News of Note
Joint Committee comments on the revised EIFEL rules
The Joint Committee has made numerous comments on the revised draft excessive interest and financing expenses limitation (EIFEL) rules released November 22. To focus on a few of the comments made regarding their application to foreign affiliates:
A controlled foreign affiliate’s interest and financing expenses (“IFE”) that is deductible in computing its income (or loss) and that is re-characterized under s. 95(2)(a), or interest described in s. 95(2)(a)(ii)(D) that is paid by the affiliate to another affiliate (and thus is not deductible in computing the FAPI of the payer affiliate), could still be included in computing the relevant affiliate interest and financing expense (“RAIFE”) respecting a foreign affiliate despite the active business treatment of such amounts. The Committee recommends that the rules should clarify the exclusion from RAIFE any IFE of a controlled foreign affiliate that is (i) included in computing its income or loss from an active business under s. 95(2)(a); and (ii) not included in computing its FAPI by virtue of that amount constituting, to the recipient of the interest, income from an active business under s. 95(2)(a)(ii)(D).
RAIFE can arise where the affiliate otherwise has no FAPI revenues or IFE exceeding such revenues, so that there can nonetheless be a denial of deductions to the taxpayer under the EIFEL rules.
It is unclear how the EIFEL rules apply where a partnership (“LP”) is interposed between controlled foreign affiliates - e.g., where two controlled foreign affiliates (“CFA1” and “CFA2”); of Canco wholly-own LP, which wholly owns “CFA3,” with CFA3 incurring interest expense that is otherwise deductible in computing its FAPI relative to LP – given, inter alia, that LP is not a “taxpayer (as defined in draft s. 18.2(1)) for EIFEL purposes and draft s. 95(2)(f.11)(ii)(A) provides that s. 18.2(2) does not apply for purposes of computing FAPI of a foreign affiliate.
A partnership not being wholly-owned by a taxpayer group could result in a significant administrative burden. For example, where Canco (subject to the EIFEL rules) owns, say, a 9% interest in a partnership (“LP”) owning a controlled foreign affiliate (“CFA”) that earns FAPI (and incurs interest expense that is otherwise deductible in computing that FAPI) then, notwithstanding that Canco only has an indirect minority interest in CFA, and CFA likely would not be a controlled foreign affiliate of Canco had Canco instead directly owned shares of CFA, the effect of the structure is that LP becomes a “FAPI aggregator” in that CFA is required to compute its FAPI vis-à-vis LP, with that FAPI being allocated by LP to its partners.
It is inappropriate to reduce the relevant affiliate interest and financing revenues (RAIFR) of a CFA by an amount deducted under s. 91(4) regarding Canadian withholding taxes. For example, where an interest-bearing upstream loan by a CFA to wholly-owning Canco is subject to Canadian withholding tax of 25%, this scenario is neutral from an EIFEL perspective since there is IFE (in Canada) and corresponding IFR (in a wholly-owned CFA) – yet, Canco would would recognize IFE but no interest and financing revenues (IFR) since the RAIFR of the CFA would be fully offset by a FAT deduction, being the grossed-up deduction for the 25% Canadian withholding tax.
Neal Armstrong. Summaries of Joint Committee, “Summary of Issues Raised with the Department of Finance in Respect of the Excessive Interest and Financing Expenses Limitation (EIFEL) Proposals,” 22 March 2023 Joint Committee letter under s. 18.2(1) - relevant affiliate interest and financing expenses, relevant affiliate interest and financing revenues.
We have translated 7 more CRA interpretations
We have published a translation of a CRA interpretation released last week and a further 6 translations of CRA interpretations released in September of 2003. Their descriptors and links appear below.
These are additions to our set of 2,417 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 19 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
|Bundle Date||Translated severed letter||Summaries under||Summary descriptor|
|2023-03-22||23 December 2022 Internal T.I. 2021-0880421I7 F - SUCL - Dépenses de loyer admissibles||Income Tax Act - Section 125.7 - Subsection 125.7(1) - Qualifying Rent Expense - Variable A - Paragraph (b) - Subparagraph (b)(i)||government assistance does not reduce interest|
|2003-09-12||26 June 2003 Internal T.I. 2002-0169607 F - Sécurité sociale française
Also released under document number 2002-01696070.
|Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax||French payroll taxes and social security contributions qualified as non-business income taxes|
|1 August 2003 Internal T.I. 2003-0009697 F - Usufruit et amortissement
Also released under document number 2003-00096970.
