When might Reversionary Trust Rules Apply? • Beneficiary Defrays the Trust’s Expenses – Beneficiary funds trust bank account – Beneficiary pays expenses directly – Accounting firm: “no one should put additional money or other assets into the trust, or pay the trust’s expenses” • Consider instead: – Pay dividends to defray trust expenses – Account for payments as loans to trust • Trip Over Reversionary Trust “Technicality” – Default distribution dependent upon provisions of contributor’s will – Default distribution dependent on other person’s will (e.g., spouse) where contributor is the beneficiary
When might Reversionary Trust Rules Apply? • Contributor Has “Veto - type” Power Over the Contributed Property • Examples: – Contributor is trustee and must be part of majority decisions – Other trustees resign or pass away • CRA Administrative largesse – If exercise of veto stems from individual’s duty as a trustee – Where transferor is one of two trustees or unanimity is required • Largesse does not apply: – Where trust expressly requires contributor’s consent – Where contributor is sole trustee – Where powers do not stem from duties as trustee
When might Reversionary Trust Rules Apply? • S.107(4.1) – Other Points – Rectification of situation so that reversionary trust rules no longer apply not sufficient – 107(4.1) continues to apply if contributor leaves Canada – Application of 107(4.1) does not depend on actual income being generated from contributed property
New Testamentary Trust Traps Matthew Getzler
New Testamentary Trust Traps • Introduced in 2014 Federal budget • Draft legislation released on August 29, 2014 • Passed into law on December 16, 2014
New Testamentary Trust Traps (cont.) • New rules apply to testamentary trusts as of January 1, 2016 – No access to graduated rates of tax, subject to limited exceptions – No requirement to pay tax instalments – Off-calendar year-end
Lifetime Interests: The Impact of the New Rules on Spousal Trusts • Non-tax reasons for use of spousal trusts in a Will – Protect assets for future generations – “Blended” families – Control over assets following death
Spousal Trusts : Old Rules vs New Rules • Old rules – On death of surviving spouse, deemed disposition of assets, trust funds tax liability, balance divided in accordance with terms of Will(s) • New rules – On death of surviving spouse, deemed disposition of assets, tax funded out of estate of second-to-die spouse, balance of trust divided in accordance with terms of Will(s)
Spousal Trusts : Old Rules vs New Rules • New rules (cont.) – Tax liability technically shared between spousal trust and second-to- die spouse’s estate – If sufficient assets in second-to-die spouse’s estate, CRA not required to seek payment from first-to- die spouse’s estate
Spousal Trusts : Example 1 • Husband and wife each have 2 children from a previous marriage • Each have estates worth $5m with death taxes of $1m • Husband dies first leaving estate in a spousal trust for wife
Spousal Trusts : Example 1 (cont.) • Old Rules – On wife’s death, $1m of taxes gets paid by spousal trust in husband’s Will – $4m residue of his estate divided among his 2 kids, so that they each receive $2m – Wife’s estate pays her $1m tax liability – Remaining $4m of her estate divided between her two kids so that they each receive $2m
Spousal Trusts : Example 1 (cont.) • New Rules – On wife’s death, $1m of taxes from the spousal trust created in husband’s Will gets paid by wife’s estate – $5m residue of his estate divided among his 2 kids, so that they each receive $2.5m – Wife’s estate pays her $1m tax liability – Remaining $3m of her estate divided between her two kids so that they each receive $1.5m
Spousal Trusts : Example 2 • Husband and wife have 2 kids together • Husband’s estate is valued at $1m with death taxes of $250k; wife’s estate is valued at $5m with death taxes of $1m • Husband wants to leave a legacy to his two siblings of $50,000 each • Wife dies first leaving estate in a spousal trust for husband
Spousal Trusts : Example 2 (cont.) • Old Rules – On husband’s death, $1m of taxes gets paid by spousal trust in wife’s Will – $4m residue of her estate divided among the two kids so that they each receive $2m – Husband’s estate pays his $250k tax liability – Each of his two siblings gets $50,000 – Remaining $650k of his estate divided between his two kids so that they each receive $325k
Spousal Trusts : Example 2 (cont.) • New Rules – On husband’s death, $1.25m of taxes owing from his estate (i.e., $1m from the spousal trust created in wife’s Will and $250k from his estate) – CRA would have to go after wife’s estate for the $250k shortfall (but not obligated to go after any more) – Nothing left after payment of taxes by husband’s estate so his siblings’ legacies can’t be funded – As a result, children receive $100,000 extra among them
Subsection 55(2) Traps Joan Jung
Are ordinary intercorporate dividends still tax free? • Changes to s.55(2), ITA proposed in the April 21, 2015 Federal Budget – Draft legislation released July 31, 2015 – Not yet enacted, but to apply to dividends received after April 20, 2015 • Has been the subject of considerable commentary and submissions
Current Law • s.55(2) can recharacterize an intercorporate dividend into: – proceeds of disposition of a capital property, where the shares have been disposed of, or – a gain on the disposition of a capital property
