News of Note
Finance official indicates that the U.S. was informed in the FATCA negotiations of Canada’s view that estate planning trusts are excluded
Email this ContentA Finance official indicated that, in the course of the negotiations of the IGA with the U.S., the US tax authorities were informed of the Canadian government’s position that personal trusts used for estate planning purposes and not seeking to raise external capital are excluded from the FATCA reporting requirements for Canadian financial institutions. Finance considers that the Canadian legislation in this regard is compatible with the "financial institution" definition in the IGA.
Neal Armstrong. 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.10.
CRA confirms that a corporate-owned policy is valued for SBC or QSBCS purposes at the cash surrender value even if non-shareholder lives are included
S. 110.6(15)(a) provides that a shareholder’s shares are to be valued for various listed purposes including the “small business corporation” definition on the basis that a life insurance policy owned by the corporation on the shareholder’s life is to be valued at its cash surrender value. CRA has confirmed that 110.6(15)(a) applies even where the corporate policy covers lives other than that of the shareholder, e.g., the payout occurs on the death of both the shareholder and a key employee, or on the survivor of the shareholder and his spouse.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.9 under s. 110.6(15)(a).
CRA indicates that gifts made in Year 5 by a but-for GRE can only be claimed before death or in Years 5 to 10
Where an estate which otherwise would still be a graduated rate estate but for the passage of 36 months from the date of death makes a charitable gift in Year 5 of the estate (i.e., within 60 months of the death as required by s. 118.1(5.1)), that gift can be claimed in the year of death of the deceased or in the preceding year (s. (c)(i)(C) of the “total charitable gifts definition”), or (under s. (c)(ii)(A)) in the year of the gift or in one of the five following years (i.e., in Years 5 to 10) - but cannot be claimed in any of Years 1 to 4.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.8 under s. 118.1(1) – total charitable gifts – s. (c)(ii).
CRA states that recovery tax applies to undistributed income in a QDT at the time of the disabled beneficiary’s death
CRA confirmed that where the disabled beneficiary of a qualified disability trust dies during a year, this will result (in addition presumably to the QDT not qualifying as such in the year of death) in the imposition of “recovery” tax, based on the top marginal rate, on any undistributed income from previous years still in the hands of the trust at the time of the beneficiary’s death. S. 159(3) could apply if the trustee of the former QDT distributed trust property to the estate of the deceased without the recovery tax being paid.
Neal Armstrong. Summaries of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.7 under s. 122(2)(c) and s. 159(2).
CRA states that a beneficiary of a qualified disability trust must be specifically named by the deceased individual
One of the requirements for a testamentary trust to qualify as a qualified disability trust is that each of its beneficiaries be an individual “named as a beneficiary” by the deceased individual. CRA stated:
This term refers to a beneficiary whose name is specifically stated in the instrument under which the trust was created.
Consequently, a beneficiary who is part of a class of persons described in the instrument under which the testamentary trust has been established, such as children or descendants of the deceased individual, as well as a beneficiary who is not yet born, would not be considered as a named beneficiary.
Neal Armstrong. Summary of 7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.6 under s. 122(3) - qualified disability trust - para. (b).
CRA provides detailed guidelines on the split-receipting rules
Positions in the new Folio on split-receipting include:
- The common law concept of gift (requiring inter alia that “no benefit or consideration must flow to the donor”) and the civil law concept (encompassing “gifts with partial consideration that are remunerative gifts or gifts with a charge”) differ, so that implicitly, s. 248(30), which can permit recognition of a gift where a benefit of under 80% of the donated property’s value flows back to the donor, is more necessary in the common law provinces.
- Even where this numerical test is satisfied, CRA considers that the other “gift” elements must be satisfied, e.g., “the intention to make a gift.”
- If the amount of advantages (other than cash or near-cash items such as gift certificates) received by the taxpayer (e.g., pens, and a pro rata portion of door prizes) do not exceed the lesser of 10% of the fair market value of the gifted property and $75, they will not be regarded as an advantage for the purposes of determining the eligible amount (i.e, taking into account their modest value, the advantages in fact can exceed 80%, and a receipt can be issued for the larger implied gift).
