29 November 2022 CTF Roundtable - Official Responses
Presented by: Yves Moreno, Director, International Division, Income Tax Rulings Directorate, Canada Revenue Agency; and
Stéphane Prud'Homme, Director, Reorganizations Division, Income Tax Rulings Directorate, Canada Revenue Agency
Question 1: Loans Made by Limited Partnerships to Limited Partners
In technical interpretation 2016-0637341E5 (dated June 27, 2016), the Canada Revenue Agency (CRA) stated that the scope of subparagraph 53(2)(c)(v) is very broad and could in theory (depending on all relevant facts) apply to the amount of the loans made by a limited partnership to a limited partner in a situation as described in the letter.
The situation described in technical interpretation 2016-0637341E5 involved loans arguably made by a limited partnership to a limited partner in lieu of the payment of distributions of the limited partner’s share of the partnership profits.
What are the CRA’s current views on situations where loans are received by a limited partner from a limited partnership that have a purpose of avoiding a gain that could be realized under subsection 40(3.1)?
Depending on the facts and circumstances, money or property received by a limited partner as a loan from a limited partnership may or may not be viewed as received “on account or in lieu of payment of, or in satisfaction of” a distribution of the limited partner’s share of the partnership profits or partnership capital for purposes of the application of subparagraph 53(2)(c)(v).
The CRA will generally not attempt to include a loan received (in lieu of payment of, or in satisfaction of a distribution of the taxpayer’s share of the partnership profits or capital) by a limited partner from a limited partnership under subparagraph 53(2)(c)(v) if all of the following conditions are met:
1. The loan is not made in lieu of payment of, or in satisfaction of, a return of contributions of capital of the limited partner.
2. The aggregate of all such loans received by the limited partner in respect of a partnership’s fiscal period does not exceed the total of the “ limited partner’s share of the partnership adjusted net income” for such period and the limited partner’s adjusted cost base (ACB) at the end of the fiscal period (ACB determined before the application of subparagraph 53(2)(c)(v) to the loans); or if there is an excess, the excess is an immaterial amount.
3. Shortly after the end of the fiscal period, the limited partnership makes a distribution payable to the limited partner, which is equal to the aggregate amount of the loans received by the limited partner in the fiscal period, and the distribution is used to fully settle such loans (in cash, or by set-off or compensation).
4. The loan (made in lieu of the payments of distributions in cash) is made primarily for the purpose of avoiding a deemed gain under subsection 40(3.1) that would be realized by the limited partner at the end of the fiscal period of the partnership and that would solely be due to the timing difference between the addition in and the deduction from the calculation of the ACB of the partnership interest held by the limited partner of, respectively:
(a) the limited partner’s share of the partnership adjusted net income for such fiscal period, and
(b) the distributions to the limited partner in respect of that period pursuant to subparagraph 53(2)(c)(v) if no portion of such distributions was made by way of loans.
5. The partnership interest is not a tax shelter or the partnership, or the transactions involving or related to the partnership, are not part of a broader series of transactions that includes an avoidance transaction (within the meaning of subsection 245(3)) to which subsection 245(2) should apply.
Where any of the above conditions is not met, the CRA may consider the whole amount received as a loan to be received “on account or in lieu of payment of, or in satisfaction of” a distribution of the limited partner’s share of the partnership profits or partnership capital for purposes of the application of subparagraph 53(2)(c)(v), but without another reduction of ACB under this provision for the distribution made by the partnership to repay the loan, or may consider the application of the general anti-avoidance rule (GAAR).
Question 2: Taxable Canadian Property Status and Purchaser’s Obligation under Section 116
Where a non-resident of Canada disposes of taxable Canadian property (TCP) that is shares of a private corporation, interest in a partnership or interests in a trust, subsection 116(5) imposes an obligation on the purchaser to remit to the Receiver General within 30 days after the end of the month in which the purchaser acquired the property 25% of the amount by which the purchaser’s cost exceeds the certificate limit issued under subsection 116(2). At the same time, the purchaser is entitled to deduct or withhold the amount remitted from the purchase price paid or credited to the non-resident vendor. The failure to remit under subsection 116(5) could result, in the hands of the purchaser, in penalties and interest in addition to the tax payable on capital gains realised on the disposition.
There are exceptions to the remittance obligation as described above. For example, the purchaser would not be held obligated to remit where, after reasonable enquiry, such purchaser has no reason to believe that the vender is a non-resident of Canada. Neither would the purchaser be liable to remit where the property is treaty-protected property.
The legislation does not provide an exception where, after reasonable enquiry, the purchaser believes that the property is not TCP. The CRA has confirmed at the 2010 Canadian Tax Foundation Conference that it does not make determinations of whether a property is TCP in the course of processing a section 116 certificate request.
The determination of whether shares of a private corporation, interests in a partnership or interests in a trust are TCP can be complicated because it must be determined if at any time in the previous 60-month period more than 50% of the fair market value of the share or interest was derived directly or indirectly from real or immovable property, Canadian resource properties, timber resource properties and options or interests in these properties. Even if the non-resident vendor believes that the property disposed of is not TCP, a purchaser may be inclined to withhold and remit 25% of the purchase price to the CRA to avoid the potential liability exposure under subsection 116(5). Although the amount remitted can be recovered by the non-resident vendor when a tax return reporting the disposition is filed, there can be serious financial consequences of not having 25% of the purchase price available on closing. Would the CRA consider a ruling process for a seller or a purchaser to confirm whether a property is TCP?
The general purpose of section 116 is to establish a procedure to collect tax on capital gains realized by non-resident vendors on a disposition of TCP and certain other property that is not otherwise excluded. Where section 116 applies to a disposition of shares of a private corporation, interests in a partnership or interests in a trust that are TCP (“the described property”) and no certificate was obtained under subsection 116(2) or 116(4), the purchaser is liable to remit 25% of the purchase price of the property to the Receiver General and can withhold that portion of the purchase price.
Where, in relation to a disposition of the described property, the vendors do not notify the CRA in accordance with subsection 116(1) or 116(3) or do not make the payment or furnish the security required to obtain the clearance certificate under subsection 116(2) or 116(4) based on the view that the property disposed of is not TCP, the purchaser may be inclined to withhold and remit under subsection 116(5) to guard against being liable for the payment of the tax payable on the realized capital gain, related interest and penalties, should the CRA conclude otherwise. There is no program offered by the CRA to confirm before the transfer of a property or before an audit whether the property is TCP. The CRA stated in technical interpretation 2012-0465221E5 that the onus of determining if a property is TCP is on the taxpayer.
The advance income tax ruling program administered by the CRA’s Income Tax Rulings Directorate (ITRD) offers confirmation of how the CRA will interpret specific provisions of Canadian income tax law that are relevant to a definite transaction or transactions that a taxpayer is contemplating. As described in the most recent version of Information Circular IC70-6, “Advance Income Tax Rulings and Technical Interpretations” (IC70-6), an advance income tax ruling will not determine or confirm the fair market value of a property. Although the advance income tax ruling letter might indicate the fair market value of property as represented by the taxpayer making the request, it is standard practice for the letter to caveat that information from the confirmations provided.
Another limitation of the program involves situations where the determination is primarily factual, or where the application of a provision is conditional on the existence of facts. In this regard, advance income tax rulings have sometimes been issued on provisions involving primarily a determination of facts where sufficient supporting facts and evidence were provided. However, advance income tax ruling letters always indicate that the confirmation they provide is conditional on the disclosure of all the relevant facts and information.
