27 October 2020 CTF Roundtable

This provides the text of the written questions that were posed, and summaries of the CRA oral responses, at the CRA Roundtable webinar hosted on 27 October 2020 by the Canada Tax Foundation. The presenters from the Income Tax Rulings Directorate were:

Yves Moreno, Acting Director, International Division
Stéphane Prud'Homme, Director, Reorganizations Division

The questions were orally presented by Catherine Brayley (Miller Thomson) and Martin A.U. Sorensen (Bennett Jones). Some of the titles are our own.

The CRA written responses are now also available.

Q.1 – ACB increase in s. 55(3)(a)/88(1) reorg

Parentco incorporates Subco1

  • subscribed for Subco 1 shares for $2,000

Subco1 incorporated Subco2

  • subscribed for Subco2 shares for $2,000

Subco2’s value then increased to $20,000

Value of other assets in Subco1 increased to $180,000

Neither Subco1 nor Subco2 realized any safe income

Parentco, Subco1 and Subco2 are CCPCs

Reorganization qualifies - 55(3)(a) or 55(3)(b)

Newco is a wholly-owned subsidiary of Parentco

Parentco transfers 10% of Subco1 shares to Newco

  • ACB of $200
  • FMV of $20,000

Newco issues shares to Parentco

  • ACB of $200
  • FMV of $20,000

Rollover basis

Subco1 transfers 100% of Subco2 shares to Newco

  • ACB of $2,000
  • FMV of $20,000

Newco issues shares to Subco1

  • ACB of $2,000
  • FMV of $20,000

Rollover basis

Shares Cross-Redeemed

Newco wound-up into Parentco

Subsection 88(1) applies to wind-up

Preliminary Response

Prud'Homme: We recently received a ruling request on a similar reorganization, and we were unable to issue a favourable ruling.

First, suppose there were no reorganization. If Subco 1 sold all of its assets at FMV, it would realize a capital gain of $198,000. If Parentco sold Subco 1 at FMV, it would likewise realize a capital gain of $198,000. Thus, on an after-tax basis and under the integration mechanism (i.e. using returns of capital, capital dividend account and safe income), it is the same as if Subco 1 sold the assets and distributed the after-tax proceeds to Parentco.

Turning to the reorganization, because Parentco has in fact exchanged shares of Subco 1 with an ACB of $200 for shares of Subco 2 with an ACB of $2,000, Parentco has obtained an increase of $1,800 in ACB. This results in a form of duplication of tax basis in assets held by Parentco.

Although the transfer of shares by Parentco may have complied with section 51 or 86 or 85, it caused a misalignment between outside and inside basis. The reorganization, followed by the winding up of Newco, thus results in what CRA considers as an inappropriate tax benefit.

In situations like the one described, CRA would not rule favourably and would consider applying the GAAR, because there is an undue increase in the hands of Parentco that is contrary to the scheme of the Act, and, more specifically, of s. 55(2).

CRA then referred to an alternative reorganization where, there was an arrangement of the transactions such that, upon the winding-up of Newco into Parentco under s. 88(1), the outside basis in Newco ($2,000) matches the inside basis (a $2,000 ACB of the shares of Subco2 to Newco). In that situation, there could be a favourable ruling because Parentco thus had transferred enough ACB in the shares of Subco 1 to Newco to cover the ACB of the assets that were then transferred by Subco 2 to Newco. This would result in an alignment of the outside and inside basis: there is an ACB of nil outside and inside on the Subco1 side of the structure; and a $2,000 basis outside and inside on the other side; so there is a perfect alignment of tax basis.

Official Response

27 October 2020 CTF Roundtable Q. 1, 2020-0860991C6 - ACB increase due to misalignment of ACB

Q.2 – Consolidation of safe income in a corporate group

Can the CRA reiterate its views on the consolidation of safe income in a corporate group?

Preliminary Response

Prud'Homme. Yes, the CRA’s longstanding position on consolidation of safe income is still valid and relevant today. Various scenarios that we will be discussing in Question 3 will help illustrate this very important concept of consolidation of safe income.

Official Response

27 October 2020 CTF Roundtable Q. 2, 2020-0861001C6 - Consolidation of safe income in a corporate group

Q.3 – Safe Income on Reorganization

What guidance can the CRA provide regarding the impact of reorganizations on safe income?

Preliminary Response

Prud'Homme. This is a complex issue that has not been addressed before. The heart of the determination made at the safe income determination time is contained in two words of paragraph 55(2.1)(c): “reasonably” and “contribute.”

CRA’s view on safe income follows the textual, contextual and purposive interpretative principle. In the examples we will be discussing, CRA’s approach is in accordance with the corporate tax integration scheme, the concept of cost, and the scheme of s. 55(2) that prevents artificial creation or duplication of cost, and also our willingness to consider solutions that avoid the loss of safe income or tax basis.

