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In  a  February  20,  2017  Tax  Court  of  Canada case  (Mullings  vs.  H.M.Q.,  2016-2938(IT)I),  at issue was whether  preventative care  associated with phenylketonuria (PKU) would be eligible for the  DTC.  Without  the  ongoing  care  and  strict monitoring  of  the  individual’s  diet,  permanent and severe rain damage would occur.

An individual may be eligible for the credit (Subsection 118.3(1)) where the  ability  to  perform  a  basic  activity  of  daily  living  is  markedly restricted or would be markedly restricted but for therapy that:

• is essential to sustain a vital function of the individual;
• is required to be administered  at least three times each week for a total duration averaging not less than 14 hours a week; and
• cannot  reasonably  be  expected  to  be  of  significant  benefit  to persons who are not so impaired.
• The types of activities which count towards the 14 hours (Subsection 118.3(1.1)) include:
• time  away  from  normal  everyday  activities  in  order  to  receive therapy;
• time spent on determining the dosage of medicine where regular doses are required and daily adjustments are needed; and
• time  spent  by  a  child’s  primary  caregiver  performing  or supervising therapy which the child cannot perform on their own.

Time spent on certain activities do not count towards the 14 hours(Subsection 118.3(1.1)).  This includes  time spent on activities related to:

• dietary or exercise restrictions or routines;
• travel time;
• medical appointments; and
• shopping for medication or recuperation after therapy.

Taxpayer wins

The  Court found that the  following activities counted  towards the 14-hour requirement:

• weekly blood tests;
• the  primary  caregiver’s  time  spent  administering  the  child’s treatment;
• medical appointments where there is actual treatment or testing that is part of the treatment; and
• counting  and  analysis  of  the  number  of  milligrams  of phenylalanine (found in many foods) ingested. This activity was considered  more  akin  to  the  administration  of  medicine  rather than the activities related to dietary restriction.

The taxpayer’s time spent on the above activities exceeded the 14-hour requirement per week, and therefore the DTC claim was allowed.

In a June 21, 2017  Tax Court of Canada  case (Lawson vs. H.M.Q., 2015-3474(IT)I), at issue was whether the wholly dependent credit  could be claimed where only one party  was  providing a cheque  which represented the  net  of  each  party’s  child  support  liability.Where  both  parties  are  required  to  pay,  either  may claim  the  credit  (Subsection  118(5.1)).  At  issue  was whether the agreement, in fact, created two obligations to pay or just one.

Taxpayer wins

While the Court expressed concern that minor wording differences in an agreement  could  cause  a  credit  to  be  available  or  not,  the  Court determined that in this situation there truly was an obligation on each person’s part. As such, the credit was allowed.

Specifically, the Court noted: “..where a separated couple rely on CRA commentary suggesting there can be one cheque  for  convenience sake, where the couple draft their agreement with the intention to create mutual requirements to pay, where  the  net  payment  is  not  based  solely  on  the  Guidelines  but represents an obligation of one side to make payments towards travel expenses of the other and where a subsequent written agreement is accepted  by  the  CRA  while  not  altering  the  prior  agreed-upon arrangement, I am prepared to interpret the separation agreement as creating  two  obligations  and  not  simply a means of calculating one support payment.”

The Court also gave particular credence to minutes of the settlement that stated precisely the  gross amount  that each party should pay. For specific excerpts from the settlement agreement, see the Ruling.

Since release of the Department of Finance’s Tax Consultation on Private Corporations on July 18, 2017,  there  has  been  much  discussion  and  debate over the proposals.  Below are a number of issues that have been raised,  in addition to those noted in the basic  discussion  of  the  proposals  (see  VTN 433(5)).

1)      TAX ON SPLIT INCOME (TOSI)

Broadly,  the  Government  is  proposing  to  extend  the  tax  on split  income  (TOSI,  commonly  referred  to  as  “kiddie  tax”)  to persons not acting at arm’s length with the business principal(s) where  amounts  are  considered  unreasonable  based  on  such factors as labour and capital contributed, risk assumed, and prior remuneration. The TOSI will remain inapplicable to employment income,  and  to  portfolio  investment  income,  except  for compounding income as discussed below.

