26 May 2016 IFA Roundtable
This shows the question posed at the May 26, 2016 IFA (Canadian Chapter) Roundtable together with a transcript (edited to go half the distance to pasteurized prose) of the oral responses provided by Dave Beaulne and Terry Young (each, a Section Manager in the International Division, Income Tax Rulings Directorate). The wording of oral supplementary questions posed by the moderators (Claire Kennedy and Brian Mustard) is truncated.
Preliminary remarks. In his preliminary remarks (which are not reproduced below), Dave Beaulne thanked by name the numerous contributors in the International Division to the preparation of the answers, and also stated:
We have 23 international tax specialists at Rulings. We have representatives in Vancouver, Calgary, Saskatoon, and we have offices in Toronto, right here in Montreal, and of course we still have an Ottawa office—it is our mother ship. There have been recent federal government announcements to commit more resources to combat, among other things, international tax avoidance. As a result of that, we at Rulings International are expecting to grow even further, and I wanted to announce that we are planning on running some external hiring processes. So be sure to tell two friends, who can tell two friends, who can tell two friends: your country needs you.
At this conference last year, the CRA confirmed that it still follows a so-called “two-step approach” to entity classification. It also stated that it was in the process of considering the proper classification of limited liability partnerships (“LLPs”) and limited liability limited partnerships (“LLLPs”) governed by the laws of Florida but that it had not yet concluded its analysis. At the Canadian Tax Foundation’s annual conference in November 2015 the CRA said that it had still not concluded its analysis in this regard but that it was heavily leaning toward treating them as corporations. It also stated that its analysis had been broadened to include LLPs and LLLPs governed by the laws of Delaware.
Does the CRA have anything new to add on this subject?
Dave Beaulne: In addition to speaking about this issue at the Canadian Tax Foundation in November, we spoke about it at last year's IFA conference in Calgary, where we outlined several factors being considered in the analysis. The written response will not go over the history and will just take a technical position.
As we know this is a sensitive issue, we quite reasonably asked for submissions from the tax community. Our first call for submissions was at the IFA Conference last year; our second was at CTF in Montreal in November. We did not get many submissions, but we would like to thank the three people who did provide submissions.
We are now ready to take a final position. We will reiterate a couple of the factors that we considered to be of overwhelming significance - those being:
- legal personality - I know we went down that road a number of years ago, but these entities that we were asked to opine on [i.e. LLPs and LLLPs] were substantively different, in that;
- in addition to having legal personality (which admittedly is a slightly vague concept), they have limited liability protection (and I don't find that to be a very vague concept – that is what corporations have).
So, despite whatever arguments may exist that these entities operate as partnerships, we think that, similar to LLCs, these entities are corporations. So, just to be clear: we have reached the general conclusion that Florida and Delaware LLPs and LLLPs should be treated as corporations for the purpose of Canadian income tax law.
Claire Kennedy: Can you provide any administrative relief?
Dave Beaulne: We acknowledge the difficulties that might be created by these positions. In order to promote fairness and predictability, we are prepared to make certain administrative concessions. Specifically, in the absence of abusive tax avoidance, we are prepared to accept that any such previously created LLP or LLLP be treated as a partnership for the purposes of the Act from the time of its formation where four conditions are satisfied:
- the entity is formed and begins to carry on business before July 2016;
- it is clear from the surrounding facts and circumstances that:
- the members are carrying on business in common with view to a profit (the general condition for partnerships); and
- they intended to establish an entity that would be treated for Canadian income tax purposes as a partnership and not a corporation;
- neither the entity itself nor any member of the entity has ever taken the position that the entity is anything other than a partnership for Canadian income tax purposes; and
- finally (and most importantly) the entity has to convert to an entity that we will recognize as a partnership, for example a general partnership or a limited partnership, before 2018.
We are going to give some administrative relief where those conditions are met, and they will be retroactive, so that we will allow partnership treatment for these entities back to day one, if these conditions are met, the key one being that they convert before 2018. However, if the entity starts off as an LLC, a C Corp or in some other well understood corporate form, and then converts to an LLP or a LLLP (so if an LLC, for example, has converted to an LLP or an LLLP) and there is no significant substantive change to the legal context, we will not offer this administrative relief.
