News of Note

Income Tax Severed Letters 16 June 2021

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

CRA provides a more comprehensive description of its policies on secondary and repatriation adjustments

CRA has substantially expanded its Transfer Pricing Memorandum on secondary adjustments, and relief therefrom where there is an acceptable repatriation agreement. Where a Canadian taxpayer (including for these purposes, a partnership) is subject to a “primary adjustment” under s. 247(2) regarding its participation in a transaction or series with a non-arm’s length non-resident, (other than a CFA) a secondary adjustment (usually, a deemed dividend) is generally required to account for the benefit conferred on the non-arm’s length non-resident, namely, the excess amount paid to, or insufficient amount received from, such non-resident. However, if there is a repatriation agreement that is acceptable to CRA (that promptly refunds the benefit that otherwise gave rise to the secondary adjustment), CRA generally will not assess the deemed dividend.

Since the time of the original memorandum, ss. 212(12) and (13) were enacted to provide statutory authority for secondary adjustments and repatriation adjustments in the case of taxpayers who are resident corporations. However, this makes less of a difference than one might think. Where the taxpayer (e.g., a resident individual or trust) is not deemed to pay a dividend under s. 247(12), CRA will get to the same result by applying s. 15 (for a non-resident shareholder) or s. 56(2) (where the non-resident is not a shareholder) in order to impose withholding tax on the secondary adjustment under s. 214(3) – except that it may instead consider invoking s. 246(1)(b).

Similarly, although the potential relief for repatriation adjustments under s. 247(13) only applies to Canadian corporate taxpayers, CRA as an administrative matter applies the same policy to Canadian trusts and individuals.

However, CRA states that it will not provide relief from Part XIII tax on secondary adjustments, where there is repatriation, in the following cases:

  • the Transfer Pricing Review Committee has approved the application of paragraphs 247(2)(b) and (d) of the ITA;
  • the General Anti-Avoidance Rule Committee has approved the application of the general anti-avoidance rule under subsection 245(2) as an assessing position;
  • other anti-avoidance provisions of the ITA are applicable to the transaction(s) or series of transactions (for example, subsections 17(2), 247(9), etc.);
  • the taxpayer or a non-arm’s length non-resident has failed to honour a requirement or compliance order issued under the ITA relating to the transaction(s) or series of transactions; or
  • any other circumstance in which the Minister does not concur with the repatriation.

These conditions for relief are expressed with greater rigidity than one would have expected for an appropriate exercise of Ministerial discretion.

Neal Armstrong. Summaries of TPM-02R Secondary Transfer Pricing Adjustments, Repatriation and Part XIII Tax Assessments 1 June 2021 under s. 247(12), s. 247(13) and s. 247(14).

CRA indicates that it will not issue rulings or TIs on what is normal accounting practice for CEWS purposes

Regarding a question as to the timing of recognition of qualifying revenue for CEWS purposes, CRA noted that, per s. 125.7(4), the qualifying revenue of an eligible entity is generally determined in accordance with its normal accounting practices, and stated:

In situations involving an opinion on accounting or commercial principles, practices, or guidelines, we will not issue a ruling or a technical interpretation.

Neal Armstrong. Summary of 26 October 2020 External T.I. 2020-0856791E5 under s. 125.7(4).

WRD Borger – Tax Court finds that a taxpayer was engaged in trial and error rather than SR&ED

The taxpayer’s business included installing culverts in housing subdivisions. A particular project was seeking to instal and tie-in new box culverts with existing box culverts that, in turn, hooked into a catchment pond 4 meters below the water surface. After trying various approaches, what ultimately worked was using a combination of a concrete cap, small objects, and pumps to dewater a square culvert (so that its workers could work inside it and instal the necessary tie-ins).

In confirming the disallowance of the taxpayer’s related SR&ED claims, Wong J stated inter alia that the taxpayer’s approach “was more akin to problem-solving by trial and error than formulating hypotheses and systematically testing them to reduce or eliminate a technological uncertainty.”

Neal Armstrong. Summary of WRD Borger Construction Ltd. v. The Queen, 2021 TCC 40 under s. 248(1) - SR&ED.

We have translated 10 more CRA interpretations

We have published a further 10 translations of CRA interpretation released in February and January, 2008, and December 2007. Their descriptors and links appear below.

