2020 IFA-YIN Seminar on COVID-19 Guidelines
This summarizes CRA responses at a webinar hosted by the International Fiscal Association (Canadian Branch) on 6 August 2020 (a Young Members Event). The CRA presenters were:
Ted Gallivan, Assistant Commissioner, Compliance Programs Branch, Canada Revenue Agency
Randy Hewlett, Director General, Legislative Policy Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency
Alexandra MacLean, Director General, International and Large Business Directorate, Compliance Programs Branch, Canada Revenue Agency
The moderators were Lindsay Gwyer (Stikeman), Bhuvana Rai (BLG) and Kevin Yip (Fasken). Various references to the "Guide" or the "guidelines" were to the CRA's Guidance on international income tax issues raised by the COVID-19 crisis.
Q.1 — Whether "Travel Restrictions" Must Be Enforceable
What qualifies as a “Travel Restriction” imposed by a business or a Government?
- Would recommendations without legal restrictions qualify (e.g., the recommendation of the Canadian government that every Canadian return home)?
- Would a mandatory quarantine period (imposed by the Canadian government or a foreign government) be considered a Travel Restriction?
Gallivan: Canada’s focus is to avoid changing someone’s residency for changes directly caused by the pandemic – by itself, that should not push anyone “offside.”
On the other hand, if we were already going to question a taxpayer’s residency, we didn’t want our policies to block us from pursuing that.
MacLean: A recommendation that does not have legal force may qualify as a “travel restriction” depending on the surrounding facts and circumstances.
We would generally view a government recommendation to return to Canada as a “travel restriction.”
Q.2 — Meaning of "Solely as a Result"
The CRA’s relief for individuals explicitly discusses only one type of situation: where individuals visiting Canada at the time of the Travel Restrictions were not able to return to their country of tax residence as they intended, and instead remained in Canada.
- When is an individual’s presence in Canada considered to be “solely as a result” of Travel Restrictions?
- As an example, consider a US-resident individual who is required to exercise their employment in Canada on a regular basis, and who is normally not present in Canada for 183 days or more in total in any 12-month period. The individual cannot practicably travel back and forth between the US and Canada due to mandatory quarantine periods in one or both countries, and so stays in Canada for an extended period of time. Would the CRA consider the mandatory quarantine periods to be Travel Restrictions? If so, would the CRA consider the individual to be in Canada solely as a result of the Travel Restrictions?
- Would this change if the reason the individual was required to be present in Canada on a regular basis was personal?
MacLean: A mandatory quarantine period is a travel restriction.
For scenarios not specifically addressed in the guidance or this session, we recommend contacting CRA at email@example.com (standing for “Permanent Establishment, Residence, COVID Guidelines”), so that CRA can give the inquirer a call, get more information, have a discussion, and give a response. The box is monitored during vacations, etc.
Gallivan: When working with your clients, there are definitely situations where you want the certainty of a written response. Outside of those situations, ask yourself whether residency is really in play for your client. Is this a long-time Canadian resident who disposed of and wound down things, purchased a home in Barbados, maintained extensive ties in Canada, and then got trapped in Canada by the pandemic?
To reiterate my point in Q.1, we wouldn’t use the pandemic to create an issue – but if residency is already in play, we will use whatever relevant information there is.
MacLean: Exactly. We are always concerned about avoidance, and taxpayers who might exploit the flexibility of concessions to erode the Canadian tax-base - but otherwise want to be reasonably accommodating.
Regarding the last bullet-point, I think it’s fairly clear that CRA is not going to be challenging the Canadian residency of someone who is prevented from travelling home.
Of course, we can’t speak for other tax authorities. We are monitoring different accommodations, of which there are tens of thousands, and they are similar to CRA’s approach – all the tax authorities are trying to be accommodating in the circumstances.
Q.3 — Individual Not Ordinarily Resident in Canada
If an individual is not ordinarily resident in Canada, but is in Canada due to Travel Restrictions or otherwise due to public safety concerns relating to COVID-19, and works remotely (for their non-resident employer) from Canada:
- Would such individuals now be considered Canadian residents and their foreign employment income be subject to tax in Canada?
- If the employer has no (other) Canadian ties, would it now have new withholding obligations in Canada?
- Would the presence of an employee in Canada — with or without the approval of their employer — be a situation in which the employer is considered to be carrying on business in Canada pursuant to paragraph 253(b) of the ITA?
MacLean: The first bullet-point is covered in the published Guidelines on individual residency. Provided that the individual meets the requirements for relief, CRA would not consider the individual to be resident in Canada.
The Guide does not address withholding obligations. As the Guide points out, Canadian income tax rules requires that amounts must be deducted or withheld or remitted in respect of remuneration paid to a non-resident officer or employee in respect of services of an office or employment provided in Canada.