2) Authorized OECD approach to profit attribution
The possibility of deducting notional expenses in determining the profits attributable to a permanent establishment (“PE”) of a non-resident under Canada’s tax treaties was seemingly put to bed by the 1998 decision of the Federal Court of Appeal in Cudd Pressure. However, the Organization for Economic Cooperation and Development’s (“OECD”) 2008 Report on the Attribution of Profits to Permanent Establishments has led to renewed interest in this issue in light of its development of the so-called “authorized OECD approach” (“AOA”). This report was revised in 2010 in order to be read harmoniously with the new wording of Article 7 of the OECD’s Model Tax Convention on Income and Capital (“Model Convention”) and its related commentary.
Canada did not enter any observation or reservation in respect of the AOA in the Model Convention’s commentary. As a result, many have wondered whether Canada’s position on notional expenses may have changed.
Can the CRA give us an update on its position in respect of notional expenses and the AOA?
Terry Young: Yes, we can. Notional expenses relate to dealings resulting from interactions between different divisions of a single taxpayer, such as headquarters and a branch, in a different jurisdiction. In a nutshell, the AOA is a two-step process which generally applies the OECD transfer pricing guidelines, by analogy, to determine the profits of the PE. The first step is a functional and factual analysis which requires the attribution of the functions, risks, assets and PE to hypothesize the PE as a separate entity. The second step involves the pricing to recognize dealings based on the OECD guidelines. The two-step process might, among other things, result in recognition of notional dealings and consequent notional expenses.
Having said that, in accordance with Cudd Pressure we are maintaining our long-standing view that notional expenses are generally not allowed in determining profits attributable to a PE. This position is essentially based on our view that paragraph 4(b) of the Income Tax Conventions Interpretation Act (ITCIA), prevents such deductions. However, under the terms of that paragraph, the prohibition does not apply where an agreement is entered into between the competent authorities for the particular tax convention in question, and such agreement expressly so provides for such notional expenses. To date, Canada only has one competent authority agreement in place, and that is the one entered into with the US in 2012.
In respect of the Canada-UK Tax Convention, we note that the new AOA-based Article 7 language was included in the Convention by virtue of the protocol signed on July 21, 2014. Pursuant to paragraph 4(b) of the ITCIA, it will be necessary to enter into a competent authority agreement in order to allow notional expenses under that Convention.
Brian Mustard: If I understand correctly, what you are saying is that notional expenses are not permitted with any country, other than the U.S.
3) Application of ss. 84(3) and (4) to a functional currency tax reporter
Assume a Canadian corporation (“Issuer”) that has a US$ “elected functional currency” (“EFC”), within the meaning of subsection 261(1), issues for full fair market value consideration preferred shares to a shareholder (“Shareholder”) with a redemption value of US$100,000 at a time when US$1.00 = C$1.00. Issuer then redeems the preferred shares held by Shareholder for proceeds of US$100,000 at a time when US$1.00 = C$1.25.
In the following situations, what is the CRA’s view as to how the deemed dividend paid by Issuer and received by Shareholder would be computed:
- a) Shareholder is a U.S. corporation – For withholding tax purposes, would the deemed dividend be computed in US$ or C$? Assuming the deemed dividend for withholding tax purposes would be computed in C$, would there be a separate deemed dividend calculation in US$ for other purposes, such as Part VI.1 tax?
- b) Shareholder is a Canadian corporation that also has a US$ EFC – Would the deemed dividend be computed in US$ or C$? Assuming both corporations are Canadian-controlled private corporations, would there be a separate calculation for purposes of determining the dividend refund to Issuer (i.e. based on US$ proceeds in which case there is no deemed dividend) and for purposes of determining the Part IV tax payable by Shareholder (i.e. based on proceeds in C$ in which case there would be a deemed dividend of C$25,000, which equals US$20,000 using the spot rate on the day of the redemption)? Would the answer change if the Issuer were not a functional currency tax reporter, i.e. where it reports its Canadian tax results in C$?