The purpose of the first example is to illustrate the allocation of what the CRA terms direct safe income, as contrasted to indirect safe income.

Opco is a wholly owned by Holdco and has realized after-tax income of $1,000. This income is reflected in the ACB of Asset 2 held by it. Essentially, Opco has acquired Asset 2 with the income realized. Now Opco would like to proceed with a spin-out – an internal reorganization of Asset 2 for its transfer to Newco, a corporation that is a wholly-owned subsidiary of Holdco, in a reorganization that would qualify for a rollover under s. 55(3)(a).

How should the safe income of Opco be allocated after the reorganization? Asset 2, having an ACB of $1,000, is transferred over to Newco on a rollover basis. The direct safe income of Opco was used to acquire Asset 2, and it would not be appropriate to split that safe income such that a portion remains with the Opco shares. Instead, it will all be shunted over to the Newco shares. Thus, even if 50% of Opco shares are transferred to Newco to achieve the reorganization, all the direct safe income would be pushed over to Newco.

This is a sensible result: the direct safe income of $1,000 transferred to the Newco shares contributes to the gain on the Newco shares, and it should not be considered as contributing to the gain on the Opco shares that are left behind. When you look “downstairs,” the only thing in Opco is an Asset with no ACB, so that all the unrealized gain remains in the assets retained by Opco. The direct safe income of Opco is not prorated based on the latent gain that you would have after the reorganization on the Opco shares in the Newco shares. Rather, it would all be pushed onto the Newco shares

The next example deals with the allocation of indirect safe income following an internal reorganization.

The structure here is similar to before, but now Opco has two subsidiaries, Subco 1 and Subco 2. Here Opco did not realize any income, so that there is no direct safe income in Opco - but there is indirect safe income in Opco, because Subco 2 realized some income, which is direct safe income of $1,000 on the shares of Subco 2, and indirect safe income on the Opco shares of $1,000.

A similar reorganization takes place. Opco transfers Subco 2 in a s. 55(3)(a) reorganization, and again the question is how to allocate the indirect safe income afterwards. Once again, because the shares of Subco 2 are transferred to Newco on a rollover basis, the direct safe income in the shares of Subco 2 is transferred over to Newco. On a consolidated basis, the shares of Newco held by Opco have indirect safe income of $1,000. Again, the indirect safe income is pushed over to Newco.

This result also makes sense, because there should no longer be any indirect safe income in the Opco shares. Looking underneath Opco, there is only the unrealized gain on the assets owned by Opco (the shares of Subco 1), and there is no underlying safe income in Subco 1. By contrast, looking at the other side of the corporate structure, there is unrealized gain on the Newco shares, but that unrealized gain is fully supported by the direct safe income in the Subco 2 shares. In our view, it would be logical and fair to push all the indirect safe income of $1,000 from the Opco shares to Newco, and there should not instead be an attempt at a pro rata allocation of the indirect safe income between the Opco shares and the Newco shares based on the latent gain in those shares after the reorganization. Again, all the (indirect) safe income is transferred over to Newco.

The third example is incrementally more complicated. Although similar principles apply, this example is intended to show how inside and outside basis interact – and in this case, how they can misalign, (a theme already touched on in Q.1). Here, the misalignment of inside and outside basis causes a duplication of basis.

Holdco owns Opco, and Opco has two subsidiaries. Holdco had acquired Opco for $300 a few years previously, and at that time, Subco 2 had direct safe income of $200. Since the acquisition of control, Subco 2 generated an additional $150 of safe income.

Even though Subco 2 has $350 of direct safe income, Opco only has an indirect safe income of $150. Why? The $200 of preacquisition safe income generated by Subco 2 is reflected in the ACB of the Opco shares that have been acquired by Holdco. In other words, nothing has been lost.

The right of the diagram reflects a capitalization of the safe income before the reorganization. CRA considers safe income to be equivalent to tax basis, so that if safe income is capitalized, that will provide hard tax basis.

With the safe income capitalized before the reorganization, Holdco would have an ACB of $450, being $300 plus the indirect safe income of $150 for the Opco shares. If Opco were wound up, Holdco would have shares of Subco 1 and Subco 2 with an aggregate ACB of $350. To summarize, the maximum ACB that Holdco could have in the subs should be $450.

Above, the first reorganization possibility is illustrated: a s. 55(3)(a) spin-off of Subco 2 to Newco. To effect that spin-off, Holdco transfers shares of Opco having an ACB of $150, and an FMV of $500.

How it the safe income allocated after the reoganization? The transaction was done on a rollover basis, so the direst safe income of $350 in the Subco 2 shares is transferred over to Newco on a consolidated (and rollover basis), so the indirect safe income of $150 on the Opco shares is transferred over to the Newco shares, as in the previous two examples.

