26 November 2013 Annual CTF Roundtable
Email this ContentQ. 1 ("Pre-ruling consultations")
Can the CRA provide an overview of its new pre-ruling consultation service?
Notes from Presentation
The Pre-Ruling Consultation Program has now been formalized in order to set out ground rules. It is now being provided under a one-year pilot project. Details are available on the CRA website at Pilot project: Pre-ruling consultations.
Q. 2 ("Upstream loans")
Q. 2(a) – Repayment of upstream loans
Pursuant to 90(8)(a), 90(6) upstream loan inclusion doesn’t apply if loan is repaid within 2 years (other than as a series of loans or other transactions and repayments), or if the loan was made in the ordinary course of the creditor’s business.
Can the CRA comment on when it would consider a loan or indebtedness to have been repaid? Would the CRA consider a loan or indebtedness that has been “set-off” against a receivable to have been repaid?
Are there any comments the CRA could provide on cash pooling arrangements in the context of upstream loans?
Notes from Presentation
As indicated at the 2013 IFA conference, Q. 5(c), CRA generally will be guided by reference to its interpretive approach to the s.15(2) rules. The courts and CRA have accepted that payment can be by way of set-off. Whether there has been repayment of a loan will be determined in light of the demonstrated intention of the parties. CRA will look at the agreements and accounting records among other things in this regard. In a situation of a temporary repayment of an amount, the issue of a “series of loans or other transactions and repayments” would arise.
It is very difficult for CRA to comment definitively on cash pooling arrangements as they can differ significantly in terms of the parties, their attributes and the legal relationships. Cash pooling arrangements give rise to a "series" issue. CRA has considered cash pooling in the context of s. 15(2) and similar principles will apply here.
Official Response
26 November 2013 CTF Round Table, Q. 2.2.1, 2013-0508141C6
Q. 2(b)(i) – Repayment of upstream loans – Back-to-back loans
- 90(7)(a) - $500 loan deemed to have been made by FA to Canco
- 90(7)(b) - Loan 1 and Loan 2 deemed to have been made in the amount of $500
- INT repays $500 on Loan 1
What, if any, amount of the deemed loan is considered repaid?
Notes from Presentation
No provision in the Act deems there to be a repayment of the deemed s. 90(7) loan and, therefore, CRA will make a determination based on the facts. How much of the loan funded by FA may reasonably be considered to be related to the loan made by the Intermediate to Canco must be evaluated. In this scenario, CRA would consider that it is appropriate to conclude that, as Canco continues to be liable for $500, that there has been no repayment of the deemed loan.
Summary of Written Response
See summary under s. 90(6).
Official Response
26 November 2013 CTF Round Table, Q. 2.2.2, 2013-0508151C6
Q. 2(b)(ii) – Repayment of upstream loans – Back-to-back loans
Same facts as 1(b)(i), except:
- Canco repays $100 to INT (Loan 2 balance now $400)
- INT repays $700 to FA (Loan 1 balance now $300)
What, if any, amount of the deemed loan is considered repaid?
Notes from Presentation
In this situation, as Canco will remain indirectly liable for $300 under the arrangement, $200 of the deemed loan will be considered to have been repaid.
Summary of Written Response
See summary under s. 90(6).
Official Response
26 November 2013 CTF Round Table, Q. 2.2.2, 2013-0508151C6
Q. 3 ("CAE Inc.")
Can the CRA provide any guidance or clarification following the comments made by the Federal Court of Appeal in CAE Inc. on the application of the change in use rules?
Notes from Presentation
CRA does not agree with the views of the Federal Court of Appeal. Ss. 45(1) and 13(7) apply only to changes to or from personal use, and not to changes between inventory use and income-generating use as a capital property. This is consistent with some limited existing jurisprudence (other than the CAE case) as well as the 2001 Explanatory Notes. As recognized in the reasons of the Federal Court of Appeal itself, their approach involved treating the concept of income-producing purpose inconsistently in the situations where the property is inventory and where it is personal property. Their comments were obiter. Accordingly, CRA will not change its position in IT-102R2 and IT-218R. References was made to something being drafted to deal with the CAE case and until then CRA will hold the line.
Summary of Written Response
See summary under s. 45(1)(a).
Official Response
26 November 2013 CTF Roundtable, Q. 2, 2013-0493811C6
Q. 4 ("T1135/T1134")
Q. 4(a) – T1135 – T3/T5 exception
CRA guidance :
“Whether the reporting exclusion applies must be determined for each specified foreign property and for each taxation year during which the property was held. For example, if there are numerous properties held in one investment account, only those properties for which a T3 or T5 was issued for a particular taxation year would be subject to the reporting exclusion in that particular year.”
