If you weren’t at this morning’s STEP 2014 CRA roundtable, you missed some scintillating tax talk (no, really). CRA representatives were on hand to answer tough questions. Here’s a summary of what happened, as tweeted through @advisorca:
First up: Transfers between spouses and common law partners on death. Can you do both? #step2014
Person has both spouse and common-law partner (panelist jokes he knows why the taxpayer is dead). Provision to rollover is applicable on property by property basis. Just as if someone is separated and has a new partner. #step2014
If spouse receives trust income only after death of individual, is it a joint trust if spouse dies first? Yes. #step2014
Next question: Foreign corp typically has 10% share class as foreign. What if 2/20 LLC and no share capital? Look at law and partner agreements #step2014
For a U.S. LLC, if partner has 30% income and 3 votes, and another 40% and 4 votes, considered identical share class. #step2014
If one equity class offers special voting rights, there would be two classes of equity in a foreign corp. Compare equity interests for non-proportional differences, rather than looking at number of differences, for share classes. #step2014
How does CRA view U.S. Limited Liability LPs, which have no FAPI issues? (No general partner) Is it actually a partnership? CRA says context matters. Could be corporation due to no general partner. Compare with Canadian entities. Ask for a CRA decision. Panelist adds: If no one is liable for debts, seems like corporation. #step2014
Evil trusts connect two corporations to trigger 75(2) and attributes a dividend to corp A. Cash goes out, income is tax free. Dividend is a tax-free intercorporate dividend. Is this ok? Does 75(2) apply? CRA says we don’t like this. CRA says if property is transferred to trust for fair market value, 75(2) doesn’t apply. But CRA will look for tax avoidance. #step2014
What are the hot audit issues? Concerns include attribution under 75(2). Taxpayer, as sole beneficiary, accepted undervalued shares — and that triggered 75(2). CRA says 105(1) is another area of concern. Also, gifts by will are always contentious. For instance, look at CRA File 2012-0472161i7: were estate executors entitled to make gift and claim deduction? No.
Another question about safe income, as per 55(2), when shares of opco are redeemed to holdco. If we want a capital gain and it exceeds safe income, can taxpayer self assess? Answer: 55(5)(f) is not an election section. CRA applies 55(2) only to excess income over safe income. Self assess could be considered abuse.
CRA has said it wouldn’t assess installment interest and penalties on late inter vivos trust installments under section 156. Still true? #step2014 CRA says they still won’t assess interest and penalties for inter vivos trusts. But this might change due to budget 2014.
#step2014 Regarding cancelled immigrant trusts: let’s say someone arrives Aug 2009 and is resident through Aug 2014. Does CRA see trust as Canadian resident as of Aug 2014, or Jan 2014? If budget act passes, it will be Jan 2014.
But say immigrant moves Aug 2015 and had an existing trust. When would it be deemed resident? Jan 2015? CRA says trust would be resident as of Jan 2015, under 94(3)(a). This is 7 mths before immigrant is resident and taxable.
Is a trust non-resident if all beneficiaries are non resident and deceased is Canadian? CRA says even if all beneficiaries are non-resident, the contributor (though dead) was Canadian and so trust is Canadian. Once estate is wound up, then the trust becomes non-resident. But then there’s a deemed disposition, so wind up early.
Regarding voluntary disclosures made after 10 years (see Bozzer), CRA says they are processing those disclosures with discretion for forgiveness.
#step2014 IRS has no legal authority to regulate preparers. CRA’s position is we’ll register preparers but have no CE requirements.
Regarding restrictive covenant rules, there are 2 categories: consideration or no consideration. What if consideration is $1? Is a nominal sum still defined as “proceeds?” CRA says $1 constitutes proceeds. Therefore consideration exists. Not a new issue, adds CRA. CRA adds if taxpayer is seeking relief re : $1 consideration, talk to Dept of Finance.
RE: stock options on death, an unexercised option with cancellation at death cannot be carried back, since deemed disposition occurs at death.
#step2014 capital interest in a trust: is it eligible property to be rolled to a corporation? CRA says likely to qualify under 85(1.1).
#step2014 what if CRA assesses an amount exceeding the taxes owed due to multiple (possibly conflicting) assessments? CRA responds: 220(3.1) gives minister discretion to forgive arrears or penalties for last 10 years. CRA adds IC 07-1 will relieve due to taxpayer being under financial hardship. Cheeky response from panel: pic.twitter.com/iMC59evCV8
#step2014 T1135 errors: how far to go to get accurate info? What if info comes late (e.g., U.S. info)? Where do ETFs go? CRA can’t answer.