News of Note

CRA effectively indicates that, to disengage a single PLOI election, the loan agreement must be replaced

Effective March 25, 2022, CRA adopted an administrative policy that requires only one PLOI election to be made in respect of each loan or indebtedness governed by the same agreement owing by each non-resident person, with no election being required to be made regarding amounts borrowed under the same agreement in a subsequent taxation year. What if the taxpayer does not wish to have the election apply to amounts advanced under the agreement after the initial year of the election?

CRA indicated:

  • If the intention is to treat only certain amounts as a PLOI, then the above policy does not apply, and a separate election should be filed in respect of each separate amount under the agreement.
  • Taxpayers who have engaged the policy by making a single election in respect of all amounts made under the same agreement, and then no longer wish for the election to apply to amounts borrowed in subsequent years should ensure that those amounts are governed under a separate agreement. (This seems to imply a necessity of terminating or bifurcating the current loan agreement.)
  • The single election to engage the administrative policy is made by checking “yes” in field 100 of Form T1521. If the administrative relief is not desired, a separate election for each separate amount should be made, and “no” checked in field 100 in each T1521 form.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.6 under s. 15(2.11)(d).

CRA indicates that a late-filing of a PLOI election does not cause the related deemed interest to be statute-barred

Where a late-filed PLOI election is made prior to the three-year limitation period referred to in s. 15(2.12) or 212.3(12), CRA confirmed that the interest deemed to thereby arise under s. 17.1(1) not having been reassessed would not preclude the election from being valid. However, s. 152(4)(b)(iii)(A) would extend the normal reassessment period for assessing such interest given that the joint PLOI election filing by a CRIC and its non-resident parent would be an “arrangement or event” and, thus, a “transaction,” as defined in s. 247(1), involving a taxpayer and a non-resident person with which it did not deal at arm’s length.

Where the CRIC and each "non-resident parent" (defined in s. 212.3(1)(b) as a member of a group of non-resident persons not dealing with each other at arm’s length) are not related, they nonetheless will not be dealing at arm’s length as a factual matter, so that CRA would be able to reassess the relevant taxation years beyond the normal reassessment period to include additional interest income for the CRIC.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.5 under s. 152(4)(b)(iii)(A).

CRA revises its procedures for the filing of late PLOI elections

S. 15(2.12) or s. 212.3(12) allows for a late filing of a PLOI election by up to three years provided that the late filing penalties are paid by the corporation resident in Canada (CRIC).

CRA indicated that it has revised its procedures for the late-filing of a PLOI election. Although this can still be accomplished by the CRIC filing an amended Schedule 1, the CRIC can instead use recently published CRA forms (Forms T1521 and T2311 for filings under s. 15(2.11) and s. 212.3(11), respectively) to provide the relevant information.

Regarding loan indebtedness owing to a qualified Canadian partnership, the instructions contained in Part 3 of Form T1521 will be revised to clarify that, in order to process the adjustment in respect of the qualified Canadian partnership and corporate partners, the taxpayer should submit an amended partnership information return(s) as well as an amended Schedule 1.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.4 under s. 15(2.12).

Income Tax Severed Letters 22 May 2024

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

Carter – Tax Court of Canada finds that s. 84.1 did not apply to a sale of the taxpayer’s Opco shares to her cousin’s holdco for cash funded by an Opco dividend

The appellant, her cousin (“McAllister”) and her father held 40%, 40% and 20% of the common shares of Brown’s Paving Ltd. (“BPL”), respectively, and her father also had voting control through special voting shares (representing over 90% of the voting rights). Both she and McAllister worked in the business. After McAllister had approached the appellant about purchasing her shares, the following occurred:

  1. BPL took out a $600,000 bank loan, secured by a charge on its assets and a secured guarantee of McAllister and his personal holding company (Corco).
  2. Corco purchased all of the appellant’s shares in consideration for issuing a $600,000 demand promissory note.
  3. BPL redeemed the shares held by Corco for $600,000 in cash, which was used by Corco to pay off the demand promissory note. Corco claimed the s. 112(1) deduction.

