 164(6)(c) or (d) by the taxpayer’s legal representative is deemed to have arisen and, as a result, refund interest would start pursuant to s. 164(3) on the day that is 30 days after the latest of three dates:

• the first day immediately following the subsequent taxation year;
• the day on which the return of income for that subsequent taxation year was filed; and
• the day on which the amended return was filed under s. 164(6)(e).

Official Response

15 June 2022 Roundtable, 2022-0929381C6 - STEP 2022 - Q13 - 164(6) – Amending Deceased’s Final T1 Return

Q.14 T3 EFILE processing

Can the Canada Revenue Agency (CRA) provide us with additional information about their new service which allows users to file a T3 return via EFILE?

CRA Preliminary Response

The 2018 Federal Budget proposed that certain trusts be required to file a T3 return annually, and to provide beneficial ownership information. Based on the draft legislative proposals released for public comment on February 4, 2022 by the Department of Finance, these new proposed reporting requirements will be applicable for taxation years that end on or after December 31, 2022.

As a result, some trusts will be required to file a T3 return where they previously did not. Therefore, the volume of T3 returns is expected to increase significantly. In preparation, CRA is in the process of modernizing how T3 returns are electronically filed, shifting from an XML internet file transfer to EFILE.

A new resource is available on the Government of Canada website. The T3 electronic filer’s manual (the RC4657) provides supplementary information to taxpayers for the completion and submission of the electronic T3 return using the T3 EFILE service. CRA’s EFILE web service is now accepting transmissions of T3 returns, currently limited to 2021 regular T3 filings, along with a few special T3 return types, which are listed in the written response, and the T1135 foreign income verification statement.

For more detail, see:

• https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/efile-electronic-filers/t3-efile.html for a the list of certified EFILE software.
• https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/how-file-t3-return.html for links to the trust account registration online service. You must have a trust account registration number in order to use the EFILE system. This page also includes a list of the different types of T3 returns that can be EFILEed, and links to more information for electronic filers.

Some of the earlier questions dealt with elections relating to T3 returns. My understanding is that the T3 electronic filers manual (i.e. the second above-mentioned page) notes that a T3 EFILE return has an elections indicator, but that elections and supporting documentation must be submitted in writing or online through the “submit documents” option.

Official Response

15 June 2022 Roundtable, 2022-0930221C6 - STEP 2022 - Q14 - Info on new T3 EFILE process

Q.15 Treaty meaning of habitual abode

As you know, Canada’s extensive treaty network contains residency “tie-breaker” provisions – usually in Article IV:2 of most of the treaties. For example, in the Canada-US treaty, the residency “tie-breaker” rule is indeed in Article IV:2. Paragraph (b) of the provision states:

“…if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;”

Can the CRA comment on its views of what an habitual abode is of an individual and what factors the CRA reviews to make a determination?

CRA Preliminary Response

An individual may be a factual resident or deemed resident of Canada, both of which are liable to tax in Canada on worldwide income. Although the term “residence” is not defined in the Act, its meaning has been determined by the courts. In Thomson, the Supreme Court of Canada found residency to be “a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.” To determine factual residence of an individual, all of the relevant facts in each case must be considered, including the residential ties with Canada, and length of time, object, intention, and continuity with respect to stays in Canada and abroad.

For greater clarity, CRA has split “residential ties” into three main categories: significant; secondary; and other. Significant residential ties include an individual’s dwelling places, their spouse or common law partner, and dependents. Secondary residential ties include personal property, social ties, and economic ties. Other residential ties include a Canadian mailing address and a post office box or safety deposit box, but are generally of limited importance except when considered together with other factors.

If an individual is not considered a factual resident of Canada, they may still be considered a deemed resident under s. 250(1).

If it is determined that an individual is a resident of Canada as well as a resident of another country, then the residency tie-breaker provision under Art. IV(2) of the treaty between the two countries may apply. Under the Canada-US treaty, the term “resident” includes an individual who is liable to tax by reason of that individual’s domicile, residence, or citizenship. The residency tie-breaker tests in Art. IV(2) are applied in order. Paragraph (a) considers where the individual has a permanent home. If that test is not determinative (i.e. the individual has a permanent home in both or neither state), the second test, relating to the individual’s center of vital interests under paragraph (b) is considered. This test looks at personal end economic ties which the individual has in each country, and will usually determine the individual’s residence. If the individual’s center of vital interests cannot be determined, only then is the individual’s habitual abode considered under paragraph (c).

