News of Note

Special rules (and gaps in the rules) apply where CFAs have debts forgiven or deferred

In determining whether a debt owing by a foreign affiliate is a “commercial debt obligation” for purposes of the debt forgiveness rules, the test is whether any interest paid on the debt would be deductible against foreign accrual property income (FAPI). The forgiven amount cannot be applied to reduce the various tax attributes of the debtor, and will either be applied against any foreign accrual property losses or be carried forward to reduce any future year FAPLs.

2002-0165195 … provides that the "exempt earnings" or "taxable earnings" would not pick up forgiveness of a commercial debt obligation that did not relate to FAPI and that 5907(2)(f) would not be available, thus resulting in such income not being included in the exempt or taxable surplus of the FA debtor. … [T]his position is questionable given Regulation 5907(2)(f) and the definition of "earnings" in Regulation 5907 and may give rise to double taxation.

Assuming that an amount is not recognized as foreign accrual tax (FAT) until it is paid, COVID-related deferrals of tax payments in foreign jurisdictions will generally reduce the Canadian taxpayer’s FAT deduction in computing FAPI by four times the amount so deferred, thus potentially giving rise to Canadian taxes.

Neal Armstrong. Summaries of Marc André Gaudreau Duval and Michael N. Kandev, “Foreign Affiliate Issues in Troubled Times,” International Tax (Wolters Kluwer CCH), No. 112, June 2020, p. 1 under s. 95(2)(g.1), s. 248(27), Reg. 5907(2)(f) and s. 91(4).

Supreme Court grants leave in Alta Energy

Alta Energy rejected what essentially was a Crown position that Treaty-shopping (here, transferring an investment in a Canadian resource company to a Lux holding company followed by a sale, two years later, that was Treaty-exempt) was a GAAR abuse – with Webb JA saying, for instance that there “is no distinction in the Luxembourg Convention between residents with strong economic or commercial ties and those with weak or no commercial or economic ties,” and that “the object, spirit and purpose of the relevant provisions of the Luxembourg Convention is reflected in the words as chosen by Canada and Luxembourg.”

The Supreme Court will be hearing the Crown’s appeal.

Neal Armstrong. Summary of Canada v. Alta Energy Luxembourg S.A.R.L., 2020 FCA 43, leave granted 6 August 2020 under s. 245(4).

Samsung Heavy Industries – Supreme Court of India finds that a Mumbai liaison office for a domestic construction project was not a PE

Samsung, a resident of South Korea, was a member of a consortium for fabricating and installing offshore drilling plaforms at an oil development off the west coast of India of an India oil company (“ONGC”). The Supreme Court of India found that a two-person liaison office in Mumbai (which was unfortunately called the “project office”) did not constitute a permanent establishment of Samsung.

Art. 5 of the Treaty with South Korea (the “DTAA”) provided inter alia that the term PE “means a fixed place of business through which the business of an enterprise is wholly or partly carried on,” and went on to provide (in Art. 4(e)) that the term was deemed not to include “the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research or any other activity, if it has a preparatory or auxiliary character in the trade or business of the enterprise.”

Nariman J stated:

[T[he Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also… the Mumbai Project Office … would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.

Neal Armstrong. Summary of DIT vs. Samsung Heavy Industries Co Ltd (Supreme Court) CIVIL APPEAL NO. 12183 of 2016 under Treaties – Income Tax Conventions – Art. 5.

Income Tax Severed Letters 5 August 2020

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

Chevalier – Court of Quebec finds that the subdivision of a residential land into around 30 serviced building lots by the purchaser-developer did not scupper capital gains treatment

An individual who had held property for her personal residential use, was approached by a housing developer, who agreed to purchase her land on the basis that it would acquire around 30 fully-serviced building lots, with it doing all the work to make this subdivision and addition of the services happen. Lewis JCQ found (in reliance inter alia on Latulippe) that the taxpayer’s gain was on capital account given her lack of involvement in the development work.

Neal Armstrong. Summary of Chevalier v. Agence du revenu du Québec, 2020 QCCQ 2220 under s. 9 – capital gain v. profit – real estate.

Wachal – Tax Court of Canada finds that non-granular pleading of the Minister failed to shift the onus to the taxpayer

The taxpayer’s eligibility for Canada child tax benefit for his son turned primarily on whether he qualified as the “eligible individual” for that child. The Crown pleaded that in the periods in question, the taxpayer “was not the parent primarily responsible for the care and upbringing of [the child],” i.e., it simply quoted from the relevant portion of the statutory definition of “eligible individual,” and did not refer to how any of the eight factors listed in Reg. 6302 for determining such primary responsibility applied, with the exception of a brief reference to a divorce judgment.

Russell J considered this pleading to be deficient, and found that, given that there was not much of a burden on the taxpayer regarding his “eligible individual” status, somewhat fluffy and poorly substantiated testimony of the taxpayer was sufficient to establish that the taxpayer so qualified for various periods in issue (other than those as to which the taxpayer had effectively conceded.)

Neal Armstrong. Summaries of Wachal v. The Queen, 2020 TCC 78 under s. 122.6 - eligible individual – (b)(ii) and s. 122.62(1).

Spouses might be able to access the lower prescribed rate for s. 74.5(2) by simply refinancing their interspousal loan

Where spouses have avoided the application of the income attribution rules through a demand loan made at the prescribed rate from one spouse to the other in reliance on s. 74.5(2), they may now wish to take advantage of the reduction in the prescribed rate from 2% to 1%.