A)     Reasonability of the Amounts from the Business – There is concern  that  the  determination  of  whether  a  payment  is reasonable or not will be costly and uncertain. Such concerns and  questions  posed  relating  to  this  determination  include  the following, for example:

• Should the reasonability of a dividend be based solely on risk, capital and labour as indicated in the proposal?  How is one factor balanced against another?
• How does one account for the “right” input at the “right” time,  luck,  and  factors  outside  the  control  of  the shareholders?
• Can all of the profits of a successful corporation be traced to  reasonable  returns  based  on  contributions?  Is  the amount  of  a  reasonable  dividend  equal  to  reasonable salaries (for labour), interest (for capital), and guarantee fees (for risk) or would the reasonable dividend be lower as there is no deduction for the corporation, and a lower tax cost for the individual?
• How can a reasonable return for financing by a non-arm’s length person be determined?

The  fourth  component  in  measuring  reasonability  is  a consideration  of  previous  amounts  received  by  the shareholder.  This implies that the total amount of profits eligible to  be  reasonably  distributed  to  each  shareholder  must  be calculated on a historic basis. In other words, it appears as if the summary of value associated with function/labour, risk, and capital  contribution  from  the  beginning  of  a  taxpayer’s involvement  must  be  netted  against  the  sum  of  their remuneration. It is uncertain whether contributions and receipts prior to obtaining an ownership interest would be included.

B)      Paying Extra Dividends in 2017?  –  As the extended TOSI rules are  not  proposed  to  come  into  effect  until  2018,  some practitioners may be motivated to maximize dividend payments in 2017  to  ensure  access  to the marginal tax rates one last time before  the  change.  While  appropriate  in  some  circumstances, consideration should be given to non-tax and business issues that are associated with  paying dividends.  Such factors include:

• Impact  on  Future  “Reasonability”  Calculations  –  As noted  above,  it  appears  that  the  reasonability  analysis should  be  done  on  an  ongoing  basis,  considering  past remuneration and contribution.  If a large dividend is paid in 2017, it may impact the taxation of future dividends.
• Corporate  Law  Restrictions  –  Due  to  the provincial/territorial corporate laws, an entity may be restricted from making a dividend payment (for example, if they fall offside on a solvency or liquidity test).
• Joint and Several Liability (Section 160) – A number of Court decisions have found that dividends  paid to a nonarm’s length shareholder constitute an amount that an individual  receives  for  less  that  fair  market  value consideration.  As such, if the corporation has (or will have) a tax liability at the time the dividend is paid, the dividend recipient could be held jointly and severally liable for the corporation’s debt.
• Other Familial Considerations – While family members of the business principal may be shareholders, the principal may wish not to pay a large dividend to an uninvolved adult child for a number of reasons, one of which may be for fear of “spoiling” or “ruining” the adult child.

 

C)      Second Generation Income – Prior to the proposals, the TOSI did  not  apply  to income earned on income (second-generation income).For example, consider a child who received $100,000 subject to the  TOSI.  The  child  could  then  invest  the  after-tax  amount  in certain  other  assets  such  as  an  investment  portfolio  or  GIC.Investment  earnings  from  the  second  corporation  would  not generally  be  subject  to  TOSI.  Under  the  TCPC  proposals,  this second-generation income will also be split income subject to the TOSI.  In addition,  second-generation income  will be split income  where the first-generation  income was  subject to  one of various provisions (Sections 56, 74, or 74.1 to 74.5) attributing it to a different taxpayer.

As well, investments acquired with funds received from capital dividends  will  be  subject  to  the  same  TOSI  rules  if  taxable dividends on the share would have been subject to either TOSI or the attribution rules.These  rules will apply to  individuals up to age 24.  Similar rules

will apply to investments held through trusts.D)  Significant Impact on Low Income

D)     Significant Impact on Low Income Earners  –  Consider  a  small corporation with $70,000 in earnings.Assume that the shares are held 50/50 between  a  married  couple;  however, only  one  is  involved  in  the  company while  the  other  is  not.  Also,  assume that  $10,000  in  corporate  tax is paid and $30,000 in ineligible dividends is paid to each spouse.  In the past,  there  would  be  nominal  personal  tax  and  $10,000  in corporate tax.  Essentially, the family unit would net $60,000.  Had the $70,000 been earned directly by one spouse as an employee,the family’s total tax bill would be roughly the same.