- c) Would the approach to the calculations be any different if Shareholder was a Canadian corporation that had the euro (“€”) as its EFC and Issuer had a US$ EFC?
- d) Would the answers to a) and b) be the same if Issuer returned capital to Shareholder in the amount of US$100,000 thereby invoking subsection 84(4), instead of redeeming the preferred shares? Does this answer, or any of the other answers, depend on the currency in which the stated capital of Issuer is maintained for legal purposes?
David Beaulne: (I would point out that our forthcoming written answer is very long, but necessarily so: this is a complicated issue.)
I would like to provide our views as to some general principles to be followed, in the hopes of providing taxpayers with the tools necessary to address other specific questions that may arise. Where there is still doubt in a particular situation, including where certain anomalies arise based on these principles, we would invite taxpayers to submit additional questions to us for consideration.
As alluded to in the Department of Finance Explanatory Notes from 2009, PUC has a dual-nature vis à vis a functional currency tax reporter. First, it might be relevant to the electing corporation itself (for example, in determining thin-cap room), but it will also be relevant in determining the amount of tax to withhold with respect to a deemed dividend under 84(3), as illustrated in Part a of this question. Thus, a functional currency tax reporter will have to track two PUC balances - one in its elected functional currency, and the other in Canadian dollars. I think that is pretty clear from the Department of Finance Explanatory Notes.
That's based on the premise that PUC, for thin-cap purposes, is relevant in computing the functional currency tax reporter's Canadian tax results, whereas PUC for 84(3) purposes is relevant in computing the shareholder's Canadian tax results. Since an election to report in a functional currency affects only the issuing corporation vis à vis its own Canadian tax results, it must use Canadian dollars for all purposes of the Act that do not concern its own Canadian tax results. This is so even if the shareholder is a Canadian corporation that has itself elected into the functional currency regime and has the same elected functional currency as the issuing corporation.
However, since PUC is also a Canadian tax result of the shareholder, the shareholder that elects into the functional currency regime will have to re-compute the PUC of the shares it holds in its elected functional currency for the purposes of computing its income inclusion in respect of an 84(3) dividend, notwithstanding that the deemed dividend amount is computed by the issuing corporation in Canadian dollars.
To summarize, because PUC can be relevant in computing the tax payable of both the issuing corporation and a shareholder of the issuing corporation, PUC is a relevant tax attribute of both the issuer and the shareholder in the determination of their Canadian tax results, and taxpayers must make the proper adjustments to reflect this.
Those are the principles that lead to (I hope) fairly obvious answers to these questions:
Claire Kennedy: Let us run through a few of these scenarios to apply these principles. In (a), for example, the shareholder is a US corporation. Is the deemed dividend computed in US dollars or Canadian dollars?
Dave Beaulne: Canadian dollars – so that there is a deemed dividend of $25,000.
Claire: Is there a separate US dollar calculation for other purposes, for example, for Part VI.1 tax purposes?
Dave: Yes - because that is a separate issuing corporation computation of its tax results. There is a separate calculation, but in this case there is no dividend because there is full PUC.
Claire Kennedy: Shareholders of Canco have the U.S. dollar as their elected functional currency – is the deemed dividend computed in US dollars or Canadian dollars?
Dave Beaulne: U.S. dollars.
Claire Kennedy: Let's say that such Cancos are CCPCs - are there separate calculations of the dividend refund for the issuer? For example, if the proceeds are calculated in U.S. dollars, there would be a nil dividend, vs. Part IV tax for the shareholder (if there were Canadian-dollar proceeds) on a $25,000 deemed dividend, which is US$20,000.
Dave Beaulne: It is a bit tricky. In some cases, there will be no dividend to account for, but it really depends on when the shares were issued and when the taxpayers converted into the functional currency. If the shares were issued after both the shareholder and the issuer converted into the functional currency regime, there would be no dividend to account for.