Can the CRA provide any further administrative guidance on the practical application of the T3/T5 exemption for T1135 reporting purposes or any other administrative relief?
Notes from Presentation
At this point, CRA is not prepared to make further concessions.
CRA also observed that the extended reassessment period under draft s. 152(4)(b.2) (where there has been a failure to file the T1135 as and when required or to provide the required information in respect of a specified foreign property, and (b) to to report an amount, in respect of a specified foreign property, that is required to be included in the taxpayer's income) applies for all purposes and not just to income derived from the unreported foreign assets [see 11 June 2013 STEP Round Table, Q. 3, 2013-0485761C6].
Q. 4(b) – T1135/T1134 – No e-filing/ T1135 -extension of normal reassessment period
Notes from Presentation
Electronic filing of T1134s and T1135s has not yet arrived.
Q. 4(c) – T1134 – Repetitive Reporting
At the 2013 IFA Conference, the CRA noted that it was considering developing administrative relief for repetitive reporting in section 3B of Form T1134 (in this example FA 3 would be reported twice, once by FA 1 and again by FA 2, but what if FA 3 had 200 FAs, each needing to be reported 3 times)?
Can the CRA provide an update on the development of administrative relief for repetitive reporting on Form T1134?
Notes from Presentation
CRA is providing further relief in the form of there no longer being a requirement to report indirect interests, so that only direct interests would need to be reported in the described situation.
Q. 5 ("Article XXIX-A of the Canada-US treaty")
Q. 5(a) – Article XXIX-A of the Canada-US treaty – “Qualifying person”
Under paragraph 1, a “qualifying person” is entitled to all of the benefits of the Canada-US treaty and a person that is not a “qualifying person” (with certain exceptions) is not entitled to treaty benefits. Paragraph 2 sets out the test for “qualifying person”.
What issues has the CRA recently considered regarding paragraph 2?
Notes from Presentation
CRA refused to rule in a situation where the U.S. company had a class of super-voting shares which were closely held, on the basis that the "primarily traded" test was not satisfied.
In 2011-0429261R3, CRA gave a favourable ruling with respect to a Canadian subsidiary of a U.S. corporation which had a single class of traded shares, although the ruling contained a caveat that the parent had to maintain its listing/trading.
Summary of Written Response
See summary under Treaties - Article 29A.
Official Response
26 November 2013 CTF Round Table, Q. 5, 2013-0507961C6
Q5(b) – Article XXIX-A of the Canada-US treaty – Active trade or business test
Paragraph 3 contains the “active trade or business test”, which if met, entitles certain non-qualifying persons to treaty benefits in respect of income derived from the other contracting state in connection with or incidental to that trade or business.
Can the CRA comment on recent rulings on this test and offer any insights?
Notes from Presentation
Before giving the rulings in 2011-0424211R3 and 2012-0458361R3, CRA reviewed the relative size of assets, number of employees and activities of the U.S. person and provided a caveat that this same level of relative activity would be required to be continued in the future, for the same result to apply.
In 2011-0399351R3 and 2012-0435211R3, the U.S. parent was bankrupt. Nonetheless, CRA was prepared to view that U.S. person as carrying on a business so that a dividend paid by the Canadian subsidiary to the bankrupt parent qualified for relief, even though the dividend was paid to fund creditors and the busines activities had ceased.
Summary of Written Response
See summary under Treaties - Article 29A.
Official Response
26 November 2013 CTF Round Table, Q. 5, 2013-0507961C6
Q5(c) – Article XXIX-A of the Canada-US treaty – Derivative benefits test
The exception in paragraph 4, the “derivative benefits test”, provides that a company that is a resident of a Contracting State (Canada or U.S.) is entitled to the benefits of Articles X (dividends), XI (interest) and XII (royalties), even if that company is not a qualifying person and does not satisfy the active trade or business test, if the owner of the company would have been entitled to the same benefit had the income been earned directly by that owner.
Can the CRA provide a brief overview of the types of issues considered by the Directorate in recent ruling requests related to paragraph 4?
Notes from Presentation
In 2012-0471921R3, CRA was unable to rule on the basis of the application of the base erosion test to a previous year of the US Holdco as there was no such year. However, CRA ruled on the basis of satisfaction of the derivative benefits test with the caveat that the base erosion test must be satisfied in the current year.
