26 April 2017 IFA Roundtable

This reproduces the written questions provided at the Annual IFA CRA Roundtable held in Toronto on 26 April 2017, as well as summarizing the CRA responses. The CRA presenters were:

Dave Beaulne, Manager, International Division, Income Tax Rulings Directorate

Lori Carruthers, Manager, International Division, Income Tax Rulings Directorate

This does not summarize the oral elaboration of the questions provided by Heather O'Hagan (KPMG) and Byron Beswick (Felesky Flynn), but summarizes some supplementary oral questions posed by them.

Q.1 Application of s. 247(2) to s. 17 loans

Under subsection 17(1), income may be imputed to a corporation resident in Canada in respect of an amount owing by a non-resident person, based on a prescribed rate. Under subsection 247(2), an amount in respect of a transaction entered into with a non-arm’s length non-resident may be adjusted to reflect arm’s length terms and conditions.

Where a corporation resident in Canada makes a non-interest bearing loan to a wholly-owned non-resident subsidiary, could the CRA provide its views on the potential application of subsection 17(1) and/or subsection 247(2) in the following two scenarios?

a) The loan remains outstanding for more than one year and does not qualify for the controlled foreign affiliate exception in subsection 17(8).

b) The loan remains outstanding for one year or less and it would, if it had been outstanding for more than one year, have qualified for the controlled foreign affiliate exception in subsection 17(8).

Response to 1(a)

Dave Beaulne: In a 2004 interpretation (2003-003389), which we stand by today, the subject loan was assumed to be outstanding for less than one year, but would not otherwise satisfy the conditions of s. 17(8). In that context, we concluded that the transfer pricing rules in s. 247(2) could apply to adjust the interest rate to an arm’s-length rate.

The two presented scenarios build on that interpretation but have slightly different facts. In the (a) scenario, the specific exception contained in s. 247(7) would not be applicable, as the conditions of s. 17(8) are assumed not to be met. However, the fact that s. 17(1) could apply to the amount of interest does not, in our view, preclude the potential application of s. 247(2).

Thus, even if s. 17(1) would result in a 1% inclusion in income, if the arm’s-length rate is, say, 3%, it is our view that the total inclusion in income would be 3%.

Response to 1(b)

Dave Beaulne: Our answer is favourable. The key is that, notwithstanding that s. 247(7) would not apply here (because s. 17 would not potentially apply here), because this particular loan is the type of loan contemplated by s. 17(8) (and s. 247(7)), it is our view that the transfer pricing rule in s. 247(2) would not be applicable.

Official Response

Official response

Q2. Application of s. 247 to FAPI computation

Section 247 may apply in respect of transactions with non-arm’s length non-residents.

Does the CRA consider section 247 to apply in computing a foreign affiliate’s FAPI in respect of a taxpayer, in the context of a transaction between the foreign affiliate and another nonresident person?


Lori Carruthers: Generally, yes.

However, in the context of a transaction between a foreign affiliate and another non-resident, where the transaction impacts the foreign affiliate’s FAPI, the CRA would generally not challenge the pricing of that transaction if:

  • the pricing is reviewed by the tax authority of the country in which the foreign affiliate is resident;
  • the pricing is determined to be in accordance with the transfer pricing legislation or guidelines of that country; and
  • that legislation (and guidelines) adopt the arm’s-length principle.

Thus, we would generally apply s. 247 to such a transaction, but not where that transaction has been reviewed by an appropriate authority in a foreign jurisdiction, which applies the arm’s length principle.

I would also share that the transfer-pricing Information Circular (IC 87-2R) is currently under review. That review will include the content within that Circular (five paragraphs towards the beginning) respecting the computation of FAPI.

