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CRA indicates that it has not been deluged by ruling requests on the s. 55(2.1)(b) purpose test

CRA repeated an earlier statement that it can provide rulings on the application of the purpose test in s. 55(2.1)(b) provided that “all manifestations of purpose and corroborating circumstances support the absence of one of the purposes described in paragraph 55(2.1)(b)” and the taxpayer represents “that the purposes for which the dividend was paid do not include one of [such] purposes.” CRA unsurprisingly indicated that it “other than rulings on loss-consolidation, the CRA has not been deluged by requests for rulings on this topic.”

The “Manual used … [in] audits of small and medium-sized businesses does not contain any information on the application of subsection 55(2) and the purpose test, in particular.”

Neal Armstrong. Summary of 9 May 2018 CPA Roundtable Q. 11, 2018-0765271C6 under s. 55(2.1)(b).

Income Tax Severed Letters 3 April 2019

This morning's release of five letters from the Income Tax Rulings Directorate is now available for your viewing.

Kerry (Canada) – Federal Court finds that a request to hold notices of objection in abeyance pending Canadian competent authority review amounted to implied waivers

A Canadian company (Kerry Canada) was reassessed under s. 247 to increase its income from product sales to a US affiliate and disallow deductions for royalties paid to an Irish affiliate. Kerry Canada objected to these reassessments, but requested that its objections be held in abeyance pending a decision by the Canadian competent authority (CCA) of these transfer-pricing issues. In its ensuing application to the CCA, Kerry Canada reiterated that it had requested such abeyance.

After the CCA agreed with Kerry Canada on the product transfer pricing issue, CRA issued second reassessments to give effect to that adjustment. Kerry Canada did not object to the second reassessments. Subsequently, the CCA also agreed with Kerry Canada on the deductibility of the royalties, but CRA refused to implement this favourable decision because the taxation years in question were now statute-barred.

Walker J found that Kerry Canada’s request to keep the objections in abeyance until a CCA decision on the two issues amounted to an implied waiver for those years, so that CRA was still permitted under s. 152(4)(c)) to reassess those years by virtue of having received the waivers. Kerry Canada had made the mistake of not objecting to the second reassessments. However, this was essentially irrelevant to the point that the implied waivers nonetheless had been given (albeit, in connection with objecting to reassessments that were replaced by, and, therefore, voided by, the second reassessments.)

Since CRA had not addressed this point, the matter was referred back to CRA for reconsideration of the request of Kerry Canada to reassess it to implement the favourable CCA decision.

Neal Armstrong. Summary of Kerry (Canada) Inc. v. Canada (Attorney General), 2019 FC 377 under s. 152(4)(c).

CRA states that taxpayers should be able to handle the allocation of costs between pipelines and pipeline appendages

CRA noted that although its published policies distinguish between pipelines (Class 49 properties) and attachments to a pipeline that are not an integral and component part of the pipeline ("pipeline appendages") (which are often Class 7 properties), it has provided no “guidance as to how costs are allocated between pipelines included in class 49 and equipment included in class 7” – but went on to state:

However, it is our understanding that there is sufficient information at the disposal of taxpayers, such as detailed engineering documents, progress reports, authorizations for expenditures and invoices, to enable a reasonable allocation of costs, including general contractor costs.

Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.8 under Sched. II, Class 49.

CRA indicates that refinery catalysts are Class 26 property notwithstanding their short useful life

In response to a submission that “Most modern refinery catalysts have a useful life of 1 to 3 years and are disposed of at the end of this period,” CRA stated:

Our position remains that the cost of catalysts is properly classified as Class 26, deductible on a declining basis at 5% per year. … We suggest you make a submission to the Department of Finance.

Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.7 under Sched. II, Class 26.

CRA indicate that dispositions by oil and gas corporations of properties generally do not give rise to terminal losses

Although CRA noted that the determination of whether a person is carrying on a single business or multiple separate businesses is a question of fact, it indicated that in the context of Reg. 1101(1):

We do acknowledge that, in the oil and gas industry, it is common for businesses to acquire properties and dispose of non-core properties on a continual basis. Generally, the acquisitions and dispositions during the normal course of business would not be considered acquisitions or dispositions of separate businesses.

Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.5 under Reg. 1101(1).

CRA appears to be prepared to accept that natural gas and oil are similar properties for s. 111(5)(a)(ii) purposes

When commenting on how it has applied the “sale, leasing, rental or development…of similar properties” test in s. 111(5)(a)(ii), CRA noted that it still considers the “similar properties” term to reference a narrower meaning than “having characteristics in common” and that it instead references properties “of the same general nature or character.”

