News of Note

CRA revises its CbC reporting publication

At the end of November, CRA published a revised description in RC 4651 of country-by-country reporting (CbC) obligations. Since we have a copy of the historic CRA website (in addition to scraping the current CRA website every 4 hours), the previous 24 March 2017 version of RC4651 is also available for comparison purposes.

Additions by CRA include:

  • “Given the widespread understanding of CbC reporting requirements by multinationals, any failure to file a CbC report as required under subsection 233.8(3) … will, for the 2018 and subsequent filing years, be presumed to be gross negligence [for purpose of s. 162(10) penalties] unless special circumstances exist that explain the failure to file.”
  • CRA considers that a private holding company can qualify as an “ultimate parent entity” (UPE) even if there are public corporations lower in the corporate chart.
  • There now is an explicit statement that “The only exemption from filing is for an MNE group with consolidated group revenue below the €750 million threshold. There are no exemptions for any specific industries, investment funds, entities with tax exempt status, non-corporate entities or entities that are not publicly listed.”
  • A reporting entity is now generally permitted to report in one of the other four qualifying currencies (the euro, USD, pound or Australian dollar) even where it has not made a functional currency election.
  • CRA states that a business entity “that is organized under the laws of a particular country but that is not tax resident in any jurisdiction” can be the ultimate parent entity of a multinational group, and that there is a special code for such an entity. (CRA does not explain how you can do this.)

Summaries of RC4651 “Guidance on Country-By-Country Reporting in Canada” 23 November 2018 under s. 233.8(1) – “multinational enterprise group”, – “ultimate parent entity”, s. 233.8(3), s. 233.8(6), s. 162(10), s. 241(1), and s. 247(2).

CRA notes that the travel allowance exemption in s. 6(6)(b)(i) does not include travel from a “temporary” place of residence

As noted in a previous post, CRA gave a “question of fact” response to a query as to whether employees of auditing firms are taxable on the travel allowances received for travel to and from their home and the audited premises in the context of audit engagements lasting about two weeks. This turned on whether the client premises were “regular places of employment.” In commenting further on the RPE concept, CRA stated that:

[A] work location may be considered to be a RPE for an employee even though the employee may only report to work at that particular location on a periodic basis (e.g., once or twice a month) during the year.

Turning to the exemption in s. 6(6)(b)(i) for an allowance for transportation between the taxpayer’s “principal place of residence” and a (temporary) special work site, CRA stated:

[I]f a special work site is a RPE for an employee, the value of a reasonable employer-provided allowance or reimbursement for travel between the employee’s temporary place of residence (e.g., a hotel, camp, rental home, etc.) and the special work site is included in the employee’s income under paragraph 6(1)(a) or (b).

Neal Armstrong. Summaries of 4 December 2018 External T.I. 2016-0670851E5 under s. 6(1)(b) and s. 6(6)(b)(i).

CRA indicates that the penalty for late-filing information slips references when the last slip was filed

The penalty under s. 162(7.01) for late-filing most types of information slip (e.g., the T3, T4, T4A, T5, NR4 or T4RSP) is calculated under a formula which references the number of late-filed slips and “the number of days, not exceeding 100, during which the failure continues.” CRA considers that “the failure” continues until the last slip of a particular type is filed. Thus, if 73 T5 slips are filed a few days late but a 74th slip is filed 56 days late, the penalty is calculated in the same manner as if all 74 slips had been filed 56 days late.

Neal Armstrong. Summary of 15 August 2018 Internal T.I. 2018-0748441I7 under s. 162(7.01)(b).

6 further translations of CRA interpretations are available

We have published another 6 translations of CRA interpretations – one of which was released last week and the others in December and November 2012. Their descriptors and links appear below.

These are additions to our set of 753 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 6 years of releases 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
2019-01-09 19 July 2018 External T.I. 2014-0551941E5 F - Déplacement effectué par un employé Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(b) travel allowances of employees at accounting firms for travel on their audit engagements might be taxable
2012-12-05 5 October 2012 APFF Roundtable Q. 13, 2012-0454181C6 F - Discretionary Dividend Shares Income Tax Act - Section 245 - Subsection 245(4) general policy against conferring a benefit on a corporation
Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(7) - Paragraph 110.6(7)(b) acquisition by Holdco of discretionary dividend shares of Opco at undervalue could engage s. 110.6(7) application to Opco commons
Income Tax Act - Section 15 - Subsection 15(1) discretionary dividend shares issued for nominal consideration
2012-11-28 27 August 2012 Internal T.I. 2012-0435571I7 F - Opposition à une cotisation Income Tax Act - Section 165 - Subsection 165(1) Act does not limit the reasons for an objection (taxpayer can change mind up to objection time)
22 October 2012 External T.I. 2012-0432241E5 F - Impôt des enfants mineurs - gain en capital Income Tax Act - Section 120.4 - Subsection 120.4(4) purported dirty s. 85(1) capital gains crystallization by minor child instead generates dividend
2012-11-14 22 October 2012 External T.I. 2012-0452491E5 F - Repas fournis dans le cadre d'une formation Income Tax Act - Section 67.1 - Subsection 67.1(2) - Paragraph 67.1(2)(a) Pink Elephant followed/potential exception for training business where it breaks out meals on its invoices
Income Tax Act - Section 67.1 - Subsection 67.1(1) trainees required to break out meal portion of their invoices even if not separately identified
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Know-How and Training training expenses deductible (subject to s. 67.1(1)) provided that no new skill or qualification is acquired
Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(h) deductibility of meal portion of training charges may be denied under s. 18(1)(h)
10 October 2012 External T.I. 2012-0451751E5 F - Statut fiscal des artistes /présomption Income Tax Act - Section 5 - Subsection 5(1) status as an employee not affected by presumption in Quebec Status of Artists Act that an independent contractor