The problem here is that the reorganization will result in a duplication of ACB because of the misalignment of the outside and inside basis. If the safe income is capitalized after the reorganization and Newco is wound-up, there is a resulting aggregate ACB of $500 in the shares of Opco and Subco 2, which exceeds the $450 maximum mentioned above. In CRA’s view, the $50 ACB increase is unacceptable, and the solution would be to proceed with a reorganization that results in an alignment of the basis.

Instead of transferring Opco shares to Newco with an ACB of $150, Opco shares having an ACB of at least $200 could be transferred. That is shown above, with a $200 ACB for the transferred Opco shares, and for the Newco shares, shown in red. This will achieve alignment of the basis. If the safe income were capitalized after this reorganization and Newco then was wound-up, Holdco would have an aggregate ACB in Opco and Subco 2 of $450.

The written response will address the numbers in detail. What should be appreciated is that this is an illustration of the duplication or multiplication of tax basis that can result where spin-offs are effected internally without aligning the outside and inside basis. This is thematically similar to Q.1, but this example combines the allocation of safe income with the problem of misalignment of outside and inside basis. This leads to an unacceptable increase of ACB, but a misalignment can also work against the taxpayer, as can be seen in the next example.

The above structure is similar to the one in Example 3. The only change made here is that Subco 1 has realized its safe income of $500 after the acquisition of control. If the safe income is capitalized before the transaction, there will be an ACB of $950 of the Opco shares. If Opco is wound up, Holdco will have an aggregate ACB of $950. In Example 3, our magic number was $450, and now it is $950, the maximum ACB that these entities can hold.

Opco again transfers Subco 2 to Newco in an internal s. 55(3)(a) reorganization. To effect the spin-off, Holdco transfers shares of Opco having an ACB of $150, and an FMV of $500. All the direct safe income of $350 in Subco 2 will be transferred over to Newco on the Subco 2 shares because it is a rollover. The indirect safe income of $150 will also be transferred from the Opco shares to the Newco shares.

The difference here from Example 3 is the indirect safe income of $500 in Opco. Why? Because underneath there continues to be Subco 1, which has direct safe income of $500. That $500 is staying, which is logical because it is supported by the direct safe income downstairs in the structure.

The problem here is that, if the safe income were to be capitalized after the reorganization, Holdco would end up having an ACB of $650 in the Opco shares, being the $150 of ACB on the Opco shares plus the indirect safe income of $500 that was capitalized, resulting in an ACB of $650, but an FMV of only $500. If the Opco shares were then disposed of, that would give rise to a loss that would be denied under s. 112(3). This is because only $150 of ACB has been transferred to Newco on the reorganization.

If the ACB of Opco held by Holdco were streamed over to Newco, so as to transfer the full $300 of ACB in the Opco shares to Newco, there would be a resulting alignment of the basis, and there no longer would be a loss on the Opco shares that would be denied under s. 112(3). There would be an ACB of $500 and a FMV of $500.

In summary, we consider these positions to be fair and logical, and based on some important concepts like corporate tax integration, and the underlying policy in s. 55(2) against the duplication of tax attributes. We are also ready to find solutions to avoid what would be perceived as a loss of safe income or tax basis.

Official Response

27 October 2020 CTF Roundtable Q. 3, 2020-0861031C6 - Safe income on reorganization

Q.4 – Sale of taxable Canadian property by a partnership

Where “taxable Canadian property” (TCP) is sold by a partnership, the CRA has consistently administered the provisions of section 116 on the basis that it is the partners of the partnership which have disposed of the property

However, CRA’s policy is to accept one notification of disposition filed on behalf of all partners (see 2009-0317371I7 and 2012-0444081C6)

If a section 116 certificate is issued to the partnership, the certificate limit will not reflect the estimated proceeds of disposition of the TCP that is attributable to Canadian resident partners

Would the CRA confirm that a purchaser who purchases TCP or property described in subsection 116(5.2) from a partnership has no liability under subsections 116(5) or (5.3) in respect of the portion of the consideration paid to the partnership that, after reasonable inquiry, the purchaser believes is attributable to direct or indirect partners (through one or more other partnerships) of the partnerships that are resident in Canada?

Preliminary Response

Moreno: First, some context on how section 116 provides a liability to a purchaser of certain types of property from a non-resident. The provision is structured based on the type of property. In general, the liability is driven by the excess of the purchase-price over the limit set out in a disposition certificate, if a certificate is issued.

In normal circumstances, where a non-resident individual or corporation sells the property, the certificate limit will generally be equivalent to the purchase price. However, where the seller is a partnership, the CRA looks at the partners on the basis that the partnership is not considered to be a person under s. 96 for purposes of s. 116. CRA looks at the partners and, if some of the partners are non-resident, then all the partners are viewed as having disposed of their interest in the partnership property.