The level of certainty and assurance that could be offered by an advance income tax ruling that determines whether a property is TCP would need to be ascertained in light of such qualifications, caveats and disclaimers. The caveat turning on the accuracy of the valuations provided by the taxpayer and supporting the advance income tax ruling request along with the caveat related to the disclosure of all the relevant information in respect of the entire period covered by the definition of TCP would be particularly relevant.
Timeliness is another factor that would likely be considered to ascertain whether the advance income tax rulings process would facilitate the commercial transaction. For purposes of an advance income tax ruling request on the determination of whether a property is TCP, the timeline would include both the time to prepare the relevant valuations and other information required to substantiate the position that the particular property is not TCP over the relevant period and the time required for the CRA to process the request.
If a taxpayer identifies a particular interpretative issue that may inform the determination of a property’s TCP determination, including whether the methodology used is consistent with the text, context and purpose of the Act in general and more specifically of the definition of TCP in subsection 248(1), the taxpayer might want to consider requesting a pre-ruling consultation to the ITRD as described in IC70-6 for views on whether the ITRD would be in a position to consider the issue in the context of an advance income tax ruling request.
In situations where the purchaser insists on bearing no risk under subsection 116(5), even when the vendor believes that the property is not TCP, the vendor might consider requesting a clearance certificate under subsection 116(2) or 116(4) by paying to the Receiver General the estimated amount of tax or by furnishing the CRA with acceptable security upon notifying the CRA of the proposed or concluded disposition. By doing so, the remittance liability of the purchaser under subsection 116(5) could be decreased or eliminated. In this regard, technical interpretation 2012-0465221E5 and a response at CRA round table presented at the 2010 Canadian Tax Foundation Conference indicated that the filing of form T2062 would not be viewed as a declaration that the property disposed of is TCP and the CRA would not consider the property to be TCP on that basis only.
For more information on section 116, see Information Circular IC72-17R6, “Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116.”
Question 3: Post-closing Adjustments and the Impact to Escrow Shares
Can the CRA comment on whether subsection 84(3) applies in the following situation?
A vendor (Vendor) sells all of its shares of a corporation (Target) to a purchaser corporation (Purchaser) in consideration for, exclusively, shares of the Purchaser. The agreement governing the purchase and sale of the Target shares (“the Agreement”) requires the Vendor to place some of the share consideration received from the Purchaser in escrow (“the Escrow Shares”) pending any downward post-closing adjustments to the purchase price. The applicable corporate law treats the Escrow Shares as having been issued to the Vendor at the time of issuance and the Vendor is the legal and beneficial owner of the Escrow Shares at that time, notwithstanding that the escrow agent has physical possession of them.
Subsequently, the post-closing adjustments under the Agreement require that the purchase price be adjusted downwards (“the Downward Adjustment”) and all of the Escrow Shares are returned to the Purchaser for cancelation to satisfy the obligation of the Vendor to repay an amount equal to the Downward Adjustment. The Escrow Shares have a value equal to the amount of the Downward Adjustment and have a paid-up capital (PUC) that is less than the amount of the Downward Adjustment.
The Vendor will be deemed to have received a dividend under subsection 84(3) to the extent the amount paid by the Purchaser on the cancelation of the Escrow Shares exceeds the PUC of those shares. Since the value of the Escrow Shares returned to the Purchaser is equal to the amount of the Downward Adjustment, the amount considered to be paid under subsection 84(3) will be equal to the amount of the Downward Adjustment. This is because the Vendor should be viewed as having received an amount equal to the amount of the Downward Adjustment on the cancelation of the Escrow Shares in order to satisfy its obligation to repay the overpayment of the purchase price.
Question 4: Servers/Data Centres and Location of Services Rendered
With the expansion of e-commerce, and more people working virtually, what is the CRA's position on the taxation of a non-resident physically located outside of Canada that provides support services related to servers and data centres physically located inside Canada?
To be more precise, assume the following scenario: a Canadian customer (Canco) has engaged Serverco, an arm’s length server provider, to host Canco’s copy of a software and the data related to it. Canco also enters into an agreement with a company incorporated in the United States (USco) which will provide it with the right to use the software and to receive updates and support services (“the Canco-USco agreement”). Canco and USco are non-arm’s length parties. For regulatory purposes and/or in order to ensure that Canco’s Canadian customers’ data is protected under Canadian privacy laws, the server running the software and storing the data will be located in Canada. As part of the services provided by USco, U.S. based employees of USco will frequently access the server in order to provide application support and upgrades. More specifically, the employees of USco will access the Canadian server periodically to provide the following services:
- Ongoing software maintenance, i.e., maintaining network communications, fixing any software issues, technical support;
- Customization of the software and upgrades, as needed; and
- Quality control and disputes, i.e., periodic quality control tests and investigating customer complaints regarding software output.
The services described above are being provided by USco to Canco. Canco then uses USco’s software to provide other products and services to its Canadian customers such as selling the output of the software (i.e., data and analytics) to create reports for Canadian customers. Thus, it is not selling USco’s software to its customers.
In such a scenario, could part of the services rendered by USco be:
A. considered “services rendered in Canada” for purposes of Regulation 105; and
B. considered “services… provided in that other State" for purposes of Article V:9(b) of the Canada-U.S. Tax Treaty?
For each of these provisions, would USco’s remote application support and upgrade on the server located in Canada be considered services performed in Canada, or does the physical presence of its employees outside of Canada prevail in making that determination?
CRA Response (A)
The Canco-USco agreement described above is somewhat different from a regular “Software as a Service” (SaaS) since it appears to be a hybrid arrangement in which a separate copy of the software is maintained on a server in Canada owned and operated by Serverco which has agreed to host software and data for Canco.
We made a number of assumptions to clarify the context of the question:
a) Employees and possibly clients of Canco can remotely access the server and use the software.
b) The software is developed by USco and the particular client (Canco in this case) may use features of the software to provide for a degree of customization, like featuring client logos, but fundamentally the software is designed to be used by multiple clients of USco.
c) The server hosting the software will also store Canco’s client specific data because the geographic location of the server is important to Canco’s clients, which explains why the related group maintains separate servers with copies of the same software on both, giving up some of the efficiency of SaaS but providing assurance to clients as to which regulatory or privacy laws apply to their data.
d) Canco will pay a fee to USco that is consistent with the transfer pricing standards.
e) When unbundling the payment to analyze the Canadian income tax consequences of the payment, a portion is for the right to use the software and another portion is for the accessory support services described above, with only a nominal portion of the payment in respect of support services possibly rendered in Canada.
f) The nature of USco’s support personnel’s work related to the Canadian server is essentially one of monitoring and communicating with the server. That includes activities like checking to see that the proper version of the software is running, monitoring internal logs to see what errors have occurred, delivering updated software to ensure that identified bugs or security risks are addressed.
Regulation 105 provides that every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada shall deduct or withhold 15 per cent of such payment. Whether Regulation 105 applies depends on whether a portion of the services are rendered in Canada. As we have noted previously in CRA document E2003-TEI-QA (question 8), the client and the service provider are required to use reasonable efforts to determine the portion of the payment which is in respect of services rendered in Canada.
The determination as to what services are rendered in Canada is a question of fact. It seems likely that all of the support services described above provided by USco’s employees are rendered in the United States and delivered through a communication system such as a computer (or a telephone) to Canco and its employees.
CRA Response (B)
Where a non-resident person carries on a business in Canada, an income tax shall be paid, pursuant to subsection 2(3), on that person's taxable income earned in Canada. However, if the person is a resident of the United States, it may be exempt under Article VII of the Canada-U.S. Tax Treaty if the person does not carry on business in Canada through a permanent establishment situated in that country.