In discussing how it has applied this test, CRA noted that 9234795 stated that oil or gas from wells located in different provinces would be considered to be a “similar property,” and that although CRA has not taken a position on whether the different types of hydrocarbons are similar to each other, in 9314945 it “opined that where a corporation carries on the business of mining and selling metallurgical coal as well as the business of mining and selling other minerals, income therefrom will be considered to be derived by those businesses from the “sale, leasing, rental or development…of similar properties” for the purposes of subparagraph 111(5)(a)(ii) provided that the other conditions in paragraph (a) are met.” This appears to suggest that natural gas and oil would be accepted as similar properties.

Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.4 under s. 111(5)(a)(ii).

6 more translated CRA interpretations are available

We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretations released in April 2012. Their descriptors and links appear below.

These are additions to our set of 819 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for April.

Bundle Date Translated severed letter Summaries under Summary descriptor
2019-03-27 29 January 2019 External T.I. 2018-0780481E5 F - Tenir un établissement domestique autonome Income Tax Act - Section 6 - Subsection 6(6) - Paragraph 6(6)(a) - Subpargraph 6(6)(a)(i) can qualify as self-contained domestic establishment if no ownership but expense responsibility
Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(b) “self-contained domestic establishment” entails expense responsibilty
2012-04-20 29 March 2012 Internal T.I. 2011-0430871I7 F - Participation à une étude de recherche clinique Income Tax Act - Section 5 - Subsection 5(1) "volunteers" for drug clinical trials earned business rather than employment income
Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit compensation received by participants in clinical drug studies were business income even where they had a personal interest in the study
2012-04-13 29 March 2012 External T.I. 2011-0427821E5 F - Biens agricoles admissibles Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Interest in a Family Farm or Fishing Partnership potential qualification where farm property of partnership is leased to farming corp. with same family owners
Income Tax Act - Section 30 s. 30 expenses can be claimed by farming lessee or carried forward
1 March 2012 Internal T.I. 2012-0437901I7 F - Timing of the adjustments pursuant to 111(5) Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a) acquisition of control of target does not reduce its NCLs at that time – streaming rules apply prospectively
26 March 2012 External T.I. 2012-0440441E5 F - Déduction accordée aux petites entreprises Income Tax Act - Section 125 - Subsection 125(1) trite SBD overview
17 June 2011 Internal T.I. 2011-0394471I7 F - Associated Corporations - 256 Income Tax Act - Section 256 - Subsection 256(2) s. 256(2) does not multiply the SBD but protects it where particular corporations otherwise are eligible
Income Tax Act - Section 256 - Subsection 256(2.1) list of 5 “useful” factors in determining s. 256(2.1) application
Income Tax Act - Section 256 - Subsection 256(5.1) Transport M.L. Couture cited as an example

Lavrinenko and Morrissey – Federal Court of Appeal finds that “near equal” means no lower than 45%

While normally the Canada child tax benefit (CCTB) and the GST/HST credits (the “Benefits”) can at most be claimed by only one parent, individuals who are a child’s “shared‑custody parent” are each entitled to ½ of the Benefits. One of the requirements in order to be a “shared‑custody parent” is that the parent reside with the child “on an equal or near equal basis.”

In Lavrinenko, Webb JA has concluded that the “near equal” concept is to be handled by rounding relative residing-with-the-child percentages to the nearest multiple of 10% - so that if, as in the case before him, this percentage was (at most) 41%, it was to be rounded down to 40% (test failed). If it were 47%, it would be rounded up to 50% (test passed).

A second FCA decision by a different panel agreed with the Webb JA approach and, in that case (Morrissey), rounded a percentage that might have been 43% down to 40% - so that, again, the Benefits were not available.

Neal Armstrong. Summary of Lavrinenko v. Canada, 2019 FCA 51 under s. 122.6 – shared-custody parent – para. (b) and summary of Morrissey v. Canada, 2019 FCA 56 under s. 122.6 – shared-custody parent – para. (b).

CRA finds that the Canada-U.K. Treaty does not exempt shares deriving their value from Canadian oil and gas licences – even where the Canadian business is carried on “in” them

Para. 5(a) of the Canada-U.K. Treaty provides that shares may be taxed in Canada if they derive the greater part of their value from immovable property situated in Canada, or Canadian oil and gas licences. Para. 7 provides that for these purposes, immovable property does not include “any property (other than rental property) in which the business of the company was carried on.”

In an interpretation provided prior to the Alta Energy decision, CRA took the view that where a UK resident disposed of its shares of a Canadian subsidiary deriving most of their value from Canadian oil and gas licences, the gain was not exempted by para 7 having regard to the ‘or” which we bolded above.

Alta Energy appears to have effectively treated Canadian oil and gas licences as immovable property, so that the somewhat comparable exclusion under the Canada-Luxembourg Treaty for immovable property in which the company’s business was carried on was available. It is not at all clear that the specific dealing by the Canada-U.K. Treaty with oil and gas licences effectively deems them not to be immovable property. Accordingly, this interpretation is debatable.

Neal Armstrong. Summary of 7 June 2017 Canadian Petroleum Tax Society Roundtable, Q.3 under Treaties – Income Tax Conventions – Art. 13.