- Purchasing items at charity auctions generally gives rise to an eligible gift if any excess of the purchase price over the retail price is such as to satisfy the 80% test.
- Membership fees also can give rise to an eligible amount.
- CRA discusses s. 248(39), which is intended to prevent a taxpayer from avoiding a reduction in his gift amount under s. 248(25) (deeming the fair market value of gifted property to be equal to its cost, for example, when it is promptly gifted after purchase), by instead selling the property to the charity and then gifting the proceeds, or property substituted therefor), in a way which suggests that it considers the rule to apply mechanically rather than only in an avoidance context.
- S. 248(41) provides that the eligible amount of a gift is nil if the taxpayer fails to inform the qualified done of any circumstances that would cause the eligible amount of the gift under ss. 248(31), (35), (36), (38) or (39) to be less than the fair market value of the gifted property. CRA stipulates that this required disclosure might include not only the length of time the taxpayer held the property, and whether it was acquired as part of a tax shelter arrangement or from a non-arm’s-length party, but also “whether the taxpayer [was] engaged in a transaction or series of transactions to avoid the deemed fair market value rule.”
Neal Armstrong. Summaries of S7-F1-C1, Split-receipting and Deemed Fair Market Value under s. 118.1(1) – total charitable gifts, s. 248(30), s. 248(32), s. 248(39), s. 143.2(1) – limited-recourse amount, and s. 248(41).
CRA maintains its policies on retiring allowances
The CRA positions in the Folio on Retiring Allowances are generally quite similar to those in IT-337R4, although CRA no longer discusses the treatment to employers of retiring allowances, presumably because this would not fit into its Folio taxonomy. Although the significance of the distinction from ordinary employment income is fading with the phasing out of the s. 60(j.1) transfers to RRSPs, CRA also still recognizes that damages received by an employee for harassment, defamation or human rights violations are exempt.
Neal Armstrong. Summary of S2-F1-C2, Retiring Allowances under s. 248(1) – retiring allowance.
CRA states guidelines on what is a business
In its Folio on the Meaning of Farming and Farming Business, CRA has carried forward most of its positions on what constitutes farming from three IT Bulletins and also updated for some more recent positions, e.g., that farming does not include raising pets. Of more general interest, CRA states guidelines for applying Stewart in determining whether farming activities are a business.
Neal Armstrong. Summaries of S4-F11-C1 under s. 248(1) – farming, s. 4(1)(a) and s. 3(a) – business source.
The ASPA rules can have an unexpected impact on share purchase transactions
Where a target holds partnerships which have a different fiscal period end, and to which the adjusted stub period accrual (ASPA) rules apply, the application of the ASPA rules may result in the partnership income being recognized in hands of the target at times that are substantially different from the times at which such income was earned in the hands of the partnerships, including potentially in the second taxation year of the target following the acquisition of control. This should be taken into account in assessing the application of clauses in the Agreement of Purchase and Sale which allocate respective responsibilities for target taxes.
Neal Armstrong. Summary of Janette Pantry and Robyn Campbell, “Partnerships and ASPA on Acquisition of Control,” Canadian Tax Highlights, Vol. 24, No. 10, October 2016, p. 3 under s. 34.2(1) - adjusted stub period accrual.
Double income inclusions can still arise under the revised stub period FAPI rules
If exceptions do not apply, a controlled foreign affiliate of a taxpayer is deemed under draft s. 91(1.2) of the revised stub period foreign accrual property income rules to have a deemed stub year-end in respect of the taxpayer and a corporation or a partnership that is connected to the taxpayer. However, because the deemed year-end extends only to connected corporations and partnerships, double income inclusion may still arise:
Assume that a Canco disposes of a CFA to a non-arm's-length Canadian individual who does not own the CFA before the transfer and who continues to own the CFA at the end of its normal year-end. In this case, the stub period FAPI is included twice: in the hands of both the Canco and the individual. Similar anomalies arise if the transferor is another individual instead of a Canco, or if the transferee is a trust, or if a partnership with non-corporate members is involved.
Neal Armstrong. Summary of Melanie Huynh and Paul Barnicke, "September 2016 FA Proposals," Canadian Tax Highlights, Vol. 24, No. 10, October 2016, p. 8 under s. 91(1.1).