I would point out that the issuer would still be required to produce its T5 returns based on Canadian dollars because that is not in respect of its own Canadian tax results.
Claire Kennedy: We are going to skip over (c) and the first part of (d) (about an s. 84(4) scenario), and just ask the question: what is the relevance, if any, of the currency of the issuer's stated capital (maintained for legal purposes)?
Dave Beaulne: It is not relevant, in our view (and we will fully discuss this in our written response). Just to be clear, the maintenance of legal stated capital in a foreign currency does not change any of these answers, as PUC is fundamentally a Canadian-dollar tax concept, absent functional currency considerations.
4) Upstream loans converted to PLOIs
Assume the following hypothetical facts:
- a) NRco, a non-resident corporation, owns all the shares of Canco, a taxable Canadian corporation.
- b) Canco generates $10M of excess cash and would like to provide that cash to NRco by means other than a direct distribution.
- c) In 2010, Canco incorporates FA, a non-resident wholly owned corporation, and transfers the $10M of cash to FA in exchange for additional shares of FA.
- d) FA immediately uses the cash to make a loan to NRco at an arm’s length rate of interest.
- e) In April 2016, NRco repays the loan to FA and FA immediately distributes the cash to Canco as a dividend out of pre-acquisition surplus.
- f) Canco immediately lends the cash to NRco and makes a valid PLOI election under subsection 15(2.11).
The intent of these transactions is to unwind the so-called “second-tier loan” structure before the August 19, 2016 deadline and thus avoid the application of the upstream loan rules in subsections 90(6) to (15) of the Act.
Would the CRA view these transactions as constituting a “series of loans or other transactions and repayments” within the meaning of paragraph 90(8)(a) such that the exception in that paragraph would not apply, resulting in an inclusion under subsection 90(6) of $10M?
Dave Beaulne: The question that arises here is whether the loan made by Canco to NRco, which is the second loan, would cause the repayment by NRco of the loan it receives from FA to be caught by the series of loans and repayments rule. We are of the view that in this hypothetical situation, the repayment by NRco of the loan from FA would not be caught by the series rule, such that the repayment would qualify under paragraph 90(8)(a), and no 90(6) inclusion would occur.
5) Upstream loans – ss. 90(7) and (9)
Assume the following hypothetical facts:
- a) Canco, a corporation resident in Canada, directly owns all the shares of FA1, a foreign affiliate of Canco;
- b) FA1 owns all the shares of FA2, another foreign affiliate of Canco;
- c) FA2 generates excess liquidity in its active business and loans $10M to FA1;
- d) FA1 immediately uses the funds to make a $10M loan to Canco;
- e) The shares of FA1 held by Canco have a $4M adjusted cost base;
- f) At the lending time, FA1 has an exempt deficit of $20M and FA2 has exempt surplus of $100M;
- g) The loans are not repaid within two years.
The facts are the same as in Part A except that FA2’s source of funds is a borrowing of $10M from an arm’s length financial institution and it does not have any excess liquidity.
Can the CRA tell us how it would apply the back-to-back loan rule in subsection 90(7) in these two scenarios?
Daved Beaulne: This scenario illustrate what CRA believes (and Finance shares that view) what may be perceived by some (and us) as a deficiency in the upstream loan rules.
Based on the apparent policy intent in subsection 90(11) as it relates to the so-called "reserve deduction" under subsection 90(9), if FA2 had loaned directly to Canco, Canco would not be able to access enough of FA2's surplus to eliminate the deficit in FA1 because the dividend is only $10 million and the deficit is $20 million. Thus, Canco would not be entitled to a full deduction under subsection 90(9), notwithstanding that the foreign affiliate group as a whole has sufficient net surplus - so that seems to be a deficiency.
However, if it were FA1 that had made the loan, subsection 90(11) would apply to elevate all of FA2's surplus to create a sufficiently large exempt surplus balance to fully cover the upstream loan.