In finding that the sale in 2 above was a transaction between persons dealing with each other at arm’s length, so that s. 84.1 did not deem the appellant to receive a dividend, Graham J indicated that:

  • “The Appellant and Corco engaged in hard bargaining regarding the terms of the sale.”
  • “[T]he transactions were structured in the way they were to benefit Corco … [which] needed a way to finance the purchase.”
  • “The parties only ended up in the position that they did because the Appellant, when asked, was willing to sell her shares to Corco”, and a transaction in which her shares instead were redeemed by BPL was not a realistic alternative.

Graham J stated:

Ultimately, for the Appellant and Corco to have been acting in concert without separate interests, there must be something more than sharing the same tax advisors and having a common interest in getting the deal done.

Graham J also found that BPL was not connected to Corco immediately after the sale, as required by s. 84.1(1). In particular, Corco (which held under 10% of the votes) also did not control BPL pursuant to s. 186(2) given that there was no evidence that Corco did not deal at arm’s length with the person (the appellant’s father) who held over 90% of the voting rights over the BPL shares.

Neal Armstrong. Summary of Carter v. The King, 2024 TCC 71 under s. 84.1(1).

CRA discusses when a cash pooling arrangement may be a notifiable transaction

The CRA list of notifiable transactions includes a non-resident (NR1) entering into an arrangement with a non-resident (NR2) to indirectly provide financing to the taxpayer who would file on the basis that it was not subject to the thin capitalization rules; or on the basis that the interest it pays under the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.

A Canadian taxpayer is a participant in a global cash pooling arrangement (the “Cash PA”) involving an arm’s length non-resident intermediary. The other participants are non-resident entities with which the Canadian taxpayer does not deal at arm’s length, and the total amounts borrowed by participants cannot exceed total amounts deposited by other participants.

If the Canadian taxpayer is a debtor under the Cash PA, is the Cash PA a “notifiable transaction” if at least one non-resident participant resides in a jurisdiction that is subject to a higher Canadian withholding tax rate on interest than the rate applicable on interest paid by the Canadian taxpayer to the intermediary?

After noting that the definition of “substantially similar” in s. 237.4(2)(a) encompasses situations that are either factually similar, or informed by the same tax strategy and can be expected to yield similar tax consequences, CRA indicated that although the designated transaction does not specifically describe a cash pooling arrangement, such a cash-pooling arrangement would be substantially similar to a designated transaction.

On the other hand, if it is reasonably expected, at the time that the Canadian taxpayer first becomes a participant, that it would only be a creditor under the pooling arrangement, it would not be a notifiable transaction: as there was no financing of the taxpayer, different provisions than in the designated transaction would be potentially engaged, e.g., s. 15(2.16) or (2.17).

Furthermore, even if the Canadian taxpayer was participating as a debtor in the arrangement, it would not be a notifiable transaction if it was reporting on the basis of any relevant application of s. 18(4) and it withheld and remitted tax on the basis of any application of the back-to-back rules, so that no reduction in withholding tax rates was achieved.

CRA also indicated that since the cash pooling constituted a series of transactions, if it constituted a notifiable transaction:

  • the reporting obligation would arise on the first transaction to occur after November 1, 2023, e.g., an interest payment; and
  • the filing in respect of one element of the series would satisfy the filing requirement in respect of the whole series, provided that the filing describes the nature of the subsequent transactions, and whether they are recurring or not.

Whether there was a requirement for a professional services firm to report if the cash pooling arrangement was a notifiable transaction but it was not involved in the set-up of the arrangement and only undertook compliance services based on debt, interest and withholding figures provided by the taxpayer would turn on the reporting position of the taxpayer (for example, is it filing on the basis of the application of s. 18(4), and is there withholding and remitting as if the financing had come directly from NR1?) and on whether the firm had a professional obligation to validate or advise the client on the actual filing position or on the application of the Act to the client’s cash pooling arrangement.

Neal Armstrong. Summaries of 15 May 2024 IFA Roundtable, Q.3 under s. 237.4(2), s. 237.4(4) and s. 237.4(1) - advisor.