Article V:9(b) of the Canada-U.S. Tax Treaty provides that where an enterprise of the United States provides services in Canada, that enterprise is deemed to provide those services through a permanent establishment in Canada if the services are provided in Canada “for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who are either residents of [Canada] or who maintain a permanent establishment in [Canada] and the services are provided in respect of that permanent establishment”.
Since Canco is a single Canadian customer being serviced by USco as part of the same project, Article V:9(b) could apply if the other conditions of this provision were met. However, according to the Technical Explanation to the Fifth Protocol notes, the intent of the parties to the treaty appears to be that Article V:9(b) should not apply in circumstances where services are performed or provided in the United States, but furnished to customers in Canada through a telephone or computer:
“Paragraph 9 only applies to services that are performed or provided by an enterprise of a Contracting State within the other Contracting State. It is therefore not sufficient that the relevant services be merely furnished to a resident of the other Contracting State. Where, for example, an enterprise provides customer support or other services by telephone or computer to customers located in the other State, those would not be covered by paragraph 9 because they are not performed or provided by that enterprise within the other State.”
Furthermore, to the extent that any support services rendered in Canada by USco by telephone or computer are of a preparatory or auxiliary nature, and that USco does not otherwise have other activities in Canada that are more than preparatory or auxiliary, USco would not have a permanent establishment in Canada pursuant to Article V:6 of the Canada-U.S. Tax Treaty.
Question 5: The New Proposed Critical Mineral Exploration Tax Credit
In order for taxpayers to be eligible for the critical mineral exploration tax credit (CMETC) one of the requirements is that a qualified professional engineer or professional geoscientist provide certification within the 12-month period immediately preceding the time that the flow-through share (FTS) agreement is made, in prescribed form and manner, that the expense will be incurred pursuant to an exploration plan that primarily targets critical minerals. Presently, there is no prescribed form available to taxpayers.
Given that the CMETC applies to FTS agreements entered into after April 7, 2022, can the CRA:
a) provide some guidance to taxpayers as to when the prescribed form will be made available; and
b) describe the certification process, including the information that it will require as part of that process for corporations that have raised FTS prior to the prescribed form being made available?
The CMETC was announced on April 7, 2022 as part of Budget 2022. Draft legislation was released by the Department of Finance on August 9, 2022 which included provisions relating to the CMETC that, if and when enacted, will apply as of April 7, 2022. Provisions relating to the CMETC were included in Bill C-32 (“Proposed legislation”) which was tabled in Parliament on November 3, 2022. Those provisions, if and when enacted, would also apply as of April 7, 2022.
An expenditure that is to be renounced under an FTS agreement will not meet the definition of “flow-through critical mineral mining expenditure” in subsection 127(9) of the Proposed legislation unless, among other things:
- a qualified professional engineer or professional geoscientist certification (“Certification”) is completed in respect of that FTS agreement, and
- that Certification is made in “prescribed form and manner”.
Prescribed Form and Manner
A prescribed form for the Certification is in the process of being completed and will be released to the public in the coming weeks. It is anticipated that it will be required to be attached to one of the existing forms that are already required to be completed in connection with an FTS offering, such as the T100A. Specific instructions on this point will be released at the same time the prescribed form is released.
Completion of an FTS Offering Before the Prescribed Form is Released
Subject to the comments in the next section below, for an FTS agreement made after April 7, 2022 and before the date that a prescribed form for the Certification is released to the public, the CRA will accept a letter signed by a “qualified professional engineer or professional geoscientist” (as defined in the definition in subsection 127(9) of the Proposed legislation) within the 12-month period immediately preceding the time that the FTS Agreement is made. That signed letter must include the following information:
- the name, address and business number of the corporation offering the FTS;
- the targeted critical mineral(s);
- a brief explanation of why it is expected that the mineral deposit(s) being explored will contain primarily (i.e., more than 50%) critical minerals;
- the name, occupation and business address of the qualified professional engineer or professional geoscientist; and
- the name of the professional association to which the qualified professional engineer or professional geoscientist belongs and their membership identification number.
The signed letter should be attached to the Form T100A for the FTS offering that is being made pursuant to the FTS agreement.
The corporation offering the FTS should also keep in its records, and make available to the CRA upon request, documents that support the Certification, such as the following:
- map of the project area including claim outline(s) and claim number(s);
- description of the geological features of the property(ies);
- description of proposed exploration activity(ies) and how they relate to the targeted critical mineral(s);
- copies of exploration plan(s) submitted for approval to the board of directors of the corporation; and
- copies of exploration plan(s) submitted for approval to regulating authorities.
Other Comments: Proposed legislation
As noted above, the Proposed legislation relating to the CMETC has not yet been enacted and the final legislation that is enacted could differ from the Proposed legislation (some of which is referred to in this document).
In response to Question 16 at the 2009 CRA Round Table at the Canadian Tax Foundation’s Annual Conference, we made the following comments regarding the filing of tax returns based on proposed legislation:
It is the CRA’s longstanding practice to ask taxpayers to file on the basis of proposed legislation. This practice eases both the compliance burden on taxpayers and the administrative burden on the CRA. However, where proposed legislation results in an increase in benefits (for example, Canada child tax benefit) to the taxpayer, or if a significant rebate or refund is at stake, the CRA’s past practice has generally been to wait until the measure has been enacted.
Generally speaking, the CRA will not reassess if the initial assessment was correct in law. As a result, a taxpayer’s request to amend their tax records to reflect proposed legislation will be denied. It is recommended that taxpayers file a waiver in respect of the normal reassessment period to protect their interests.
In the event that the government announces that it will not proceed with a particular amendment, any taxpayers who have filed on the basis of the proposed amendment are expected to take immediate steps to put their affairs in order and, if applicable, pay any taxes owing. Where taxpayers acted reasonably in the circumstances, took immediate steps to put their affairs in order, and paid any taxes owing, the CRA will waive penalties and/or interest as appropriate.
The above comments should be taken into account by any taxpayer seeking to claim an investment tax credit based on the Proposed legislation.
Question 6: Guidance on Crypto-assets Taxation and Reporting
The number of jurisdictions with crypto tax guidance has continued to rise as tax authorities around the world realise that individuals and businesses alike need guidelines to be aware of how to meet their tax obligations regarding crypto-assets.
Does the CRA plan on providing additional guidance with respect to the taxation of crypto-asset related transactions and associated reporting obligations in the near future?
Given the unique nature of crypto-assets transactions, the CRA is aware of the potential uncertainty associated with applying existing tax rules to those transactions, and the importance of providing contemporaneous guidance to the tax community to facilitate compliance in this area.
As such, the CRA has recently created the Speciality Tax Division within the Income Tax Rulings Directorate (“the Division”) to deal with specialty areas, such as crypto-assets transactions. The Division is responsible, among other things, for providing income tax guidance relating specifically to crypto-assets. The Division works closely with existing teams responsible for crypto-asset related audits within the CRA’s Compliance Programs Branch.
Also, in order to facilitate the reporting of crypto-related transactions, the CRA is currently in the process of updating a number of its forms, schedules and guides. Specifically, the CRA is working on providing further guidance on preparing tax returns for crypto-asset dispositions by updating the T1 Federal Income Tax and Benefit Guide, the T1 Schedule 3 and the T4037 Capital Gains Guide for the 2022 tax year.
Question 7: Permanent Establishment and Crypto-asset Mining Equipment
Crypto-asset mining can generally be described as the process of using computing power, often called “hash power”, to verify and record transactions on a blockchain. In order to generate such computing power, most crypto-asset “miners” rely on the use of application specific integrated circuit miners (ASIC) or graphics processing units (GPU). In many cases, this equipment is housed and operated in large datacenters capable of providing significant electricity and internet connections required for their use.
