Tag: income tax
Last year I blogged about some possible changes to the CRA’s Voluntary Disclosure Program (“VDP”). The new VDP rules came into effect March 1, 2018.
One of the concerns that had been raised in relation to the VDP changes in advance of them coming into effect, is that it seemed the CRA was attempting to make the VDP less accessible for taxpayers. For example, the changes created a “tiered” system for VDP applications, meaning that applications would fall under either the “general program” (for more minor non-compliance) and the “limited program” (for major non-compliance). Another example is the apparent elimination of the “No-Name” method for submitting disclosure (which allows the taxpayer to gain some understanding of how their situation may be treated by CRA in advance of officially submitting his or her application).
According to this article, in July and August 2018, the CRA responded to the first round of disclosure applications that had been filed under the new rules. The CRA’s approach in practice was troubling to the article’s authors.
In particular, the CRA appears to be taking the position that it will be rejecting VDP applications if the relevant tax returns aren’t enclosed. This seems to be contrary to the guidelines set out in CRA’s Information Circular IC00-1R6. While CRA takes the position that it will reject applications that do not enclose tax returns, the Information Circular seems to indicate that a taxpayer may submit additional information or documentation to complete the VDP application up to 90 days from the day that the CRA receives the application. The article’s authors are of the view that the language of the Information Circular in this regard would include the relevant tax returns, as these are clearly documents required to complete the disclosure. The position taken by CRA provided confirmation to the authors that CRA was seeking to make the VDP inaccessible for taxpayers.
As we previously set out in this blog, the VDP can be relevant to an Estate Trustee if the deceased was not in compliance with his or her obligations to the CRA, such as failure to file income tax returns, or reporting of inaccurate information. The VDP may allow an Estate Trustee to voluntarily disclose such non-compliance and avoid penalties. Unfortunately, with the new VDP rules in effect, and the apparent uncertainty regarding how the CRA will apply its guidelines, it may be tricky for Estate Trustees to make effective use of the VDP. It will be interesting to see how the new VDP rules develop, and any further feedback to their practical application.
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As you may have heard, new rules have recently come into effect that may not only have a stabilizing effect on the housing market in Canada but also usher in new Canada Revenue Agency (“CRA”) reporting requirements.
Until recently, when an individual sold their home, they did not have to report the sale on their income tax return to take advantage of the principal residence exemption. However, on October 3, 2016, the Canadian government announced that, starting with the 2016 taxation year, the sale of a primary residence must be reported to the CRA to receive the benefit of the principal residence exemption. This new reporting requirement will apply to any sale that took place on or after January 1, 2016.
The principal residence exemption is a benefit that provides a vendor with an exemption from capital gains earned on the sale of a property that has been used as their primary residence. The exemption will apply for each year the property was designated as their primary residence.
With the new reporting requirement in place, to benefit from the principal residence exemption, the CRA will only allow the principal residence exemption if the sale and designation is reported. Accordingly, estate trustees and tax professionals should pay careful attention during the preparation of income and terminal tax returns to ensure compliance with this reporting obligation.
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Earlier this week I blogged about planning considerations for establishing a testamentary trust that may qualify as a graduated rate estate. To continue on the topic of planning consideration in light of the recent changes to the Income Tax Act, I thought it would be fitting to highlight some considerations regarding the newly introduced Qualified Disability Trust (the “QDT”).
One planning technique that is commonly used when disabled beneficiaries are involved is a Henson Trust. It is important that testators understand that the creation of a Henson Trust does not automatically qualify as a QDT since the disabled beneficiary must be a recipient of the Disability Tax Credit. Accordingly, it would be prudent to highlight that it is possible that the income earned from the Henson Trust may be subject to top-rate taxation.
It is also quite common for a testator to identify the beneficiaries of a testamentary trust as a class of beneficiaries such as children or issue. However, given that testamentary trusts are now taxed at the highest rates, a testator may wish to specifically name the beneficiaries of the Trust in the event that the named beneficiary becomes disabled during the length of the testamentary trust. In doing so, the testator will have satisfied one of the requirements for the Trust to be designated as a QDT.
The limit of one QDT election per beneficiary also raises some estate planning challenges. It may be necessary to explore planning solutions in situations where the named beneficiary of an insurance trust and a testamentary trust is disabled. In this case, the testator may want to consider whether both trusts are necessary.
It is extremely important that clients understand the estate planning challenges that arise when attempting to take advantage of the graduated rate of taxation, and should discuss any estate planning options with a tax professional before a final decision is made.
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This week on Hull on Estates, Noah Weisberg and Nick Esterbauer discuss a recent decision of the Tax Court of Canada that addresses the use of property transferred to spouses to satisfy tax liabilities pursuant to the Income Tax Act. A copy of the Kuchta v. The Queen decision is available here: http://bit.ly/1QcncGi
Should you have any questions, please email us at firstname.lastname@example.org or leave a comment on our blog.
In just over a month, starting on January 1, 2016, a number of amendments to the Income Tax Act will be coming into effect. These changes have been discussed on this blog before. On November 16, 2015, the Department of Finance issued a letter addressed to the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, the Conference for Advanced Life Underwriting, and the Technical Tax Committee of STEP Canada. The purpose of the letter was to address the submissions of these organizations regarding certain amendments to the income taxation of trusts and estates, particularly concerns with respect to the income tax treatment of certain trusts subject to deemed realization on the death of a beneficiary.