Official Response

Official response

Q.3 U.S. LLPs and LLLPs

At the 2016 CTF annual conference, the CRA announced that it had established an internal working group to study compliance issues related to Florida and Delaware LLPs and LLLPs arising from its prior announcement that it would generally consider such entities to be corporations for Canadian tax purposes. As part of this announcement, the CRA indicated that it was open to a prospective approach whereby prior filings would, in certain circumstances, be allowed to stand.

Can the CRA provide an update on the activities of the working group?


Dave Beaulne: In our minds, this was not a change of position and was the first time we had ever addressed the subject.

The working group on this topic was announced at CTF 2016 Annual Conference. It is continuing its study of the compliance issues relating to Florida and Delaware LLPs and LLLPs. It is part of a cross-Branch and cross-Department committee, composed of Rulings people, as well as Department of Finance people, and is lead by Alex McLean from the Audit Branch.

The work is continuing, significant progress has been made, and we do have some statements to make. We would like to thank the tax community for the many submissions received.

We analyzed the complexities to taxpayers and to the administration of transitioning from partnership to corporate filings, and have decided against it. We have instead decided to build on the prospective approach referred to in the November CTF announcement, and offer administrative grandfathering.

"Administrative grandfathering” means that any such entities formed before today (26 April 2017) would be accepted as partnerships for all prior years as well as all future years. We think that is a reasonable approach – although not applying black-letter law, we believe that there is room for fairness in tax administration.

There are conditions. Any Delaware or Florida LLP or LLLP formed before today may be treated as partnerships for all prior and future years provided that none of these conditions are met:

  • one or more members of the entity, or the entity itself, takes inconsistent positions from one taxation year to another, or for the same taxation year, as between partnership or corporate treatment;
  • there is a significant change in the membership or the activities of the entity; or
  • the entity is being used to facilitate abusive tax avoidance.

Where any of those conditions is met, the CRA may issue assessments to the members and/or the entity for one or more taxation years, on the basis that the entity is a corporation. However, any entity that has consistently filed as a corporation for Canadian income tax purposes may of course continue to file on that basis (because we maintain that such entities are corporations).

For any such entities that, notwithstanding this administrative grandfathering, choose to file as a corporation, we will insist that they do so for all taxation years, and we may have to adjust some partnership and partner returns for prior years to ensure consistent treatment of income and losses and make sure that there is no double-counting.

Any such entities formed after today will be assessed on the basis that they are corporations; and to the extent that LLPs and LLLPs of other US jurisdictions have similar attributes to those entities, and therefore the CRA views them as corporations, will also be eligible for this administrative grandfathering.

Heather O’Hagan: A follow-up question: LLCs that are disregarded for US purposes but regarded for Canadian purposes are typically allowed to fall under para. IV(6) of the Canada-US Treaty. Would the same kind of thought-process apply to these LLP/LLLP entities, that are really a form of hybrid entity?

Dave Beaulne: Absolutely. I would also add that s. 93.2 could apply also to them (the same way as for LLCs) as non-resident corporations without share capital.

Official Response

Official response

Q.4 Ss. 261(20)/(21) and foreign affiliates

Subsections 261(20) and (21) deny FX losses in respect of specified transactions between related taxpayers with different “tax reporting currencies”

Subsection 261(1) defines

  • “tax reporting currency” as the currency in which a taxpayer’s “Canadian tax results” are determined
  • “Canadian tax results” as any amount that is relevant in computing income, taxable income, or taxable income earned in Canada
  • Subsection 261(6.1) deems a FA, for purposes of computing FAPI, to have an elected functional currency that is the same as that of the Canadian taxpayer of which the FA is a FA

Does the CRA agree that the conditions in subsection 261(20) would not be met in this case because FA is deemed to have an elected functional currency only for purposes of determining its FAPI?


Dave Beaulne: Yes, it is our view that s. 261(21) would apply in these circumstances, mainly because the loan is on FAPI account, and therefore within the scope of s. 261(6.1), which means that FA, a US-dollar subsidiary, would have a tax-reporting currency of the U.S. dollar and, therefore, the conditions for the application of s. 261(21) would be met.