Consider the following situation:
- UKco is a company incorporated under the laws of the United Kingdom (U.K.).
- Hostco is incorporated under the Canada Business Corporations Act and is a resident of Canada.
- UKco owns a significant number of ASICs and GPUs that it uses in the process of mining crypto-assets in Canada (“the Mining Equipment”).
- Hostco owns real estate located in Canada that is used to provide “hosting services” to UKco with respect to the Mining Equipment. The hosting services include the supply of housing, security, electricity, internet access and maintenance/management services to ensure the proper operation of the Mining Equipment. The Mining Equipment will be hosted in Hostco’s premises and will remain at the same location throughout its useful life.
- UKco does not have any employees or physical presence in Canada otherwise than through the use of the Mining Equipment.
- UKco employees located in the U.K. have the capacity to direct the use of the Mining Equipment remotely through the use of software. However, the employees do not have the ability to alter the physical state of the Mining Equipment.
In the situation described above, will CRA consider that UKco has a permanent establishment in Canada under Article 5 of the Canada – U.K. Tax Convention (“the Treaty”) ?
Generally, when a person (“a miner”) that operates Mining Equipment creates a valid block, they will receive an amount of the mined crypto-asset. CRA document 2018-0776661I7 indicates that a miner who receives a bitcoin for validating transactions will be considered as having rendered a service.
Subparagraph 115(1)(a)(ii) and paragraph 2(3)(b) provide that a non-resident is taxable in Canada on its income from a business carried on by it in Canada. Because the phrase “carrying on business” is not defined in the Act, that determination is a question of mixed fact and law. According to paragraph 1.53 of Income Tax Folio S5-F2-C1 “Foreign Tax Credit”, the place where a particular business (or a part of the business) is carried on is generally the place where the operations in substance, or profit generating activities, actually take place.
That same paragraph indicates that for a service business, the place where the services are performed should be given consideration. When the service requires no or little human intervention, such as when the service is provided by automated equipment, the location of the Mining Equipment will be a significant factor in determining where the business is carried on.
Where a non-resident carries on a business in Canada, a bilateral tax treaty may provide relief from Canadian income tax. In this particular scenario, paragraph 1 of Article 7 of the Treaty, like most of Canada’s bilateral tax treaties, states that the business profits of a resident of a contracting state shall be taxable only in that state unless the resident carries on business in the other contracting state through a permanent establishment situated therein. Pursuant to paragraph 1 of Article 5 of the Treaty, the term “permanent establishment” generally means a fixed place of business in which the business of the enterprise is wholly or partly carried on. A permanent establishment could also be found to exist for other reasons. Indeed, paragraphs 2 to 6 of Article 5 of the Treaty provide specific rules pertaining to the determination of the existence of a permanent establishment.
Consistent with the commentaries on the OECD Model Tax Convention, a non-resident miner will generally be considered to carry on business in Canada through a permanent establishment where:
- the crypto-mining business is carried on, wholly or in part, through the operation of crypto-mining equipment;
- the crypto-mining equipment is at the non-resident’s disposal (whether the taxpayer owns or leases the crypto-mining equipment); and
- the crypto-mining equipment is used in an identifiable fixed geographic location within Canada.
Whether or not crypto-mining equipment would constitute a permanent establishment of a non-resident taxpayer, such as UKco, is to be determined upon a review of the relevant facts and circumstances.
Non-resident miners seeking certainty with respect to Canadian taxes on proposed crypto-mining operations can request a pre-ruling consultation for preliminary views on whether the CRA would consider the issue further in the context of an advance income tax ruling request. The pre-ruling consultation and advance income tax ruling request processes are described in Information Circular IC70-6R12, “Advance Income Tax Rulings and Technical Interpretations.”
Question 8: Capital Cost Allowance and Crypto-asset Mining Hardware
Commercial crypto-asset mining operations often involve the use of several graphics processing units (GPUs) or application-specific integrated circuit (ASIC) miners to generate computing power (hash power). In the context of commercial crypto-asset mining operations, the cost of both GPUs and ASIC miners generally represents a significant portion of the total cost of capital assets relating to the operation.
The hash power generated by this equipment is used by crypto-asset miners in order to solve a cryptographic “puzzle” and hopefully receive crypto-asset rewards in the process. This activity is an integral part of the process of verifying and recording transactions on a blockchain. Although crypto-asset mining equipment can connect directly to a blockchain network through an internet connection, most will prefer to connect to “mining pool” servers to increase their likelihood of receiving rewards.
The use of either GPUs or ASIC miners will generally be dependant on the blockchain selected by the crypto-asset miner.
GPU mining rigs
GPUs can be used for a variety of purposes including gaming, professional applications, and crypto-asset mining. In order to connect to a blockchain network or mining pool server, GPUs must generally be linked to other computer components, such as a motherboard, a central processing unit (CPU), a USB flash/hard drive, RAM, a power supply, and other components, together forming a “rig”. GPU mining rigs are generally composed of several GPUs. GPUs typically come with preinstalled updatable firmware in order to allow low-level control of the devices. Additional operating software is also installed on the rig’s USB flash/hard drive.
ASIC miners, on the other hand, are designed and optimised to perform a single task – mine crypto-assets. ASIC miner components generally include hash boards, a control board, a power supply and other components. ASIC miners also come with preinstalled updatable firmware.
Once installed, ASIC miners can be controlled using a separate computer device and be directed to connect to a mining pool server. Additional software can also be installed on the separate computer device to manage the ASIC miners.
For GPU mining rigs and ASIC miners that are capital property acquired after March 18, 2007, will CRA consider that such hardware qualifies under capital cost allowance (CCA) class 50?
Although the determination of the proper CCA classification of a particular piece of hardware is a question of fact, we will provide the following general comments.
Schedule II of the Income Tax Regulations (“the Regulations”) provides the various classes for depreciable capital property and the applicable rates of capital cost allowance.
Class 50 property is property acquired after March 18, 2007 that is “general-purpose electronic data processing equipment” (GPEDPE) and systems software for that equipment, including ancillary data processing equipment, but does not include property that is principally or is used principally as:
(a) electronic process control or monitor equipment
(b) electronic communications control equipment
(c) systems software for equipment referred to in (a) and (b) or
(d) data handling equipment (other than data handling equipment that is ancillary to GPEDPE).
GPEDPE is defined in subsection 1104(2) of the Regulations as electronic equipment that, in its operation, requires an internally stored computer program that:
(a) is executed by the equipment;
(b) can be altered by the user of the equipment;
(c) instructs the equipment to read and select, alter or store data from an external medium such as a card, disk or tape; and
(d) depends upon the characteristics of the data being processed to determine the sequence of its execution.
In order to fall within class 50, GPU mining rigs and ASIC miners would thus initially have to qualify as GPEDPE or ancillary data processing equipment. Although it is not specifically stated above, it is our understanding that the hardware would typically not be considered as “ancillary data processing equipment” considering its significance in most crypto-asset mining operations.
Examples of GPEDPE are a desktop computer system and a laptop computer. However, based on the decision of the Tax Court of Canada in Funtronix Amusements Ltd. v. Minister of National Revenue 89 D.T.C. 545, the definition of GPEDPE is not limited to those types of assets. In our view, GPU mining rigs and ASIC miners could meet the conditions required to qualify as GPEDPE.
We are also of the view that GPU mining rigs and ASIC miners would typically not be captured by the exclusions mentioned in paragraphs (a) to (d) of class 50.