With respect to tax deferral for alter ego trusts and spousal trusts, the new rules in subsection 104(13.4) provide that, upon death of the beneficiary, all the trust’s income for the trust’s taxation year must be included in computing the beneficiary’s income for the beneficiary’s final taxation year when the trust’s year ends (which will be the end of the day on which the beneficiary dies). Subsection 160(1.4) then makes the trust jointly and severally liable with the beneficiary for the portion of the beneficiary’s income tax payable due to inclusion of the trusts’ income.
There was an issue raised with respect to concerns that the amendments may apply in some cases with unfair and unintended results, within which were two sub-issues.
The first issue was the possibility that the income tax liability falling to the beneficiary will be ultimately borne by the beneficiary’s estate, even though the trust’s property, including any income, will be enjoyed by the trust’s beneficiaries, in some cases to the exclusion of the estate’s beneficiaries.
The second issue was the possibility that charitable donation tax credits could become stranded in the trust. If a trust makes a charitable gift of property after the death of the beneficiary, and the trust’s income is then deemed to be included in the beneficiary’s income, the trust will have no income against which to deduct any donation tax credit.
The Department of Finance, in discussions with the organizations to whom the letter was addressed, came up with an option to respond to these concerns. It was noted in the letter that the suggested solution would involve amending paragraph 104(13.4)(b) so that it would not apply to a trust in respect of the death of a particular beneficiary unless several factors are met, including that the beneficiary’s graduated rate estate and the trust jointly elect to have the paragraph apply. Accordingly, if no election is made, the tax liability for the trust’s income would remain with the trust.
With respect to the “stranding” of donation tax credits, the Department of Finance noted that the option above would include provision for a trust to be permitted to allocate the eligible amount of a donation made by the trust after the beneficiary’s death to its taxation year in which the death occurs.
Nothing has been implemented with respect to these issues or suggested options yet, nor is there a guarantee that the amendments will be implemented. However, the Department of Finance appears open to discussion and to working toward a solution that addresses the concerns raised.
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"Relief of the aged, impotent, and poor people; maintenance of sick and maimed soldiers and mariners, schools of learning, free schools, and scholars in universities, repair of bridges, ports, havens, causeways, churches, seabanks, and highways, education and preferment of orphans, for or towards relief of stock, or maintenance for houses of correction, marriages of poor maids, supportation, aid, and help of young tradesmen, handicraftsmen, and persons decayed, relief or redemption of prisoners or captives, aide or ease of any poor inhabitants concerning payments of fifteens, setting out soldiers of soldiers and other taxes."
The above is the preamble to the Statute of Charitable Uses, passed by Queen Elizabeth I in 1601. Although more than 400 years have passed since the statute came into force, to this day these words play an important role in what organizations may receive the benefit of being officially registered as charities under the Income Tax Act.
In Commissioners for Special Purposes of the Income Tax v. Pemsel,  A.C. 531 (H.L.). ("Pemsel") the Statute of Charitable Uses was broken down into four headings under which a charitable purpose must fall. They are: (1) the relief of poverty; (2) the advancement of education; (3) the advancement of religion; and (4) certain other purposes beneficial to the community. If a charity’s "purpose" does not fall within one of these four headings, the charity cannot receive the benefit (i.e. tax free status and ability to give tax receipts) of being officially registered as a charity under the Income Tax Act.
The courts in Canada have strictly adhered to the charitable purpose headings contained in Pemsel (and by implication the preamble to the Statute of Charitable Uses written in 1601). In A.Y.S.A. Amateur Youth Soccer Association v. Canada (Revenue Agency) ("A.Y.S.A."), a 2007 decision of the SCC, a youth soccer association applied to the Canada Revenue Agency to become a registered charity pursuant to the Income Tax Act. The CRA refused to register the soccer association, and the soccer association appealed its ruling. In the end the SCC agreed with the Canada Revenue Agency, and refused to allow the soccer association to be registered as a charity.
In A.Y.S.A. the soccer association argued that its purpose was charitable as it fell under the fourth heading "certain other purposes beneficial to the community", arguing that the promotion of sport and physical fitness amongst youth was for the public benefit. The court rejected this argument, focusing on the fact that the soccer association had as its main purpose in its letters patent the "promotion of soccer" and to "increase participation in sport", goals that the court says are not charitable. In a way, because sport was not seen as "charitable" in 1601, the SCC could not accept it as "charitable" today.
I would like to think that in the 21st Century an organization that promotes health and physical activity amongst children would be considered "beneficial to the community". There is certainly no lack of information out there about the growing obesity rates amongst children, and the impact that it is having on their overall health. Perhaps it is finally time that we move away from our 17th Century definition of what a charity can be, and allow for a definition that is more in tune with life in the 21st Century.
Ian Hull – Click here for more information on Ian Hull.
Listen to The Business of Being an Estate Trustee.
This week on Hull on Estate and Succession Planning, Ian and Suzana discuss the business side of being an Estate Trustee and talk about what to do with assets.