CRA comments on whether a société en commandite simple is a partnership

When asked as to the entity classification of a Luxembourg limited partnership (société en commandite simple (SCS)) or special limited partnership (société en commandite spéciale (SCSp)), CRA (without wishing to respond definitively to this question) noted:

  • The fact of an SCS having separate legal personality under Luxembourg law is not determinative.
  • CRA has viewed a French société en commandite simple as a partnership, irrespective of whether it has irrevocably elected to be taxed as a corporation in France – and similarly, the recent enactment of reverse hybrid rules in Luxembourg would not be determinative.
  • The Directorate will shortly be publishing an opinion that a société en commandite simple formed in Ivory Coast and Gabon most closely resembled a partnership under “Canadian law” (being the Quebec Civil Code given that the Ivory Coast and Gabon are civil law jurisdictions) notwithstanding its separate legal personality, given the unlimited liability of the general partner, as well as other characteristics.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.2 under s. 96.

CRA suggests that a non-resident’s increasing its voting shareholding in Canco to access the Treaty-reduced dividend withholding rate does not engage the PPT

A UK-resident corporation increased its voting shareholding of Canco the day before a dividend was paid so as to hold 10% of the shares. How would CRA apply the principal-purpose test (PPT) in Art. 7(1) of the MLI in this situation? CRA noted:

  • Example E of the 2017 OECD Commentary on Art. 29 describes the similar situation of a shareholder who is slightly below the threshold for access to the lower dividend rate, and who acquires shares for the purpose of taking advantage of the reduced rate. The view in the Commentary is that such transaction would be in accordance with the object and the purpose of Art. 10(2), which provides the reduced rate.
  • This OECD answer was conditional on the taxpayer’s acquisition "genuinely increas[ing]" its participation in the company. CRA understood “genuinely increasing” to suggest that there be no manipulation of the shareholding in the form of transitory acquisitions where, for example, a person, holding 8% of the shares, bought just enough shares to exceed the threshold for accessing the 5% reduced rate and, right after the dividend, returned to its initial 8% shareholding.

CRA indicated that the PPT had supplanted Art. 10(8) of the Canada-UK Treaty, so that this answer nullified the adverse position in 2019-0792651I7.

Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.1 under Treaties – Income Tax Conventions – Art. 10.

We have translated 7 more CRA interpretations

We have translated a CRA interpretation released in March 2024 and a further 6 CRA interpretations released in December of 2001. Their descriptors and links appear below.

These are additions to our set of 2,838 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 22 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
2024-03-20 18 February 2021 Internal T.I. 2014-0554901I7 F - Bourses d’études Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(n) treatment of assistance received from the Ministry for the Master's program in advanced pharmacotherapy
2001-12-21 19 December 2001 External T.I. 2001-0077175 F - FRAIS ENCOURUS POUR UNE INVENTION Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc) costs of patent agent, provisional patent application and consulting lawyers deductible under s. 20(1)(cc)
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs business may have commenced with incurring costs to obtain a temporary patent
2001-12-07 17 December 2001 External T.I. 2001-0101675 F - T5008 NON-RESIDENT Income Tax Regulations - Regulation 230 - Subsection 230(6) requirement to prepare Reg. 230(6) return may apply to a non-resident
10 December 2001 External T.I. 2001-0109195 F - Test d'objet à 55(2) Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) s. 55(3)(a) applicable to creditor-proofing transactions
18 December 2001 External T.I. 2001-0110315 F - ACTIONS SEPE PLACEMENTS ADMISSIBLES Income Tax Regulations - Regulation 4901 - Subsection 4901(2) - Connected Person overview of connected person and exempt person definitions
18 December 2001 External T.I. 2001-0114435 F - Capacité de gain - Earn Out Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) it must be possible to compute all the payments within the 5-year period
19 December 2001 External T.I. 2001-0115095 F - DISPOSITION D'UNE ASSURANCE-VIE Income Tax Act - Section 148 - Subsection 148(1) application to maturity (other than on death) of pre-1982 policy

The 2024 IFA Roundtable is available

We have published the written questions which were posed, and a summary of the preliminary oral responses of CRA, at yesterday’s CRA Roundtable hosted by IFA in Montreal.

See 15 May 2024 IFA Roundtable.