Under the proposed TOSI rules, the $30,000 received by the nonparticipating  spouse  will  now  be  taxed  at  the  top  non-eligible dividend rate.  In Ontario in 2017, for example, the applicable rate is  45.3%.  This  would  increase  the  family’s  total  tax  liability  to approximately  $23,590  ($10,000  corporate  tax,  plus  $13,590, 45.3% of $30,000). As such, families with mid to low incomelevels  will  have  to  be  extremely  diligent  to  not  pay  out “unreasonable” dividends subject to the TOSI.

Further, while it is easy to determine that nothing should be paid to  a  family  member  with  no  participation,  determining  what would  be  reasonable  amounts  for  some  activity  is  much more challenging.Although  a  salary  will  be  non-deductible  to  the  extent  it  is unreasonable, the cost of added corporate tax, especially if the small  business  deduction  is  available,  will  be  significantly  less than the cost of TOSI where a family member has lower income levels.

E)      Unincorporated Business – While much of the focus has been on the impact of these proposals on private corporations, even unincorporated entities  such as  partnerships  and  trusts  may be  impacted.  In some cases, two or more individuals may be carrying  on  a  business  as  a  partnership  without  realizing  it  as such.  Even  partnerships  without  a  formal  Partnership Agreement may be impacted.

F)      Business  Structures  –  Consideration  should  be  given  to  the rights  and  classes  of  the  shares  of  a  corporation.  If  both spouses have the same class of shares, it may not be possible to differentiate  dividend  payments  between  spouses.  As  such, consideration  may  be  given  to  reorganizing  the  corporate structure such that each spouse has a separate class of shares and/or to remunerate the participating member via salary.Likewise,  attention  should  be  paid  to  a  Partnership’s Agreement as it may dictate how profits should be allocated to partners.  This  Agreement  may  restrict  partners  from  using discretion in allocating amounts.

2)      SHARE SALES

A)     Gains  subject  to  TOSI  –  The  lifetime  capital  gains exemption  (CGE)  will  not  be  available,  or  limited,  in  a number  of  scenarios,  such  as  where  the  asset  to  be  sold generated  income  that  was  subject  to  TOSI.  Consider  a  nonparticipating spouse that acquires a share in the corporation.Any gains accrued on the shares disposed that are considered to be “unreasonable” are not eligible for the lifetime CGE. 

B)      Non-Arm’s  Length  Share  Sales  –  “Unreasonable”  capital gains  which  arise  from  dispositions  to  a  non-arm’s  length person  may  also  be  converted  to  ineligible  dividends(Subsections 120.4(4) and (5)).  As those gains are considered TOSI, they are subject to tax at the highest rate, and no personal tax credits can be applied.

3)      CONVERTING  INCOME  INTO  CAPITAL  GAINS (SECTION 84.1)

A)     Elimination of Pipeline Planning on Death  –  Prior to the TCPC proposals, where an individual died holding shares of a  private corporation,  the  individual  or  their  Estate  would  generally  be subject to capital gains (pipeline planning) or deemed dividend (Subsection 164(6) loss carryback planning) taxation.

However, the proposed extension of Section 84.1  will result in the non-arm’s length acquirer (the  Estate  in  this  case)  not  inheriting  the seller’s (the deceased individual’s) hard adjusted cost  base,  even  though  capital  gains  tax  had already been paid on the deemed disposition at death.  This  results  in  the  typical  previous “pipeline”  planning,  where  only  capital  gains taxation is experienced, being eliminated.  The proposals will effectively result in double tax, a  capital gain  on the  deemed  disposition  of  the  private  corporation  shares  at

death, and a deemed dividend in the Estate.

B)      Payment to a Non-Arm’s Length Individual (Section 246.1)– In general terms, proposed new Subsection 246.1(1) provides that  an  individual  is  deemed  to  have  received  a  taxable

dividend in a taxation year equal to the portion of an amount received or receivable by the individual in the year where:

• the individual is a Canadian resident individual;
• the individual  received  the  amount from a non-arm’s length person;
• as part of the series, there is a  disposition of property  or an increase or reduction in paid-up capital; and
• one  of  the  purposes  of  the transaction was to effect a significant  reduction  or  disappearance  of  assets  of  a private  corporation  in  a  manner  which  avoids  tax otherwise payable.

This provision is worded broadly  and may apply in a significant number  of  scenarios.  While  it  appears  that  the  purpose  of  the provision is to prevent the removal of corporate value at reduced tax  rates,  the  effect  is  that  identified  amounts  received  by  an individual  from  the  corporation  may  be  considered  taxable dividends.

