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The response to the new U.S. anti-hybrid Regs. may not generate much revenue to the IRS

Code s. 267A and the regulations thereunder target deduction/non-inclusion situations. All of the common structures used by Canadian (and other non-U.S.) multinationals with U.S. operations have been adversely affected. What come to mind are cross-border repo financing structures, tower structures, Lux Fincos with MRPS, and branch mismatch structures.

Some taxpayers are exploring clever technical changes to their existing hybrid structures, notwithstanding that this approach may bump up against the PPT antiavoidance rule in the proposed Regulations. Others may throw in the towel.

[O]ther MNEs based in Canada (and elsewhere) might opt for a third approach that relies on simpler, non-hybrid, third-country financing structures. Some countries that have tax treaties with the United States — for example, Bulgaria, Hungary, Ireland, and Switzerland — have been carefully preparing for a post-BEPS world and offer very competitive corporate tax rates around 10 percent that may bring in business. Trading a 21 percent rate for a 10 percent rate is likely to be an attractive option for many tax managers.

Neal Armstrong. Summaries of Nathan Boidman and Michael N. Kandev, “Expected Adverse Effects of Proposed U.S. Anti-Hybrid Regulations on Inbound Financing by Canadian MNEs,” Tax Notes International, February 11, 2019, p. 623 under s. 95(2)(a)(ii)(B)(II) and s. 113(1)(a).

CRA ruling letter indicates that an intercompany subordinated loan will bear interest at the rate for a senior secured financing

CRA provided the usual rulings (including on s. 55(2)) respecting a transaction for the transfer of non-capital losses from Profitco to its Lossco parent by means of Lossco lending at interest to Profitco, Profitco subscribing for pref of a newly-incorporated sister corp (Newco) and Newco lending without interest to Lossco.

Notwithstanding that the loan made to Profitco was subordinated, the ruling letter states that the interest rate is “based on a comparison to the most recent arm’s length senior secured financing issued” by Lossco. It is unclear whether this was volunteered or volun-told.

The only financial capacity reps given are that Profitco has the financial capacity to pay the interest on the loan to it from its own cash flow and that Lossco has cash of a specified level and will fund annual contributions of capital to Newco (to fund dividend payments on the Newco pref) out of an independent source of income.

Neal Armstrong. Summary of 2018 Ruling 2018-0742641R3 under s. 111(1)(a).

Zdzieblowska – Tax Court of Canada finds that CRA is required to grant an unclaimed and available new rental housing rebate when assessing to deny a new home rebate

ETA s. 296(2.1), generally requires CRA to take unclaimed rebates into account when assessing a taxpayer.

D’Arcy J dealt with a situation where a new home purchaser had claimed a new home rebate on the purchase, whereas in fact a new rental home rebate should instead have been claimed. He found that s. 296(2.1) is applicable where such an individual is assessed to deny a new home rebate. CRA in assessing must take into account any unclaimed new rental housing rebate that was available, as was the case here. However, CRA failed to do so, and the individual failed to file a notice of objection. The individual instead made a late filing for the new rental housing rebate, which was the incorrect thing to do as the two year deadline for making such a filing was inflexible (whereas there is no time limitation for requiring CRA to take that rebate into account at the time it assesses the individual to deny a new home rebate.)

Thus, the individual had no recourse for the mistake of CRA in not applying s. 296(2.1) when it assessed her.

Neal Armstrong. Summary of Zdzieblowska v. The Queen, 2019 TCC 40 under s. 296(2.1).

6 further full-text translations of CRA interpretations are available

We have published a further 6 translations of interpretations released in June 2012. Their descriptors and links appear below.

These are additions to our set of 795 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 ¾ 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 March.

