Income Tax Severed Letters

This Week's Release

Ruling

2018 Ruling 2017-0729431R3 - Transfer Pricing Adjustment and Earnings

Unedited CRA Tags
247(2), 95(1), definition of "earnings" and "net earnings" under Reg. 5907(1); Reg. 5907(2)
fictional transfer pricing adjustments did not affect the exempt surplus calculation (other than for the foreign taxes adjustment)
CRA agreed under MAP to fictional transfer pricing adjustments re NR sister charging NR customer too much and Canco charging too little
MAP downward adjustment to foreign income taxes increased net earnings

Principal Issues: Where, as a result of a corresponding adjustment under foreign tax law pursuant to a mutual agreement procedure and a bilateral advance pricing arrangement, the taxable income and income taxes payable of a foreign affiliate have been reassessed by a foreign tax authority, would there be i) a re-computation of earnings and net earnings of the foreign affiliate for the relevant taxation years under subsection 5907(1) of the Regulations and ii) an addition to the earnings of the foreign affiliate under paragraph 5907(2)(f) of the Regulations for the relevant taxation years of the amount of the money retained but not included in computing the earnings of the foreign affiliate as a result of the corresponding adjustment?

Position: In the factual circumstances provided, i) yes and ii) yes.

Reasons: i) The corresponding adjustment and the resulting reassessment by the foreign tax authority changes the income or profit from active business of the foreign affiliate computed in accordance with the foreign tax law and the income taxes paid by the foreign affiliate in respect of that income or profit. ii) The money realized and retained by the foreign affiliate, but excluded from its income for foreign income tax purposes as a result of the corresponding adjustment by the foreign tax authority, would be "revenue, income, or profit" derived by the foreign affiliate for purposes of paragraph 5907(2)(f) of the Regulations.

2018 Ruling 2018-0765411R3 F - Subsection 104(4) and Pipeline Transaction

Unedited CRA Tags
75(2), 84(2), 84.1, 104(4), 107(2), 245
pipeline ruling for inter vivos trust transferring prefs stepped up under s. 104(4) to Newco for high-PUC shares

Principales Questions: A trust will realize a capital gain by the application of subparagraph 104(4)(b)(ii) on the deemed disposition of shares of a Canadian controlled private corporation and will include the taxable capital gain realized in its income for the year. After the 21th anniversary of the trust, the trust will enter into a pipeline type transaction (Proposed Transactions). The assets of the corporation subject to the pipeline transaction are mainly rental properties and shares of subsidiaries. The activities of the corporation subject to the pipeline transaction will be maintained over the years after the pipeline transaction is completed. The shares or the substituted shares of the corporation subject to the pipeline transaction will be redeemed more than one year after the pipeline transaction is completed and paid partly with the profits earned after the pipeline transaction. 1) Does section 84.1 apply to the Proposed Transactions? 2) Does subsection 84(2) apply to the Proposed Transactions? 3) Does section 245 apply to the Proposed Transactions?

Position Adoptée: 1) No 2) No 3) No

Raisons: Wording of the Act and previous positions.

Technical Interpretation - External

11 January 2019 External T.I. 2018-0740741E5 - Taxation of supplemental retirement plans

Unedited CRA Tags
248(1) salary deferral arrangement, 6(14)
additional benefit features of a supplemental pension plan treated as SDAs
additional benefit features of supplemental pension plan treated as SDAs separate from qualifying base component of plan

Principal Issues: Whether either of the two supplemental retirement plans (or any of their components) constitute an SDA?

Position: Question of fact.

Reasons: Insufficient information to provide definitive determination. The basic contribution component appears to be largely consistent with the CRA’s general position on supplemental plans to not be treated as an SDA. The bonus contribution and vacation pay contribution components as well as the Retirement Allowance Plan appear to be primarily motivated by tax deferral considerations and would likely constitute an SDA.

4 December 2018 External T.I. 2017-0683371E5 - Medical expenses - sauna and hydrotherapy pool

Unedited CRA Tags
118.2(2); Reg 5700

Principal Issues: Would the costs of a steam shower / sauna and hydrotherapy pool (that are part of a master bathroom in an individual’s home) qualify as a medical expense in a particular situation?

Position: Question of fact, but generally no.

Reasons: Renovations to install a hydrotherapy pool or steam bath would not generally meet the requirements under paragraph 118.2(2)(l.2) because they are of a type 1) that would typically be expected to increase the value of the dwelling, or 2) that would normally be incurred by persons who have normal physical development or who do not have a severe and prolonged mobility impairment. Conversely, the conditions under the home accessibility tax credit (HATC) – namely paragraph (g) of the definition of “qualifying expenditure” – are less restrictive, in that they allow expenditures that may increase or maintain the value of an eligible dwelling, as long as these expenditures are not made or incurred primarily for that purpose. Also, the HATC provisions recognize the cost of goods acquired in addition to the services received (for example, to install the goods in question).

Conference

3 December 2018 CPA Canada Roundtable, 2018-0773811C6 - Tax on Split Income (TOSI)

Unedited CRA Tags
120.4

PRINCIPAL ISSUES: English and French versions of the PowerPoint presentation prepared for the CPA Canada Income Tax for the General Practitioner Course.

POSITION: See below.

REASONS: See below.

Technical Interpretation - Internal

5 September 2018 Internal T.I. 2017-0698241I7 - Interpretation of subsection 93(4)

Unedited CRA Tags
Subsection 93(4)
FA sub shares acquired “on” disposition of FA parent shares occurring on completion of liquidation and dissolution process
Words and Phrases
on
s. 93(2.01) applied to capital loss resulting from s. 94(3) basis bump
no s. 93 election available where ACB bump under s. 94(3) eliminated gain before application of s. 93(1)

Principal Issues: Whether 93(4) applies to FA shares received in the course of a liquidation and dissolution of another FA?

Position: Yes.

Reasons: Textual, contextual and purposive reading of 93(4).

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