Revised tracking interest rules may not permit recognition of offsetting FAPLs

Where foreign investment funds are structured as corporate umbrella funds (i.e., with each sub-fund of the corporation being a separate investment fund for commercial and regulatory purposes), it is quite possible that there would only be a few Canadian investors in a particular Canadian-dollar sub-fund (with the manager typically hedging the sub-fund’s non-Canadian assets back to the Canadian dollar), so that the Canadian investor’s shares may very well be tracking interests – because the Canadian dollar class or series would be seen as a separate tracked interest from the other interests in the sub-fund. Accordingly, such Canadian investors, holding a relatively small number of shares of the sub-fund, but more than 10% of the shares of the Canadian dollar class or series of the sub-fund, may be caught by the tracking interest rules. This issue still arises under the amended version of the tracking interest rules released on October 25, 2018.

Under s. 95(11)(e) of the new October 25, 2018 rules, where the tracked property has been deemed to be property of a separate corporation, that deemed separate corporation is deemed to have 100 outstanding shares of a single class, with each shareholder deemed to hold its "aggregate participating percentage” (as defined in s. 91(1.3)) of the shares of the separate corporation.

Given the $5,000 threshold rule in the definition of “participating percentage” in s. 95(1), the taxpayer will not have any shares of the separate corporation attributed to it if foreign accrual property income in the relevant cell does not exceed $5,000. This may imply that the taxpayer does not get the benefit of any foreign accrual property loss that might otherwise arise in a particular year.

It seems inappropriate to impute FAPI of a deemed CFA to the taxpayer but deny the taxpayer the benefit of any FAPLs of the CFA.

Neal Armstrong. Summaries of Peter Lee and Annika Wang, “The Tracking Interest Rules,” International Tax (Wolters Kluwer CCH), No. 193, December 2018, p.5 under s. 95(8) and s. 95(11)(e).

Abdalla – Federal Court of Appeal confirms the test to be applied in determining a waiver’s validity

Rossiter CJ had found that taxpayers had given valid waivers of their right to appeal: even though the waiver letter drafted by CRA was “poorly worded … if read in its entirety … there is a sufficient and adequate explanation in the letter [such] that a person would have full knowledge of the rights being waived.” In affirming this finding, Gleason JA indicated her agreement that the following judicial test had been satisfied:

[T]wo elements [are] required to show a valid waiver: (1) full knowledge of rights; and (2) an unequivocal and conscious intention to abandon them communicated to the other party.

Neal Armstrong. Summary of Abdalla v. Canada, 2019 FCA 5 under s. 169(2.2).

Maxar Canada shareholders exchanged all their shares for a new U.S. holding company

In connection with regulatory approval of its acquisition of DigitalGlobe, Maxar Technologies Ltd. (“Maxar Canada”) committed that the Maxar group would restructure so that, by the end of 2019, the ultimate parent would be a U.S.-incorporated corporation. This was accomplished on January 1, 2019 pursuant to a B.C. Plan of Arrangement. There was a three-party exchange under which

  1. the Maxar Canada shareholders transferred their shares to a newly-formed B.C. unlimited liability company subsidiary of Maxar Canada (“AcquisitionCo”);
  2. a newly-formed Delaware subsidiary of Maxar Canada (“Maxar U.S.”) issued shares to the former Maxar Canada shareholders in consideration for the transfer to it of Maxar Canada in 1 ; and,
  3. AcquisitionCo issued common shares to Maxar U.S. in consideration for the issuance by Maxar U.S. in 2.

The incorporator’s share of Maxar U.S. held by Maxar Canada then was cancelled; and AcquisitionCo and Maxar Canada amalgamated so that Amalco was now a wholly-owned subsidiary of Maxar U.S.