Summary of Written Response
See summary under Treaties - Article 29A.
Official Response
26 November 2013 CTF Round Table, Q. 5, 2013-0507961C6
Q. 6 ("Daishowa")
Paragraph 29:
“the assumed reforestation obligations are not appropriately characterized as the assumption of an existing debt of the vendor that forms part of the sale price of the property. The obligations — much like needed repairs to property — are a future cost embedded in the forest tenure that serves to depress the tenure’s value at the time of sale. This is different from a mortgage, which does not affect the value of the property it encumbers.”
Can the CRA provide any comments on how Daishowa has impacted the CRA’s treatment of vendor proceeds?
Notes from Presentation
CRA accepts the Daishowa case. It discussed the case as being applicable in the case of (forestry industry) silviculture and (mining) reclamation obligations and intimated that it did not apply to other industries. In the applicable cases, the obligation is imbedded in the property and has a negaive impact on its value.
Q. 7 ("CRA's policy on amending prior year discretionary deductions")
The CRA seems to be taking the position that the amendment of prior year returns to reduce reported non-capital losses by reversing CCA claims is inappropriate, where it would permit a taxpayer to create new non-capital losses in subsequent years by virtue of subsection 111(5.1) in place of the reported non-capital losses that would otherwise expire in the absence of the amendments and subsection 111(5.1).
Can the CRA describe those circumstances where it may apply this position and that it is not intended to override its general positions regarding requests to amend prior year CCA claims as set out in paragraphs 9 and 10 of IC 84-1?
Notes from Presentation
In a situation where CRA declined to rule, they concluded that s. 111(5.1) could not be used to resurrect prior years losses that had expired, i.e., the principles in IC 84-1 cannot be used to resurrect expired losses. [See 2013-0474111I7.] CRA will continue to apply those principles to open years.
Q. 8 ("Part XIII tax on convertible debentures")
At the 2013 IFA conference, the CRA noted that the Rulings Directorate was examining questions of interpretation and submissions made by the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada concerning the potential application of Part XIII tax with respect to convertible debentures issued by issuers in Canada. The CRA noted at that time, that its analysis of the relevant issues was substantially advanced, but that it needed to obtain the views of the Department of Finance before providing any guidelines to the Joint Committee.
Can the CRA provide an update on its current position with respect to the application of the Part XIII tax to convertible debentures owned by foreign lenders (i.e., paragraph 212(1)(b), the definition of “participating debt interest” in subsection 212(3), and subsection 214(7) and the qualification of such debentures as an “excluded obligation” under paragraph 214(8)(c) of the ITA)?
Notes from Presentation
CRA restricted its comments to convertible debentures issued by public companies. In particular, CRA stated that the same principles may not apply to convertible debt issued by a trust, partnership or private corporation.
As noted at the 2013 IFA conference, Q. 9, CRA had issued a ruling (see summary of 2012 Ruling 2011-0418721R3 under s. 212(3) – participating debt interest) on a regular convertible debenture indicating that the regular interest was not participating interest. CRA cautioned that taxpayer should not extrapolate from that ruling to obligations with both a participating and non-participating interest component (to conclude that the non-participating component would be treated in the same manner).
CRA has now addressed the issue respecting deemed interest arising under s. 214(7) as a result of the assignment of a convertible debenture (or deemed assignment under s. 214(14)), and has concluded that such deemed interest is not participating debt interest.
CRA is not comfortable that convertible debentures can qualify as excluded obligations under s.214(8)(c), as there are difficult interpretative issues respecting the yield calculation contemplated in that provision. However, given the position above that s. 214(7) deemed interest is not participating interest, this issue is largely academic.
Summary of Written Response
See summary under s. 212.3(11).
Official Response
26 November 2013 CTF Round Table, Q. 8, 2013-0509061C6 E
Q. 9 ("Income or profits tax")
FA can elect to either pay tax on gross revenues or net income. FA elects pay tax on gross revenue. CRA found this tax to be an “income or profits tax”
Can the CRA provide any comments on its consideration of what constitutes an “income or profits tax”?
Can the CRA provide its comments on implications of what constitutes an “income of profits tax” beyond foreign tax credits (ex. computation of FAPI, surplus, etc.)?
Notes from Presentation
CRA applies three criteria in determining whether tax levied on gross revenue qualifies as an income tax on the basis of its integration with an income tax statute:
- Is the gross revenue tax imposed under the same statute that imposes an income tax?