It may be possible to obtain a waiver from withholding if there is an income tax treaty with the employee’s country of residence.
Finally, with respect to carrying on business in Canada and any potential relief from withholding in respect of the employee, this appears to be a real-life situation so we recommend sending an email with all relevant facts and circumstances to firstname.lastname@example.org.
Q.4 — Non-Resident Employers
How should non-resident employers deal with a situation in which they discover that employees are (without permission) working remotely from Canada due to the COVID-19 crisis?
MacLean: If this question forms part of the scenario in Q.3, the facts and circumstances regarding this aspect should be included in the submission. We would also suggest that, in order to ensure minimal potential penalties, the employer commence with any applicable withholding or reporting obligations as soon as possible.
I know this is a tough situation for practitioners. We will try to be flexible when we encounter withholding problems, as the extraordinary circumstances can make compliance difficult.
Gallivan: CRA doesn’t have infinite resources. You should be alive to the concept of materiality.
MacLean: That remark makes me a little bit nervous!
Q.5 — Directors Forced to Stay in Canada
In the guide, CRA has considered the issue of corporate residency as it relates to directors who may be forced to travel to or remain in Canada. Administrative relief has been provided for corporations which would otherwise be potentially a dual resident of Canada and a country to which a tax treaty applies under such circumstances. Does this relief from common law residence rules broadly apply to companies in treaty-based countries, in situations where Travel Restrictions result in inadvertent Canadian residency?
MacLean: The Guide comments on corporate residency do not provide blanket relief outside of the location of board meetings. If there is a taxpayer who has an actual situation as described in the Question and would like to ask for relief, they should contact the mailbox.
Having said that, yes, I think to the extent that it’s within Canadian control, as opposed to an issue of dispute between two different countries, the object and spirit of the guidance would continue to apply in relation to treaty-based countries.
Q.6 — Location of Board Meetings
The CRA’s residency guidance for corporations focuses particularly on the location of board meetings in situations where directors are in Canada due to Travel Restrictions. However, as noted in the guide, the location of board meetings is also only one element in determining the location of a corporation’s place of effective management. Will the CRA take into account the Travel Restrictions and other circumstances related to COVID-19 more generally in determining whether the effective management of a corporation is in Canada (for example, in a situation where an individual officer or director typically exercises management activities outside of Canada but is in Canada due to Travel Restrictions or other COVID-19 related circumstances?
MacLean: We are going to want to look at all the facts and circumstances on some of these cases.
The guidance was careful to note that our administrative concessions in the guidance were not a promise that you would avoid Canadian residency, but rather that this new COVID situation and the restrictions on travel would be taken into consideration. We would not necessarily apply deeming rules or presumptions and impute Canadian residency just because of changes in the ability to travel.
The circumstances described in the question feel close to the line – is this a company that’s always really been managed in Canada? We often run into questions like that in Audit, and we don’t want to give too much comfort on any kind of box-ticking exercise that’s undertaken to avoid Canadian residency.
We are trying to be accommodating, but we’re also going to take a hard look at what the reality of the situation is, particularly in common law situations where you’ve got a kind of “mind and management test” – treaty-type rules of course work a little bit differently. I am more interested in the substance of what is going on than necessarily the form, and I appreciate not every piece of jurisprudence in Canada agrees with that position, but there you have it.
Gallivan: If there is a company whose residency was manufactured in a certain way using black-letter law, then maybe we feel supported in also taking a black-letter approach to the situation.
In the vast majority of these cases, we want to take an interest-based “object and spirit” approach and to be reasonable – but sometimes our approach will be driven by the position of the taxpayer and the level of discretion might in part be influenced by the past record and behaviour of the taxpayer.
Q.7 — Applicability to Residence in Other Jurisdictions
The CRA’s guidance with respect to residency focuses largely on whether a foreign corporation will be resident in Canada. Will the CRA apply the same general principles in determining whether a foreign corporation is resident in a jurisdiction other than Canada where relevant for purposes of the ITA (for example, with respect to the computation of a foreign affiliate’s surplus)?
MacLean: An official response will be taken up by IFA in September.
Q.8 — Competent Authority Tie-Breaker Rule
Is the CRA’s guidance on corporate residency and COVID-19 applicable to corporations residing in a treaty jurisdiction where the only tie-breaker rule in the treaty relating to corporate residency is a competent authority tie-breaker rule?
MacLean: The corporate residency portion of the Guide does provide potential relief in respect of income tax treaties with the competent authority tie-breaker rule. We would need more details before we could give a definitive answer on this question.