As such, although the determination of whether or not specific pieces of hardware can fall within CCA class 50 is a question of fact, it is our view that GPU mining rigs and ASIC miners used in the process of crypto-asset mining could fall within that class when acquired after March 18, 2007.
Question 9: Multiple Wills
For non-income tax reasons, an individual may establish two wills – one that is subject to probate and one that is not subject to probate. The beneficiaries under each will may be substantially the same; however, the terms under which distributions can be made may be different. Provincial law may direct that the executors of each will must be different.
Can the CRA confirm the tax-filing obligations of the executors under each will – specifically, does subsection 104(2) apply so that one T3 return is filed for the estates created under both wills? At what point in time can each executor file a return for the estates created under each will?
We understand that an individual may have two wills for the purpose of reducing probate taxes, or for other estate planning purposes and we have previously stated that there is nothing to preclude these from being administered separately. We have been of the consistent view however, that regardless of the existence of multiple wills, an individual has only one estate which encompasses all of the worldwide property owned by the individual at death.
In our response to Question 2 of the 2015 STEP Roundtable we further stated:
“While paragraph (e) of the definition of graduated rate estate requires that “no other estate designates itself as the graduated rate estate of the individual”, in our view, this wording was used for greater certainty to ensure that there not be competing parties attempting to make the designation as the graduated rate estate of an individual.”
Additionally, the Department of Finance Explanatory Notes in respect of the definition of “graduated rate estate” in subsection 248(1) state,
“The income tax rules are predicated on the understanding that an individual has only one estate that arises on the individual’s death…”
For the purpose of the Act, a trust is defined in subsection 248(1) to have the meaning assigned by subsection 104(1) and, unless the context otherwise requires, includes an estate. The post-amble to subsection 104(2) can only be applied where there is more than one trust and the conditions of paragraphs (a) and (b) are satisfied. However, in the question provided, there is only one trust for income tax purposes – the estate; and the post-amble to subsection 104(2) is not applicable.
Depending upon the manner in which the estate planning is undertaken, the use of multiple wills may create practical difficulties in regard to an executor’s reporting requirements pursuant to paragraph 150(1)(c) and section 204 of the Regulations under the Act, and the designation of the estate as a graduated rate estate (GRE) of the deceased individual. Information sharing issues, communication between executors, and other such issues can arise. These will need to be considered and coordinated to ensure the complete and timely filing of the estate’s T3 Trust Income Tax and Information Return (“T3 return”).
Pursuant to paragraph 150(1)(c), the T3 return is to be filed within 90 days from the end of each taxation year of a trust or estate. As was noted in our response to Question 3 of the 2018 STEP CRA Roundtable, paragraph 249(1)(b) defines a taxation year of a GRE to be the period for which the accounts of the estate are made up for purposes of assessment under the Act. Paragraph 249(1)(c) defines, for purposes the Act, a taxation year of a trust, other than a GRE, to be a calendar year.
Question 10: Common Reporting Standard – Trusts and the Meaning of “Controlling Persons”
Assume that a trust is resident in Canada, is not a “reporting financial institution” (RFI), is a “passive non-financial entity” (Passive NFE) and has a “financial account” with an RFI.
In this circumstance, the RFI with which the trust has a financial account will have reporting obligations under Part XIX if one or more “controlling persons” are “reportable persons”, as both of these terms are defined in subsection 270(1).
Subsection 270(1) defines “controlling persons”, in part, as follows:
“controlling persons, in respect of an entity, means the natural persons who exercise control over the entity (interpreted in a manner consistent with the Financial Action Task Force Recommendations - International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, adopted in February 2012 and as amended from time to time) and includes,
(a) in the case of a trust,
(i) its settlors,
(ii) its trustees,
(iii) its protectors (if any),
(iv) its beneficiaries (for this purpose, a discretionary beneficiary of a trust will only be considered a beneficiary of the trust in a calendar year if a distribution has been paid or made payable to the discretionary beneficiary in the calendar year), and
(v) any other natural persons exercising ultimate effective control over the trust.” [emphasis added]
With respect to whether a discretionary beneficiary is a “controlling person”, the CRA’s Guidance on the Common Reporting Standard (“CRA Guidance”) states as follows:
“9.54 In the case of a trust, the controlling persons include its settlors, trustees, protectors (if any), beneficiaries or class of beneficiaries, and any other natural persons exercising ultimate effective control over the trust. A person is treated as a beneficiary if they have the right to receive, directly or indirectly, a mandatory distribution; or they receive, directly or indirectly, a discretionary distribution from the trust. In the case of discretionary distributions, the beneficiary may only be treated as a beneficiary in the calendar year in which they receive a distribution.” [emphasis added]
Can the CRA provide examples of “indirect” distributions?
The term “settlor” is not defined in the Act and the CRA Guidance is also silent on this point.
Would the CRA consider any contributor to the trust as a “settlor” for purposes of Part XIX of the Act?
CRA Response (A)
Subsection 270(2) provides that the provisions of Part XIX relate to the implementation of the Common Reporting Standard (CRS) set out in the Standard for Automatic Exchange of Financial Account Information in Tax Matters (“Standard for Automatic Exchange”) " domain="oecd-ilibrary.org" class="link-internal">https://www.oecd-ilibrary.org/taxation/standard-for-automatic-exchange-of-financial-account-information-in-taxmatters-second-edition_9789264267992-en.] approved by the Council of the Organisation for Economic Co-operation and Development (“OECD”) and, unless the context otherwise requires, these provisions are to be interpreted consistently with the CRS, as amended from time to time.
The OECD Model Competent Authority Agreement (CAA) for the automatic exchange of CRS information (“Model CAA”) " domain="oecd-ilibrary.org" class="link-internal">https://www.oecd-ilibrary.org/taxation/standard-for-automatic-exchange-of-financial-account-information-in-taxmatters-second-edition/model-competent-authority-agreement_9789264267992-4-en] and associated Commentary contained in the Standard for Automatic Exchange are also relevant to the interpretation of the provisions of Part XIX of the ITA, in addition to the CRA Guidance released on March 10, 2017 and updated on March 10, 2022.
The OECD published the CRS Implementation Handbook, " domain="oecd.org" class="link-internal">https://www.oecd.org/ctp/exchange-of-tax-information/implementation-handbook-standard-for-automaticexchange-of-financial-account-information-in-tax-matters.htm.] which, although not part of the CRS, provides a practical guide to implementing the CRS. The OECD also maintains and updates a list of CRS-related Frequently Asked Questions " domain="oecd.org" class="link-internal">https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/CRS-related-FAQs.pdf.] (“OECD CRS-FAQ”) on the application of the CRS. The response to OECD CRS-FAQ - SECTION VIII: DEFINITIONS - C. FINANCIAL ACCOUNT Question 11 provides examples of what constitute indirect distributions by a trust:
“11. Indirect distributions by a trust
How are indirect distributions by a trust treated under the CRS?
[OECD Response] Pursuant to Section VIII(C)(4), a Reportable Person will be treated as a beneficiary of a trust “if such Reportable Person [...] may receive, directly or indirectly, a discretionary distribution from the trust.
Indirect distributions by a trust may arise when the trust makes payments to a third party for the benefit of another person. For example, instances where a trust pays the tuition fees or repays a loan taken up by another person are to be considered indirect distributions by the trust. Indirect distributions also include cases where the trust grants a loan free of interest or at an interest rate lower than the market interest rate or at other non-arm’s length conditions. In addition, the write-off of a loan granted by a trust to its beneficiary constitutes an indirect distribution in the year the loan is written-off.