Related Group Intercorporate Dividends • Prior to proposed amendments, basis for non-application of s.55(2): – Related corporation exemption in s.55(3)(a) might apply • be mindful of the five restrictions in paragraphs (i)-(v) therein – Safe income – Purpose test
Related Group Intercorporate Dividends • After proposed amendments (i.e., dividends received after April 20 2015 assuming July 31 2015 draft legislation is enacted): – Related corporation exemption in s.55(3)(a) will not apply to ordinary dividends, but only may apply to deemed dividends resulting from s.84(2) or (3), ITA – Safe income (more restrictive) – Purpose test (changes and two new purpose tests)
Changes to Purpose test in Proposals • “One of the purposes” is gain reduction purpose (i.e., old test): Change/Clarification(?): purpose of “payment or receipt of the dividend”, rather than purpose of transaction or series Change/Clarification(?): “payment or receipt” suggests purpose from perspective of payer or recipient Note: In the case of s.84(3) deemed dividend, substitute “result” for “purpose”
New Purpose tests in Proposals • Proposed new s.55(2.1)(b) • “One of the purposes” of the payment or receipt of the dividend is to effect: – Significant reduction in fair market value of any share, or – Significant increase in the cost of property of the dividend recipient looked at after the dividend • New purpose tests not applicable to s.84(2) or (3) deemed dividend
Safe Income Restriction in Proposals • If using safe income harbour, proposals will require that safe income “reasonably be considered” to contribute to the capital gain on the share(s) on which the dividend is received, assuming fair market value disposition of the share – Discretionary dividend shares – if no inherent gain, no safe income harbour – Multiple classes of shares – built in safe income allocation issues relevant to reliance on safe income harbour
Ordinary Intercorporate Dividends within Corporate Group • Assume paid in cash, in kind or promissory note: – Can the new purpose tests in proposed s.55(2.1)(b) apply? • Conflating purpose with result? • Purpose test is subjective • See Placer Dome Inc. v. The Queen 96 DTC 6562 (FCA)
Ordinary Intercorporate Dividends within Corporate Group (cont’d) • Use alternative structure to “back into” s.84(3) deemed dividend? – Requires share redemption steps leading to additional costs?
Ordinary Intercorporate Dividends within Corporate Group (cont’d) – s.84(3) deemed dividend is not subject to the new purpose tests in proposed s.55(2.1)(b) but: • means relying on the s.55(3)(a) related party provision or safe income • mindful of restrictions in s.55(3)(a)(i)-(v), e.g., could issues arise if there is a trust which owns shares of a company within the group with beneficiaries not related to the dividend recipient?
Purification Structure • Assume common shares held by inter vivos trust whose beneficiaries include a corporation controlled by freezor (excluding the dividend payer) • Past planning: – surplus cash distributed by way of dividend on common shares to inter vivos trust – Trust allocates and pays same to corporate beneficiary • Can the new purpose tests in s.55(2.1)(b) apply? • Safe income? – See CRA document no. 2014-0538061C6
Non-Resident Trust Traps Michael Goldberg
The Importance of Residence in Canadian Tax Law • Residents of Canada are taxed on their worldwide income • The determination of a trust’s residency status is very complex
Residence of Trusts Under Canadian Law • Common-law or factual resident – “Central management and control” – Garron * • Pure non- resident trusts (“Pure NRTs ”) • NRTs deemed resident under s.94 (“S.94 NRTs ”) – Enacted in June 2013, and generally are effective for taxation years after 2006 * Fundy Settlement v. The Queen , 2012 DTC 5063 (SCC)
NRT Traps – Not so Exotic • Loss of the immigrant trust exception – has your client made a contribution to a Pure NRT? • Offshore granny creates a trust and your client is a beneficiary • Cdn client wants to start CDN branch of EU family business that is owned by a Pure NRT of which client is a beneficiary
NRT Traps – Not so Exotic • Canadian client wants to put in place testamentary “pour - over trust” planning to protect US child from US estate tax and to provide other benefits
NRT Tax Traps • S.94 NRT Tax Traps – The scope of what can be a contribution – The rules may continue to apply even after the death of a contributor – Election limitations re: “Canadian resident” contributions – Joint and several liability • Pure NRT Tax Trap – Distributions of appreciated property
S.94 NRT Basics • S.94 contains extremely broad deeming rules which will apply if there is either: – Resident contributor; or – Resident beneficiary at the end of the relevant period and will generally make a trust taxable as a resident of Canada during that period* * s.94(3)
Subsection 94(1) definitions • Contributor – Any person who has made a “contribution” to a trust – Whether in existence or not – Exceptions: certain ‘exempt persons’
Subsection 94(1) definitions • Contribution – Any direct or indirect transfer of property or obligation to make a transfer of property to a trust will be a “contribution” • Property very broad concept per s.248(1) • Subject to s.94(2) interpretive rule exclusions and “arm’s length transfer” exclusions • S.94(2) interpretive rules may also significantly broaden the net of what will be a contribution