Some commentators have expressed concern that the payment of a capital dividend  to a shareholder may get  caught  under these  provisions,  resulting  in  a  tax-free  capital  dividend  to  be deemed to be a taxable dividend.  Similarly, the repayment of a shareholder loan  could be  caught.  There are also concerns that proceeds  from a  corporate owned life insurance policy  may also fall afoul of these provisions, such that no amount is added to  the  capital  dividend  account  (currently,  the  proceeds  less adjusted  cost  basis  is  added).  This  could  significantly  impact estate planning and whether there is  adequate life insurance  to fund a buy-out or redemption of shares.

4)      NUMBERS/FACTS IN THE MEDIA

A)     The 73% Tax Rate on Passive Earnings? A number of commentators have noted that certain earnings  on passive  investments  would  be  taxed  at  a  73%  rate.  The proposals suggest a couple of alternatives to taxing earnings on passive  investments  where  the  capital  for  the  investments  is derived  from  active  business  income.  One  alternative considers  eliminating  the  refundable  portion  of  the  corporate investment tax.  By doing so, after considering corporate tax and personal tax on the dividend paid to the shareholder, the effective tax rate on these earnings is about 73% (for an individual in the top marginal bracket).

This change is intended to equalize the after-tax cash retained by an individual who invests funds on which personal tax, and not the lower corporate tax rate on active business income, has been paid. As an individual’s personal marginal tax rate decreases, the total tax rate would decrease.  However, the result will be less after-tax cash  retained  by  lower  income  individuals  who  invest  in  a corporation,  rather  than  personally,  with  the  disadvantage growing the lower their average personal tax rate.

B)      The $150,000 Income Earner is not Impacted?A  number  of  Government  officials  have  stated  either  that  the proposals will either not affect, or not be targeted at, those earning  less  than  $150,000.  While  the  proposals  are  very broad, it is likely that these statements were made in respect of the passive income proposals.  Government officials have clarified that  earned  income  up  to  this  level  would  create  maximum RRSP  contribution  room  ($145,722  in  2017  earnings  will generate  maximum  contribution  RRSP  room  for  2018).  In addition, TFSA contribution room for the year will allow for a tax-free  savings  plan.  Earnings  beyond  this  point  will  not generate further RRSP contribution room.  As such, those earning less  than  this  level  should  not  be impacted, due to alternative mechanisms to save and defer tax.

Tax paid by the $50,000 vs. $250,000 Income Earner A  high-ranking  Government  official  has  stated  that  a  person earning $50,000 a year should not pay higher taxes than people who make $250,000 a year. As no public comment has yet been made to provide an explanation as to how this claim would  be  achieved,  a  number  of  commentators  have  tried  to determine a scenario where the above may exist.An individual  earning $50,000  in wages  would pay roughly $8,300 in  personal  tax  (in  Ontario  in  2017).  A  corporation  earning $250,000  at  the  lowest  rate  of  15%  would  pay  $37,500  (in Ontario in 2017). Therefore, the overall tax would be greater for the $250,000 earner in  a corporation than that of the $50,000 earner, even before any personal tax is considered.If the comment was made in the context of a tax rate rather than the total absolute tax amount, a former Chair of the Canadian Tax Foundation, Kim Moody,  opined that income splitting would have to be conducted amongst 17 persons to achieve the claim (stated to  the  Minister  of  Finance  at  the  CPA  One  Conference  on September 24, 2017)

In a July 25, 2017 Tax Court of Canada case (Hole vs. H.M.Q., 2011-3541(IT)G, 2013-164(GST)G), at issue was whether the taxpayer earned income and appropriately charged GST on the sale of marihuana. An RCMP search of the taxpayer’s premise resulted in the discovery of 90 mature marihuana plants, 144 clones, and a lead to a forest location where 172 other mature plants were located. CRA also assessed tax with regards to unreported logging income. Gross negligence charges were applied on all unreported income and GST.

A specialized indirect verification of income (IVI), a “yield analysis”, was completed to determine the unreported income. The primary variables included the number of plants in the crop, the expected yieldof dried marihuana from each plant, the frequency of harvest, and the price at which marihuana is sold. In this case, the taxpayer did not dispute the variables of the analysis, but rather argued that nothing was produced in the first few years, and that there was no profit in the third due to the seizure of crops and the claim that what was produced was for personal use.

