News of Note
S. 261(6.1) deems a foreign affiliate, for purposes of computing foreign accrual property income, to have an elected functional currency that is the same as that of the Canadian taxpayer of which it is a FA. Suppose that FA, a U.S. subsidiary of Cansub which has elected to have the U.S. dollar as its functional currency, makes a U.S.-dollar loan to Parent (which has the Canadian dollar as its functional currency and is the parent of Cansub).
CRA considers that any FX loss realized by Parent on maturity of the loan would be denied by s. 261(21) given that the loan made by FA was on FAPI account – even if Parent had entered into a cross-currency swap to hedge its U.S.-dollar exposure under this loan and thus realized a (supposedly) offsetting gain on the swap.
CRA has further extended its grandfathering relief from its view of Florida and Delaware LLPs and LLLPs as corporations, so that any such entities formed before 26 April 2017 would be accepted as partnerships for all prior years as well as all future years, provided that none of the following applies:
- one or more members of the entity, or the entity itself, takes inconsistent positions from one taxation year to another, or for the same taxation year, as between partnership or corporate treatment;
- there is a significant change in the membership or the activities of the entity; or
- the entity is being used to facilitate abusive tax avoidance.
CRA also indicated that such entities, if treated as corporations (e.g., they were formed after 26 April 2017), would be treated the same as LLCs for purposes of para. IV(6) of the Canada-US Treaty, and that s. 93.2 would apply to them.
CRA will not apply s. 247(2) to a CFA earning FAPI if the transaction has been vetted under foreign OECD-based transfer pricing rules
CRA considers that the s. 247(2) rules apply to transfer pricing between a controlled foreign affiliate and non-resident non-arm’s length persons where such transactions affect the computation of the CFA’s foreign accrual property income. However, CRA generally will not apply s. 247 to such a transaction where
- the pricing is reviewed by the tax authority of the country in which the foreign affiliate is resident;
- the pricing is determined to be in accordance with the transfer pricing legislation or guidelines of that country; and
- that legislation (and guidelines) adopt the arm’s-length principle.
CRA considers that s. 247(2) generally applies to boost the imputed cross-border interest arising under s. 17
CRA indicated that even though a cross-border loan from Canco to a CFA was subject to s. 17 (so that interest income was imputed at 1%), the total imputed interest inclusion would be 3%, if that were the s. 247(2) arm’s length rate. However, if the loan was of the type described in s. 17(8), but did not (in CRA’s view) technically come within the s. 247(7) safe harbour because it was outstanding for less than a year, CRA would consider that loan to be shielded from the application of s. 247(2).
CRA indicates that income that is paid to a minor beneficiary in contravention of the trust deed is non-deductible under s. 104(6)
A family trust paid income to the minor children in breach of a prohibition in the trust deed against making distributions to designated persons. Obviously, the trust was still entitled to a s. 104(6) deduction given that s. 104(24) deems an amount to be payable to a beneficiary for s. 104(6) deduction purposes if it was paid to the beneficiary.
Wrong - at least according to CRA, who view s. 104(24) more as a timing rule, so that if the amount cannot be legally payable, actually paying it will not bring it within the s. 104(6) rule. Accordingly, there was no s. 104(6) deduction to the trust, and CRA considered the distributions to be includible in the children’s income under s. 105(1) rather than s. 104(13).
Stephanie Smith of the Department of Finance tentatively estimated that Canada will sign the MLI in the summer of 2017, at which time it would list its preliminary notifications and reservations. Entry into force might occur on December 1, 2018, in which case entry into effect for withholding tax purposes would occur effective January 1, 2019, and entry into effect for other taxes relating to calendar years would occur for 2020 and subsequent years.
The MLI arbitration clause in significant part bears the imprint of the arbitration provisions in the Canada-U.S. Treaty.
There will be significant work to come up with bilateral Technical Explanations and the like between MLI counterparties.
Neal Armstrong. IFA 2017 Annual Conference - Stephanie Smith on MLI.
Full-text translations of the two French technical interpretations that were released last week and of four French technical interpretations released between April 22, 2015 and April 8, 2015, are listed and briefly described in the table below.
These (and the other translations covering the last two years of CRA releases) are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for May.
Biles Estate – Federal Court accepts that an alleged settlement agreement had an implied condition that the subject property’s legal ownership be confirmed
Phelan J accepted a CRA submission that an alleged settlement agreement with the taxpayer was subject to an implied condition that the ownership of the property in question be confirmed to be consistent with the proposed reassessment. This was not established. Phelan J stated:
[A]bsent an agreement as to the chain of title not only were the parties not in agreement about the Proposal, but the Proposal could not be legally implemented. A reassessment cannot be made contrary to law.
Neal Armstrong. Summary of Biles Estate v. Canada (National Revenue), 2017 FC 371 under s. 152(4.2).