In all of the above cases the Reportable Person will be person that is the beneficiary of the trust receiving the indirect distribution (i.e. in the above examples, the debtor of the tuition fees or the recipient of the favourable loan conditions.”
Although not incorporated into paragraph 9.54 of the CRA Guidance which describes a beneficiary (hence a “controlling person”) as a person receiving or having the right to receive an indirect mandatory or discretionary distribution from a trust, Question 11 of the OECD CRS FAQ provides context to what is referred to in the CRA Guidance.
CRA Response (B)
The term “settlor” is not defined in Part XIX.
Paragraph 2 of section 1 of the Model CAA states that a term that is not defined in the CAA or in the CRS has the meaning under the applicable tax laws of the jurisdiction applying the CAA. The Commentary on paragraph 2 of section 1 of the Model CAA states, in part, as follows:
“The second sentence of paragraph 2 provides that, unless the context otherwise requires or the Competent Authorities agree to a common meaning, any term not otherwise defined in this Agreement or in the Common Reporting Standard has the meaning that it has at that time under the law of the jurisdiction applying the Agreement. In this respect any meaning under the applicable tax laws of that jurisdiction will prevail over a meaning given to that term under other laws of that jurisdiction. Further, when looking at the context, the Competent Authorities should consider the Commentary on the Common Reporting Standard and any terms defined therein.”
Technical terms are generally to be given their technical meaning unless the context suggests otherwise. For Canadian law purposes the concept of settlor generally refers to the person who set up the trust by contributing property to the trust. On that basis, the question of whether a specific contributor is the settlor of a particular trust is generally a question of law to be determined in light of the relevant facts and circumstances.
The Department of Finance Explanatory Notes to the definition of “controlling persons” in subsection 270(1) echo paragraph 132 of the OECD’s Standard for Automatic Exchange and makes reference to the Financial Action Task Force Recommendations:
“[The definition of “controlling persons”] is intended to correspond to the term “beneficial owner” as described in “Recommendation 10” and the “Interpretative Note on Recommendation 10” of the [OECD’s] Financial Action Task Force Recommendations (as adopted in February 2012 and as amended from time to time - International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation, the FATF Recommendations, FATF/OECD Paris), and is to be interpreted in a manner consistent with such Recommendations, with the aim of protecting the international financial system from misuse, including with respect to tax crimes.”
The Interpretive Note to the FATF Recommendations has a General Glossary which defines terms for the purposes of the FATF Recommendations and defines the term “settlors” as follows: “Settlors are natural or legal persons who transfer ownership of their assets to trustees by means of a trust deed or similar arrangement.”
The CRS Implementation Handbook also provides guidance on the meaning of the term “settlor”:
“236. In general terms, a trust is a fiduciary relationship, rather than an entity with its own separate legal personality. The trust arrangement commences when a person (the settlor, or also called the grantor) transfers specific property to the trustee, with the intention that it be applied for the benefit of others (the beneficiaries). A settlor may place any kind of transferrable property into a trust.” [emphasis added]
It is noteworthy that as a result of consultation between the Society of Trust and Estate Practitioners (STEP) UK branch and the OECD, the STEP UK branch published further guidance notes on the CRS and trusts (“STEP/OECD Guidance”) which clarifies part of the context on the application of the CRS principles to trusts. In particular, paragraph 1.3 - Example 3 of the STEP/OECD Guidance states as follows:
“1.3 Example 3: ‘nominal’ and joint settlors – there may be trusts in existence where an individual (X) acts as the named settlor of the trust and contributes a nominal amount on its creation but where another individual (Y) then makes the substantive contribution of assets to the trust. In circumstances where trustees satisfy themselves that X has only made a nominal contribution to trust assets and that Y has made the substantive contribution, then applying AML/KYC principles, Y should be regarded as the settlor of the trust for CRS purposes rather than X. However, in accordance with CRS and FATF recommendations, HMRC consider that it is also necessary to identify and disclose X as a settlor and that the full value of the trust assets should be reported with respect to both X and Y notwithstanding the fact that X had added only a nominal amount.”
The STEP/OECD Guidance, in paragraph 1.5 - Example 4, adds that “it is necessary to consider the Controlling Person of the entity at the time it contributes assets to the trust in order to determine who should be regarded as the settlor for CRS purposes.”
The discussion above provides context to the interpretation of subparagraph 270(1)(a)(i) in the definition of “controlling persons” to determine who are the “settlors” of a trust under Part XIX of the Act in a given set of circumstances.
In addition, where a contributor exercises ultimate effective control over the trust, the contributor is a “controlling person” of the trust.
Question 11: Shares Sold Subject to an Earnout Agreement
In Interpretation Bulletin IT-426R “Shares Sold Subject to an Earnout Agreement” (September 28, 2004) [archived] (IT-426R), the CRA describes the cost recovery method of reporting gains or losses on the sale of shares subject to an earnout agreement. Generally speaking, under the cost recovery method the vendor reduces their adjusted cost base of the shares as amounts on account of the sale price become determinable. Once such an amount on account of the sales price exceeds the adjusted cost base of the shares, as reduced by any such previous amounts, the excess is considered to be a capital gain that is realized at the time that that amount became determinable, and the adjusted cost base becomes nil.
Paragraph 2 of IT-426R sets out the conditions for a taxpayer to be able to use the cost recovery method. Subparagraph 2(c) states that it must be reasonable to assume that the earnout feature relates to underlying goodwill, the value of which cannot reasonably be expected to be agreed upon by the vendor and the purchaser at the time of the sale.
At the CRA Round Table at the Canadian Tax Foundation’s (CTF’s) 2019 Annual Conference, the CRA addressed a situation where a vendor sold shares of a corporation, with the only assets owned by the corporation being the shares of a subsidiary. The proceeds of disposition of the shares of the corporation were determined pursuant to an earnout clause, with the quantum of proceeds determined by reference to the future earnings generated by the subsidiary. Under this scenario, the earnout feature related only to the underlying goodwill of the subsidiary. The CRA indicated that the mere fact that the earnout feature related only to the underlying goodwill of the subsidiary would not preclude the application of the cost recovery method.
Suppose a vendor owns shares of a Holdco and the Holdco owns shares of 3 corporations: ACo, BCo and CCo. The proceeds of disposition of the shares of Holdco are determined pursuant to an earnout clause, with the quantum of proceeds determined by reference to the future earnings generated by ACo. Under this scenario the earnout feature relates only to the goodwill of ACo.
Does this earnout feature meet the condition of subparagraph 2(c)?
There is a difference between the html and pdf versions of the condition in subparagraph 2(d) of IT-426R on the CRA website. Specifically, the html version on the CRA website provides:
The earnout feature in the sale agreement must end no later than 5 years after the end of the first taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earnout feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement.
whereas the pdf version provides:
The earnout feature in the sale agreement must end no later than 5 years after the date of the end of the taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earnout feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement.
Can the CRA confirm which version of subparagraph 2(d) reflects its policy?
Suppose a vendor owns shares of a target corporation whose year-end is September 30, 2022. The shares of the target corporation were sold on October 1, 2022. The purchaser of the shares of the target corporation chooses a December 31 year-end for the target corporation. Under the terms of the purchase and sale agreement for the shares of the target corporation, the earnout amount will be determinable no later than September 30, 2027.
For the conditions of subparagraph 2(d) to have been met, must the earnout amount be paid by December 31, 2027 or September 30, 2028, or is it sufficient that it was determinable on September 30, 2027?
CRA Response (A)
The question of whether the conditions set out in the IT-426R are met in a particular situation requires an analysis of all relevant facts.