Taxpayer loses The Court noted that there was no change in electricity usage despite the alleged commencement of production, and the amount produced would be sufficient for decades of use, yet the potency of the product deteriorates after one year. These factors, among others, persuaded the Court that CRA’s revenue projection was, if anything, conservative.Income tax was assessed on the income, and GST was imputed based on the expectation that the market price included GST. The Court noted that no expenses were considered, but no evidence of any expenses such as electricity, interest or property tax was provided.The Court agreed that just over $315,000 in income from marihuana sales was made over a three-year period.

Taxpayer loses again CRA also assessed the individual with unreported logging income. A bank deposit analysis tied to trucking invoices was used to make the determination. The Court voiced concerns about the use of multiple IVI techniques, for multiple streams of income, however, was ultimately satisfied that that the auditor had exercised care to avoid any double counting of income. The CRA agent started with a summary of deposits made by the taxpayer, his spouse, and their children. He then reduced the total for:

1. transfers between accounts;
2. cash deposits (under the assumption that they were revenues already included in income from the marihuana projections); and
3. unknown deposits of less than $1,000 that were round figures (assuming that they were cash deposits from the marihuana business). Round numbers over $1,000 were left in as the taxpayer was often paid amounts in larger round numbers for his logging services.

The Court ultimately determined that over $100,000 in logging income over 4 years should be included. The gross negligence charge was upheld, primarily due to the comparative magnitude of the missed income. The taxpayer had originally argued that he felt that his income was low and, therefore, would be able to just file without reporting income

In an August 16, 2017 Tax Court of Canada case (Radelet vs. H.M.Q., 2015-2089(IT)G), at issue was whether  a waiver  (Form T2029) signed by  the  taxpayer  was  enforceable  such  that  CRA  could  assess  the taxpayer  beyond  the  normal  reassessment  period.  The  taxpayer asserted that the  waiver  was executed under duress  and/or coercion and that the taxpayer failed to understand that the normal reassessment period was extended by the waiver.

Due to the taxpayer’s travels (he spent the winter in Mexico and was very difficult to contact) and health conditions, CRA offered an extension to provide documents  in  exchange  for  a  signed  waiver.Without  a  signed  waiver,  CRA  would  issue  a reassessment  which  was  not  favourable  (and included  gross negligence penalties) to the taxpayer.

Taxpayer loses: The Court opined that the waiver was enforceable. The taxpayer was not unduly ressured, misled or unduly influenced to an extent which would nullify the waiver. Further, the Court found that the taxpayer did not lack the mental capacity to understand the nature of the waiver and that he intended to waive the normal reassessment limitation period described in the waiver. The Court also noted that there was no situational or physical intimidation; inclusion of gross negligence in the proposal letter was not unreasonable; and documented communication indicated a cordial, normal and considered tone.

Comments-A  waiver  extends  the  normal  reassessment  period  indefinitely.  As such, practitioners should consider  submitting a Notice of Revocation Waiver  (Form T652) to limit the reassessment period.  The revocation is effective  6  months  after  the  day  it  is  filed,  essentially  limiting  the waiver period to 6 months.Also, practitioners should ensure that the waiver clearly indicates the specific issues to which it applies.  The taxpayer need not sign a waiver for the entirety of the return. Once a reassessment has been issued, the taxpayer is permitted to file a Notice of Objection in respect of any issues, regardless of whether they were included in the waiver.The waiver only permits CRA to reassess after the statute-barred date which would have otherwise applied and only for the issues specified in the waiver.

VOLUNTARY DISCLOSURES

On August 8, 2017, the  Joint Committee on Taxation  of The Canadian Bar  Association  and  CPA  Canada  submitted  their  comments  to  the Minister  of  National  Revenue,  Diane  Lebouthillier,  on  the  proposed changes  to  the  Voluntary  Disclosures  program.  The  document highlights  a  number  of  concerns  with  the  proposals  that  practitioners should be aware of. For example, it noted that certain taxpayers may be prohibited from acceptance into the program, where in the old program they may have been accepted.  It also provides a comparison of different types  of  relief  that  may  be  available  to  different  types  of  taxpayers (General vs. Limited program).

For a detailed discussion of the proposals, which aim to be effective on January  1,  2018,  see  VTN  431(9).  The  proposals  are  expected  to  be finalized in the fall of 2017.

