The various records or books of account of a corporation described in Reg. 5800(1)(a) are to be kept until two years after its dissolution, whereas other records or books of the corporation need only by kept until six years after the taxation year to which they relate.

Regarding the scope of Reg. 5800(1)(a)(iv), which refers to “the general ledger or other book of final entry containing the summaries of the year-to-year transactions of a corporation,” CRA indicated that:

• In general, the term “summary” refers only to the summary items posted to the general ledger (GL), so that more details, such as the names of the parties and the dates of the transactions, are not required.
• However, in some cases, the GL may present only a total for several transactions otherwise presented individually in another book of final entry, such as a subsidiary ledger, in which case such subsidiary ledger is also subject to the longer retention period.
• Notwithstanding some ambiguity in this regard arising under the wording of ITA s. 230(4)(a). the vouchers and accounts required to verify the information contained in the GL are only subject to the shorter (six-year) retention period.

Reg. 5800(1)(a)(v) refers to “any special contracts or agreements necessary to an understanding of the entries in the [GL]”. CRA stated:

Generally speaking, we are of the view that a special contract or agreement is one that includes particular provisions or conditions that are not generally found in a contract or agreement of a similar nature.

Neal Armstrong. Summaries of 5 July 2023 External T.I. 2022-0954271E5 F under Reg. 5800(1)(a)(iv) and Reg. 5800(1)(a)(v).

It is suggested that the mere presence of contractual protection (CP) is not sufficient to engage the CP hallmark and that a “discernible link must exist between the CP and the avoidance transaction in question.” This is consistent with CRA’s example of an RRSP trustee receiving an indemnity regarding the RRSP acquiring non-qualified investments, as such indemnity “relates to transactions (for example, the making of non-qualified investments) that do not form part of the tax motivation that gives rise to the avoidance transaction” (establishing the RRSP).

To apply a similar approach in the context, for example, of a cross-border loan transaction with a gross-up clause, where the loan itself was not an avoidance transaction but was part of a series of transactions that included an avoidance transaction (e.g., a rollover transaction), an entirely appropriate conclusion would be that the usual indemnity and gross-up are not CP “in respect of” that avoidance transaction.

Furthermore, given that CP is defined in relation to a “tax benefit,” which, in turn, refers to a reduction, avoidance, or deferral of amounts payable under the ITA, because interest to an arm’s-length foreign lender generally is not taxable under the ITA, there is no identifiable “reduction, avoidance or deferral” that would make the existence of a tax benefit clear. A tax benefit may also be identified by referring to an alternative transaction that might reasonably have been carried out but for the existence of the tax benefit (Copthorne) - yet, in normal cross-border lending situations, no such reasonable alternative is likely to exist.

Accordingly, the absence of a tax benefit is a further potential basis for a standard gross-up and indemnity in an arm’s-length lending transaction not engaging the CP hallmark.

Neal Armstrong. Summary of Andrew Spiro and Jessica Charendoff, “Mandatory Disclosure Is Here: Now What?” Perspectives on Tax Law & Policy, Vol. 4, No. 3, September 2023, p. 1 under s. 237.3(1) – contractual protection.

Shawn Porter, who was an Associate Assistant Deputy Minister, Tax Policy Branch during the design of the more recent mandatory reportable transaction (RT) rules, has co-authored an article providing perspectives on when these rules should be engaged.

The article suggests:

Hallmarks are intended to identify potentially abusive transactions on the basis that such transactions often exhibit a hallmark. …

[H]allmarks do not just exist in the ether; rather, they reveal themselves in circumstances where their presence may influence or cause a party to engage in the targeted riskier behaviour by entering into the potentially aggressive transaction.

In particular, since the contractual protection (CP) hallmark must be present by the time that the avoidance transaction was completed, it follows that “[p]rotection arising after the relevant avoidance transaction is consummated—and operating for the benefit of an arm’s-length person not involved with or interested in the earlier transaction that gave rise to the tax risk—is not the target.”

Thus, the Explanatory Notes “differentiate, appropriately, between (1) a situation where a purchaser obtains protection from pre-sale liabilities (including tax) and (2) a situation where insurance is obtained to cover specific identified tax risks in relation to avoidance transactions.”

Similarly, the CRA guidance indicates that protection relating to existing pre-closing tax issues, the quantum of existing tax attributes, and pre-sale safe income dividend transactions, do not bear the CP hallmark.

However, the CP hallmark would apply if CP were received after the fact, but the taxpayer seeking the benefit knew in advance that this would occur, or if the purchaser and vendor agreed to reduce the risk of a contemporaneous avoidance transaction under the guise of standard indemnities.

Neal Armstrong. Summary of Rob Jeffery and Shawn D. Porter, “Mandatory Disclosure: A Reasonable Balance Between Timely Information and Administrative Burden,” Perspectives on Tax Law & Policy, Vol. 4, No. 3, September 2023, p. 4 under s. 237.3(1) – contractual protection.

We have translated a CRA interpretation released last week and a further 6 CRA interpretations released during December of 2002. Their descriptors and links appear below.

These are additions to our set of 2,584 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 20 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5^th of each month).