Subsection 94(1) definitions • S.94(2) interpretive rules – A transfer to a trust will be deemed to have occurred if because of a loan or transfer of property by a person to any other person: • the FMV of trust property increases; or • the liability or potential liability of a trust increases* * s.94(2)(a)
Subsection 94(1) definitions • S.94(2) interpretive rules – Other key deeming rules can result in: • the issuance of shares, trust, partnership or other interests*; or • the provisions of services** to be transfers – Due to complex deeming rules indirect transfers need to be reviewed carefully * s.94(2)(g) ** s.94(2)(f)
Subsection 94(1) definitions • If a transfer qualifies as an “arm’s length transfer” it will not result in a transfer to a trust and will not cause a contribution – Exception can be quite limited – particularly in freeze situations – Conservatism to be applied in paying returns to the trust – must not exceed FMV
S.94 NRT Basics • S.94 contains extremely broad deeming rules which will apply if there is either: – Resident contributor; or – Resident beneficiary
Resident Contributor • If a contributor to a trust is resident in Canada at a particular time then trust will have a resident contributor and trust will be a S.94 NRT – Loss of the immigrant trust exception – Very limited grandfathering
NRT Traps – Not so Exotic • Offshore granny creates a Pure NRT and your client is a beneficiary – Client provides free management services • Client wants to start Canadian sub of EU family business that is owned by a Pure NRT of which client is a beneficiary – Client takes an arm’s length salary – Loans funds to sub w/o interest
Resident Contributor • Due to how broad the contribution concept is an immigrant might not even know that he/she has made a contribution to a Pure NRT
Resident Beneficiary • A beneficiary of the trust is resident in Canada at a particular time & the trust has a “connected contributor” • Connected contributor – Similar to a resident contributor but: • additional grandfathering where contributions made at a “non - resident time” • once a person is a connected contributor even their ceasing to exist will not matter
Resident Beneficiary • A trust could be caught by the S.94 NRT rules if it: – has a “beneficiary” that is resident in Canada even where the trust’s connected contributor has ceased to exist – initially has no beneficiary resident in Canada but after death of a connected contributor a beneficiary becomes a Canadian resident
Becoming/Ceasing to be a S.94 NRT • S.94(4) modified version of the: – S.128.1(1) immigration rules re: ACB step ups and year-ends, etc. – S.128.1(4) emigration rules re: deemed dispositions and year-ends, etc. – Timing and application could be problematic
NRT Traps – Not so Exotic • Client wants to put in place testamentary “pour - over trust” planning – Estate is contributor to pour-over trust not deceased* • Until estate is wound-up US trust will be caught by the S.94 NRT rules – Assumes no beneficiaries resident in Canada • Canadian tax consequences could be a nuisance or far worse – Treaty relief will likely not apply to S.94 NRTs * Doc #2013-0514771E5 and #2014-0523071C6
Resident Portion Election • If Pure NRT receives even a nominal contribution caught by the S.94 NRT rules, then all of its income is subject to the S.94 NRT rules unless the trust elects* to be a s.94(1) “electing trust” • Consequence of filing election: – Only “resident portion” subject to the S.94 NRT rules *Under s.94(3)(f)
Resident Portion Election • Technical requirements – Must be able to track resident and non- resident portions • Older trusts might not have suitable records – Election must be filed by first year filing deadline that the trust is both a S.94 NRT and has a resident portion • No right to late-file
Joint & Several Liability Paragraph 94(3)(d) • Resident beneficiaries and resident contributors are jointly, severally or solidarily liable for S.94 NRT’s taxes – Limits on amount recoverable* • Often will not be applicable *s.94(7) and s.94(8)
Pure NRT Tax Trap • In Doc #2015-0582701E5, CRA opined that a distribution of appreciated property from a pure NRT generally occurs on a rollover basis* – Result: Cdn beneficiaries could pay more tax than expected on a future disposition – Solution: if possible, distribute high ACB assets to Cdn beneficiaries • Consider triggering gains in the Pure NRT
Pipeline Traps Ryan Chua
Death of a Taxpayer • Estate deemed to acquire property at FMV – Shares of Opco have high ACB but low PUC – Redemption/repurchase tax consequences to estate: • Dividend treatment; and • Capital loss on disposition of shares
Subsection 164(6) Planning • S. 164(6) planning – Apply loss to offset capital gains of deceased on death – Result of planning – depends • Does Opco have tax pools (RDTOH, CDA, etc.) • Must be completed in the first taxation year of the estate
Pipeline Planning • Pipeline planning – Extract corporate property without dividends or capital losses to estate – Simple to implement • Transfer Opco shares to Holdco for a note • Holdco accesses Opco assets without tax • Holdco repays the note to the estate • Some tax issues to be aware of – Bill C-43 - loss carry-back planning only available to a GRE. Pipeline will be easier to implement.