Comments-Practitioners  should  review  scenarios  where,  under  the  proposed program, taxpayers may not receive relief as currently provided(either  due  to  not  being  accepted  into  the  proposed program at all or being accepted into only the Limited program).  For example, income from the proceeds of crime will no longer be  accepted.  As well, there may only be  limited  relief  where  large  amounts  are  involved,  the  taxpayer  is sophisticated, or there are multiple years of non-compliance.  Practitioners may consider submitting applications before 2018 in cases where future relief may be limited

SPECIFIC LEGISLATION VS. PARLIAMENT’S INTENT

In a November 4, 2016 Tax Court of Canada case (Athabasca  University  vs.  H.M.Q.,  2014-1301(GST)G), at issue was whether books supplied to students as part of their distance learning course would  be  taxable  supplies  (require  a  GST/HST charge) or not.

Of  particular  interest,  however,  was  whether  the specific legislation  or  Parliament’s intent behind the  legislation  should  be  used  to  determine  whether  Parliament’s intent was relevant in the application of the law in this matter.

The  Court  opined  that  where  the  legislation  is  clear  and unambiguous, the  parliamentary intent is  irrelevant.  The legislation indicated that the books would be considered part of one supply  –  the provision of educational services.  As such services are considered exempt, the provision of books would not be taxable.

Comments In  other  words,  it  is  Parliament’s  responsibility  to  ensure  the  intent matches the legislation. Only where unclarity or ambiguity exist should parliamentary intention be used.

BANKRUPTCY – CRA TRUST FUNDSIn a July 27, 2017  Federal Court of Appeal  case (H.M.Q. vs. Callidus Capital Corporation, A-400-15), at issue was  whether CRA could  collecttrust funds (GST/HST received but not remitted) from a taxpayer’screditor upon bankruptcy. Just prior to bankruptcy, when GST/HST was owed,  the  taxpayer  transferred  assets  to  one  of  its  other  creditors (CreditCo).  This  case relates  to  CRA’s  attempt  to  obtain  assets  from CreditCo.

Creditor losesThe Court opined that since the assets were not held by the taxpayer upon bankruptcy, Subsection 222(1.1) of the Excise Tax Act (which releases a taxpayer’s trust debt upon bankruptcy) would not absolve the taxpayer’s GST/HST  liability.  Therefore,  CRA  was  entitled  to  pursue unremitted GST/HST from CreditCo that had been paid prior to bankruptcy.

INTEREST  PAYABLE  ON  REFUND  –  REVERSED JEOPARDY ORDER

An August 9, 2017 Federal Court of Appeal  case (Grenon vs. H.M.Q., A-239-16) overturned a May 11, 2016,  Tax Court of Canada case  (Grenon vs. H.M.Q., T-1013-15, see VTN 421(9)) which found that interest was not required  to be paid by CRA on $12.75 million  obtained  by CRA  as aresult of a  Jeopardy Order,  but then fully refunded to the taxpayer.

Taxpayer wins-The FCA determined that the original decision  was  neither reasonable nor  correct.  This  was  primarily  because  the  FCA  determined  that the Minister is not relieved from paying interest due to a Jeopardy Order in the case where an Order is cancelled or set aside.

Interest on the amount was ordered to be paid (Subsection 164(3)).

2017 T1 TAX FILING STATISTICS

CRA has released its filing statistics for the 2017 personal tax-filing season covering the period from February 13, 2017 to August 7, 2017.

	Efile		Netfile		Paper		Total
Year	Number	%	Number	%	Number	%
2017	16,005,283	57%	8,212,118	29%	3,869,830	14%	28,087,231
2016	16,246,107	56%	8,071,902	28%	4,728,642	16%	29,046,651
2015	15,720,437	55%	7,662,876	26%	5,397,643	19%	28,780,956
2014	4,937,178	53%	7,197,415	25%	6,162,087	22%	28,296,680

CRA also noted that 68% of the refunds  were issued by  direct deposit.

A July 25, 2017 New York Times article (Canada Debates Whether Gift of Leibowitz Photos Is Also a Tax Dodge, by Sopan Deb and Colin Moynihan) discussed the acquisition  of 2,070  photographs  by American portrait  photographer  Annie  Liebovitz  and  their  donation  to  the  Art Gallery of Nova Scotia.