- Is an annual election available to choose to be taxed on net income rather than on gross revenue, which election can be changed year-to-year?
- Is the rate of tax on income not unreasonably high, so that there is a real option to choose the income tax alternative?
In due course, CRA will update its folio on foreign tax credits to reflect this position.
Summary of Written Response
See summary under s. 126(7).
Official Response
26 November 2013 CTF Round Table, Q. 9, 2013-0508171C6
Q. 10 ("Audit project update - NPO")
Can the CRA provide an update on the status of the NPO audit project? Is it complete?
What were the CRA’s findings and is Finance contemplating legislative changes?
Notes from Presentation
CRA has finished its project of identifying NPOs (based on a relative risk assessment process) which it will now audit.
Q. 11 ("Cross-border butterfly transactions")
Can the CRA provide any comments on the increase in favourable rulings in the area of cross-border butterflies in the last couple of years (see below for three examples)? What are the key issues that CRA is focused on?
- 1. Foreign Spinco incorporates Canco TC
- 2. Foreign Pubco exchanges common shares of Canco DC for new common and preferred shares of Canco DC under s. 86
Three-Party Exchange Agreement
- 3a. Foreign Pubco transferspreferred shares of Canco DC to Canco TC
- 3b. Canco TC issues shares to Foreign Spinco
- 3c. Foreign Spinco issues shares to Foreign Pubco
Notes from Presentation
Commencing in 1997 (with 2006-0215751R3), CRA started issuing favourable rulings respecting cross-border butterfly transactions which avoided the s. 55(3.2)(h) problem for such butterflies by using the three-party "vaccine" [i.e., a three-party circular exchange of consideration so that Foreign Spinco is never a shareholder of DC - see Russell, “Cross-Border Butterfly Ruling,”]. In 2007, use of the three-party vaccine was determined not to be offensive. Recent such rulings are 2012-0439381R3, 2011-0431101R3 and 2011-0425441R3, and two more will be published in due course. In the cases CRA has seen, it has been satisfied that there was no abuse; however, CRA can envision potential abuses of the rule and, thus, taxpayers should be cautious and may need to seek a ruling.
CRA was unable to issue one cross-border butterfly ruling recently because of minority preference shareholders who did not wish to participate in the butterfly transaction.
In order for any of these butterflies to work, the 10% test in s. 55(3.1)(b)(i) must be satisfied. Also, the series of transactions limitations nonetheless apply such that, for example, a takeover bid occurring as part of the same series of transactions will preclude the availability of the butterfly rules.
Q. 12 ("GAAR and subsection 93(2)/112(3) - Ruling not given")
At the 2013 IFA conference, the CRA found the acquisition of a second class of shares of FA and the payment of dividends thereon to preserve the loss on the original FA shares owned to offset a gain on the repayment of non-arm’s length would result in abuse of 93(2) and GAAR would apply.
Would the CRA’s conclusion to Q3 at the 2013 IFA Conference be different if the funds used to acquire the original FA shares had been borrowed from an arm’s length party more than 30 days before the acquisition of the shares?
Furthermore, what are the CRA’s views on whether the GAAR would apply to a series of transactions undertaken for the purpose of avoiding the application of subsection 112(3) through the use of a second class of shares, for example preferred shares?
Notes from Presentation
The conclusions provided at the 2013 IFA conference, Q. 3 would not change if the loan used to finance the acquisition of the foreign affiliate satisfied all the conditions in s.93(2.01)(2)(b)(ii) other than that the loan to finance the foreign affiliate acquisition was made more than 30 days before the acquisition. It is only where all the conditions in that provision are satisfied that it is not abusive to generate a loss. A similar analysis would apply under s. 112(3) which, unlike s. 93(2) does not have a specific safe harbour rule, so that the described transaction would result in a denied loss.
Summary of Written Response
See summaries under ss. 93(2.01), 112(3), and 245(4).
Official Response
26 November 2013 CTF Round Table, Q. 12, 2013-0508161C6
Q. 13 ("Surplus stripping")
In a TI released this past summer (TI 2012-0433261E5), the CRA stated that despite [Gwartz], the CRA intends, at the next opportunity, to demonstrate to the Court that there is a specific scheme in the Act for taxing the distribution of a Canadian corporation’s surplus as taxable dividends in the hands of individual shareholders, and that there is an overall scheme in the Act against surplus stripping.