Q.9 — Non-Treaty Countries
The guide indicates on multiple occasions that CRA will consider administrative relief for non-resident entities which are resident in countries with which Canada has not entered into an income tax treaty “on a case-by-case basis”. What factors are likely to determine whether such relief will be provided?
MacLean: CRA is being careful not to accommodate avoidance techniques, so we’re avoiding bright-line tests.
Broadly speaking, however, taxpayers should be prepared to illustrate how the location and timing of the board meetings were necessary from a business corporate governance perspective and not intended to exploit the relief in the Guide for tax avoidance purposes.
Q.10 — Non-resident corporation's return obligation
In light of the commentary from the OECD to the effect that tax administrations should minimize or eliminate unduly burdensome compliance requirements for taxpayers during the COVID-19 crisis, has the CRA considered waiving the requirement to file a tax return for non-resident corporations resident in a non-treaty jurisdiction, which are considered to be carrying on a business in Canada only because of the Travel Restrictions?
- Does the administrative relief applicable to such taxpayers as outlined in the CRA guidance include relief from filing a tax return?
- How do such taxpayers apply for the administrative relief outlined in the CRA guidance?
MacLean: The general expectation would be that the corporation would file a tax return. We don’t have a formal process for seeking relief, but you are welcome to contact email@example.com to outline the situation and try to persuade us to show some flexibility in circumstances not covered in the Guidelines.
Q.11 — S. 253(b) test during COVID
Is the expanded test for “carrying on business in Canada” (under paragraph 253(b) of the ITA) different during the travel restrictions in place during the COVID-19?
MacLean: Again, this is not covered by the guidance. Direct questions about specific situations to firstname.lastname@example.org.
Q.12 — TPM-17 and COVID government assistance
What are the CRA’s views on the impact and treatment of the COVID-19 related government assistance programs in the context of Transfer Pricing Memorandum 17 (TPM-17), and whether CRA’s position may in any way be different given the unprecedented business circumstances caused by the pandemic?
MacLean: We think the government assistance position in TPM-17 applies in this situation. Our position remains unchanged in the pandemic.
Q.13 — Contacting CRA
How should tax practitioners and taxpayers contact CRA during periods impacted by COVID-19?
- Telephone numbers: Many CRA agents are not working at their ordinary offices and may have omitted to put on out-of-office replies during this time. Does CRA intend to publish a directory of telephone numbers so that taxpayers can continue to contact representatives at this time?
- Correspondence: At this time, sending documents by fax often does not work due to the volume of inquiries directed at CRA. In addition, many businesses’ mailrooms have limited functionality at this time due to COVID-19 restrictions. My Account is not an option for many non-residents (or for taxpayer representatives who are not accountants). Is there a general inquiry e-mail box which taxpayers can use to submit international tax issues by e-mail?
Gallivan: Yes. There is a government electronic directory. We are setting people up with cellphones, and have worked with our security people around having more in-depth conversations with agents by cellphone with consent. We have also relaxed restrictions on email communications and again, with the right protocols and consent, we can talk about more things via email with practitioners and taxpayers.
Through the CEWS and the wage subsidy, we see more people getting on to My Business Account and interacting with us electronically.
Finally, having conversations around protected information by video is something that we got clearance for in the last five or ten days.
We have spent a lot of time to equip ourselves to responsibly use cellphones, email, video conferencing to interact. It’s still very new, and there are still cautions around consent and those kinds of things, but we think we have a better suite of tools to interact with you now than we did in March.
MacLean: We are using email more. Previously there was a ban, and so everyone was reluctant to use it, although there were some exceptions.
If you know the person’s name but not their email address, the usual convention is “<firstname>.<lastname>@cra-arc.cg.ca”. If you do get the wrong person, normally they will pass the message on to the right person.
Sometimes you have to be a little creative and persistent, especially in the COVID situation, but people do want to be responsive and get back to you where possible.
As a last resort, dare I say it, my email address also respects the first-name-dot-last-name convention, and I know my way around the Agency now so I can probably get your inquiry to right home.
Gallivan: I would say the same thing. If you have a taxpayer about to go bankrupt or not make payroll, I sometimes get emails like that and, where reasonable, I jump right on that.
MacLean: These communications are on a consent basis. We have a caveat that we read to make sure people understand the risk of emails but, provided that the taxpayer or representative are aware of the security concerns, we go ahead.
We’ve removed an important IT limitation on My Business Account – the maximum size of file-uploads has been greatly increased, so it should now be straightforward to provide large volumes of documentation that way.
Gallivan: We have started setting up purpose-specific mailboxes, and I think we do have a process of setting up workload-specific mailboxes.
Q.14 — Waiver and Clearance Certificates
Can the CRA provide any update on current timelines for processing application under Regulations 102 and 105 and section 116 clearance certificates?