|Income Tax Act - Section 248 - Subsection 248(3)||s. 248(3) generates CCA claim to deemed trust, whereas previously no CCA was available|
|Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c)||bare owner not entitled to claim CCA on property even if s. 248(3) does not apply|
|22 July 2003 Internal T.I. 2003-0018027 F - Fondation du Liechtenstein
Also released under document number 2003-00180270.
|Income Tax Act - Section 248 - Subsection 248(1) - Corporation||Liechtenstein sifting was a corporation rather than trust|
|Income Tax Act - Section 95 - Subsection 95(1) - Controlled Foreign Affiliate||Liechtenstein sifting in which the resident individual had a life interest was to be treated as a 100% CFA|
|Income Tax Act - Section 94 - Subsection 94(3)||Liechtenstein siftung was corporation, not trust|
|28 August 2003 Internal T.I. 2003-0019767 F - Investissement dans une société étrangère
Also released under document number 2003-00197670.
|Income Tax Act - Section 95 - Subsection 95(1) - Controlled Foreign Affiliate||redeemable convertible rights of a Canco investor in Foreignco were not shares, so that Foreignco was not a CFA|
|Income Tax Act - Section 17 - Subsection 17(1)||redeemable convertible rights of a Canco investor in Foreignco had not been redeemed, so that they were not debt for s. 17 purposes and Foreignco was not a CFA|
|Income Tax Act - Section 94.1 - Subsection 94.1(1)||inferred satisfaction of main reason test where all stock market investment income and gains were reinvested free of local tax|
|27 August 2003 Internal T.I. 2003-0019857 F - Attribution de dividendes par un RPEB
Also released under document number 2003-00198570.
|Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(d)||dividends allocated to a non-resident beneficiary by an EPSP were taxable to the extent that the allocation related to duties performed in Canada|
|Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(i)||dividends allocated to a non-resident beneficiary by an EPSP in respect of duties performed in Canada were taxable under ss. 6(1)(d) and 115(1)(a)(i)|
|2003-09-05||5 August 2003 External T.I. 2003-0027705 F - DON A UN ENFANT MAJEUR
Also released under document number 2003-00277050.
|Income Tax Act - Section 74.1 - Subsection 74.1(2)||no attribution on income from gift to child over 17|
CRA indicates that the FMV of an addition to a MURC does not include any portion of the underlying land
A builder who constructs an “addition” to a multiple unit residential complex (“MURC”) may be required to self-assess for the fair market value of the addition pursuant to s. 191(4). CRA indicated that where there is an internal reconfiguration of units within a MURC resulting in new residential units but not in an expansion of the building envelope, it does not consider there to be the construction of an addition to a MURC (so that there is no self-supply under s. 191(4).)
Conversely, CRA considers that where there is an addition of residential units through an expansion of the MURC building envelope, there will be the construction of one or more “residential units” for s. 191(4) purposes. In this regard, it indicated that the fair market value of the addition would not include that of the land if the addition was constructed on land contiguous to the existing building and that was reasonably necessary for the use and enjoyment of that building as a place of residence for individuals.
Neal Armstrong. Summary of 7 April 2022 CBA Roundtable, Q.8 under ETA s. 191(4).
CRA indicates that government assistance did not reduce interest payments for CERS purposes
CRA indicated that government assistance related to interest paid on a debt obligation secured by a mortgage on a qualifying property would not reduce the amount of interest paid on the debt obligation for purposes of s. 125.7(1)(b)(i) of the definition “qualifying rent expense” for purposes of the Canada emergency rent subsidy ("CERS") rules.
Neal Armstrong. Summary of 23 December 2022 Internal T.I. 2021-0880421I7 F under s. 125.7(1) – qualifying rent expense - (b)(i).
CRA indicates that a s. 94(3)(f) election can be filed with a very late return, likely including a return filed after an arbitrary assessment
The s. 94(1) definition of “electing trust” provides that, with a non-resident trust’s return for the first taxation year in which it is deemed by s. 94(3)(a) to be a resident trust, the trust can elect to reduce its taxable income by being deemed by s. 94(3)(f) to be a “non-resident trust” respecting a portion of its property.