The exchange by the Maxar Canada shareholders occurred on a taxable basis for ITA purposes. Although for Code purposes, the reorganization was expected to qualify as an “F” reorg, Code s. 367 resulted in most taxable U.S. residents, who owned Maxar Canada shares with a fair market value of U.S.$50,000 or more, recognizing a gain (if any), but not a loss, for Code purposes.

Neal Armstrong. Summary of Maxar Technologies Circular under Other – Continuances/Migrations – New Non-Resident Holdco.

CRA declines to provide comfort that travel allowances of employees at accounting firms for travel on their audit engagements are non-taxable

Are employees of auditing firms taxable on the travel allowances they receive for travelling to and from their home and the audited premises in the context of audit engagements lasting about two weeks? CRA noted that in T4130 it had stated that its concept of a "regular place of employment” included, for example, “a client's premises when an employee reports there daily for a six month project” and “a client's premises if the employee has to attend biweekly meetings there,” and then indicated that it could only make a few general comments, including:

If the place of business of a client of the firm constitutes a "regular place of employment" for the auditor, the travel between the auditor’s residence and the place of business of that client is considered personal travel and is therefore not considered travel "in the performance of the duties of the employee’s office or employment". Consequently, the allowance received from the firm by the auditor in the year for this travel must be included in the auditor’s income by virtue of paragraph 6(1)(b).

This was not as bad as stating that the allowances were clearly taxable. It took the Directorate almost four years to respond to this question.

Neal Armstrong. Summary of 19 July 2018 External T.I. 2014-0551941E5 F under s. 6(1)(b).

CRA finds that a US LLC did not have a Canadian PE where a former employee serviced its U.S. clients from his Canadian home office under pass-through payroll arrangement

CRA ruled that the emigration to Canada of a portfolio manager (“Can Worker”), who had been employed in the U.S. office of an investments manager (an LLC), with Can Worker thereafter doing the same work from his home office (in his Canadian home), did not cause the LLC to acquire a permanent establishment in Canada under Art. V of the Canada-U.S. Treaty.

This conclusion likely was assisted by some structuring, namely, Can Worker ceased to be an employee (although he continued to be a shareholder of the LLC). Instead, he was now employed and remunerated by a special-purpose Canadian subsidiary of an arm’s length non-resident services firm which, in turn, charged service fees to the LLC.

Can Worker had no authority to contract on behalf of the LLC, his home office was not identified with the LLC’s business of manager, and his office’s expenses were not borne by the LLC (although it reimbursed Can Worker for costs of travel to and from the U.S. to meet clients or prospects, and his computer was owned by the LLC and connected to its network.)

The services PE rule in Art. V(9) was irrelevant since it was U.S. clients who were being serviced, and well under 50% of the revenue of the LLC was derived from the services performed by Can Worker.

Neal Armstrong. Summary of 2018 Ruling 2017-0713071R3 under Treaties – Income Tax Conventions – Art. 5.

CRA goes along with new OECD transfer-pricing policy of overriding the legal characterization of transactions

The OECD 2017 Transfer Pricing Guidelines reoriented transfer pricing towards the concept of value creation, namely, of ensuring that profits are taxed where economic activities take place and value is created. This represents a significant departure from the Canadian jurisprudence, which generally respects the legal substance of arrangements rather than recharacterizing them in accordance with their underlying economic substance.

The 2017 Transfer Pricing Guidelines also essentially proposed that, in order to compare an (actual) transaction between associated enterprises with a comparable transaction entered into between independent parties, the actual transaction must be first "accurately delineated" in light of "economically significant characteristics," e.g., the conduct of the associated parties, the functions they perform, the assets they actually use and the risks they actually assume.

If an analysis of the above enumerated economically significant characteristics results in a delineation of a transaction that differs from that entered into under the contract between the associated enterprises, the accurate delineation principle would then ignore the contractual transaction in the comparability analysis, instead focusing on the "accurately delineated" transaction.

As an example of this recharacteriazation approach (even where the criteria in s. 247(2)(b) are not both satisfied), the OECD’s recent Discussion Draft on Financial Transactions provides an example of a purported loan being “accurately delineated” as equity, chiefly because of a low likelihood of repayment within the specified term.

In this context, it is problematic that the 2018 CTF Rouundtable, Q.4 indicated that CRA will apply the 2017 Transfer Pricing Guidelines to pre-2017 taxation years, as well as to the interpretation of treaties entered into post-2017. CRA does not consider such an application to be retroactive, due to CRA’s characterization of these Guidelines as merely an elaboration on the prior OECD guidance.

Neal Armstrong. Summary of Matias Milet and Jennifer Horton, “The Canada Revenue Agency’s Interpretation of the 2017 OECD Transfer Pricing Guidelines,” International Tax (Wolters Kluwer CCH), No. 103, December 2018, p.10 under s. 247(2).