Where some partners are non-residents, CRA would look at those non-residents when asked to issue a certificate under section 116. In those cases, CRA would accept a consolidated request from the partnership rather than require each partner to apply separately.

The certificate limit on that certificate would be the portion of the purchase-price that is attributable to the interest that is sold by the non-resident partners.

This question raises a potential issue arising on a superficial reading of the provision. As stated above, the amount of the liability under s. 116(5) is the excess of the purchase price over the certificate limit. As a result, if all the partners are consolidated in a single request, and some of the partners are Canadian residents, the certificate limit will only reflect the portion of price that is attributable to the non-residents. Therefore, the certificate limit would be lower than the purchase price, which could trigger liability under s. 116. That is clearly not the right result. In CRA’s view, s. 116 can be interpreted such that, in determining the amount of the liability, the purchase price is only the portion that is attributable to the interest sold by the non-residents such that the certificate limit and the purchase price would line up, and there would be no resulting liability resulting from that administrative practice.

Official Response

27 October 2020 CTF Roundtable Q. 4, 2020-0862451C6 - Sale of TCP by a partnership

Q.5 – Art. IV:6 of U.S. Treaty where further French layer

Where conditions in Article IV:6 of the Canada-U.S. Treaty are satisfied, Canadian-source income, profit or gain earned by a U.S. resident through a fiscally-transparent entity for U.S. purposes is deemed to be derived by that U.S. person for purposes of the Treaty


  • U.S. resident owns a French entity that earns Canadian-source dividends and the entity is considered fiscally transparent in the U.S.
  • U.S. resident considered to derive Canadian-source dividends for purposes of the Canada-U.S. Treaty

French corporation is a resident of France for purposes of the Canada-France Treaty receives dividends and interest from a Canadian corporation

French corporation is fiscally transparent for U.S. purposes

  • Not fiscally transparent under Canadian tax law
  • Not fiscally transparent under French tax law

Wholly-owned by partnership that is also fiscally transparent for U.S. purposes

Partners are non-residents of Canada

  • Residents of the US
  • Residents of countries with which Canada has a treaty
  • Residents of countries with which Canada does not have a tax treaty

Can the CRA confirm that the Canadian payor of the dividends and interest can determine its withholding tax obligations in accordance with the relevant articles under either the Canada-France Treaty or the Canada-US Treaty as appropriate?

Preliminary Response

Moreno: Consider the legacy scenario, where a US resident invests in a Canadian company through an entity in the US that is transparent or a flow-through for US tax purposes. Historically, CRA’s position has been that the dividend paid by the Canadian company to the flow-through entity would not benefit from the reduced rate under the Treaty, on the basis that the flow-through entity does not reside in the US for Treaty purposes: being a flow-through entity, it is not subject to tax.

That position changed in 2007, when Art. IV(6) was introduced in the Canada-US Treaty. The Article provides that, where its conditions are met, the dividend, interest, or other income subject to the Treaty that is received by the flow-through entity would be considered to be derived by the upper-tier member or shareholder, and therefore would be eligible for the Treaty benefits.

The Technical Explanation released with Art. IV(6) included an example. The example added one twist to the above scenario, by making the US company instead a French company, but still a flow-through entity in the US - but not for French or Canadian purposes. Thus, when the Canadian company pays a dividend to the French company, the Technical Explanation concluded that, if the conditions of IV(6) are met, that payment could benefit from the application of the US Treaty, on the basis that the French entity is looked through for US tax purposes.

Alternatively, CRA would also grant the application of the benefits under the French Treaty because, from a Canadian perspective, the French company is a legal entity, to which a dividend is paid – a straightforward application of the Canada-France treaty. Therefore, either the French or US treaty is applicable for determining the withholding obligations of the Canadian payor.

A further twist can be added to that example. Keeping the same structure, if a partnership is inserted between the French company and the US resident (i.e. the US resident holds the partnership; which holds French company; which holds the Canadian company) and the Canadian company then pays a dividend to the French company, the answer would be the same. The layering of an additional US-based flow-through entity would not change the analysis, and therefore either the US or French treaty might be applicable.

To add one further twist, consider the same structure, except that some partners of the US partnership are not residents of the US. The response is similar, but there are really two options from CRA’s perspective. The first option is that, if IV(6) applies, and some of the dividend paid by the Canadian company to the French company are deemed to be derived by the US partners, US Treaty benefits can be claimed to reduce the withholding rate on the portion of the dividend attributable to those partners, under Art. IV(6).

The second option remains the same – that, from a Canadian perspective, there is a single dividend payment from a Canadian entity to a French entity, so that the French Treaty is applicable to the entire amount of the dividend.

