News of Note
BlackBerry – Tax Court of Canada finds that s. 95(2)(b)(i) is inapplicable where no net inbound services are provided, and the s. 95(3)(b) and (d) exclusions apply to integrated R&D services
Email this ContentBlackBerry had acquired four US companies (the “US Affiliates”) so that it could benefit from the tech expertise and services of their employees, who mostly remained in the US. The US Affiliates charged fees to BlackBerry for R&D services on a cost plus 8% basis, and BlackBerry provided service of greater value to the US Affiliates.
Bocock J indicated that s. 95(2)(b)(i) “is unclear whether only the R&D services paid for by the taxpayer are to be considered or whether all services provided between the foreign affiliate and the taxpayer should be considered.” However, a key objective of the foreign accrual property income (FAPI) regime was “to prevent erosion of the Canadian tax base”, and here there was no base erosion going on given that the cross-border services were fully reciprocal. In this light, s. 95(2)(b)(i) should be interpreted as applying “solely to situations where a net positive amount is paid from Canada to the foreign affiliate”, which was not the case here.
In the alternative, he found, in light of the broad meaning of “in connection with” and the important and ongoing role which the R&D services played in meeting the immediate demands of smartphone customers (e.g., teleco carrier testing and bug fixes), that the exclusion in s. 95(3)(d), for “services performed in connection with the … sale of goods,” applied.
The s. 95(3)(d) exclusion regarding manufacturing outside Canada applied for similar reasons, e.g., that “the product development process was indistinguishably meshed with the manufacturing process”.
In obiter, he accepted the Crown’s submission that, if the fees for the R&D services were FAPI, there was no foreign accrual tax (FAT) deduction because the CIRA (US tax credit for increasing research activities) should be wholly allocated to the US Affiliates, whose R&D activities generated the credit, rather than to the consolidated US group as a whole.
Neal Armstrong. Summaries of BlackBerry Limited v. The King, 2024 TCC 123 under s. 95(2)(b)(i). s. 95(3)(b), s. 95(3)(d) and s. 91(4).
Income Tax Severed Letters 2 October 2024
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Mandic – Tax Court of Canada orders the implementation of a settlement agreement notwithstanding the taxpayer’s death before the final version could be signed
Mandic reached a form of agreement with the Crown regarding a reassessment of his 2015 taxation year, and the parties signed a consent to judgment stating that the reassessment would be vacated. However, on review by a Tax Court judge, that judge directed that the agreement refer instead to referring the reassessment back to the Minister for reconsideration (not vacating it). Mandic died before the parties signed an amended consent to judgment with the corrected wording. With such death and the lack of an executor for Mandic’s estate, the Crown now refused to implement the settlement.
After referring to a degree of discretion accorded to him by the General Procedure rules, MacPhee J stated (at para. 10):
[P]ursuant to subparagraph 171(1)(b)(iii) this Court should allow the appeal by referring the assessment back to the Minister for reconsideration and reassessment in accordance with the settlement agreement, with the amendment requested by the Court.
Neal Armstrong. Summaries of Mandic Estate v. The King, 2024 TCC 91 under s. 171(1)(b)(iii) and Tax Court General Procedure Rules, s. 126(4)(e).
Various issues regarding trusts holding employer shares for employees are discussed
Elizabeth Boyd and Jeremy Herbert have provided an extensive discussion of issues regarding the holding of shares for employees by trusts, so that only a few facets can be mentioned.
Regarding employees profit sharing plans:
- EPSPs seem to be used quite frequently to facilitate employee share purchase plans to which both the employees (by way of payroll deduction) and employers contribute on the open market.
- When so used, advantages of the EPSP over an employee benefit plan (EBP) trust include that the increase in the shares’ value from their acquisition can be received by the employee as a capital gain (in contrast to employment income under an EBP) and dividends and capital gains generated by the EPSP can retain that character when allocated to an employee – and the employer’s deduction of contributions to an EPSP is more immediate and straightforward (i.e., no need for the trustee to determine the employer’s deduction nor is it offset by income earned in the trust).