Since  the  2013  transactions,  the  Canadian Cultural  Property  Export  Review  Board  has ruled  on three applications  and is in the midst of  the  fourth.  The article notes that  one concern appears  to  be  the  valuation  of  the  collection, appraised  at  $20  million,  compared  to  the $4.75  million  for  which  they  were  acquired  by  the  donor  from  the photographer. The Board has granted status  to 762  of the prints, at a value of $1.6 million. The Board’s determinations are based on factors including  artistic  value,  aesthetic  qualities,  and  the  work’s association with Canadian history.

Comments-The  donor  would  typically be entitled to a donation receipt for the full value of the donated works, although this can be restricted for tax shelter gifting arrangements (Subsections 248(35) through (38)). Donations of Canadian  Cultural  Property  permit  tax  on  any  capital  gains  on  the property to be avoided (Subparagraph 39(1)(a)(i.1)) and reduce exposure to  the  “gifting  arrangement”  provisions  (Paragraph  248(37)(c)).  The Canadian Cultural Property Export Review Board determines whether the property is Canadian Cultural Property and also determines its value as a donation.

GIFT OF A LIFE INSURANCE POLICY

In  a  May  18,  2017  Technical  Interpretation  (2017-0692361C6, Johnstone, Alexander), CRA opined that the adjusted cost basis of an interest in a life insurance policy  is generally a  reasonable proxy  for the  “cost”  of  an  interest  in  the  policy  for  the  specific  purpose  of determining the fair market value of a donated life insurance policy (Subsection 248(35) and (36)) where the property is acquired less than three years before the gift is made.

In a June 9, 2017  Tax Court of Canada  case (Gingras vs. H.M.Q., 2013-4696(IT)G), at issue was whether an ABIL could be claimed in respect of the  loan  from  a  taxpayer  to  his  daughter’s  start-up  company.Within approximately two years, operations had ceased and the daughter had claimed personal bankruptcy.
One of the conditions required to claim an ABIL is that the  loan  was  advanced  to  earn  income(Subparagraph  40(2)(g)(i)).  The  loan  agreement stipulated that  interest at 6%  was to be charged, but payments would not commence until 2009, which, as it  would  turn  out,  was  after  the  business eventually ceased.  The  Minister  argued  that  no  interest  was charged, and therefore, there was no intent to earn income.  This  was  partially  based  on  accounting records  of  the  daughter’s  company  which  were inconsistent in their reflection of accruing the interest.

Taxpayer wins Despite the conflicting records the Court opined that the interest rate included in the agreement was legitimate and that there was an  intent to earn income. The ABIL was allowed.

PRINCIPAL  RESIDENCE  EXEMPTION  (PRE)  –DESTROYED PROPERTY In  a  July  13,  2017  Technical  Interpretation  (2017-0702001E5, Robinson, Katie), at issue was the applicability of the principal residence exemption  to  the  sale  of  the  land  remaining  after  the  principal residence that was previously located on it was destroyed by fire.

CRA opined that for calendar years subsequent to fire, the conditions  for designation  as  a  principal  residence  (Section  54)  would  not  be  met.Presumably, CRA was referring to the requirement that the property be ordinarily inhabited  in the year.  However, it was noted that the full gain could be eliminated by the “+1” rule in the formula if the land were sold in  the  subsequent  year  to  the  fire,  and  the  property  eligible  for designation in all prior years.

SETTLEMENT OF FORWARD CONTRACTS –  INCOME OR CAPITAL In an August 8, 2017  Tax Court of Canada  case (MacDonald vs. H.M.Q., 2013-4032(IT)G), an individual entered into a  forward contract  (FC) to speculate against a short-term increase in the trading price of Bank of Nova Scotia (BNS) shares. Although the taxpayer also held actual BNS shares, the FC was to be settled in cash with no exchange of shares. As the stock value increased, the taxpayer suffered $9.9 million in lossesrelated  to  the  FC.  At  issue  was  whether  the  loss  was  on  account  of income or capital.

Taxpayer wins CRA  argued  that  the  contract  was  obtained  to  hedge  against  the taxpayer’s capital investments in BNS shares and was, therefore,  capital in nature.  However, the taxpayer argued that the FC was not a hedge, the  intent  was  to  profit  in  the  short-term,  that  it  was  pure speculation, and simply an adventure in the nature of trade.