Official Response

Official response

Q.5 S. 91(4.7) and Brazilian deductible dividends

Foreign tax credit generator (FTCG) rules in subsections 91(4.1) to (4.7) deny a deduction for foreign accrual tax (FAT) if a “specified owner” is considered under relevant foreign law to own less than all shares of a particular corporation than it is considered to own under the Act (Lesser Ownership Test). The Lesser Ownership Test is deemed by subsection 91(4.7) to be met if, under relevant foreign law, dividends or similar payments on shares held by specified owner are treated as interest or another form of deductible payment.

Under Brazilian law, corporations can choose to make tax deductible distributions to shareholders, within certain limits (called “interest on equity” or IOE). Under what circumstances, if any, would the CRA consider such distributions to meet the conditions of subsection 91(4.7)?


Dave Beaulne: The CRA would consider the conditions for the application of s. 91(4.7) to be met in a taxation year of a Brazilian foreign affiliate if, at any time in that year, dividends paid to a specified owner (no matter the amount) are deductible by the paying corporation under Brazilian tax law by virtue of an IOE election. Thus, the application of s. 91(4.7) would result in the application of 91(4.1), and the denial under s. 91(4.1) of FAT applicable to foreign accrual property income of that Brazilian foreign affiliate for that year of the dividend.

Under the chain rules, if the Brazilian affiliate had a chain of other foreign affiliates under it, that could also by reason of the chain rules result in the denial of FAT in respect of FAPI for those underlying subsidiaries – or any subs up above, as well.

Heather O’Hagan: To clarify, in a particular taxation year where there, say, was a distribution made by the Brazilian entity but there was no deduction available for whatever reason, in that year you would be okay in terms of this rule?

Dave Beaulne: Yes, as long as there were no other dividends paid in the year that were deductible.

Official Response

Official response

Q.6 T1134 filing issues

CRA has previously provided administrative relief from certain duplicate or repetitive reporting for Form T1134 to reduce the compliance burden for a reporting entity. Duplicate reporting often arises due to requirement of a reporting entity to file a T1134 for foreign affiliates and controlled foreign affiliates owned at any time in the reporting entity’s taxation year.

a) Assume each of Canco1, Canco2, CFA1 and CFA2 has a December 31st tax year-end, and that Canco1 and Canco2 amalgamate on August 1st. Would CRA consider extending its administrative relief to situations where there is a deemed year-end due to an amalgamation of two or more Canadian corporations, such as in this example?

b) Assume Canco1 transfers CFA1 to Canco2 mid-year. Would CRA consider extending its administrative relief to situations where multiple Canadian taxpayers or partnerships in a related group are required to file a T1134 for the same FA even though information reported may be minimal for reporting entities that do not own FA at end of year, such as in this example?

c) For Canadian taxpayers with large FA groups, the requirement to paper file T1134 forms and related attachments is extremely burdensome. Often an additional copy of all forms and attachments is requested by CRA auditors when their audit is commenced. Is there an expected time frame for being able to file T1134 forms and attachments electronically?

Response to 6(a)

Lori Carruthers: No, we are not able to give that administrative relief.

However I would note that the duplicate T1134s (specifically, the T1134 supplements to be filed by Canco 1 and Canco 2) would require limited to no information in various areas of that supplement. For example, Section 3 of Part 2 of the supplement, and Sections 1-4 of Part 3 of the supplement, specifically refer to taxation years of the affiliate ending before the entity’s taxation year. In the situation given, the amalgamation of CFA1 and CFA2 do not cause a year-end for the foreign affiliates.

That being said, the administrative relief requested would not be consistent with the purpose of the T1134 reporting requirement, which is to provide the CRA with an accurate record of the history of foreign affiliates, and transparency of offshore structures. Not having Canco1 and Canco2 file T1134s could diminish the accurate history that the reporting was meant to provide.