Bundle Date Translated severed letter Summaries under Summary descriptor
2012-06-22 24 April 2012 Internal T.I. 2011-0400671I7 F - Honoraires professionnels Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs fees incurred by individual before intention to form a corp did not qualify as pre-incorporation expenses
Income Tax Act - Section 15 - Subsection 15(1) meaning of “benefit”
Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) tax planning fees paid to joint counsel qualified as a disposition expense
2012-06-15 30 May 2012 Internal T.I. 2012-0434471I7 F - Remise de prix non monétaires aux employés Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) distinction between non-cash award for overall contribution to workplace and performance recognition
17 May 2012 Internal T.I. 2012-0437001I7 F - Price Adjustment Clause General Concepts - Effective Date per Gurberg, a PAC has retroactive effect
Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e.2) no need to file amended s. 85(1) election where PAC engaged
14 May 2012 Internal T.I. 2010-0367831I7 F - Régime de pension étranger. France Income Tax Act - Section 5 - Subsection 5(1) contributions paid by employer to voluntary French pension funds for expatriates were constructively received by employee member
Income Tax Act - Section 248 - Subsection 248(1) - Retirement Compensation Arrangement since employer acted as employee agent in making pension contributions, no RCA, EBP or SDA
23 May 2012 Internal T.I. 2011-0418071I7 F - Remise de dettes, PAC Income Tax Act - Section 80 - Subsection 80(3) - Paragraph 80(3)(a) debt settlement results in immediate application of forgiven amount to reduce NCL at that time
Income Tax Act - Section 111 - Subsection 111(8) - Non-Capital Loss - D.2 debt settlement results in immediate application of forgiven amount to reduce NCL at that time
2012-06-08 7 October 2011 APFF Roundtable, 2010-0371941C6 F - Application de l'article 80 - fusion/liquidation Income Tax Act - Section 80 - Subsection 80(1) - Relevant loss balance NCL of acquired subsidiary preserved for debt forgiveness purposes on amalgamation but lost (if business ceased) on wind-up
Income Tax Act - Section 88 - Subsection 88(1.1) - Paragraph 88(1.1)(e) fiction in s. 80(13) is insufficient to preserve non-capital losses of a subsidiary from a business that ceased following an AOC where subsidiary wound-up and parent has forgiven amount

CRA indicates that auditors should communicate their reasons for requiring information from taxpayers

Comments of Ted Gallivan included:

Q.3 CRA’s annual audit yield has grown from $8.8 to $13.8 billion gross, with the use of around 5% more in CRA resources. Having said that, the goal is to increase compliance rather than to increase audit yields (Q.10).

Q.5 and 6. CRA is evaluating whether the focus of risk assessment should be done on a transaction-by-transaction, taxpayer-by-taxpayer or return-by-return basis. If CRA sees a big risk indicator, it should tell the taxpayer at that point, rather than waiting for an audit, when decisions have already been made and positions solidified. More generally, CRA is considering getting information to taxpayers even before they file their returns (Q.2).

Q.7 CRA decided not to appeal the BP decision to the Supreme Court because it would effectively have been asking for absolute authority. Headquarters then clarified to field auditors that there must be a valid business reason for seeking information, and that that reason should be communicated to the taxpayer.

Q.9 Although the Panama papers and other leaks did not necessarily relate to the most aggressive types of tax avoidance, it was necessary for CRA to respond to show its resolve. The fact that the 30 exchanging jurisdictions all gave the list a priority resulted in improved information-exchange functioning.

Q.10 There will be a trend towards better coordination within different branches of CRA, such as between the rulings and audit functions (or possibly involving Appeals) and more involvement from Justice, before a decision is made to assess taxpayers.

Neal Armstrong. Ted Gallivan at the 27 February 2019 CTF Corporate Management Tax Conference, including summary of Q.7 under s. 231.1(1).

Finucane – UK Supreme Court finds that the government was required to demonstrate that it resiled from an undertaking based on genuine policy grounds

It is unclear to what extent CRA is legally bound to honour rulings given by it.

The applicant’s husband, a solicitor, was murdered in their home, in the presence of her and their children, by Irish loyalist terrorists with the assistance of collusion from members of the government security forces. Respecting her claim that the government should be held to its promise to hold an inquiry, Lord Kerr stated:

[W]here a clear and unambiguous undertaking has been made, the authority giving the undertaking will not be allowed to depart from it unless it is shown that it is fair to do so. The court is the arbiter of fairness in this context. And a matter sounding on the question of fairness is whether the alteration in policy frustrates any reliance which the person or group has placed on it. …

However, in finding that the government could now resile from its undertaking, he stated:

Where political issues overtake a promise or undertaking given by government, and where contemporary considerations impel a different course, provided a bona fide decision is taken on genuine policy grounds not to adhere to the original undertaking, it will be difficult for a person who holds a legitimate expectation to enforce compliance with it.