These are additions to our set of 1,578 full-text translations of French-language severed letters (mostly, Roundtable items and Technical Interpretations) of the Income Tax Rulings Directorate, which covers all of the last 13 ½ years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2008-02-01 22 January 2008 External T.I. 2006-0165521E5 F - Prime versé à l'emprunteur Income Tax Act - Section 13 - Subsection 13(7.1) no opinion expressed on whether a bonus received under the Quebec Immigrant Investor Program reduced the cost of the eligible capital property acquired
23 January 2008 External T.I. 2007-0236051E5 F - Frais de relocalisation Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) IT-178R3, IT-470R and T4130 should be referenced for question on employee relocation reimbursement and allowance
2008-01-18 8 January 2008 Internal T.I. 2007-0254881I7 F - Amortissement d'une aire de camping Income Tax Regulations - Schedules - Schedule II - Class 17 costs of developing a campground would generally be added to Class 17(c)
Income Tax Regulations - Regulation 1100 - Subsection 1100(17) campground, if a business, not subject to leasing property restriction rule
Income Tax Regulations - Schedules - Schedule II - Class 1 septic tanks are structures
Income Tax Regulations - Schedules - Schedule II - Class 6 swimming pool is a water storage tank
2008-01-11 5 December 2007 Internal T.I. 2007-0221211I7 F - Capital Dividends Income Tax Act - Section 184 - Subsection 184(3) Reversed by 2011-0412071C6 F and 2017-0709031C6 F
Income Tax Act - Section 165 - Subsection 165(3) suggesting awaiting by CRA of a court resolution of a related dispute would be contrary to its duty to act with all due dispatchReversed by 2011-0412071C6 F and 2017-0709031C6 F
Income Tax Act - Section 184 - Subsection 184(3) CRA will not accommodate appeal of underlying Pt. I and III assessments by agreeing to act on a waiver if appeal successful or by deferred processing of a s. 184(3) electionReversed by 2011-0412071C6 F and 2017-0709031C6 F
2 January 2008 External T.I. 2007-0228241E5 F - Programme canadien d'options familles agricoles Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(r) - Subparagraph 56(1)(r)(iv) payments under the Canadian Farm Families Options Program to those without a farming source of income would be included under s. 56(1)(r)(iv)
Income Tax Act - Section 9 - Computation of Profit payments under the Canadian Farm Families Options Program were business income to those with a farming source of income
Income Tax Act - Section 146 - Subsection 146(1) - Earned Income payments under the Canadian Farm Families Options Program to those without a farming source of income would be excluded from earned income
2007-12-28 18 December 2007 External T.I. 2007-0224761E5 F - Changement d'usage partiel et choix 45(3) Income Tax Act - Section 45 - Subsection 45(3) election not available where change from 20% to 100% personal use
2007-12-14 4 December 2007 Internal T.I. 2007-0237461I7 F - Définition d'activité de construction Income Tax Regulations - Regulation 238 - Subsection 238(2) construction activities included cable installation, maintenance and upgrading/primarily means over 50%
4 December 2007 Internal T.I. 2007-0255041I7 F - Employé de l'OTAN Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(a) Canadian-resident NATO employee’s income not exempted if the employee was seconded by Canada to NATO, or a Canadian military member
Income Tax Act - Section 146 - Subsection 146(1) - Earned Income income exempted under s. 81(1)(a) is not added to earned income
4 December 2007 Internal T.I. 2007-0255381I7 F - Dommages reçus suite à la perte d'un emploi Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance two judicial tests for what is a retiring allowance
2007-12-07 7 November 2007 Internal T.I. 2007-0253861I7 F - Partie non-imposable du gain en capital Income Tax Act - Section 132.1 - Subsection 132.1(2) no ACB increase under s. 132.1(2) if no previous reduction under s. 53(2)(h)(i.1)
Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) - Clause 53(2)(h)(i.1)(B) - Subclause 53(2)(h)(i.1)(B)(I) s. 53(2)(h)(i.1)(B)(I) designation does not increase unit ACB

ValueClick - French Supreme Court finds that French staff who lined up the contracts (albeit “automatically” signed elsewhere) gave rise to dependent-agent PEs

ValueClick Inc., a US corporation, was one of the market leaders in the online advertising business. Its Irish subsidiary, ValueClick Ireland, had a staff of no more than seven employees, who were responsible for account management and sales of ValueClick services for the world outside North America. ValueClick Ireland established subsidiaries in local European jurisdiction, including in France (“ValueClick France”). The external contracts between ValueClick and French advertisers were formally entered into with ValueClick Ireland rather than ValueClick France. However, a staff of around 50 employees of ValueClick France was responsible for marketing to French advertisers as well as various administrative and support functions, and forwarded contracts to Value-Click Ireland for signing. The intercompany services agreement between ValueClick Ireland and ValueClick France provided that it did not create an agency relationship, and that it did not authorize one party to sign contracts in the name of the other party or to represent that party for the purpose of contractually binding it. ValueClick France was remunerated by Value-Click Ireland under the agreement on a cost-plus-8% basis.