However, consistent with the CRA’s response at the CRA Round Table at the CTF’s 2019 Annual Conference, the mere fact that the earnout feature of the sale of the Holdco shares relates only to the underlying goodwill of one of the subsidiaries owned by Holdco will not preclude the application of the cost recovery method.
CRA Response (B)
After having looked into the historical amendments to subparagraph 2(d) of IT-426R in the CRA’s files it has been determined that the pdf version of the document on the CRA’s website, which matches the language used in the French pdf and French html versions of IT-426R, is the correct version of the Interpretation Bulletin. Notwithstanding that IT-426R is archived, the CRA has updated the CRA’s website so that the html version of IT-426R matches the pdf version. It is not considered that the slight variation in language between the two versions of subparagraph 2(d) in IT-426R would lead to a different interpretive result.
CRA Response (C)
As noted above, the question of whether the conditions set out in IT-426R are met in a particular situation requires an analysis of all relevant facts.
This example raises three general questions. First, which taxation year is relevant for the purposes of calculating the five-year period set out in subparagraph 2(d) of IT-426R. Second, what is meant by the reference to “may become payable” in subparagraph 2(d) of IT-426R and is it equivalent to the term “determinable”. Finally, does the CRA’s administrative policy for the use of the cost recovery method impose a requirement that amounts under the earnout feature be paid within a certain period of time.
Relevant Taxation year for the Purposes of Calculating the five-year Period
As confirmed above, pursuant to subparagraph 2(d) of IT-426R, the earnout feature in the sale agreement must end no later than 5 years after the end of the taxation year of the corporation (whose shares are sold) in which the shares are sold. For the purposes of this condition, the CRA considers that an earnout feature in a sale agreement ends at the time the last contingent amount may become payable pursuant to the sale agreement.
In order for the CRA’s administrative position regarding the use of the cost recovery method to apply, subparagraph 2(a) of IT-426R requires that the vendor and the purchaser be dealing at arm’s length. Therefore, it is generally expected that if the cost recovery method applies there will be an acquisition of control of the target corporation. It is also assumed that there would be an acquisition of control of the target corporation for the purposes of the question given the purchaser has selected a new taxation year on the acquisition of the target corporation. If there is an acquisition of control of the target corporation then subsection 249(4) will apply to deem the target corporation to have a taxation year-end that occurs immediately before the acquisition of control. Therefore, the shares of the target corporation will be acquired in the short taxation year that the purchaser has selected ending on December 31, 2022 and the earnout feature must end no later than December 31, 2027.
Distinction between “determinable” and “payable” in IT-426R
The word “payable” is not specifically defined in the Act. The courts have generally interpreted the word payable according to its ordinary meaning as either synonymous with an amount that is due (where there is a present obligation to pay) or to describe the circumstances where there is a clear legal, though not necessarily immediate, obligation to pay an amount.
As noted above, under the cost recovery method set out in paragraph 3 of IT-426R the vendor will reduce the adjusted cost base of the shares they have sold as amounts on account of the sale price become determinable with any amounts received for the sale of the shares in excess of the adjusted cost base considered a capital gain that is realized once the amounts become determinable. Paragraph 5 of IT-426R indicates:
“For the purposes of this bulletin, an amount becomes determinable once it is capable of being calculated with certainty and the taxpayer has an absolute but not necessarily immediate right to be paid. Where the sale agreement stipulates a minimum amount payable by the purchaser in any event, that amount is considered to become determinable by the vendor at the time of the sale.”
IT-426R indicates that meaning of the term “determinable” in paragraph 5 was modified to specify that an amount be brought into account when the taxpayer has an absolute but not necessarily immediate right to be paid.
Given this context, it is considered that the reference to an amount becoming “payable” in subparagraph 2(d) of IT-426R is meant to refer to the circumstances where there is a clear legal, though not necessarily immediate, obligation to pay the amount. Therefore, subparagraph 2(d) of IT-426R requires that there is a clear legal, though not necessarily immediate, obligation to pay the last contingent amount under the earnout feature no later than December 31, 2027 in order for the cost recovery method to apply.
Payment of the Last Contingent Amount
There is no requirement in subparagraph 2(d) of IT-426R setting out as to when the last contingent amount must be paid.
Question 12: T1134 Reporting
A. Various Questions Relating to T1134 Reporting (for 2021 and later taxation years)
(i) Part I Section 3E – Lower tier non-controlled foreign affiliates (Table)
Column 6 of the table asks, “Were there any transformation transactions during this reporting period that impacted its surplus account balance(s)?”. The term “transformation transactions” is not defined with sufficient clarity. The term also appears in the context of Part II Section 3B regarding surplus accounts with more specific questions.
Can the CRA provide more guidance on meaning of this term?
(ii) Part II Section 1D – Foreign Affiliate Dumping Rules (Table)
Where a corporation resident in Canada is not controlled by a non-resident such that the conditions in subsection 212.3(1) are not met, should this table be left blank?
(iii) Part II Section 3A – Surplus Accounts – 4. Upstream Loan Rules (Table)
Column 2 of the Table requires reporting entities to identify if a specified debtor (as defined in subsection 90(15)) owes an amount to the foreign affiliate (or a partnership of which the foreign affiliate was a member) at any time during the reporting period. If so, columns 3 and 4 require the reporting entities to indicate if subsections 90(6) or 90(8) apply to that debt. As the application of subsection 90(6) or paragraph 90(8)(a) may not be confirmed until after the T1134 information return is required to be filed, the reporting entities may not have a firm answer as to the application of subsection 90(6)/paragraph 90(8)(a).
Could the CRA provide guidance as to how the reporting entities should respond to columns 3 and 4 in such instance?
B. T1134 Missing Substantial Information (for 2021 and later taxation years)
In technical interpretation 2019-0791541I7 the CRA indicated that an information return missing substantial information will be considered invalid, and therefore, will not be considered to have been filed.
Can the CRA provide examples of what it would consider to be “substantial information” on the T1134 information return?
To assist taxpayers in preparing the T1134 information return, the CRA maintains a question and answer webpage titled “Questions and answers about Form T1134” - Canada.ca (“the Q&A Page”). The Q&A Page provides additional instructions regarding how to complete the information return in certain situations.
Over the past year the CRA has received a number of requests from different members of the tax community for guidance in respect of situations not covered by the Q&A Page. The CRA is currently working to update the Q&A Page to provide responses to those questions as well as to the above Round Table questions.
Question 13: Part XIII Tax on Royalties paid on Broadcasting Rights
At the 2011 IFA Conference, the CRA stated that the position set out in Interpretation Bulletin IT-303SR “Know-how and similar payments to non-residents” (January 1, 1995) [archived] should be followed, such that the exception in subparagraph 212(1)(d)(vi) applied to all payments for copyright in respect of a literary, dramatic, musical or artistic work, unless that payment is for a right referred to in subsection 212(5) (“the 2011 Position”). Consistent with this position, we understand that the exception in subparagraph 212(1)(d)(vi) applies to payments made by a Canadian resident to a non-resident for the right to broadcast live events in Canada such that they are not subject to Canadian withholding tax. For example, payments made by a Canadian broadcaster to acquire the rights from a non-resident to broadcast live sport or artistic events in Canada (“the Broadcast Rights Payments”) fall within the exception of subparagraph 212(1)(d)(vi), unless the Broadcast Rights Payment is in respect of a right referred to in subsection 212(5).
The Supreme Court of Canada (SCC) analyzed the definition of “copyright” under the Copyright Act, R.S.C., 1985, c. C-42 (“the Copyright Act”) in Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada  2 S.C.R. 231 (“the SCC Decision”) and made a clear distinction between the right to perform in public and the right to produce or reproduce a copyright work.