This scenario appears to represent an attempt at planning around the problem of a direct FA2 loan to Canco - but there is an impediment, and that is subsection 90(7): the back-to-back loan rule. However, given the overall context and purpose of the upstream loan rules, as informed by the more specific intent of subsections 90(7) and (11), the CRA would not generally apply the back-to-back loan rule in such a scenario, absent the presence of abusive tax avoidance. Rather, subsection 90(6) would be applied only to the loan made by FA1 to Canco, with the result that subsection 90(11) would apply, and the entire exempt surplus balance of FA2 would be included in the "reserve deduction" under subsection 90(9).
Dave Beaulne: In Part A we said we would not apply the back-to-back loan rules; in Part B, we're going to say that we will.
We think it is generally appropriate to successively apply subsection 90(7) to these loans, such that a bank would be deemed to have made a $10 million loan directly to Canco, and the three real loans would be deemed not to have been made. So, assuming the bank is not a foreign affiliate of Canco, there should be no upstream loan (subsection 90(6)) application.
We find support for this position in the overall context of the upstream loan rules, and their focus on synthetic distributions. There does not appear to be a net flow of surplus out from FA1 or FA2 in this scenario.
However, if as part of this type of arrangement, there were cash flowing back directly or indirectly to the bank from FA2 or another entity within Canco's foreign affiliate group, the CRA may, depending on the circumstances (i.e. whether there are sufficient tax attributes to cover such an upstream loan), seek to apply the GAAR on the basis of the guidance provided in the Department of Finance Explanatory Notes - in particular, the comments in respect of the use of back-to-back loan arrangements to frustrate the intent of subsection 90(7).
Brian Mustard: Just one clarification point here - when you say: CRA will apply the back-to-back loan rules such that the arm's-length financial institution has made the loan to Canco, therefore no inclusion, absent abuse? And, of course, that makes sense – you are holding fast on the application of back-to-back loan rules, but in this context there is still no income inclusion under subsection 90(6).
Dave Beaulne: Yes - that seems to fit the intent of the rules. There is no surplus being moved up from the FA group absent some switchback of funds.
The German Corporate Income Tax Act allows the taxable income or loss of a corporation resident in Germany (“Subco”) to be included in, and taxed with, the taxable income or loss of another corporation resident in Germany (“Parentco”) through a relationship referred to as an Organschaft. In order to have an Organschaft, a number of requirements have to be met, including Parentco and Subco having entered into a valid Profit Transfer Agreement (“PTA”). Under a PTA, Subco agrees to annually transfer its entire profit determined in accordance with the German statutory accounting and reporting requirements (“German GAAP”) to Parentco, and if Subco incurs a loss as determined under German GAAP, Parentco agrees to compensate Subco for such loss.
The CRA adopted a view that a profit transfer payment made by a Subco to a Parentco under a PTA was income from property to Parentco that could be re-characterized as income from an active business of Parentco in accordance with the rules in paragraph 95(2)(a) to the extent that Subco had earnings from an active business before taking into account the profit transfer payment. However, one of the effects of this view is that all or a portion of a profit transfer payment could be included in the computation of the foreign accrual property income (“FAPI”) of Parentco notwithstanding that Subco had no FAPI prior to the payment (e.g., where the statutory accounting profits of Subco included income such as dividends from underlying affiliates or capital gains from dispositions of excluded property).
With the introduction of subsection 90(2), would the CRA consider a profit transfer payment made by a Subco to a Parentco under a PTA to be a dividend under that subsection?
Terry Young: We agree that for the purposes of subsection 90(2), the payment from Subco to Parentco under the PTA could be a deemed dividend. Under that subsection, the amount is deemed to be a dividend, paid or received as the case may be, at any time on the share of a class of the capital stock of the non-resident corporation that is a foreign affiliate of the taxpayer, and the amount is the share’s portion of a pro rata distribution made at the time by the corporation in respect of all the shares of that class. This is our base case scenario: one class of shares wholly owned by the parent. It would be a question of fact whether the profit transfer payment made by Subco to Parentco meets the pro rata distribution condition of subsection 90(2). We understand that, as a matter of German corporate law, PTAs tend to be entered into by two German resident corporations under a variety of circumstances. For any profit transfer payment made after August 19th, 2011, we would consider it as being a dividend under subsection 90(2). And if the payment is such a dividend, its effect on the surplus accounts of Subco and Parentco would be in accordance with the rules of Part LIX of the Income Tax Regulations.