The two options are mutually exclusive and exhaustive – either the French Treaty applies to the full amount of the dividend, or the US Treaty applies pro-rata to the US partners. CRA advises the Canadian payor to obtain sufficient information to determine whether the benefit of the US treaty can be claimed in those circumstances. In particular, the Canadian payor would wish to be satisfied that the US residents are “qualified persons” under Art. XXIX of the US Treaty.

Where Art. IV(6) applies and the benefit of the US Treaty is claimed, NR4 forms will be required to be issued to the US residents.

Official Response

27 October 2020 CTF Roundtable Q. 5, 2020-0864281C6 - Article IV:6 of the Canada-US Treaty

Q.6 – MLI and PPT

Multi-Lateral Instrument (“MLI”) became effective January 1, 2020 for many of Canada’s income tax treaties

Among other provisions, the MLI contains an anti-avoidance rule (often referred to as the principal purpose test (“PPT”))

Limited guidance on the specific situations in which the PPT may or may not apply

Unclear whether the PPT will be administered and applied in a manner similar to that of the GAAR

Can the CRA provide examples of:

  • A. any fact patterns on which rulings have been requested or granted under the MLI; and
  • B. any fact patterns on which the CRA has applied the PTT (and whether the CRA has also applied GAAR in those situations)?

Preliminary Response

Moreno: Beginning with some background, Canada has a longstanding, clear and consistent policy on preventing base erosion on international profit shifting. The CRA supports that policy in a number of ways through the administration of a number of provisions including in s. 17, the thin-cap rules under s. 18(4), FAPI under s. 95; there is also ss. 212(3.1) to 212(3.94), 212.3, the transfer-pricing rules under s. 247, and a number of provisions in different treaties that are either specific anti-avoidance rules or limitation-of-benefits provisions. Last, but not least, the CRA supports that policy through the administration of the GAAR which was clarified back in 2005 as retroactively applying in treaty situations.

The 2014 Budget makes reference to the MLI and the 2014 Budget was part of the genesis from a Canadian standpoint of that project. The Budget referred to Canada’s efforts as part of the international community to counter some practices and its part in the constant monitoring and review of the appropriateness of the provisions in play. It referred to a number of practices, including shifting profits away from where the economic activity has taken place, which is sometimes referred to as treaty shopping. Canada and over a hundred countries were part of that BEPS initiative and, to date, 94 countries have signed the MLI - which introduced two elements.

First, it introduced an anti-avoidance rule in a number of the treaties as part of the Canadian network of treaties. It also amended the preamble of those treaties to clarify that the treaty cannot be used to achieve tax avoidance. As part of the introduction of the MLI, 13 examples were provided back in 2015 by the OECD on the application of the anti-avoidance rule that was introduced by the MLI. Additional examples were provided in 2017 by the OECD. No comments or reservations were made by Canada regarding those examples, and the CRA will look at those examples for guidance in interpreting the anti-avoidance rule under the MLI.

As part of this conference last year, the CRA had announced the creation of the Treaty Abuse Prevention Committee to provide recommendations to centralize the exercise of providing recommendations on the application of the anti-avoidance rule under the MLI. As part of its role, the Committee will also provide recommendations on the application of the GAAR in a treaty context. Since that time, the Supreme Court granted leave in the Alta case dealing with a tax benefit under the Canada - Luxembourg Treaty.

As part of its role, the Treaty Abuse Prevention Committee and the CRA might ask a number of questions. Such questions include, what are the direct and indirect results of the arrangement or transaction that is investigated; what are the surrounding circumstances and what do they say about the intended results; could non-tax objectives have been achieved in a different way; and what are the non-tax benefits related to some of the actions or steps, including the creation of entities or changes of residence. Again, other questions will be provided in the official response.

In response to the two questions, whether rulings or audit guidance can be provided or shared about files where the anti-avoidance rule has been considered, there is no such file. No ruling request has yet been made on the application of the anti-avoidance rule in the MLI. Furthermore, those years in which it is in force and in effect have not yet been audited, and no related audit questions have been posed.

Official Response

27 October 2020 CTF Roundtable Q. 6, 2020-0862471C6 - MLI and Principal Purpose Test

Q.7 – Use of cottage by children of settlor of AET/JST/CLPT

CRA commented at 1988 and 1989 Round Tables on whether a benefit would arise under section 105 from the use of property, such as a cottage, held in trust for an individual in circumstances where no rent is paid but the costs of maintenance and upkeep are paid

CRA’s position:

  • use of a cottage property by beneficiary does constitute a benefit
  • where property owned by trust that had been or would have been personal use property (“PUP”) of an individual, CRA would generally not seek to assess a benefit where the trust is effectively standing in the place of the individual and no benefit or tax advantage would have arisen if the individual, instead of the trust, had allowed the use of the property ─ PUP includes homes, cottages, boats and cars

CRA confirmed its position in Views 9707375 and 2012-0470951E5 (ITTN-11)

Can the CRA confirm that its position will also apply to a trust that is an alter ego trust or a joint spousal trust or a common-law partner trust?