In light of the SCC Decision, could the CRA confirm whether it is still of the view that Broadcast Rights Payments would be considered as being in respect of a “copyright in respect of the production or reproduction of any literary, musical or artistic work” for purposes of the exception in subparagraph 212(1)(d)(vi)?
The SCC Decision was released in July 2012 and instructs whether, for purposes of the Copyright Act, a payment made for the download over the internet of a copyrighted work is made “in respect of the production or reproduction” of that work. From that perspective, the SCC Decision informs if a payment would benefit from the exception in subparagraph 212(1)(d)(vi) for the purposes of the Act.
The provision at issue in the SCC Decision is paragraph 3(1)(f) of the Copyright Act, which states that copyright owners have the sole right, in the case of any literary, dramatic, musical or artistic work, to communicate the work to the public by telecommunication. What is relevant in the SCC Decision to the application of the exception in subparagraph 212(1)(d)(vi) is the finding of the SCC that the definition of “copyright”, in the introductory paragraph of subsection 3(1) of the Copyright Act, encompasses three separate core rights: (i) the right to perform a work in public; (ii) the right to produce or reproduce a work in any material form; and (iii) the right to publish an unpublished work. According to the majority of the SCC, the rights that are listed in paragraphs (a) to (j) of subsection 3(1) are not self-standing rights and they must be connected to one of the three separate core rights enumerated in the introductory paragraph. The SCC specified that the right to communicate a work to the public by telecommunication in paragraph (f) of the definition of “copyright” in the Copyright Act is connected to the core right to perform a work and not to the right to reproduce permanent copies of the work.
Broadcast Rights Payments are consideration for a right to which paragraph (f) of the definition of “copyright” in the Copyright Act applies, i.e., the right to communicate work to the public by telecommunication. Such right being linked to the core right to perform a work per the SCC Decision, Broadcast Rights Payments cannot be viewed as payments made “in respect of the production or reproduction” of copyrighted work and as such, they are not governed by the exception in subparagraph 212(1)(d)(vi).
The 2011 Position cannot be reconciled with the clear distinction drawn by the SCC Decision between the right to perform a work along with the related right to broadcast the performance and the right to produce or reproduce a work. On that basis, the segment of the 2011 Position dealing with subparagraph 212(1)(d)(vi) ceased to be a correct interpretation of the law and, as a result, unless subsection 212(5) otherwise applied, the CRA was thereafter required to assess Broadcast Rights Payments as being subject to tax in Canada under paragraph 212(1)(d).
Question 14: Charities – Transfer of Property to a Grantee Organization
Recently, the Act was amended to permit Canadian registered charities to make disbursements by way of a gift or by otherwise making resources available to a “grantee organization” which is defined to include a person, club, society, association or organization or prescribed entity, but not a qualified donee.
Paragraph 168(1)(f) was amended to permit the Minister to revoke a charity’s registration as follows:
168(1) Notice of intention to revoke registration
The Minister may, by registered mail, give notice to a person described in any of paragraphs (a) to (c) of the definition “qualified donee” in subsection 149.1(1) that the Minister proposes to revoke its registration if the person
(f) in the case of a registered charity, registered Canadian amateur athletic association or registered journalism organization, accepts a gift the granting of which was expressly or implicitly conditional on the charity, association or organization making a gift to another person, club, society, association or organization other than a qualified donee [emphasis added].
This amendment indicates that a registered charity cannot accept a gift of property where the donor, expressly or implicitly, directs the registered charity to transfer the property by way of a gift to a grantee organization.
For purposes of paragraph 168(1)(f), can a registered charity accept a gift of property from a donor who provides a letter of wishes expressing the hope that the charity will transfer the property to a named grantee organization? If the charity makes that transfer, will the Minister simply consider that the donation was “implicitly conditional” on the charity transferring the property to the grantee organization, notwithstanding that the letter says that it was not?
Prior to recent amendments, the Act required that a registered charity devote its resources to charitable activities that the charity carried on itself or to providing gifts to qualified donees. Where a charity conducted activities through an intermediary organization (other than a qualified donee), the charity was required to maintain sufficient control and direction over the activity such that it could be considered its own activity.
Bill C-19 amended the Act to allow a registered charity to make a qualifying disbursement, by way of a gift or otherwise making resources available, to a grantee organization, provided that the disbursement is in furtherance of a charitable purpose of the charity and the charity ensures that the disbursement is exclusively used to advance charitable activities in furtherance of a charitable purpose of the charity. A grantee organization is defined in subsection 149.1(1) to include a person, club, society, association or organization, but does not include a qualified donee.
To prevent organizations from acting as conduits in the making of a directed gift, paragraph 168(1)(f) was amended to apply to registered charities. Accordingly, the registration of a registered charity, registered Canadian amateur athletic association or registered journalism organization may be revoked if such an entity accepts a gift which was expressly or implicitly conditional on making a gift to another person, club, society, association or organization other than a qualified donee.
Whether a registered charity has accepted a gift that was implicitly conditional for the purposes of paragraph 168(1)(f) is a mixed question of fact and law, the determination of which can only be made on a case-by-case basis following a review of the facts and circumstances and related documentation.
The CRA is currently preparing guidance on these new measures.
On November 30, 2022, the CRA released draft guidance on these new measures. The guidance document CG-032, Registered charities making grants to non-qualified donees, is available on the CRA’s website and is open for public feedback. Comments should be provided by January 31, 2023.
1 We gratefully acknowledge the following CRA personnel, who were instrumental in helping us prepare for the Round Table: Lata Agarwal, Angelina Argento, Nicolas Bilodeau, Urszula Chalupa, Sylvie Danis, Dawn Dannehl, Charles Dumas, Steve Fron, Robert Gagnon, Yves Grondin, Jess Johns, Marilyn Jourdain, Sophie Larochelle, John Meek, Bob Naufal, David Palamar, Marina Panourgias, Komal Patel, Chantal Pelletier, Katie Robinson, MarieClaude Routhier, Louise Roy, Sandra Snell, Charles Taylor, Grace Tu, Nicole Verlinden, Matthew Weaver, Kimberly Wharram, Tobias Witteveen and Gina Yew.
2 The “partner’s share of the partnership adjusted net income” means in general for the partner, the total of all amounts as determined under subparagraph 53(1)(e)(i) for the fiscal period minus the total of all amounts as determined under subparagraph 53(2)(c)(i) for the fiscal period.
3 Tax shelter means the “tax shelter investment” as defined in subsection 143.2(1).
5 Regulation 204(2) provides for the same filing due date.
7 The terms “RFI”, “Passive NFE” and “financial account” are defined in subsection 270(1).
9 https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/enhanced-financial-accountinformation-reporting/reporting-sharing-financial-account-information-other-jurisdictions/gui..., paragraph 9.54.
15 Supra footnote 11, page 70.
16 Supra footnote 8.
17 Ibid., page 130.
18 Supra footnote 12, paragraph 236.
20 Ibid., paragraph 1.5.
21 Bank of Nova Scotia v. The Queen,  C.T.C. 57 80 D.T.C. 6009,  2 F.C. 545; Timagami Financial Services Ltd. v. The Queen,  C.T.C. 76 81 D.T.C. 5064,  2 F.C. 777; aff’d  C.T.C. 314 (F.C.A.) 82 D.T.C. 6268,  1 F.C.413.
23 Budget Implementation Act, 2022, No. 1, 2022, c. 10, assented to June 23, 2022.