Income Tax Severed Letters - 2017-02-01

Conference

29 November 2016 CTF Roundtable Q. 1, 2016-0669301C6 - GAAR & 21-year rule planning

Unedited CRA Tags
104(4); 104(5.8); 107(2); 245
making a s. 107(2) distribution to a corporate beneficiary held by a new trust is an abusive circumvention of the s. 104(4) 21-year rule
avoidance of 21-year rule through 107(2) transfer to corporate beneficiary

Principal Issues: Implications of a transfer of property from a discretionary trust to a Canadian corporation wholly owned by a new discretionary trust

Position: CRA will typically apply GAAR in this situation.

Reasons: The transaction described circumvents the application of subsection 104(5.8), paragraph 104(4)(b) and the Act as a whole.

29 November 2016 CTF Roundtable Q. 2, 2016-0669651C6 - Computation of safe income

Unedited CRA Tags
55(2), 55(2.1)(c), 15(1), 56(2), 69(1), 245(2), 154(2), 163(2), 239(1)
moratorium on providing interpretations on safe income allocation to discretionary dividend shares

Principal Issues: a) and b) how to apportion safe income on discretionary-dividend shares? c) are detailed safe income calculations essential?

Position: a) and b) no response until study is completed c) duty of taxpayer is to use due care in making claim that a dividend is protected by safe income. Incorrect claim could be subject to 152(4), 163(2) or 239(1) depending on circumstances

Reasons: see above

29 November 2016 CTF Roundtable Q. 3, 2016-0670201C6 - Agnico-Eagle Mines Decision

Unedited CRA Tags
39(2), 143.3(3)

Principal Issues: Whether the methodology provided by the FCA in Agnico-Eagle case results in a capital loss under subsection 39(2) or subsection 39(1)?

Position: No.

Reasons: See reasons below.

29 November 2016 CTF Roundtable Q. 4, 2016-0671491C6 - 55(2) and Part IV Tax

Unedited CRA Tags
55(2), 129(1), 186, 83(2)
s. 55(2) application to dividend as a result of a Pt IV tax refund does not generate CDA for on-payment of that dividend
repeal of the s. 55(2) exemption, for dividends for which the Part IV tax is refunded on on-payment to an individual shareholder, busts integration

Principal Issues: Where a Canadian corporation (Holdco) has been subject to Part IV tax on a dividend received from Opco and the Part IV is refunded as a result of a payment of dividend to an individual shareholder such that subsection 55(2) applies to the dividend received from Opco, could Holdco elect under subsection 83(2) for a portion of the dividend paid to the individual shareholder to be a capital dividend?

Position: No. Subsection 55(2) only applies after the application of section 186 and subsection 129(1). The 83(2) election can only be made on a subsequent dividend but not on the dividend paid by Holdco that triggered the refund of the Part IV tax, otherwise it would impair on the application of subsection 55(2) to the dividend received by Holdco.

Reasons: See document.

29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6 - Investment management fees

Unedited CRA Tags
207.01(1) "advantage"
bearing of RRSP or TFSA fees by the annuitant or holder typically will be subject to the 100% advantage tax, effective 2018

Principal Issues: Whether the advantage tax rules apply where investment management fees incurred by an RRSP, RRIF or TFSA are paid outside of the plan by the annuitant or holder.

Position: Likely

Reasons: Investment management fees represent a liability of the registered plan trust, and thus would be expected to be paid by the trustee using funds from within the plan. If paid outside of the plan, the resulting indirect increase in value of the plan assets would likely constitute an advantage under subparagraph (b)(i) of the definition of “advantage” in subsection 207.01(1) of the Act. It is not commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party. There is a strong inference that a motivating factor underlying the transaction is to maximize the savings in the plan so as to benefit from the tax exemption afforded to the plan.