Preliminary Response

Prud'Homme: Although it is CRA’s position that the use of trust property by a beneficiary of the trust constitutes a benefit for the purposes of s. 105(1), in the case of personal-use property owned by a trust, the CRA will generally not assess a benefit for the use of that property – we are talking here about the beneficiary of the trust using such personal use property.

More specifically, where, pursuant to the terms of the trust indenture or will, a trust owns personal-use property for the benefit or enjoyment or personal use of a beneficiary, our position is that a taxable benefit under s. 105(1) will not be assessed to that beneficiary for the rent-free use of such property. However, a benefit in respect of the other upkeep, maintenance, or taxes for such property may arise under s. 105(2).

When considering the use of the personal-use property by another individual, one must remember that in order for an alter ego trust to meet the conditions outlined in s. 73(1.01)(c), the alter ego trust must be a trust under which no person except the settlor may receive or otherwise obtain the use of any of the income or capital of the trust before the settlor’s death. Similarly, in the case of a joint spousal trust or a common-law spousal trust, the terms of the trust must provide that no person other than the settlor or the spouse may obtain the use of any of the income or capital of the trust before the death of these individuals.

Official Response

27 October 2020 CTF Roundtable Q. 7, 2020-0861041C6 - CTF Question 7 - Subsection 105(1)

Q.8 – SDA rules and formula-based appreciation plans

Common for a private corporation to have an equity-based incentive plan under which participating employees are granted units, the value of which is determined using formulas (“formula-based appreciation plans”)

Formulas often involve various future-oriented financial metrics of the corporation such as EBITDA

Units generally do not have any intrinsic value at the date of grant, but may increase in value over the duration of the plan, depending on the measured results

CRA has previously provided favourable rulings that certain formula-based appreciation plans were not salary deferral arrangements (“SDAs”) as defined in subsection 248(1)

We understand that CRA will no longer consider such ruling requests

Can CRA comment on why it has changed its practice?

Preliminary Response

Prud'Homme: In the context of examining a recent ruling request on whether a proposed formula-based appreciation plan was an SDA, our team encountered issues that caused us to revisit our willingness to consider such a ruling request.

One of these issues is that whether any given incentive plan is an SDA has to be determined on an annual basis, from the perspective of each employee participating in the plan, and in the context of the specific awards granted to that employee, taking into account all relevant facts and circumstances. It has become clear to us that it is simply not possible to be reasonably certain at the time of a ruling request that the formula-based appreciation plan would never become an SDA at some point in the future due to changes in the relevant facts and circumstances.

Another issue that we had is that such plans are, in our view, vulnerable to manipulation, and that these types of files would be more appropriately addressed at a later stage of the compliance continuum.

CRA will therefore no longer consider any ruling request pertaining to whether any given formula-based appreciation plan is an SDA, unless the plan is a plan described in ATR-45, or the ruling request is about whether one of the exceptions, listed in the SDA definition, applies.

This change in administration policy does not mean that the CRA considers all formula-based appreciation plans to be SDAs. On the contrary, we accept that it is quite possible that many such plans not be an SDA, where the underlying formula closely approximates the FMV of the relevant shares of the corporate employer over the duration of the plan. However, the CRA will no longer make such a determination in the context of a ruling request. See 2020-0850281I7 for further details.

Official Response

27 October 2020 CTF Roundtable Q. 8, 2020-0861061C6 - SDA and Formula-Based Plans

Q.9 – UK LLPs as corporations

Under the UK’s Limited Liability Partnerships Act 2000 (as amended), a limited liability partnership (“UK LLP”) is treated in the UK as a separate legal entity, but the profits of its business are taxed as if the business were carried on by partners in partnership, rather than by a body corporate

Does the CRA view a UK LLP as a corporation or as a partnership for Canadian tax purposes?

Preliminary Response

Moreno: CRA would consider the UK LLP to be a corporation. CRA uses a two-step approach in such characterizations, looking at the attributes of the entity under foreign law (it is a similar exercise domestically).

The CRA looks at the characteristics under foreign law, and looks at the characteristics of different forms of association under Canadian commercial law. In this example, for the reasons mentioned in the question, CRA is of the view that the UK LPP would be viewed as a corporation in Canada.

Sorensen: Is that a general statement, or would the CRA entertain in particular a ruling request if a particular taxpayer thinks that an LLP may be a partnership in specific circumstances?

Moreno: Yes, the CRA would entertain such a ruling request.