- The taxation of participants in the year in which contributions are made to an EPSP (in contrast to an EBP trust whose participants are not taxable regarding contributions to or earnings of the trust until they receive a distribution) means that EPSPs will usually be most useful in connection with employee share plans under which the contributions are relatively small.
- Most EPSP employee share purchase plans seem to be “out of profit” EPSPs under which the employer can base contributions on a percentage of employee earnings or a dollar amount.
Conclusions regarding an arrangement under which the resident corporate employer settles shares of its capital on a trust for the benefit of specific employees (free of charge to them), with the employees’ entitlements vesting after a specified period of employment, include:
- Since such trust is not a fully discretionary trust and allocations to the trust are for specific employees, the requirement in s. 7(1) for there to be an agreement to issue securities should be met, so that the s. 7 rules as modified by s. 7(2) can apply.
- In the non-CCPC context, such a trust does not provide material advantages over a traditional employee stock option structure.
- In the CCPC context this type of arrangement can be beneficial in that the clock starts running once the trust acquires the shares regarding both the s. 110(1)(d.1) 50% deduction and the hold period required to access the employee’s lifetime capital gains deduction for qualified small business corporation shares, even though vesting does not occur until three years later – and, conversely, If the vesting conditions are not met and the shares are forfeited back to the corporation, the s. 8(12) deduction to offset the s. 7 inclusion is available in the same year such employment benefit is recognized.
- However, uncertainty of tax treatment of distributions of shares or proceeds realized by the trust on a sale of shares (regarding whether and to what extent in this regard the s. 7 rules should prevail over the EBP regime) materially impacts the utility of this structure.
Various considerations for structuring a market maker trust (i.e., a trust established by the private corporate employer, with itself as beneficiary, to effect purchases and sales of shares of employees other than specified employees so as to give them capital gains rather than deemed dividend treatment) are discussed.
Neal Armstrong. Summaries of Elizabeth Boyd and Jeremy J. Herbert, "Trusts Holding Shares For Employees", draft 2023 CTF Annual Conference paper under s. 248(1) – employee benefit plan, s. 144(4), s. 144(7.1), s. 144(9). s. 144(3), s. 7(6), s. 7(2), s. 8(12) and s. 15(2.5).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in July of 2001. Their descriptors and links appear below.
These are additions to our set of 2,958 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 23 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Coopers Park – Tax Court of Canada finds that advice provided by KPMG was not protected by privilege despite KPMG’s label as the client’s agent in law firm dealings
The engagement letter between the taxpayer and other clients (the "Concord Parties"), a law firm that was to provide tax advice to the clients (Moscowitz Law), an accounting firm (KPMG Accounting) and a second law firm (Farris Law) indicated that “KPMG Accounting’s role was to act as agent on behalf of the Concord Parties to retain Moskowitz Law and to provide Moskowitz Law with factual and other information.”
Hill J found that most of the documents before her for which the taxpayer claimed solicitor-client privilege were not protected from production to the Crown. In particular, in various instances:
KPMG Accounting provided independent legal advice beyond the scope of its role as agent under the Engagement Letter. … [P]roviding advice to a lawyer as part of an overall retainer, even if the lawyer then incorporates it into their own legal advice, does not make a communication privileged. Furthermore, KPMG Accounting provided that legal advice to Farris Law, a different law firm outside of the specific solicitor-client relationship established in the Engagement Letter.
Neal Armstrong. Summary of Coopers Park Real Estate Development Corporation v. The King, 2024 TCC 122 under General Concepts – Solicitor-client privilege.
