News of Note
CRA indicates that it anticipates that Canadian governmental COVID assistance will not reduce cost under cost-plus transfer-pricing methods
TPM-17 provides that the Canadian taxpayer’s cost base should not be reduced by government assistance unless there is reliable evidence that arm’s length parties would have done so. CRA confirmed that this position also applies to COVID assistance received by the Canadian taxpayer. Although the taxpayer can seek to demonstrate that there is marketplace evidence to the contrary (whatever on earth that might be), CRA generally would expect, given the temporary and exceptional objectives of the COVID-related government assistance, that it should be kept by the Canadian recipient. Thus, in a cost-based transfer pricing methodology, the cost base should not be reduced by the amount of a wage subsidy that a Canadian company receives, and there would be no reduction in that company’s profit margin (with numerical examples provided).
Respecting the pandemic effect on various CRA international programs, CRA indicated:
- CRA has been dealing with its counterparts on APA and MAP matters using teleconferencing and, where possible, video-conferencing; and some MAP cases were recently closed. Members of the Transfer-Pricing Review Committee have also been meeting through teleconferencing.
- Bill C-20 (re domestic time limits) does not apply to treaty time limits. If there is none, the usual domestic limits apply, e.g., under s. 152, subject to Bill C-20, which extended those limits for up to six months, but to no later than December 31, 2020.
Given that both are viewed as domestic anti-avoidance provisions, CRA will follow the same MAP approach to s. 247(2)(b) as with GAAR, i.e., if it is a primary position of the CRA that 247(2)(b) applies then, as with GAAR assessments, Canada will simply present that position to the other Competent Authority and, if there is double-taxation, seek relief from the other country - rather than giving up the assessment.
Gladwin Realty – Federal Court of Appeal finds that generating and utilizing a CDA increase whose subsequent reversal would never matter was abusive
The taxpayer, a private real estate corporation, effectively generated the technical ability to pay a capital dividend of $24 million in relation to a taxable capital gain of $12 million on a property sale by, prior to the property’s sale, rolling the property into a subsidiary LP and then structuring a result under which it both realized a negative ACB capital gain of $24 million under s. 40(3.1) (as a result of an immediate distribution to it of the sale proceeds) and also was allocated the $24 million capital gain on the property sale. After it subsequently paid the capital dividend of $24 million, it took a $24 million capital loss under s. 40(3.12), in effective recognition of it having recognized the same gain twice.
Noël CJ found that there was no abuse in merely paying out the CDA balance after realizing a capital gain in one year, and before subsequently realizing a capital loss. However, here there was a s. 245(4) abuse because it was intended for the taxpayer to become immediately dormant, so that it “will never have to contend with the negative CDA balance resulting from the corresponding deemed loss” under s. 40(3.12). It did not change his GAAR analysis that, subsequently to the transactions at issue, an amendment eliminated a CDA increase for a negative s. 40(3.1) gain.
Before getting to the abuse analysis, Noël CJ indicated (citing Wild) that there had been no tax benefit so as to engage s. 245(2) because the capital dividends had not been paid outside the corporate group. However, the taxpayer made an undertaking (since fulfilled) that “a dividend be paid to non-corporate shareholders so as to allow the matter to be resolved at this juncture” with the court agreeing “to conduct the abuse analysis on the basis that a tax benefit arose by reason of such a dividend having been paid.”
In Q.60 at the 1984 CTF Roundtable, the Department suggested that where swap payments are not made contemporaneously, for example, payments under the swap agreement are made by Canco to a non-arm’s length non-resident corporation (NRco) annually, whereas NRco makes its payments to Canco quarterly, withholding tax may apply to a portion of the outbound payments that represents an interest element.
CRA indicated that this position was contrary to Shell Canada, which found that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected – so that withholding tax would not apply in such a situation absent a finding of sham or the application of a specific provision, e.g., s. 245 or 247.
CRA directs dual-currency filing of s. 85 elections where the transferor and transferee have different tax reporting currencies
CRA indicated that where the parties to a s. 85 rollover transaction have different tax reporting currencies (as defined in s. 261(1)), it would require that two separate forms T2057 be filed. The amounts would be reported and denominated in the transferor’s tax reporting currency on the first form T2057, and in the transferee’s tax reporting currency on the second T2057.
CRA has expanded its webpage Q&A on the CEWS (wage subsidy) rules. Numerous points made include:
- A non-resident corporation can be an “eligible entity” notwithstanding that it is not subject to Canadian income tax under the terms of the applicable Treaty by virtue of not having a permanent establishment in Canada.
- An “eligible entity” includes an organization prescribed under Reg. 8901.1, which includes a “person or partnership that operates a private school or private college.” CRA states that this includes “for-profit and not-for-profit institutions such as arts schools, language schools, driving schools, flight schools and culinary schools.”
- CRA provides detailed examples of the operation of the “greater of” rule re the current and preceding month in determining whether there has been a sufficient decline in qualifying revenues in claim periods 5 to 9, as well as numerical examples of the computation of the base and top-up wage subsidy.
- CRA repeats the warning in the amalgamation s. 88(1) wind-up continuity rule that it will not apply “if it is reasonable to consider that one of the main purposes for the amalgamation (or the wind-up) was to qualify for the wage subsidy or to increase the amount of the wage subsidy,” without further elaboration.
- A corporation filing its returns using a functional currency would use that currency in measuring its qualifying revenue – but Canadian dollars would be used where the normal accounting practice is to measure in Canadian dollars.
- CRA provides an example of the s. 125.7(4)(d) election being used by Canco, which has a stable income from providing payroll services exclusively to a non-arm’s length non-resident corporation, in order to access the CEWS based on a 25% decline in the non-resident’s qualifying revenues (which could be measured in the applicable foreign currency consistently with the non-resident’s normal accounting practice).
- The business continuity rule in s. 125.7(4.2) (available on an elective basis) is not available where there merely has been an acquisition of a business division which does not represent all or substantially all (in fair market value terms) of the assets of a business.
- In the absence of s. 125.7(4.2) applying, changes to the normalized scale of operations (e.g., a recent expansion or a strike) or in the type of operations are not relevant to determining whether there has been a requisite decline in qualifying revenue.
Neal Armstrong. Additional summaries of Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 12 August 2020 under s. 125.7(1) – eligible entity - (a), eligible entity - (f), qualifying entity – (d)(ii), qualifying entity – (c)(ii), s. 125.7(1) - qualifying revenue, s. 125.7(9)(b), s. 87(2)(g.5), s. 125.7(4)(d), s. 125.7(4.1), s. 125.7(1) – eligible remuneration, s. 125.7(1) – top-up percentage, base percentage.
We have published a further 5 translations of CRA interpretations released in February, 2010. Their descriptors and links appear below.
These are additions to our set of 1,267 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/2 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
In a pipeline transaction involving a portfolio company whose shares had been stepped up to fair market value in the hands of the estate on the death of the deceased (A), it is proposed that the corporation lend the necessary funds to the estate to pay the terminal taxes of A. When the estate sells its shares of the portfolio company to a Newco for two promissory notes, the estate then assigns the first of these two notes to the portfolio company in repayment of the terminal-taxes loan. This first note then is extinguished by operation of law when the portfolio company is wound-up into Newco a year later – with payments of the second note by Newco to the estate commencing thereafter.
Neal Armstrong. Summary of 2020 Ruling 2019-0819191R3 F under s. 84(2).