Can the CRA reconcile its comments in TI 2012-0433261E5 that it intends to demonstrate an overall scheme in the Act against surplus stripping with comments in Gwartz (2013 TCC 86), Collins & Aikman (2010 FCA 251) and Copthorne (2011 SCC 63) that have found that there isn’t?
Notes from Presentation
CRA noted that surplus stripping is a broad term and includes such things as PUC fabrication, s. 75(2) strips and CDA duplication. CRA's successes in Brent Kern and MacDonald related to s.75(2) not applying or s.84(2) being applied, rather than to the application of GAAR to abusive surplus stripping. Similarly, the Minister lost in Gwartz based on an unsuccessful argument that there was an abuse of the kiddie tax provisions rather than that there was abusive surplus stripping. Thus, CRA does not believe that it has had the opportunity to fully state its case regarding surplus stripping. There are other cases in the pipeline and CRA hopes to demonstrate that surplus stripping is abusive under GAAR, but will do so bearing in mind the comments in Copthorne that "abuse" must be informed by a reading of the Act's provisions.
Q. 14 ("Audit project update - Related Party Initiative")
Is this initiative still targeted towards individuals and related groups with a net asset value of about $50 million or more and a group comprised of 30 entities or more?
Has the focus of this initiative changed?
Can the CRA provide an update on the results of the Related Party Initiative (audit of high net worth individuals) to date?
Notes from Presentation
No fundamental changes (and the $50M consolidated threshold is still being used) but the questions have been revised somewhat.
Q. 15 ("Subsection 15(1.1) - Ruling not given")
Canco owns 99.99% of issued common shares of ForOpco (other 0.01% is held by another foreign affiliate of Canco in order to meet the corporate law requirements of Country A).
- Canco incorporates ForHoldco in Country B
- ForOpco modifies its organizing documents to reduce the number of outstanding shares by factor of 100,000
- ForOpco returns capital to Canco
- Canco subscribes for common shares of ForHoldco
- ForHoldco subscribes for preferred shares of ForOpco
- ForOpco pays stock dividend on preferred shares consisting of common shares, to ForHoldco
- After stock dividend, ForHoldco owns 99.8% of the outstanding common shares of ForOpco, and Canco owns 0.2%
What factors does Rulings consider in determining whether subsection 15(1.1) applies?
Notes from Presentation
CRA noted that the taxpayer claimed that it did not wish to use the s. 85.1(3) rollover to effectively transfer ForOpco to ForHoldco as this would give rise to taxable gain in Country A. CRA concluded that s. 15(1.1) applied to the transactions as they are proposed to be implemented given that there was a purpose of transferring significant equity value in ForOpco to ForHoldco. It did not matter that something similar could have been accomplished under s. 85.1(3). The benefits under a particular rollover provision can be accessed only by using that rollover provision. CRA also had concerns that the taxpayers were trying to avoid the application of Treaty provisions to any subsequent sale transaction and was not satisfied that sufficient information was being provided to CRA.
Summary of Written Response
See summary under s. 15(1.1).
Official Response
26 November 2013 CTF Round Table, Q. 15, 2013-0507981C6
Q. 16 ("Audit 'hot topics'")
Q. 16(a)
Is Tax Earned by Auditor (TEBA) still measured, and if so, what is this metric used for? Are there any new metrics that are being used in the review of auditor performance?
Notes from Presentation
CRA uses the amount of additional tax raised by particular audit programs to assess the effectiveness of the programs, but does not use this metric to evaluate individual auditors. Auditors are evaluated based on their integrity, the quality of their work, their professionalism and their satisfaction of procedural guidelines.
Q. 16(b)
Can the CRA comment on the effectiveness of the “risk-based” audit approach for large corporation case files? Are there any changes coming in this regard?
Notes from Presentation
Clients classified as large corporations fall as to approximately 34% in the high-risk category, 30% in the medium-risk category and the balance in the low-risk category. Those in the low-risk category won't be visited.
Q. 17 ("In-house loss utilizations and provincial income shifts")
The 2013 federal budget announced that the examination of the taxation of corporate groups is now complete and the government has determined that moving to a formal system of corporate group taxation is not a priority at this time. The government said that going forward it will continue to work with the provinces and territories regarding the current approach to loss utilization.
How will this impact ruling requests where there is an intentional or unintentional provincial shift of income in an in-house loss utilization? What is the CRA’s policy
and are provinces consulted? Are there provincial concerns? Is there any guidance on the potential for double-taxation if provincial GAAR is applied?
Notes from Presentation
(This question was not answered due to time constraints.)