29 November 2016 CTF Roundtable Q. 6, 2016-0669661C6 - 84.1 and the Poulin/Turgeon Case

Unedited CRA Tags
84.1
Poulin is consistent with CRA's previous statements on employee buycos

Principal Issues: With respect to the Tax Court of Canada decision in Ghislain Poulin v. The Queen (Poulin) and Herman Turgeon v. The Queen (Turgeon), 2016 TCC 154: a) Could CRA comment on what it regards as the differentiating factors identified by the Court in this decision? b) Does this decision impact CRA's view of employee buyco arrangements? c) What is CRA's view of a share sale identical to Mr. Turgeon's except the holding corporation, an employee buyco, benefits from its involvement via dividends on the shares it purchased? The benefit is real in that such dividends are in addition to subsequent share redemption amounts received by the holding corporation and used to pay off debt owed to the original vendor of shares. Would CRA’s view differ if the holding corporation was compensated for its involvement otherwise than by dividend?

Position: General comments provided.

Reasons: The question as to whether an employee and an employee buyco are, upon the sale of the shares of the capital stock of a particular corporation, dealing with each other at arm’s length is a question of fact. Such determination can only be made following a review of all facts and circumstances relating to a particular situation. However, in a particular situation, it could be concluded that an employee and an employee buyco are acting in concert without separate interests. For example, the particular facts and circumstances could establish that the employee buyco assumes no risks associated with the purchase of the shares of the capital stock of the particular operating corporation, does not benefit from buying such shares, has no interest other than to enable the employee to realize a capital gain and claim the capital gains deduction, and has no role independent of the employee or the operating corporation. In other words, the facts of a particular situation could support the position that the employee buyco is only involved in the transaction as an accommodating party for the benefit of the employee.

29 November 2016 CTF Roundtable Q. 7, 2016-0672091C6 - GAAR Assessment Process

whether a GAAR proposal letter is issued before a Headquarters/GAAR Committee referral generally turns on whether the GAAR issue is familiar

Principal Issues: Can the CRA comment on what procedures must be followed before a taxpayer can be reassessed under GAAR?

Position: General comments provided.

29 November 2016 CTF Roundtable Q. 8, 2016-0671501C6 - 55(2) clause 55(2.1)(b)(ii)(B)

Unedited CRA Tags
55(2.1)(b)(ii)(B), 12(1)(j), 52(2), 55(2), 112(1), 248(1)
cash is property for 55(2.1)(b)(ii)(B) purposes

Principal Issues: Is cash property for purposes of clause 55(2.1)(b)(ii)(B)?

Position: Yes. The scheme of subsection 55(2) considers cash as property.

Reasons: See document.

29 November 2016 CTF Roundtable Q. 9, 2016-0669801C6 - BEPS Action Item 13

Unedited CRA Tags
233.1; 233.4; 233.8; 247(4)
BEPS 13 has no effect on the s. 247 documentation requirements
no requirement to produce a Local or Master File

Principal Issues: Whether the CRA will require "master file" and "local file" information, in accordance with BEPS Action Item 13, in order to satisfy a taxpayer's responsibility to make "reasonable efforts" to determine and use arm's length transfer prices under section 247 of the Act.

Position: No.

Reasons: Action Item 13 has been dealt with by the introduction of proposed section 233.8, which has no direct relation to section 247.

29 November 2016 CTF Roundtable Q. 10, 2016-0669751C6 - U.S. LLPs and LLLPs

Unedited CRA Tags
150
CRA may allow LLPs and LLLPs to file as corps only on a going-forward basis
potential prospective filings of LLPs/LLLPs as corps

Principal Issues: Whether the CRA would accept filing as a corporation only on a go-forward basis.

Position: The CRA is open to a prospective approach and invites submissions in this regard.

Reasons: A working group has been set up to study compliance issues relating to U.S. LLPs and LLLPs.