The same progression of tie-breaker tests is found in most of Canada’s treaties, as they mirror the OECD Model Convention. The objective of the habitual abode test can generally be described as identifying where the individual usually lives. For individuals that have a permanent home in both countries, or in neither, and where the center of vital interest is not determinative, stays in all countries must be considered to identify where the individual usually, or habitually, lives or abides.

In considering the stays in a country, the nature of the individual’s activities at the location or locations in a country may also aid in establishing where the individual’s usual or habitual abode is. The stays in a country must be gauged over a sufficient period of time to identify where the individual usually lives. This period of time should be one that is reasonable and appropriate in the circumstances, and is not necessarily limited to a specific period, such as a calendar year.

For additional information regarding an individual’s residence status, see S5-F1-C1. Additional information on the habitual abode test can be found in paras. 19 and 20 of the Official Commentary to Article IV of the OECD Model Convention.

Official Response

15 June 2022 Roundtable, 2022-0927531C6 - STEP 2022 – Q15 – Meaning of Habitual Abode in Canadian Tax Treaties

Q.16 Classification of foreign foundation

In civil law countries a foundation is often used where the trust concept is not recognized. The foundation typically will have a founder who created the foundation (similar to a settlor), a foundation council with a role similar to that of trustees, and beneficiaries who may have a discretionary entitlement.

Does CRA have a view on how a foundation created under the laws of a country where civil law applies would be considered under the Act?

CRA Preliminary Response

To determine the status of a foreign entity or arrangement for Canadian tax purposes, CRA generally continues to follow the two-step approach. The first step involves determining the characteristics of the foreign entity or arrangement under the applicable foreign law, the relevant constating documents, and other relevant terms or documentation. The second step involves comparing those characteristics with those of recognized categories of entities or arrangements under the relevant Canadian law, so that the foreign entity or arrangement can be classified under one of the categories around which the provisions of the Act and Regulations are drafted.

This approach has been applied to previous interpretations on the classification of a foundation that was created under the laws of a civil-law foreign country. Those interpretations were issued after careful examination of the applicable law and documentation.

The classification of a particular entity or arrangement is to be determined on a case-by-case basis. CRA would consider the classification of a foreign foundation in the context of an advanced income tax ruling, provided that the ruling request is supported by a complete description of the characteristics, an analysis as to the proper classification of the entity or arrangement for purposes of the Act and Regulations, a discussion of the way the relevant provisions would apply to proposed transactions involving or affecting the rights and obligations of the entity or arrangement and its stakeholders, a copy of the foreign legislation applicable, and any other relevant documents.

Official Response

15 June 2022 Roundtable, 2022-0927601C6 - STEP 2022 - Q16 - Foreign Entity Classification of a Foundation

Q.17 S. 110(1)(d) deduction for deceased

On death, an individual holding stock option rights is deemed to have disposed of those rights immediately before death - pursuant to paragraph 7(1)(e) - at the value of those rights immediately after death.

CRA has stated in views 2009-0327221I7 and 2011-0423441E5 that the 50% deduction allowed under paragraph 110(1)(d) is not permitted to a deceased taxpayer.

Since providing the views above, paragraph 110(1)(d) has been amended to make specific reference to paragraph 7(1)(e) (see subparagraph 110(1)(d)(i)).

Does CRA agree that the 50% deduction is now allowed by a deceased pursuant to the amendment?

CRA Preliminary Response

CRA agrees that, as a result of the 2017 amendment to s. 110(1)(d), the deduction is now available to a deceased taxpayer in circumstances where s. 7(1)(e) applies, provided that all of the conditions of s. 110(1)(d) are met.

The 2017 amendments also included consequential amendments to s. 110(1.1) in order to ensure its proper application in circumstances where s. 7(1)(d) applies.

Official Response

15 June 2022 Roundtable, 2022-0929511C6 - STEP 2022 - Q17 - Deceased Taxpayer and Stock Options

Q.18 - McNealy Decision

Please comment on the McNealy decision, 2021 FCA 218.

Official Response

15 June 2022 Roundtable, 2022-0924791C6 - STEP 2022 – Q18 - McNeeley et al v. The Queen