CRA indicated that where it is proposing to assess a non-resident trust on the basis that it has been deemed by s. 94(3)(a) to be a resident trust from Year X onwards, the trust is still entitled to make such election on filing a return for that year, even if filed many years after Year X. Even if CRA first made an arbitrary assessment under s. 152(7) of Year X, CRA noted that such arbitrary assessment did not eliminate the obligation to file a return - with the implication that, again, such late return could be accompanied by a valid election.
CRA also indicated that the above interpretation – effectively, that the non-resident trust can lie in the grass for some time, and still be permitted to file a late election (with a late return) when CRA catches up to it – was contrary to what Finance intended, as reflected in the Explanatory Notes.
Summaries of 8 September 2022 Internal T.I. 2021-0892791I7 under s. 94(3)(f) and s. 152(7).
Samson – Quebec Court of Appeal confirms that rectification is alive in Quebec
An individual (Samson) and corporation (Bourgade) implemented a tax-planning memo that contemplated that they would transfer their shares of a corporation in December 2013 after having satisfied the conditions for realizing a business investment loss under s. 50(1)(b)(iii). This result was premised on their having had a November 30, 2013 taxation year – which had occurred for Bourgade, but not for Samson (who had a calendar taxation year).
The Quebec Superior Court agreed to rectify the share sale agreement to change its date from December 11, 2013 to the date on which it had actually been signed (April 4, 2014).
Before dismissing the ARQ’s appeal, the Court repeated that realizing the loss under s. 50(1)(b)(iii) was a specified result in the tax memo, and stated:
Since the ITA s. 50(1)(b)(iii) election could not be made before December 31, 2013, the December 11, 2013 date of the Agreement does not reflect the parties' intention.
Given this clearly expressed intention, it must be concluded that the respondent's request for rectification simply seeks to correct the date of the Agreement to give effect to that intention. This is consistent with … Jean Coutu. This is not a case where the taxpayer is seeking a tax benefit that he did not anticipate at the time of his tax planning.
Neal Armstrong. Summary of Agence du revenu du Québec v. Samson, 2023 QCCA 332 under General Concepts – Rectification.
Income Tax Severed Letters 22 March 2023
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Zhang – Federal Court sets aside a CRA rejection of s. 204.1(4) relief that did not consider whether indeed there had been an excess contribution
In 2013, the taxpayer’s spouse made a $13,142 contribution that was (the taxpayer claimed) intended to pay off her home buyers’ plan (HBP) balance. However, the RBC branch treated that amount as a contribution by her to the RRSP of the taxpayer which, if correct, meant that he had over-contributed for 2013. In June 2021, CRA assessed the taxpayer for excess contribution tax under s. 204.1(1), and in July 2021 (rather than objecting), the taxpayer requested a waiver of the tax under s. 204.1(4).
Southcott J noted that the CRA position in reaching an adverse decision - that the taxpayer had not made a reasonable error given that he was notified of his contribution on a sufficiently timely basis that he could have gone back to RBC to correct its reporting of the contribution while it still had sufficient records of the transaction – was not supported by the record, which did not establish that CRA had notified the taxpayer of his alleged over-contribution in 2013 before December 2020.
Regarding the second element of s. 204.1(4), namely, the requirement for the taxpayer to have taken reasonable steps to eliminate his excess contribution, Southcott J stated (at para. 43):
[T]he Applicant submits that he should not be expected to make an RRSP withdrawal to correct an over-contribution situation that would not exist if the Minister accepted his position that the $13,142 contribution made in 2013 should not be attributed to him. This argument raises what I consider to be a valid point that what constitutes reasonable steps, under the second element of the s 204.1(4) test, may in some circumstances be influenced by the particular facts surrounding the excess contribution for which a tax waiver is sought. In the case at hand, the Delegate’s unreasonable analysis under the first element of the test precluded the possibility of the Delegate accepting the Applicant’s characterization of the 2013 contribution and considering what, if anything, would be required as reasonable remedial steps in the context of that characterization.
As can be seen from the above passage, Southcott J was unwilling to get caught up in the scoping question as to whether s. 204.1(4) can apply to the cancellation of tax that was never owing (and whose assessment was not objected to) because in fact there was no over-contribution. The adverse decision of the CRA review officer was remitted for decision by another officer.
Neal Armstrong. Summary of Zhang v. Canada (Attorney General), 2023 FC 356 under s. 204.1(4).
We have translated 6 more CRA interpretations
We have published a further 6 translations of CRA interpretations released in September of 2003. Their descriptors and links appear below.
