Income Tax Severed Letters

Principal Issues: 1. What exchange rate should be used in converting foreign taxes paid to Canadian dollars? 2. May a foreign tax credit be claimed in respect of UK taxes payable but not yet paid?

Position: 1. Both the use of the exchange rate for the day the taxes were paid and the use of the rates used to convert the foreign income to Canadian dollars are acceptable. 2. In order for a foreign tax credit to be claimed in respect of UK income tax, the tax must actually be paid.

Reasons: 1. The day that the taxes are paid is the day the amount arises for the purposes of s. 126; pursuant to the discretionary power given to the CRA to accept alternate exchange rates to convert foreign currency amounts, the CRA accepts the use of the rates used to convert the foreign income giving rise to the tax. 2. Rulings has previously stated that the words “subject to Canadian laws” in income tax conventions addressing the avoidance of double taxation result in the provisions of s. 126 still applying – these provisions require that for a foreign tax credit to be claimed, the foreign taxes must be paid.

Principal Issues: In technical interpretation 2002-0128955, the CRA took the position that a corporation is not entitled to a dividend refund under paragraph 129(1)(a) with respect to a dividend it is deemed to have paid under paragraph 84.1(1)b). Whether such position still represents the CRA's position in the situation described herein.

Position: No, technical interpretation 2002-0128955 no longer represents CRA’s position.

Reasons: The granting of a dividend refund to a corporation that is deemed to have paid a dividend under paragraph 84.1(1)(b) in a similar situation achieves an outcome that is more in accordance with the integration principle.

Principal Issues: Can the CRA comment on the tax implications associated with the distribution of taxable Canadian property (other than property described in subparagraphs 128.1(4)(b)(i) to (iii)) from a discretionary family trust to a Canadian corporation that is wholly owned by a non-resident individual in order to avoid the application of subsection 107(5)?

Position: GAAR likely applicable.

Reasons: The transaction described circumvents the application of subsections 107(5) and 107(2.1).

Principal Issues: Whether excluded business test will apply when there has been a change in business activities and the succeeding business operations are not the same as the former?

Position: General comments provided but in this case no.

Reasons: Legislation and previous positions.

Principal Issues: 1. Should earnout payments made to non-residents in respect of a previous disposition of shares that were not taxable Canadian property be subject to subparagraph 212(1)(d)(v) withholding? 2. If subparagraph 212(1)(d)(v) applies, does the requirement to withhold not apply where the recipient is resident in a treaty country that has a typical exemption from Canadian tax on gains realized on the sale of shares that do not derive more than 50% of their value from real or immovable property in Canada?

Position: 1. Generally no. 2. Not applicable based on response to 1.

Reasons: 1. Consistent with the administrative position in respect of earnout payments received by non-resident vendors of shares that are taxable Canadian property.

Principal Issues: Could the cost recovery method be applied in the scenario where an earnout clause relates only to the underlying goodwill of a subsidiary?

Position: The mere fact that the earnout feature relates only to the underlying goodwill of the subsidiary will not preclude the application of the cost recovery method.

Reasons: Position in the Interpretation Bulletin IT-426 [archived].

Principal Issues: Can property that is acquired in advance of the disposition of the former property qualify as a replacement property?

Position: Provided the other requirements are met, yes.

Reasons: See below.