Official Response

27 October 2020 CTF Roundtable Q. 9, 2020-0866671C6 - entity classification of UK LLP

Q.10 - Refreezes and s. 74.4(2) attribution quantum

Individual exchanges preferred shares received in the course of earlier freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation

Subsection 74.4(2) provides for attribution of income where an individual transfers or loans property to a corporation and certain conditions are met

A condition: loan or transfer be for the purpose of reducing the individual’s income and to benefit a “designated person” within meaning of ss. 74.5(5)

If ss. 74.4(2) applied to the original estate freeze, the preferred shares received on the refreeze do not appear to reduce the “outstanding amount” (as determined under ss. 74.4(3)) on which the deemed interest benefit is computed under ss. 74.4(2)

If refrozen preferred shares are redeemed, the “outstanding amount” seems to only be reduced to the extent of the value of those shares, leaving a potential indefinite “outstanding amount” on which the corporate attribution rules could continue to compute deemed interest income

Does the CRA agree with the following?

  • Shares received on a refreeze do not reduce the “outstanding amount” as determined under ss. 74.4(3)
  • Redemption of refrozen preferred shares for cash consideration reduces the “outstanding amount” only to the extent of the value of those shares leaving an indefinite “outstanding amount” on which the corporate attribution rules will continue to compute deemed interest income

Preliminary Response

Prud’Homme: The short answer is, yes, we agree.

I have mixed feelings about this question, in the sense that we would generally expect that a taxpayer would not undertake an estate-freeze that is subject to the attribution rules in s. 74.4(2). What I mean here is that tax practitioners are well aware of the need for an estate-freeze to be structured in a manner that avoids s. 74.4(2), e.g. by meeting the requirements of s. 74.4(4).

That said, if an estate freeze is subject to s. 74.4(2), the deemed interest benefit is computed based on the outstanding amount determined under s. 74.4(3), and the shares received on the refreeze in the example constitute excluded consideration as defined in s. 74.4(1). Therefore, we agree that the shares received under refreeze do not reduce the outstanding amount under 74.4(3).

Regarding the second question, we also agree that the redemption of refrozen shares for cash consideration will reduce the outstanding amount, but only to the extent of the FMV of those shares. Note that, while the redemption of the refrozen preferred shares will leave an outstanding amount in a certain regard, the corporate attribution rules will only apply during the period the conditions in ss. 74.2(a), (b) and (c) continue to be met. For example, when the children are no longer minors, the attribution rules could stop at that point.

Official Response

27 October 2020 CTF Roundtable Q. 10, 2020-0860961C6 - Refreeze and 74.4(2)

Q.11 – Refinancing prescribed rate loans and attribution

Individual (other than a trust) has a prescribed rate loan at 2% for $100,000 ("Loan 1")

Borrowed money was used to purchase securities for $100,000

Securities now have a value of $200,000

Individual wants to refinance the loan at 1%

Individual wishes to sell half the securities and uses the proceeds to repay the loan

Individual would then borrow $100,000 at the new prescribed rate of 1% ("Loan 2") to purchase new investments

Can the CRA confirm that the attribution rules will not apply to the securities that are still owned and were purchased with Loan 1?

Can the CRA confirm that the attribution rules will not apply to the investments purchased with Loan 2?

Preliminary Response

Prud’Homme: With respect to the repayment of Loan 1, para. 22 of IT-511R states that if property has been acquired with a loan that satisfies the requirements of s. 74.5(2) and the loan is repaid, the attribution rules in ss. 74.1 and 74.2 will cease to apply after the repayment.

Regarding Loan 2, s. 74.5(2) (which provides an exemption from the attribution rules) could apply if all the conditions stated in such provision are met, so that s. 74.5(2) is potentially available here.

Finally, s. 74.1(3) ensures that the attribution rules will continue to apply where a new loan is used, e.g., to repay an existing loan that was used to acquire property. The provision would not technically apply here, however, because the proceeds from Loan 2 are not used to repay Loan 1.

Official Response

27 October 2020 CTF Roundtable Q. 11, 2020-0860981C6 - Refinancing Prescribed Rate Loans

Q.12 – Impact of COVID-19 on Previous APAs/Current MAPs

Economic impact created by the international response to the COVID-19 pandemic has and will negatively impact the growth prospects and profitability in many industry sectors in 2020, 2021, and potentially beyond

What are the CRA’s views on how this particular impact will affect the following:

  • Previously negotiated Advance Pricing Arrangements (“APAs”) and Mutual Agreement Procedures (“MAPs”) that are currently being negotiated
  • Benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation

Is the CRA considering amendments to historic transfer pricing policies to reflect impacts of the COVID-19 pandemic on business economics, risk sharing, etc.?

Preliminary Response

Moreno: Advance Pricing Arrangements are based on some assumptions as to certain parameters relevant to pricing. These include the economic circumstances, business circumstances, and functions, assets and risks of the parties involved. APAs are generally undertaken on the base assumption that the future will be a reflection of the past. There are therefore some assumptions that are part of the arrangement that is negotiated on that basis. If that is not the case, the arrangement might have to be revisited.