A Gold Fields Ontario subsidiary is proposing to acquire all the common shares of Osisko for cash
It is proposed that an indirect Ontario subsidiary of Gold Fields (the “Purchaser”) acquire the (common) shares of Osisko (a TSX-listed Ontario corporation whose principal asset is a 50% interest in the Windfall gold project in Quebec) for $1.9B in cash. The Purchaser acquired the other 50% interest in the Windfall Project in May 2023. Under the proposed Ontario Plan of Arrangement, which stipulates that the steps will occur at two-minute intervals starting at 12:01 a.m. Toronto time, a step has been inserted, between the cash-surrender of the RSUs and the cash-surrender of the DSUs, providing that all the directors shall be deemed to have resigned, so that for discrete intervals of time, Osisko will have no directors.
The Canadian tax disclosure contains detailed disclosure regarding the capital gains inclusion rate transitional rules.
Neal Armstrong. Summary of 6 September 2024 Circular of Osisko Mining Inc. (the “Company” or “Osisko”) respecting its acquisition by Gold Fields Windfall Holdings Inc. (the “Purchaser”) under Mergers & Acquisitions – Mergers – Shares for Cash.
CRA discusses EIFEL filing and election procedures absent forms, and waives the requirement for a s. 18.2(6) return
CRA has published a Webpage on the EIFEL (excess interest) rules. In addition to providing a basic overview of the rules and briefly explaining why it might be advantageous to make various of the available elections, CRA makes the following administrative announcements:
- Although the EIFEL reporting is required to be made largely on Sched. 130, this form is not yet available. However, CRA still requires the same information to be provided to it with the return, and explains the procedures it would like to be followed in this regard pending its release of the Schedule.
- The various election forms are also not available, so that, until then, a separate election should be sent in for each election.
- Although s. 18.2(6) requires the transferee of cumulative unused excess capacity pursuant to a joint election with the transferor to file an information return, CRA states that it “is not requiring the filing of this information return at this time.”
Neal Armstrong. Summaries of CRA Webpage, “Excessive interest and financing expenses limitation rules,” 24 September 2024 under s. 18.2(18), s. 18.2(4), s. 18.2(16), s. 18.2(1) – specified pre-regime loss, and s. 95(2)(f.11)(ii)(E).
Income Tax Severed Letters 25 September 2024
This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CPA Canada identified deficiencies in the draft capital gains legislation which were addressed in the September 23, 2024 Notice of Ways and Means Motion
CPA Canada identified issues in the August 12, 2024 draft capital gains inclusion rate legislation, which Finance took into account in the Notice of Ways and Means Motion that was released on September 23, 2024 (“WMM”). Some of these points were:
- The formulae in ss. 13(7)(b), (d) and (e) for computing the step-up in the capital cost of depreciable property where there has been a full or partial change of use or a non-arm’s length transfer produced illogical results. (These formulae were corrected in the WMM.)
- Variable E of the formula in s. 38.01 (allowing an election for the $250,000 threshold to be used for capital gains of an individual from dispositions or deemed dispositions described in any of s. 13(7)(b), (d) or (e)) seemed to allow a taxpayer which had acquired capital property and made a joint election with the transferor under 13(7.7) to deduct up to 50% of the amount covered by the election even though such transferee realized no gain on the transfer. Variable E referred to the amount covered under the election but seemed to apply both to the transferor and transferee. (This is corrected in the WMM by adding a reference in E to the elected amount being an amount relating to a capital gain of the taxpayer under s. 13(7)(b), (d) or (e)).
- Regarding, for example, Aco (with a June 30, 2024 taxation year-end) which was a member of a partnership (with a March 31, 2024 taxation year end) which realized a capital gain on March 1, 2024, given the absence of a rule to deem partners of a partnership with a taxation year ending before June 25, 2024 to have realized any allocated capital gains from the partnership in Period 1, Aco would have a capital gains inclusion rate of 2/3. (The WMM addressed this by adding a further transitional rule: s. 96(1.73).)
Neal Armstrong. Summaries of CPA Canada, “Summary of Issues Identified: Capital Gain Inclusion Rate Draft Legislation,” 3 September 2024 CPA Canada submission under s. 13(7)(e), s. 38.01(b) – E, and s. 96(1.72).
Neal H. Armstrong editor and contributor