MacLean: We are currently meeting our internal processing standard for waivers and processing files within 30 days of receipt by the Agency, provided we receive all the necessary information.
There’s a minor backlog for non-residents dispositions, with about 16 weeks between receipt and processing – again, assuming all supporting documentation has been included.
And so I think you are correct, Ted, that there is a specific mailbox for that.
On a related note, our mailrooms were shut down at the start of the pandemic, but they’re operating again. As a last resort, if you mail something in, we will get to it eventually – but for time-sensitive matters it’s better if you reach us through the newer channels described above.
Gallivan: Through the pandemic, we have been very focused on SR&ED credit claims and GST/HST people who are in a positive ITC position, and year over year, we had pushed out more, and were more timely than the year before. We had been focused on timeliness and, as we resume operations we are trying to be as sensitive as possible to the timeliness of beneficial requests – things like clearance certificates, people who want their audits done, and beneficial reassessments. Waivers can be in that category as well.
Q.15 — CEWS and bad debts/discounts
New subparagraph 125.7(4)(e)(ii) of the Income Tax Act (added by Bill C-20) allows an eligible entity to use accrual accounting “in accordance with generally accepted accounting principles”. The ancillary documents indicate this targets a cash-basis taxpayer; what about one who uses accrual accounting, but deviates from GAAP in some other respect? For example, consider a taxpayer which does not net discounts against revenues, instead reporting them as an expense, or nets bad debts against revenues.
Hewlett: Under CEWS 2.0, this provision has been amended. Subject to certain exceptions, the qualifying revenue of an eligible entity has to be determined in accordance with its normal accounting practices. Pursuant to the legislative amendment enacted by Bill C-20, an eligible entity can elect to determine the entity’s qualifying revenue for all qualifying periods using either the accrual method, in accordance with generally accepted accounting principles, or the cash method within the meaning of subsection 28(1) of the Income Tax Act.
However, all entities are not permitted to use a combination of both the accrual and cash methods. Importers will have to select an accounting method when applying for the CEWS and would be required to use that method for all qualifying periods. Section 6.3 of our current FAQ states:
When using the accrual method in accordance with its normal accounting practices, an eligible employer should usually not be able to deduct its bad debts (or an allowance for bad debts), when determining its qualifying revenue.
We have had many questions concerning deduction of certain expenses, being computed to use as a net against revenue, and our position is that revenue is the test that is in the legislation.
It is our understanding that discounts are generally netted against revenue under common accounting practices in Canada. However, whether a particular eligible entity deducts discounts when determining its qualifying revenue will depend on the normal accounting practices of the entity.
The election to use the accrual method is not intended to allow an eligible entity to change how it records its discounts under its normal accounting practices.
Q.16 — Convertible debentures
Is there any update on the CRA’s administrative position on convertible debt as expressed in 2013-0509061C6 Part XIII Tax & Standard Convertible Debentures?
MacLean: 2013-0509061C6 continues to represent CRA’s position.
Q.17 — Cameco
Given the recent FCA decision in Cameco (and assuming that it is a final decision), does CRA foresee modifying assessing practices relative to 247(2) recharacterizations?
MacLean: It would be premature to answer this question, as the deadline to seek leave to appeal is in September.
Gallivan: I’ll avoid commenting on the merits of the decision.
I’ve been at both the Senate and the House of Commons and listened to the Parliamentarians talk about a string of Federal Court of Appeal decisions, I think it’s clear that something has to give. Were that kind of decision to stand, we’d get into a situation where the COVID emergency measures couldn’t be funded, and then the transfers to provinces for health care wouldn’t happen, so you have this hole in the fiscal framework.
My sense is both the Senate and the House of Commons are very alive to that. In some of the Federal Court of Appeal decisions you can see that justice is there signaling legislative change as a solution. Different assessing positions, different arguments from the CRA, or a different approach to litigation could be a solution, but it is probably not the case that Canada as a society can sit with Cameco (FCA) as the final outcome.
I would say that through a number of cases, not just Cameco, the government per se, and not just the Liberal government that’s in power, are pretty alive to this. For sure there is the CRA role and the Supreme Court role, but there’s probably a bigger societal conversation to be had. You know some wonder around COVID too and social license and the corporate social responsibility of the boards. And so, does the COVID crisis reset that kind of contract between society and business and government? And as businesses are applying for the wage subsidy, for example, how can they explain to their boards, their customers, their shareholders, that: we’ve planned ourselves down to a 0% effective tax rate, but we’re happy to take the subsidy when bad times arrive?
So I would probably say that it might be time for a bit of a reset, and over and above this one case, there has been a massive amount of spending. I think raising the tax rates, lots of economists will debate that, but one way we can help is making sure everyone pays their fair share.