Most people would rank CRA employees among the last people they’d like to hear from. But for estate and tax practitioners at the annual STEP Canada conference held May 28-29, the CRA roundtable is a must-attend session. The roundtable answers tax questions submitted throughout the year by STEP members.
This year’s roundtable featured CRA representatives Steve Fron and Phil Kohnen, both managers in the Trusts Section, Income Tax Rulings Directorate. Asking the tough tax questions were perennial panelists Michael Cadesky of Cadesky Tax and Kim Moody of Moodys Gartner Tax Law. Christine Van Cauwenberghe of Investors Group moderated.
Fron and Kohnen stressed that their comments were conversational in nature, adding that the full written responses would be submitted to STEP in August.
Here are highlights from the roundtable.
Definitions in the split income proposals
How do you define “business income” for the purposes of the split income proposals?
Kohnen says references to “business income” and “income” in the proposals “generally means gross income.”
Given that excluded shares are defined as those for which a corporation derives less than 90% of its business income from services, will business owners have to start tracking income from services separately from other-sourced income?
Yes. “The two should generally be computed separately,” says Kohnen, adding that CRA recognizes this will create a compliance burden. He suggests business owners try first to qualify under the other exclusions in the split income proposals (namely, under the reasonableness test) before trying for the excluded shares exclusion.
Can holding-company shares qualify as “excluded shares”?
Generally no, says Fron. That’s because the definition says that “all or substantially all” income cannot be derived from one or more related businesses, and a holding company is a related business.
Can shares of a corporation with no business income be “excluded shares”?
No again, since both total income and service income are zero. You can’t compute a percentage of zero, so the “less than 90%” condition is not satisfied.
A trust’s creation date
If a will creates both a graduated rate estate (GRE) and other testamentary trusts, but doesn’t immediately fund the other testamentary trusts, when does CRA consider the trusts to have been created?
Elements of this question have come up at past CRA roundtables, most recently in 2012 and 2015. Fron reminds us that CRA has traditionally not attributed any tax consequences from estate administration to trust administration, and that CRA views trusts as being created from the residue of the estate as arising on death.
In other words, all testamentary trusts will have the same commencement date as the estate—the date of the testator’s death.
Trust return due date
When is a trust’s T3 return due in the year that the trust winds up?
Assuming this is a personal trust, Fron says the return is due 90 days after the taxation year-end of the trust.
For GREs, their returns are due 90 days after their final distribution. That’s because “a GRE will have a deemed tax year-end on the day on which the estate ceases to be a GRE,” notes CRA.
For non-GRE trusts, their returns are due 90 days after the calendar year-end. Fron adds, however, that estate trustees are welcome to send T3s in earlier than the deadline, especially if the windup occurs earlier in the year. Moody asked whether the T3 should cover the entire calendar year, or only the period from Jan. 1 to the date of windup (e.g., Jan. 1 to Feb. 15). Fron says he will look into the answer and include it in the written response.
When a Canadian resident contributes to a non-resident trust, that trust is deemed resident. This can be particularly challenging for immigrants who contribute to existing non-resident trusts, since the immigrants change from being non-residents to residents. Is it true that a non-resident trust is deemed resident as of Jan. 1 of the taxation year in which a contributor immigrated to Canada, regardless of when the contributor immigrates?
Yes—even if the contribution occurs as late as December. (CRA reached the same conclusion when this concept came up at the 2014 STEP CRA roundtable.) That means the trust becomes taxable in Canada from Jan. 1 onward, too.
Let’s say there is a non-resident trust with Canadian-resident beneficiaries who are not successor beneficiaries when the contributor immigrates to Canada, and the immigrant makes a contribution less than 60 months before becoming resident. Could the non-resident trust be deemed resident for up to five taxation years before the taxation year in which the contributor immigrated? If so, does CRA expect T3s, T1135s and T1134s for those years?
“Bad news on all fronts,” says Kohnen. Thanks to Section 94, the trust will become subject to Canadian tax for each of the five taxation years as well as interest and penalties for each tax year that the T3 return was not filed. If T1135s and T1134s were required for those years, they would also have to be filed; interest and late-filing penalties would apply for the relevant years.
Cadesky jokes that his firm now offers a new service for immigrants to Canada: “We pick them up at the airport and drive them straight to CRA for a VDP [voluntary disclosure].”