Leaky Pipelines • Question 5 - STEP 2011 Round Table – (CRA doc. 2011-0401861C6) – S.84(2) may apply to the repayment of the note – If s.84(2) is applicable estate will realize a deemed dividend equal to the amount by which • Value of property distributed or appropriated exceeds • PUC in transferred Opco shares
What about Section 84.1? • S.84.1 does not trump s.84(2)
Does Subsection 84(2) Apply? • S.84(2) will be applicable: – “Where funds or property of a corporation … have … been distributed or otherwise appropriated in any manner whatever to or for the benefit of the shareholders … • RMM (97 D.T.C. 302) – these are words of “the widest import”
Does Subsection 84(2) Apply? • Assuming there has been a corporate distribution or appropriation subject to s.84(2) then s.84(2) will be applicable if it was made: – “…, on the winding-up, discontinuance or reorganization of its business ” (emphasis added) • Is there a business? • Timing of distribution/appropriation
Does Subsection 84(2) Apply? • Favourable CRA Rulings contain the following consistent facts: – Opco’s business will continue for at least one year – Opco will not be amalgamated or wound-up into Holdco for at least one year – Opco’s assets will not be distributed to the shareholders for at least one year, followed by a progressive distribution of Opco’s assets over an additional period of time
Does Subsection 84(2) Apply? • MacDonald - 2013 FCA 110 / 2012 TCC 123 – TCC – s.84(2) did not apply because taxpayer received funds in question in his capacity as creditor rather than shareholder. – FCA – s.84(2) applies. Substance of transactions is determinative. FCA gave broad interpretation to the words “distributed or otherwise appropriated in any manner whatever”. • Descarries - 2014 TCC 75 (Informal) – “distribution” requires a gain for the shareholder and a loss for the corporation. – The “distribution” must occur concurrently with the winding up, discontinuance or reorganization – S.84(2) did not apply because the corporation still held its assets at the time of the alleged distribution. • Caution is suggested
Assessment Limitation Period Issues Ryan Chua
Assessment Limitation Period Issues • Normal reassessment period • Corporation other than CCPC or mutual fund trust – 4 years after the earlier of date of notice of original assessment for the year and date of original notification that no tax is payable for the year • In any other case – Same as above, but 3 years
Open ended assessment period – “at any time” • s.160, ITA – Transfer of property to NAL transferee for less than FMV; transferee may be assessed “at any time” for tax of transferor in respect of year of transfer or preceding taxation years • s.159(3), ITA – Liability of legal representative distributing property without clearance certificate • s.227(10), ITA – Liability of resident for Part XIII withholding
Determination in respect of a partnership, s.152(1.4) • 3 years after the later of – Day on or before which an information required is required to be filed in respect of the partnership (or would be required but for s.220(2.1)) – Day on which the return is filed • Minister may determine any income or loss of the partnership for the fiscal period or any other matter in respect of the partnership relevant in determining income or other amount payable by any member of the partnership
Outside the normal reassessment period • Capital dividend account – CRA’s position is that CDA is a cumulative calculation – until an election is filed under s.83(2), CRA may adjust amount of capital gain which arose outside the normal reassessment period • CRA document no. 9600625
Outside the normal reassessment period • Refundable Dividend Tax on Hand – CRA’s position is that it may make a determination of the amount of dividend refund in the particular year as that is within the normal reassessment period for such year – May reflect different income from property of prior statute barred year • See CRA document no. 2002-0157005
The New St. James Principle • New St. James 66 DTC 5241 (Exch. Ct.) – Taxpayer applied a loss carryforward from a statute barred year – While Minister cannot reassess the statute barred year, Minister can assess the year in which the loss or other tax balance/account is applied and effectively recompute the carried forward tax balance/account
Estate Freeze Beneficiaries Crossing the Border Matthew Getzler
Estate Freeze Beneficiary Crossing the Border • Estate freeze among most common forms of estate planning techniques • Basic form of estate freeze – Individual exchanges his shares of a corporation or his interest in property held individually for new shares with “frozen” value at fmv of shares or property transferred – Shares carrying rights of future growth issued to next generation, directly or via trust
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