In the base case (for the same structure), the CRA would view a payment made under the PTA by Parentco to Subco in respect of an accounting loss of Subco as being a contribution of capital made by Parentco to Subco for purposes of paragraph 53(1)(c). Such a payment would not be taken into account in computing the earnings, income or loss of either Subco or Parentco.
We would be willing to consider a non-base case scenario in the context of an advanced income tax ruling request. Taxpayers may continue to rely on our previous position. However, since we expect that most taxpayers would be able to rely on the CRA’s new view, we propose to restrict the ability of taxpayers to treat these payments in accordance with the previous CRA view, to profit transfer payments made before 2017. We welcome the views of the tax community in respect of this proposal to eliminate the previous position.
Assume the following hypothetical facts:
- a) Canco owns all of the shares of each of FA1 and FA2.
- b) Canco capitalizes FA1 with $1,000 of equity.
- c) FA1 loans $1,000 to FA2 for use in its active business.
- d) A few years later, after having paid dividends of $50 to Canco, FA1 becomes a wholly-owned subsidiary of FA2 as a result of a contribution of capital by Canco of the shares of FA1 to FA2. No additional shares are issued by FA2 on the transfer.
- e) Some time passes and then Canco sells the shares of FA2 to an arm’s length party, incurring a capital loss of $70. No dividends are ever paid on the shares of FA2.
Does the CRA consider that the shares of FA2 held by Canco are substituted for the shares of FA1 that are acquired by FA2 on the capital contribution such that subsection 93(2.01) would grind the loss down to $20?
Dave Beaulne: We would consider those shares to be substituted, and would take the position here that the loss should be ground, pointing out in particular that there is no purpose test inherent in subsections 93(2) and (2.01) and other similar rules.
However, consistent with past practices, we may be prepared to develop administrative solutions to the extent this could result in double-counting, or the same dividends being counted, or producing two or more losses.
8) Borrowing to return capital and s. 95(2)(a)(ii)(B)
A Canadian corporation (“Canco”) owns all the shares of a foreign affiliate (“FA1”) which in turn owns all the shares of another foreign affiliate (“FA2”). Canco also owns all the shares of another foreign affiliate (“FA3”). FA1 carries on an active business. However, the shares of FA2 are not excluded property. FA1 has issued two classes of common shares with a total paid-up capital of $1 million. The class A common shares were issued for $800,000 and were used to fund the active business of FA1 while the class B common shares were issued for $200,000 and were used to acquire the shares of FA2. FA1 wishes to borrow $350,000 from FA3 to return capital to Canco.
- a) FA1 borrows $350,000 and makes a capital distribution in respect of class A common shares. On the view that the borrowed money of $350,000 is used to replace the capital on the class A common shares that was used to finance the active business assets, would the interest on the $350,000 loan be re-characterized as active business income pursuant to clause 95(2)(a)(ii)(B)?
- b) Would the answer be different if FA1 had only one class of common shares, keeping in mind that they came in on the exact same day in such a way so that they are comingled?
Terry Young. a) Yes, and that is whether FA1 computes its earnings under subparagraph (a) on a (ii) or (iii) basis.
b) Yes, in our view the answer would change, because there is no way to separate the two uses from the capital that is being repaid. We could consider that the appropriate method would be to apply clause 95(2)(a)(ii)(B) on a pro rata basis.
9) Application of Art. IV, 7(b) to S-corps
Assume the following hypothetical facts:
- a) US Parent, a U.S.-incorporated corporation, owns all the shares of US Sub, another U.S.-incorporated corporation.
- b) For U.S. tax purposes, US Parent has elected to be treated as an “S-corporation” and US Sub has elected to be treated as a “Qualified Subchapter S Subsidiary”. Thus, both corporations are fiscally transparent for U.S. tax purposes and the shareholders of US Parent are taxable in respect of their income.