Neal Armstrong. Summary of Finucane, Re Application for Judicial Review (Northern Ireland) [2019] UKSC 7 under s. 152(1).

Keurig Canada – Court of Quebec finds that the ARQ did not need the equivalent of ITA s. 152(9) to amend its pleadings with an additional reason for failure of a Quebec bump

The taxpayer was assessed under the Quebec general anti-avoidance rule respecting its engaging in “Quebec bump” transactions, which used Class 12 property (namely, a coffee roaster) purchased from a supplier for $820 thousand to generate a non-capital loss of $541 MILLION. After the taxpayer had launched its appeal, counsel for the ARQ realized through a review of documents previously provided that the roaster likely did not qualify as Class 12 depreciable property, and sought to amend the ARQ’s pleadings to allege this as an additional ground for dismissing the appeal.

After noting that the Quebec Taxation Act did not contain a provision equivalent to ITA s. 152(9) (permitting the raising of additional arguments by the government), Lavigne J nonetheless granted the requested amendment, noting that the source of the ARQ’s error was the taxpayer’s returns, which stated falsely (it was alleged) that the roaster was a Class 12 property. She stated:

It was not for the ARQ to find the error. The burden was on the taxpayer to submit accurate tax returns. …

It would be contrary to the interests of justice for the ARQ to be precluded from a defence based on the facts, which were erroneously presented by the plaintiff, even though the file is at the stage of an appeal from the notice of assessment.

Neal Armstrong. Summary of Keurig Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 451 under ITA s. 152(9).

CRA provides guidance on a GST/HST exemption for respite care services

ETA Sched V, Pt. IV, s. 3 exempts

A supply of a service of providing care and supervision to an individual with limited physical or mental capacity for self-supervision and self-care due to an infirmity or disability, if the service is rendered principally at an establishment of the supplier.

Points made by CRA include:

  • Such an exempt service can include the provision of lodging.
  • The single supply doctrine can assimilate the provision of lunch, snacks, art supplies, and transportation to and from different activities in the exempt supply of the care.
  • The fact that an individual requires assistance with meal preparation and basic activities of daily living alone is not indicative of the individual having limited physical or mental capacity for self-supervision and self-care.
  • The factors taken into account in determining whether the care is provided at facilities of the supplier include:
  • who has authority over making operational decisions in the establishment

  • who has control of day-to-day operations of the establishment

  • who has presence in the establishment

  • the types of activities and routine carried on in the establishment

Neal Armstrong. Summary of GST/HST Memorandum 21-3 "Respite Care Services" January 2019 under ETA Sched V, Pt. IV, s. 3.

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CRA confirms that a subsequent capital loss did not render a capital dividend excessive

CRA took only three weeks to respond to a technical interpretation request by confirming that where a corporation has paid a capital dividend in Year 1 based on a capital gain realized by it in that year, a capital loss realized by it in Year 2 only affects the calculation of its capital dividend account going forward so that no Part III tax on the capital dividend is engaged.

Neal Armstrong. Summary of 22 January 2019 External T.I. 2019-0791631E5 under s. 89(1) – capital dividend account – para. (a).

CRA discusses how to measure compliance by a PHSP with the 90% METC-eligible expense test

Under CRA’s revised policy on insured private health services plans (PHSPs), all or substantially all of the premiums paid under the plan must relate to medical expenses that are eligible for the medical expense tax credit (METC). CRA confirmed that this means a test of whether 90% or more of the annual premiums paid under the plan relate to METC-eligible expenses, and it would be irrelevant if, for example, only 88% of the benefits paid in the year were METC-eligible. However, in the case of a self-insured plan, the test is one of whether all or substantially all of the benefits paid to all employees in the calendar year are for METC-eligible expenses.

Where a health care spending account (HCSA) sets a ceiling on the amounts that can be claimed under the plan, the employees’ allocation of the ceiling amount to the various expense categories is not considered, so that if the portion of the benefits paid in the year for METC-eligible benefits was, say, 92%, it would not matter that the total ceiling amounts allocated to METC-eligible expenses was only 80%. In the rare case where there was determined to be a separate HCSA plan for each employee, this same test would be applied to each such separate plan.

CRA provides helpful tabular numerical examples.

Neal Armstrong. Summary of 24 January 2019 External T.I. 2016-0651291E5 under s. 248(1) – private health services plan.

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