The Court found the taxpayer to be a credible witness. Also, it examined the taxpayer’s  investment  history, including the  quantum and timing of transactions, but found  insufficient evidence  to tie the FC to the BNS shares as a hedge. As such, the loss was determined to be on account of income

In a May 18, 2017  Technical Interpretation  (2017-0690311C6, Danis, Sylvie), CRA considered the addition to the capital dividend account(CDA)  where  two  corporations  were  the  beneficiaries  of  a corporately-owned life insurance policy. 

Generally, the addition to the CDA is equal to the amount by which the proceeds  of a life insurance policy  exceed  the  adjusted cost basis  (ACB) immediately  before the death of a policyholder’s interest (Paragraph (d) of the definition of capital dividend account in Subsection 89(1)).

Where  there  are multiple  corporate  beneficiaries designated under a policy, it is CRA’s view that eachbeneficiary  must apply  the  above calculation to its CDA  independently.  In other words, the portion of the death benefit  received by each beneficiary must be reduced by the full ACB.  The legislation does not provide for a proration of the ACB in cases of multiple beneficiaries.

For  example,  where  the  death  benefit  of  a  corporately-owned  life insurance policy is $1 million, and the cost base is $200K, the addition to the  CDA  for  each  of  the  two  corporate  beneficiaries  would  be  $300K ($500K proceeds per corporation less total ACB of $200K).

COMMISSION EARNED BY CORPORATION

In  a  July  11,  2017  Technical  Interpretation  (2017-0693761E5, Robinson, Katie), CRA opined that whether a corporation  is  carrying on a business and earning commission income is a question of fact and requires more than a mere assignment of income.

The question was asked as Income Tax Technical News 22 noted that “if insurance  agents,  realtors,  mutual  fund  salespersons,  or  other professionals are legally… precluded from assigning their commissions to a  corporation,  then  the  commission  income  must  be  reported  by  the individuals, and cannot be reported through a corporation, regardless of the documentation provided”.

In  a  2017  Advance  Income  Tax  Ruling  (2016-0675881R3),  CRA  ruled  that  the  related  party exemption  (Paragraph  55(3)(a))  would  apply  to  a proposed  internal  reorganization,  such  that Subsection  55(2)  would  not  reclassify  a  deemed dividend into a capital gain. The series of transactions effectively  split  up  a  real  estate  corporation  into two new corporations,  each  respectively  owned  by a sibling.  However,  the  parents  retained  voting  control  of  the  two new corporations, rendering them related for the purposes of Paragraph 55(3)(a).

In a supplemental Advance Income Tax Ruling (2017-0704351R3), CRA  opined  that,  provided  the  beneficial  owners  of  the  property remain  unchanged, a change in legal title of the property would not alter their opinion that the related party exception would apply.

In  an August 22, 2017  Release  (2017JTT0137-001468) it  was noted that $1,500 grants  were being offered to help resume operations  for those affected  by  BC  wildfires.   Eligible  organizations  include  small businesses, First Nations, and  non-profits  located in certain areas. For  further  details  on  qualification,  or  to  apply  for  a  grant,  visit redcross.ca. Applicants have until October 31, 2017 to apply.

ONTARIO  BASIC  INCOME  PILOT  –  SOCIAL ASSISTANCE

The  Ontario  Basic  Income  Pilot,  lasting  3  years,  will  include  lower income participants chosen at random from certain areas in Ontario (Hamilton,  Thunder  Bay,  and  Lindsay),  and  will  be  restricted  to  those between the  ages of 18 and 64. Monthly basic income payments will be responsive  to  changes  in  one’s  income,  family  composition,  and disability status. In a June 26, 2017 Technical Interpretation (2017-0704801E5, Wirag, Eric), CRA noted that the payments are based on an income  test,  and  therefore  constitute  social  assistance  payments(Paragraph 56(1)(u)). Social assistance payments are generally required to be included in an income tax return, however, may also be deductible (Paragraph 110(1)(f)).

CANADA/U.S. BORDER TRACKING

In an August 31, 2017 Canadian Press article (Ottawa sharing info with U.S. Homeland security on all Americans entering Canada, Jim Bronskill) it was noted that  data will be shared between Canada and the U.S.which includes a traveller’s name,  nationality,  date of birth, gender, the country that issued the travel document, and  date and time of crossing.

The first phase of the project did not include the exchange of information on citizens of either country (only permanent residents, foreign nationals etc.). As an interim step, an agreement was signed which now allows Canada  to supply information to the U.S. regarding American citizens. The Bill to permit the U.S. to share information on Canadian citizens  is currently at second reading in the Senate.