- c) US Sub owns all the shares of Can ULC, an unlimited liability company formed under the laws of Nova Scotia. Can ULC is a disregarded entity for U.S. tax purposes.
- d) Can ULC has an outstanding interest-bearing loan owing to US Parent.
Based on these facts, will subparagraph 7(b) of Article IV of the Canada-U.S. Income Tax Convention (the “Treaty”) apply such that US Parent will be denied Treaty benefits in respect of the interest paid by Can ULC
Terry Young: Yes, it would apply.
Our understanding is that US Parent, US Sub, and the ULC are all considered as fiscally transparent for U.S purposes, so for purposes of subparagraph 7(b), we are looking at the "same treatment" test for U.S. purposes under which there is a comparison between the treatment if the interest had been paid by the ULC as a fiscally transparent entity, or as a corporation that is not fiscally transparent. Since they are fiscally transparent, the interest is effectively being paid by the U.S Parent (or its members) to itself, so that the interest would be a nothing; whereas if the ULC were not transparent, it would be interest income to the US parent.
Therefore, since the same treatment does not apply, subpargraph 7(b) of Article IV would apply to deny treaty benefits to the US parent.
10) Interaction of ss. 93.2 and 95(2)(c)
It is our understanding that subsection 93.2(3) was introduced with the specific purpose of facilitating the application of paragraph 95(2)(c), among other provisions, to “nonresident corporations without share capital”, within the meaning of subsection 93.2(1). However, the deeming rule in paragraph 93.2(3)(a) arguably does not go far enough in providing all the elements necessary for the proper application of paragraph 95(2)(c). For illustrative purposes, assume the following facts:
- a) Canco, a corporation resident in Canada, owns all the shares of FA1.
- b) FA1 owns all the shares of FA2 and all the member interests of FA3.
- c) FA1, FA2 and FA3 are all non-resident corporations, and FA3 is a “non-resident corporation without share capital” within the meaning of subsection 93.2(1).
- d) FA1 and FA2 have only one outstanding class of shares of their capital stock.
- e) Based on the application of paragraphs 93.2(2)(a), (b) and (d), FA3 has 100 shares of a single class of its capital stock, which shares are deemed to have rights and obligations that are the same as those of the corresponding equity interests.
FA1 transfers all of its shares of FA2 to FA3 as a capital contribution, i.e. no new member interests are issued by FA3. How would the CRA apply paragraph 95(2)(c) in these circumstances?
We are prepared to take a favourable position on the application of 95(2)(c) in the context of that question.
11) PLOIs – Multiple amounts receivable and late-filing penalties
A corporation resident in Canada (“CRIC”) sold products and/or provided services to customers both within and outside Canada. The CRIC’s customers included related nonresident companies within a multinational group. The CRIC did not collect certain related company amounts receivable on a timely basis, such that within the past two taxation years either subsection 15(2) or paragraph 212.3(10)(c) became applicable (depending on the relationship with the related non-resident purchaser). The CRIC’s accounts receivable report indicates that some year-end balances were the accumulation of hundreds of sales/invoices. The CRIC did not make timely pertinent loan or indebtedness (“PLOI”) elections.
Subsections 15(2.11) and 212.3(11) allow a CRIC to file a PLOI election in respect of “an amount owing to” the CRIC. The CRA has indicated (2014-0534541I7) that a PLOI election is required for each amount owing and that a single written communication for various amounts owing would constitute a unique election for each amount owing described therein. The PLOI election may be late-filed up to three years provided a latefiling penalty is paid by the CRIC pursuant to subsection 15(2.13) or 212.3(13), as applicable. The penalty is calculated based on the number of months the election is late.
Does the CRA consider that, as a technical matter, an “amount” arises for each intercompany sale/invoice? If so, would the CRA be prepared to administratively accept that there was one accumulated “amount” for the year, or some other period within the year (e.g., each quarter or each month), for the purposes of the late-filing penalty.
No oral response
Question not answered due to insufficiency of time.