29 November 2016 CTF Roundtable Q. 11, 2016-0669761C6 - Computation of Earnings for LLCs

Unedited CRA Tags
Definition of “earnings” under subsection 5907(1) of the Regulations, subsection 5907(2.03) of the Regulations

Principal Issues: (1) Whether it continues to be the CRA's position that a disregarded U.S. LLC computes its “earnings” pursuant to subparagraph (a)(i) of the definition of “earnings” in subsection 5907(1) of the Regulations in light of the introduction of subsection 5907(2.03) of the Regulations; (2) Whether the answer would change if the LLC had one or more members which were not regarded U.S.-resident corporations

Position: (1) Upon the introduction of subsection 5907(2.03) of the Regulations, “earnings” of a disregarded LLC should be computed pursuant to subparagraph (a)(iii) of the definition of “earnings” in subsection 5907(1) of the Regulations; (2) Provided that the LLC is treated as a disregarded entity for U.S. purposes, the answer would not change. However, if the LLC is treated as a partnership for U.S. purposes, the LLC should compute its “earnings” pursuant to subparagraph (a)(i) of the definition of “earnings” in subsection 5907(1) of the Regulations.

Reasons: See response below

29 November 2016 CTF Roundtable Q. 12, 2016-0669851C6 - Support for US FTC Claims

acceptable supporting documents for individuals reporting U.S. source income

Principal Issues: Support for US foreign tax credit claims

Position: Comments provided

29 November 2016 CTF Roundtable Q. 13, 2016-0669721C6 - ECE/Class 14.1

Unedited CRA Tags
13(38), 13(38)(d)(iii), 13(41), 14(5)
s. 13(38)(d) does not extend to internally-generated goodwill

Principal Issues: Will the election in proposed subparagraph 13(38)(d)(iii) apply where a taxpayer disposes of a business whose only intangible asset is internally-generated goodwill with no cost and its year end straddles January 1, 2017?

Position: No

Reasons: See response

29 November 2016 CTF Roundtable Q. 14, 2016-0669871C6 - Estate distribution

Unedited CRA Tags
104(6); 104(7.2); 104(24); 104(13)
income may not be payable to beneficiary if estate required to pay taxes thereon
income from an estate residue generally can be distributed on a deductible basis

Principal Issues: Can an Executor of an estate pay taxable income to residual beneficiaries?

Position: General comments given

Reasons: Generally depends on the wording of the Will

29 November 2016 CTF Roundtable Q. 15, 2016-0669731C6 - The New SBD provisions

Unedited CRA Tags
125(1); 125(2); 125(3); 125(3.2); 125(7); 125(10), 129(6); 256(1)
sharing of business limit with Rentalco
sharing of business limit where no specified income

Principal Issues: Claiming of SBD on certain payments between associated corporations.

Position: Issue was resolved with the release of new subsection 125(10) on October 19, 2016.

Reasons: See response.

Technical Interpretation - Internal

24 January 2017 Internal T.I. 2016-0675901I7 F - Frais d'exploration au Canada

Unedited CRA Tags
alinéa f) de la définition de FEC au para. 66.1(6)

PRINCIPALES QUESTIONS: Modification législative à l'alinéa f) de la définition de "frais d'exploration au Canada" au paragraphe 66.1(6) de la LIR: Loi no 1 d'exécution du budget de 2016 (L.C. 2016, c 7).

POSITION ADOPTÉE: Les Lignes directrices ont été modifiées.

RAISONS: Pour refléter les modifications législatives. Toutefois, le traitement réel d'une dépense particulière engagée dépendra des faits particuliers d'une situation donnée.

24 January 2017 Internal T.I. 2016-0675902I7 - Canadian exploration expense

Unedited CRA Tags
paragraph (f) of the definition of CEE in ss. 66.1(6)
qualifying environmental studies, community consultations and feasibility studies

PRINCIPAL ISSUES: Legislative amendment to paragraph (f) of the definition of CEE in ss. 66.1(2): Budget Implementation Act, 2016, No. 1, S.C. 2016, c. 7.

POSITION: Guidelines have been provided.

REASONS: Actual determination will depend on the facts of a particular situation.