Response to 6(b)

Lori Carruthers: Once again, we do not think that granting the administrative relief requested by the tax community would be consistent with the purpose of the T1134 reporting requirements.

Where multiple Canadian-resident taxpayers or partnerships in a group own a particular foreign affiliate for a moment in the year, but only one in the group owned the shares at the end of the tax-year, in our view, not having each owner file a T1134 for the FA would diminish the transparency of the offshore structures, which frustrates one of the purposes of the form.

Response to 6(c)

Lori Carruthers: As of today, it is anticipated that corporations will have the ability to electronically file T1134s, and T106 returns, by mid-2017.

Unfortunately, the ability to transmit supporting financial documentation will not be available at the same time (we have not been able to achieve that quite yet) but there is still on-going work to add that functionality.

Official Response

Official response

Q.7 "Substantially all...income" in s. 95(2)(a)(ii)(D)(IV)2

Issues can arise under subclause (IV) of clause 95(2)(a)(ii)(D) (Cap D) where the 2nd affiliate and/or 3rd affiliate are disregarded LLCs.

Conditions for sub-subclause (IV)2 require that, for each disregarded 2nd affiliate and 3rd affiliate, and for each of their relevant taxation years that end in the taxation year of the foreign affiliate making the loan: Their members/shareholders at the end of the year be subject to tax in a country other than Canada on all or substantially all of the income of the disregarded affiliate for a relevant taxation year

a) Assume either 2nd affiliate (2nd LLC) or 3rd affiliate (3rd LLC) has a loss in a taxation year ending after loan was made to 2nd LLC, and all other Cap D conditions are met. Can CRA confirm that, notwithstanding reference to “income” in sub-subclause (IV)2, interest paid or payable on loan to 2nd LLC would be eligible for recharacterization?

b) Assume 2nd affiliate (US Holdco) owns 40% of 3rd LLC which is a partnership for US purposes, with an arm’s length U.S. resident owning the other 60%. 3rd LLC and its members all have December 31st tax year-ends. US Holdco sells its 40% interest in 3rd LLC to an arm’s length U.S. resident on June 1st and no deemed year-end arises for US tax purposes. US Holdco is subject to tax on its share of 3rd LLC’s income for the period from January 1st to May 31st. Would CRA consider the “end of year” requirement to be met, notwithstanding that US Holdco is not a member of 3rd LLC at its year-end (December 31st)?

Response to 7(a)

Lori Carruthers: Yes.

This question is essentially a continuation of a question answered at the 2015 CTF Annual Roundtable. The prior question involved both the second and the third affiliate being fiscally transparent under their respective jurisdictions’ tax law, and the second affiliate had some expenses, which would have reduced the income ultimately included in the income of the indirect member or shareholder of the third affiliate.

We were asked at that time whether, in respect of that third affiliate, the requirement that its members or shareholders be subject to income taxation outside of Canada on all or substantially all of its income, was met, and our response was yes. We stated at the time that “all or substantially all” requirement can be met where the second affiliate incurs expenses.

We compared that situation to a situation where the requirement is not met, such as where 20% of the income of the foreign affiliate is ultimately not subject to income taxation in a country other than Canada, because a 20% member or shareholder is tax-exempt or otherwise not subject to income tax in that foreign jurisdiction.

We continue to hold those views. In the situation being described today, interest-income of the CFA making the loan to the 2nd LLC would be eligible for recharacterization (based on all the other conditions of Cap D being met) so that the interest income of the CFA would still be eligible for recharacterization under Cap D, notwithstanding that either 2nd LLC or 3rd LLC, or both, had a loss in the particular year.

Response to 7(b)

Lori Carruthers: We do not think the words get you there. As you stated, the members of the 3rd LLC at the end of its taxation year likely will not be subject to income taxation in a country other than Canada on all or substantially all of 3rd LLC’s income, because of the 40% of 3rd LLC’s income in the period of January-May that would be allocated to US Holdco.