An approach which is simpler and less costly than a sale of the income-producing asset in question and the new loan being made once the sale proceeds have repaid the original loan, is for the one spouse to make a loan at the 1% prescribed rate to the other spouse, with the other spouse using such proceeds to repay the original loan. However, according to an old Interpretation (9336625) the new loan in this latter scenario would not be used for an income-producing purpose, but rather for the purpose of extinguishing the original loan, so that the new loan would not be described by the s. 74.5(2) safe harbour. However, it is suggested that this position does not reference s. 20(3), and may be incorrect.

Neal Armstrong. Summary of Michael Goldberg and Vincent Didkovsky, “Refinancing Prescribed-Rate Loans Used for Income Splitting,” Canadian Tax Focus, Vol. 10, No. 3, August 2020, p.2 under s. 74.5(2).

Contact Lens King – Tax Court of Canada finds that on-line sales of contact lenses were not zero-rated given failure to copy purchasers’ prescriptions

A GST/HST registered U.S. corporation sold and delivered contact lenses (typically replacement contact lenses) to Canadian consumers without verifying that they had a matching prescription. In finding that such sales were not zero-rated under Sched. VI, Pt. II, s. 9 (which requires inter alia that the contract lenses “are, or are to be, supplied under the authority of a prescription prepared … by [a qualified practitioner] for the treatment or correction of a defect of vision,” Smith J stated:

[I]t is not sufficient … that the appellant's website inform the consumer of the need for a valid prescription. The appellant must itself obtain a copy of the prescription … from which it can be concluded that the consumer has a prescription "for the treatment or correction of a defect of vision."

Neal Armstrong. Summaries of Contact Lens King Inc. v. The Queen, 2020 CCI 71 under ETA Sched. VI, Pt. II, s. 9 and s. 286(1).

We have translated 6 more CRA Interpretations

We have published a further 6 translations of CRA interpretations released in April, 2010. Their descriptors and links appear below.

These are additions to our set of 1,236 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 ¼ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for August.

Bundle Date Translated severed letter Summaries under Summary descriptor
2010-04-30 14 April 2010 Internal T.I. 2009-0347511I7 F - Partie I.3 - Société de personnes Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(g) s. 181.2(3)(g) was to be applied on basis that partnership interest and debt held by a Crown agent was held by the Quebec government, being a corporation
Income Tax Act - Section 248 - Subsection 248(1) - Corporation Quebec government is a corporation
2010-04-23 13 April 2010 External T.I. 2010-0358941E5 F - CIRD - franchise Income Tax Act - Section 118.04 - Subsection 118.04(1) - Qualifying Expenditure qualifying expenditure generally not reduced by insurance reimbursement
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense expense generally incurred by taxpayer even where reimbursed by insurance company
14 April 2010 External T.I. 2010-0356901E5 F - RAP- Rétroactivité Income Tax Act - Section 146.01 - Subsection 146.01(1) - Regular Eligible Amount - Paragraph (e) ownership of a home whose purchase was voided did not count
7 April 2010 External T.I. 2010-0355221E5 F - Paragraphes 145(5) et 122(2) Income Tax Act - Section 149 - Subsection 149(5) NPO settled before 1972 is not grandfathered
12 April 2010 Internal T.I. 2009-0342871I7 F - Subvention aux naissances multiples Income Tax Act - Section 3 Quebec multiple birth subsidy is not income
14 April 2010 External T.I. 2008-0293981E5 F - Loi de 2007 sur les impôts de l'Ontario Other Legislation/Constitution - Ontario - Taxation Act 2007 - Section 46 - Subsection 46(1) - Transition Time amalgamation in 2008 results in a transition time corresponding to the amalgamation time
Other Legislation/Constitution - Ontario - Taxation Act 2007 - Section 46 - Subsection 46(1) - Eligible pre-2009 Winding-up completion time does not occur until formal dissolution

Insurance Institute – Tax Court of Canada finds that the parties’ subjective intention not to be employer-employee can, to some extent, override objective indicia of their relationship

Graham J wrestled with the implications of the finding in Connor Homes that significant weight should be given to the subjective intention of the parties as to whether they were in an employer-employee, rather than independent contractor, relationship, before applying the objective indicia of whether there was an employment relationship set out in Wiebe Door and Sagaz (i.e., control, ownership of tools, opportunity for profit, and risk of financial loss). He considered that what this meant was that where, as here, the parties (an NPO providing educational services to industry members, and an instructor retained by it) clearly intended their relationship to be that of independent contractors rather than of employer and employee, it was not fatal that an application of the above objective factors indicated that there was an employment relationship. Instead, all that was required in such circumstances was that they “carry on their relationship in a manner that is similar to [rather than the same as] what one would expect from their intentions.”

Thus, although here, application of the four objective factors by themselves would have indicated an employment relationship, that application only fell somewhat short of the mark (e.g., although the instructor had no risk of loss, he had an opportunity for gain in the somewhat limited sense of “an ability to increase his effective earnings through up-front investment and efficiencies in a manner similar to that of an independent contractor”), so that their relationship was that of independent contractors.

Neal Armstrong. Summary of Insurance Institute of Ontario v. M.N.R., 2020 TCC 69 under s. 5(1).