Your first question concerns APAs previously negotiated. Obviously, the current circumstances might, in some cases, have an impact on the assumptions that were used for APAs, and whether there is a breach of one of the critical conditions or assumptions is something that has to be determined in light of the circumstances on a case-by-case basis, and also in light of the terms and conditions of the APA.

On the APAs that are currently being negotiated, the changes that are attributable to the business and economic uncertainty or changes caused by the current pandemic might pose a challenge. However, taxpayers might be affected in different ways, or industries might be affected in differed ways or to different degrees. Therefore, CRA does not consider that there is any need for a formal general policy, and those circumstances will inform the APA on a case-by-case basis. There might be a need to use some limits or critical assumptions in APAs that are currently being negotiated to colour or point to a certain return within the range.

As for MAPs currently being negotiated, CRA does not expect an impact as long as those MAPs deal with taxation years that are prior to the start of the current pandemic. Double-taxation situations are typically filed based on the information that is relevant to the years that are negotiated. The CRA does not usually take into account future events, so the CRA does not expect impacts on MAPS currently being negotiated on pre-pandemic years.

The second question concerns benchmarking analyses. In transfer pricing the CRA typically looks at year-specific company data in determining arm’s length profitability, and this will not change in the current circumstances. The benchmarking studies will continue to be based on the information we gather as part of the audit or the due diligence process. The process will remain unchanged and rooted in the underlying analysis of the functions, assets, and risks faced by the subject party, and that will inform the benchmark criteria.

Sorensen: A follow-up question: is the CRA considering amendments to its historic transfer pricing policies to reflect the impacts of COVID-19.

Moreno: No, the CRA is not considering an across-the-board change to its historic transfer pricing policy. However, the current pandemic may impact the future selection and use of transfer pricing methodologies on a case-by-case basis.

Official Response

27 October 2020 CTF Roundtable Q. 12, 2020-0862501C6 - COVID-19 and Prior APAs/Current MAPs

Q.13 – Reimbursement of Equipment

At the April 14, 2020, APFF webinar on tax aspects of COVID-19 measures, the CRA was asked two questions: (1) Is an allowance paid by the employer to an employee for the purpose of acquiring equipment for teleworking a taxable benefit for the employee? (2) Would the CRA’s response be different if the amount paid by the employer is conditional on a proof of purchase being submitted by the employee?

2020-0845431C6, “Taxable Benefit Working From Home” (14 April 2020)

CRA indicated that:

  • the allowance paid by employer to employee to acquire equipment for teleworking is a taxable benefit for employee
  • in the second scenario, it is a question of fact
  • in the context of the COVID-19 crisis, the CRA said that is willing to accept that the reimbursement of an amount not exceeding $500 for purchase of personal computer equipment will not be taxable if it is mainly for the benefit of the employer

Would the CRA please indicate:

  • whether the $500 reimbursement amount will be increased
  • whether increased or not, if its position on the amount reimbursed for the “purchase of personal computer equipment” will be expanded to include the purchase of home office furniture, such as desks, chairs, etc.

Preliminary Response

Moreno: There are no plans for now to increase the threshold. However, the $500 threshold for employment benefits will be extended to office furniture or other home office items and will not be limited to computers.

CRA is monitoring the situation and will take further action if necessary, but for now there is no plan to increase the threshold.

Invoices should be provided by the employee in those circumstances where there is reimbursement in respect of that $500 threshold.

Official Response

27 October 2020 CTF Roundtable Q. 13, 2020-0861021C6 - Reimbursement of Equipment

Q.14 – Section 86 Reorganization of Capital

Section 86 allows for a tax-free exchange of shares where there is a “reorganization of capital”

Problem: reorganization of capital is not defined in the Act nor is it a concept widely used in corporate law

CRA has previously said that articles of amendment need to be filed to meet this condition (Views Doc 2010-0373271C6, 2000-0048075, 9233955 and RCT 5-3240 [May 20, 1987])

Common for companies to include multiple share classes in their corporate structure in contemplation of subsequent reorganizations or restructurings

Will the CRA reconsider its previous position and confirm that articles of amendment need not be filed to meet the condition in subsection 86(1) that there has been a reorganization of capital?

Preliminary Response

Prud’Homme: Sorry to disappoint you; we are maintaining our longstanding position on s. 86(1). A reorganization of capital in the context of s. 86(1) should normally require an amendment to the articles of incorporation, and as noted in the response in 2010, if s. 86(1) is not applicable in a given situation, there could be another rollover provision such as s. 51 or 85 that could apply in those circumstances.

Official Response

27 October 2020 CTF Roundtable Q. 14, 2020-0860971C6 - Section 86 Reorganization of Capital