We do recognize, however, that that outcome may not be consistent with the underlying tax policy of the provision. We have brought this issue to the attention of the Department of Finance.

Official Response

Official response

Q.8 NR4 reporting of withholding-free payments

Previous versions of CRA’s Guide T4061 NR4 – Non-Resident Tax Withholding, Remitting, and Reporting stated that an information return is required where amounts are paid or credited that are subject to withholding under Part XIII.

More recent versions of this Guide appear to suggest that an information return is required for amounts identified in Regulation 202(1) that are paid or credited by a resident of Canada to a non-resident person regardless of whether the payment is subject to Part XIII withholding.

Can CRA clarify the reporting obligations for amounts paid or credited by a resident of Canada to a non-resident person? For example, is a Canadian resident required to file an information return for interest paid or credited to an arm’s length non-resident person if the interest is not subject to Part XIII withholding?


Dave Beaulne: A point of clarification – it’s not about amounts described under in Part XIII, but about amounts described in Reg. 202(1).

Filing is required by virtue of Reg. 202(1), i.e., in this particular example, if there is a payment of interest by a Canadian to a non-resident, Reg. 202(1) requires the filing of the form. It is not a question of whether it is subject to Part XIII tax.

In this example, yes, the Canadian resident must file an NR4 in respect of arm’s-length interest paid to a non-resident that is not subject to Part XIII tax. Most importantly, the Minister has not exercised her discretion to waive that filing requirement under the authority of s. 220(2.1) of the Act.

Official Response

Official response

Q.9 Earnings of disregarded U.S. LLCs

CRA’s response to Question 11 at 2016 CTF Annual Conference indicated a change in position regarding computation of earnings of a disregarded US LLC carrying on an active business.

  • 2009 Position -> compute earnings under subparagraph (a)(i) of definition of “earnings” in Regulation 5907(1) (Earnings Definition)
  • 2016 Position -> compute earnings under subparagraph (a)(iii) of Earnings Definition

CRA indicated change in position due to introduction of Regulation 5907(2.03) in 2011. Revised position applies to taxation years ending after August 19, 2011

Given fact that surplus computations have been completed, and balances relied on, for the past 5 years, would CRA be willing to consider following positions:

a) For taxation years of LLC beginning prior to November 29, 2016, taxpayer may choose whether to compute LLC’s earnings based on either the 2009 Position or the 2016 Position?

b) To extent of dividends received by a Canadian taxpayer on or before November 29, 2016, or in respect of other transactions completed prior to that date that rely on surplus computations based on the CRA’s 2009 Position, taxpayer may compute LLC’s earnings based on that 2009 Position?


Lori Carruthers: Since the 2016 position was given, we have had the opportunity to listen to your concerns regarding the retroactive effects of the change in position. We appreciate that, where taxpayers have completed transactions that have relied on computation of earnings based on the 2009 position, the retroactive effect of the 2016 position could result in unforeseeable adverse tax consequences or compliance costs that would now have to be repeated.

If a taxpayer uses the 2009 position to calculate the earnings of a disregarded US LLC for the LLC’s taxation years on or before the announcement of the 2016 position (i.e., on or before 29 November 2016), the CRA is prepared to accept those calculations, provided the taxpayer and all taxpayers related to the taxpayer use the 2009 position to calculate their earnings on all of their foreign affiliates that are disregarded US LLCs for all taxation years of those LLCs that ended on or before 29 November 2016. Alternatively, such taxpayers can choose to calculate the earnings of all their foreign affiliates that are disregarded US LLCs in accordance with the 2016 position, for all years of their LLCs that end after 29 August 2011.

Thus, there is a choice, but it’s all-or-nothing.

The earnings of a disregarded LLC in a taxation year ending after 29 November 2016 should be computed in accordance with the 2016 position.

Official Response

Official response