News of Note
CRA finds that MRPS acquired by a Canadian insurance company subsidiary in order for the Luxco to loan-finance US operations were not acquired in the ordinary course
Email this ContentIndirect US operating subsidiaries of a Canadian insurance company were funded (or their acquisition was funded) in part through an indirect Canadian subsidiary (Canco 2) of the insurance company subscribing for mandatory redeemable preferred shares (MRPS) of a Luxembourg subsidiary of Canco 2 (“Luxco 1”) which, in turn, lent the funds to such US subsidiaries (except that Canco 2 also acquired MRPS made under similar transactions by its immediate Canadian parent, Canco 1, on an s. 85(1) rollover basis). The activities of Canco 2 were limited to providing a guarantee (for guarantee fees) to US Ops Holdco (the parent of a US borrower) and holding the shares of US Ops Holdco and Luxco 1.
Because Canco 2 was a specified financial institution and the MRPS were term preferred shares, s. 258(3) would have denied the s. 113(1)(a) deduction to Canco 2 for the MRPS dividends unless (per s. 258(4)(a)) the MRPS had not been “acquired in the ordinary course of the business carried on by [Canco 2].” In finding that the s. 258(4)(a) exception applied, CRA stated:
In order to constitute “carrying on” a business, it normally requires some continuity, frequency and regularity of the commercial activities. It is arguable that the acquisition of the … MRPS is not considered part of the ordinary course of business carried on by [Canco 2], but rather the acquisition may be considered an isolated and special transaction that is not part of a course of conduct that involves repeated dealings of a similar nature. …
[I]t is also important to consider whether the arrangement in the current case, at its core, more closely resembles a debt financing arrangement or a capital investment. …[W]e are more inclined to conclude that the arrangement more closely resembles a capital investment. … [Canco 2] is not in the business of lending money to the general public or to any disinterested third parties and the loans it made were limited to its foreign related corporations. All of the proceeds from the issue of the … MRPS were used by Luxco 1 to make loans to … US foreign affiliates for their US operations. …
Neal Armstrong. Summary of 19 October 2023 Internal T.I. 2020-0856851I7 under s. 258(4)(a).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in December of 2001. Their descriptors and links appear below.
These are additions to our set of 2,844 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).
Gillies – Tax Court of Canada had no jurisdiction regarding an employee’s complaint that CRA had not credited him for source deductions withheld but not remitted
Mr. Gillies sought a Tax Court decision regarding his 2016 and 2017 taxation years that he was not responsible to the Minister for federal income tax which his then employer had withheld from his remuneration but had not remitted to the Minister. Russell J concluded (at para. 16) that he would quash Mr. Gillies’ appeal “on the basis that this Court is without jurisdiction to address the matter of an employer withholding but not remitting tax payable under the Act, which is ‘a collection problem’ falling within subsection 222(2) of the Income Tax Act, which assigns jurisdiction to the Federal Court.”
Neal Armstrong. Summary of Gillies v. The King, 2024 TCC 53 under s. 171(1).
CRA comments on the PPT application to a treaty-reduced dividends of Canco paid to a pure Holdco with an ultimate Treaty-resident parent
CRA was asked how the principal purpose test (PPT) in Art. 7(1) of the MLI) would apply in the situation where:
Canco is wholly-owned by a Foreign Entity (FE) and FE is owned by a foreign multinational (Foreign MNC). Foreign Entity (FE), with no employees and only holding shares of Canco, enjoys a treaty-reduced rate of 5% on its dividends from Canco under the relevant “Treaty 1” with Canada (a Covered Tax Agreement) and, in turn, is wholly-owned by Foreign MNC, who also would enjoy a reduced 5% withholding tax rate under “Treaty 2” had it received Canco dividends directly.
A variant of this situation was the same except that a holding company (HC), resident in a non-treaty country, was interposed for non-tax reasons between Foreign MNC and FE – but with the funding for the acquisition of the Canco shares still having come from Foreign MNC.
CRA indicated that it wished to provide only general comments which, regarding the first Situation, included:
- Regarding the transaction “principal purpose” element of the PPT, the OECD Commentary on Art. 29 in paras. 178-79 indicates that this is an objective/subjective determination which include an examination of the surrounding facts, with reasonable inferences therefrom.
- Here, the relevant factors were that FE is a pure holding corporation with no employees and that both Treaties provided a 5% withholding rate.
- Regarding the “object and purpose” part of the PPT test, para. 174 of the OECD Commentary on Art. 29 gives some indications that the treaty is meant to provide benefits in respect of bona fide exchanges of goods and services, and movements of capital and persons, as opposed to arrangements whose principal objective is to obtain favourable tax treatment.
- Another element that might inform the object and purpose part of the test is whether FE is a genuine resident of the Treaty 1 country.
- Also relevant is that the Treaties provide a reduction to a 5% dividend rate.
The same considerations would be relevant for the variant Situation. The initial factors here might be the timing of the transaction (when was HC introduced into the structure), the non-tax reasons for the structure, and any other judicial doctrines, provisions or treaties which might be relevant.
Neal Armstrong. Summary of 15 May 2024 IFA Roundtable, Q.7 under Treaties – MLI – Art. 7(1).
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:
- 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).
- Corco purchased all of the appellant’s shares in consideration for issuing a $600,000 demand promissory note.
- 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.
Neal H. Armstrong editor and contributor