The permanent establishment wording in the French-Irish Convention had the standard OECD wording respecting PEs constituted by agents of a non-independent status. In affirming the position of the French tax authorities that Value-Click Ireland had an agency PE in France, the Supreme Administrative Court stated that a French company could be considered to be habitually exercising the authority to conclude contracts in the name of an Irish company “if, on an habitual basis - even if it does not formally conclude contracts on behalf of the Irish company - it decides on transactions which the Irish company merely endorses and which, once endorsed, bind it.” The Court went on to state:

[W]hile the Irish company sets the model for the contracts concluded with advertisers in order to give them the benefit of the services it engages to be provided, as well as the general pricing conditions, the decision to conclude a contract with an advertiser and all the tasks necessary for its conclusion are the responsibility of the employees of the French company, with the Irish company merely validating the contract by a signature which is of an automatic character.

Neal Armstrong. Summary of [ValueClick case] FR: CE, 11 Dec. 2020, Case No. 420174 (Conseil d'État) under Treaties – Income Tax Conventions – Art. 5.

Bresse Syndics – Federal Court of Appeal finds that a trust deed requirement that the trustees be the Pubco directors gave Pubco de facto control of a trust subsidiary

A public company (CO2 Public), operating a high-tech business, carried on its SR&ED through a private company (CO2 Technologies) that was held by a discretionary trust whose beneficiaries were CO2 Public and special-purpose subsidiaries thereof. A provision in the Declaration of Trust provided that each trustee was required to be a director of CO2 Public.

Noël CJ noted that although “in principle” the determination of whether CO2 Public had de jure control of CO2 Technologies was to be determined having regard to the articles of incorporation of CO2 Technologies and any unanimous shareholders agreement, Duha Printers had indicated that the terms of the deed of trust for a shareholder trust of a corporation could be relevant to determining whether the deed restricted the ability of trustees to exercise their voting rights over the corporation’s shares. However, he found that it was unnecessary to resolve this issue, because the above trust deed restriction gave Public CO2 de facto control of CO2 Technologies within the meaning of s. 256(5.1), so that CO2 Technologies was not a Canadian–controlled private corporation on those grounds. He stated:

Fiducie’s deed of trust operated in such a way that by electing Public CO2’s board of directors, Public CO2’s shareholders also elected Fiducie’s trustees, as they had to be directors of Public CO2. … Thus, Public CO2 had the power to terminate the trustees’ functions by revoking or not renewing their mandate as directors.

… [T]he mechanism put in place clearly gave Public CO2 the ability to change the appellant’s board of directors or to influence in a very direct manner those who had that ability.

Neal Armstrong. Summary of Bresse Syndics Inc. acting for the bankruptcy of CO2 Solution Technologies Inc. v. The Queen, 2021 FCA 115 under s. 256(5.1).

CRA indicates that a sublease of land to a mobile home occupant is a supply of part of a residential complex, unless the site is a residential trailer park

A corporation, which has been headleased land, subdivides the land into residential lots that are registered in the land registry, and subleases the lots to persons who install manufactured homes (qualifying as “mobile homes,” as defined in ETA s. 123(1)) on the lots. CRA indicated that the subleasing of the land would be regarded as the supply of “part of a residential complex” – except that if the land was a site in a residential trailer park, the s. 123(1) definition of residential complex as it applied (in para. (d) thereof) to a mobile home, excluded the land from the residential complex (consisting only of the mobile home), so that the sublease instead would be a supply of bare land. CRA did not discuss whether such supplies were exempted under Sched. V, Pt. I, s. 6(a) or 7(b).

Neal Armstrong. Summaries of 1 December 2020 GST/HST Interpretation 193361r under ETA Sched. V, Pt. I, s. 6(a) and s. 123(1) - residential trailer park.

GST/HST Severed Letters December 2020

This morning's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their December 2020 release) is now available for your viewing.

GST/HST Severed Letters November 2020

This morning's release of four severed letters from the Excise and GST/HST Rulings Directorate (identified by them as their November 2020 release) is now available for your viewing.