These are additions to our set of 2,410 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 19 ½ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
|Bundle Date||Translated severed letter||Summaries under||Summary descriptor|
|2003-09-19||15 September 2003 Internal T.I. 2003-0013357 F - ALLOCATION RECUE PAR UN BENEVOLE
Also released under document number 2003-00133570.
|Income Tax Act - Section 5 - Subsection 5(1)||volunteer driver was not an employee|
|Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit||volunteer driver with high activity level likely was engaged in a business|
|16 September 2003 Internal T.I. 2003-0023957 F - Droits et biens crédit personne mariée
Also released under document number 2003-00239570.
|Income Tax Act - Section 118 - Subsection 118(1) - Paragraph 118(1)(a)||income of deceased from rights or things (included in separate return) is excluded from income for s. 118(1)(a) purposes|
|Income Tax Act - Section 70 - Subsection 70(2)||deemed separate nature of person for rights and things return|
|15 September 2003 External T.I. 2003-0028075 F - Definition of "Specified Class" Sub 256(1.1)
Also released under document number 2003-00280750.
|Income Tax Act - Section 256 - Subsection 256(1.1) - Paragraph 256(1.1)(b)||taking away of voting rights by shareholders agreement did not satisfy s. 256(1.1)(b)|
|2003-09-12||18 July 2003 External T.I. 2002-0162985 F - Renonciation et bénéficiaire
Also released under document number 2002-01629850.
|Income Tax Act - Section 75 - Subsection 75(2)||renunciation by transferor of capital interest (but not of income interest) may avoid s. 75(2)(a)(i) if not done in advance of transfer|
|Income Tax Act - 101-110 - Section 107 - Subsection 107(4.1) - Paragraph 107(4.1)(b)||s. 107(4.1)(b) exclusion applicable if s. 75(2) was applicable at any time|
|2 July 2003 External T.I. 2002-0180015 F - Usufruit d'un immeuble
Also released under document number 2002-01800150.
|Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) - Subparagraph 69(1)(b)(i)||application of s. 69(1)(b)(i) on transfer of individual’s property to a corporation with him having the usufruct|
|Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c)||transferor to a deemed s. 248(3) trust who receives a usufruct does not deal at arm’s length with the trust|
|Income Tax Act - 101-110 - Section 105 - Subsection 105(1)||no benefit re use of personal-use property|
|29 August 2003 Internal T.I. 2003-0018497 F - L'Année d'imposition diffère
Also released under document number 2003-00184970.
|Income Tax Act - Section 126 - Subsection 126(1)||foreign tax paid for different foreign taxation year should be prorated based on the proportions of income earned in the Canadian taxation years|
Goldhar – Tax Court of Canada finds that the taxpayer could rely on his accountants regarding his taxation years being statute-barred and avoiding penalties for T1134 filing failures
In finding that CRA could not reassess beyond the normal reassessment period to include substantial amounts as alleged unreported shareholder benefits from non-resident corporations in the income of the taxpayer (Mr. Goldhar) for his 2008 to 2011 taxation years, Visser J stated:
Mr. Goldhar carried on an international business, and engaged professional lawyers and accountants to assist in organizing his financial affairs and in filing his personal and corporate tax returns. … Considering the complexity of Mr. Goldhar’s businesses and his lack of tax expertise, it is my view that he took all reasonable steps that a wise and prudent person would to ensure that his tax returns were filed properly during the taxation years under appeal. … Mr. Goldhar lacked the expertise to undertake a more thorough review. He would have had to be a tax expert to do so. That is not the standard. That is why he engaged a professional accounting firm, which had professional tax experts within its ranks, to provide him with tax advice and file his tax returns.
Visser J made similar findings that Mr. Goldhar had established a due diligence defence to the imposition of penalties under ss. 162(7)(a) and 162(10.1)(f) regarding his failure to file T1134 forms for some but not all the taxation years under review and, in this regard:
- quoted with approval the application in Chiang of an SCC statement that under such defence “[a] defendant can also avoid liability by showing that he or she took all reasonable steps to avoid the particular event...”
- and stated: “Due to complexity of his financial affairs, and his lack of tax background, it is my view that Mr. Goldhar reasonably relied on his accountants to properly file his tax returns in each of his 2008 to 2011 taxation years.”
Neal Armstrong. Summaries of Goldhar v. The King, 2023 TCC 30 under s. 152(4)(a)(i) and s. 162(10.1).