Income Tax Severed Letters

This Week's Release

Conference

3 December 2019 CTF Roundtable Q. 1, 2019-0824551C6 - Multilateral Instrument (“MLI”)

“TAP” Committee, similar to the GAAR Committee, to address PPT issues

Principal Issues: What measures were put in place by the CRA to administer the anti-avoidance rule in Article 7 of the MLI?

Position: A consultation process including the creation of a committee similar to the GAAR Committee will be used to make recommendations on the application of that rule. The responsibility to provide recommendations on the application of the GAAR on tax benefits emanating from a bilateral treaty will be transferred to the new committee.

Reasons: See Response.

3 December 2019 CTF Roundtable Q. 2, 2019-0824381C6 - Foreign taxes paid

Unedited CRA Tags
Section 126, definition of “relevant spot rate” in s. 261(1), s. 261(2)
taxpayers can translate under s. 126 foreign taxes at the exchange rate applied to the related income
US and UK Treaties do not eliminate FTC requirement that the taxes be paid
translation of foreign taxes at same FX rate as that used for related income is acceptable

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.

3 December 2019 CTF Roundtable Q. 3, 2019-0824391C6 - Safe Income Determination Time

Unedited CRA Tags
55(2), 55(5)(d)
the TFSB of FA should be translated into Canadian dollars under s. 55(5)(d) at the safe income determination time

Principal Issues: Which currency exchange rate should be used to calculate income earned or realized under paragraph 55(5)(d) when the rate that prevails immediately before the safe income determination time is different from the rate that prevails immediately before the payment of the dividend?

Position: The operation of paragraph 55(5)(d) requires the use of the rate that prevails immediately before the safe income determination time.

Reasons: See document.

3 December 2019 CTF Roundtable Q. 4, 2019-0824521C6 - 84.1(1)(a) v/s 129(1)(a)

Unedited CRA Tags
84.1(1)(b), 129(1)(b)
CRA confirms its recent volte-face that s. 84.1(1)(b) dividends can generate dividend refunds

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.

3 December 2019 CTF Roundtable Q. 5, 2019-0824561C6 - 212.1 Post-mortem Pipeline Transaction

Unedited CRA Tags
84.1, 212.1
a pipeline transaction where there are non-resident beneficiaries currently generates Pt XIII tax

Principal Issues: Whether a non-resident beneficiary of an estate that has implemented a post-mortem "pipeline" transaction may be subject to section 212.1 of the Act.

Position: Generally yes, subject to the comfort letter issued by the Department of Finance on December 2, 2019.

Reasons: The application of the look-through rules in subsection 212.1(6) of the Act could result in the conditions of subsection 212.1(1) of the Act being satisfied in respect of the non-resident beneficiary.

3 December 2019 CTF Roundtable Q. 6, 2019-0823581C6 - 21 year planning, 107(5), and TCP

Unedited CRA Tags
107(5); 104(4); 107(2); 107(2.1)
a s. 107(2) rollout of Cdn Realtyco shares (i.e., TCP) to a NR-owned corporate beneficiary is inherently abusive
abuse of ss. 107(2) to rollout private Realtyco shares to NR-owned Cdn corporate beneficiary

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).

3 December 2019 CTF Roundtable Q. 7, 2019-0824401C6 - TOSI and Inherited Property

Unedited CRA Tags
120(1.1)(b)(ii)
shares distributed out of an inter vivos trust on an active individual’s death were received as a consequence of death for s. 120.4(1.1)(b)(ii) purposes

Principal Issues: Whether shares are acquired as a consequence of death for purposes of paragraph 120(1.1)(b).

Position: 7(A) No. 7(B) Yes.

Reasons: Consistent with prior positions and rulings.

3 December 2019 CTF Roundtable Q. 8, 2019-0824411C6 - TOSI - Excluded Business

Unedited CRA Tags
120.4(1), 248(1), Regulation 1101(1)
income derived from a prior year’s sale of an excluded business is not excluded

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.

3 December 2019 CTF Roundtable Q. 9, 2019-0824421C6 - Excluded Amount-Non-related Business exception

Unedited CRA Tags
120.4
source individual status retained after arm's length sale if continued active involvement in business
a transitional services agreement with an arm’s length purchaser can engage the TOSI rules

Principal Issues: Application of the excluded amount exception in the context of the sale of a business.

Position: General comments provided.

Reasons: See comments.

3 December 2019 CTF Roundtable Q. 10, 2019-0824461C6 - Earnout payments to non-residents

Unedited CRA Tags
12(1)(g), 212(1)(d)(v), 2(3), 115(1)(a)(iii), 115(1)(b), 248(1) taxable Canadian property
reverse earnout payments generally are not subject to Pt XIII tax

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.

3 December 2019 CTF Roundtable Q. 11, 2019-0824511C6 - Common Reporting Standards

Unedited CRA Tags
270-281
Canada uploads common reporting standards (CRS) info onto its systems for full-spectrum compliance use

Principal Issues: How is CRA using CRS information?

Position: General comments provided.

3 December 2019 CTF Roundtable Q. 12, 2019-0824531C6 - Earnout and Cost Recovery Method

Unedited CRA Tags
12(1)g), 39(1)
cost-recovery method earnout can be based on the earnings of a lower-tier corporation

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].

3 December 2019 CTF Roundtable Q. 13, 2019-0824491C6 - Triangular Amalgamation

Unedited CRA Tags
87(9)(a.4), 87(9)(c), 245(2)
use of a “Midco” on triangular amalgamation “technically” avoids ss. 87(9)(a.4) and (c) limitation
GAAR may apply to the use of a “Midco” to step up the tax basis of a target investment on a triangular amalgamation

Principal Issues: Whether an additional corporation can be used in a triangular amalgamation to increase the cost of shares that are received by a corporation that indirectly wholly-owns the corporation resulting from the amalgamation.

Position: The use of the additional corporation to avoid the limitation on cost imposed by paragraphs 87(9)(a.4) and 87(9)(c) could be subject to the application of GAAR. The views expressed in the 1991 documents are no longer valid.

Reasons: See document.

3 December 2019 CTF Roundtable Q. 14, 2019-0824481C6 - Replacement Property Rules

Unedited CRA Tags
13(4), 13(4.1), 44(1), 44(5), 54, 248(1)
a replacement property can be acquired before disposing of the former property
property acquired in advance for expansion purposes can qualify

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.

3 December 2019 CTF Roundtable Q. 15, 2019-0824501C6 - Subsection 104(13.4) and LCBs

Unedited CRA Tags
104(13.4)(a), 104(13.4)(c), 104(4)(a),(a.1),(a.4), 111(1)(b), 150(1), 161(1), balance-due day in 248(1)
there can be no interest ultimately payable to the extent that a life interest trust realizes a capital loss in the stub period following death

Principal Issues: Paragraph 104(13.4)(a) applies to alter ego, joint spousal and certain other trusts. Where the provision applies, the trust will have two taxation years in the same calendar year. Consider a situation where the trust realizes a capital gain in the first taxation year and realizes a capital loss in the second taxation year. 1. What is the proper method for ensuring the capital loss is applied in the first taxation year? 2. Where the net capital loss carried back (LCB) is at least equal to the taxable capital gain in the first taxation year, will arrears interest be charged in respect of tax payable in the first taxation year?

Position: 1. The capital loss realized in the second taxation year must be reported in the T3 return for that year and the LCB request must be made by filing a T3A form. The T3A form should be filed on or before the balance-due day for the first taxation year. 2. The LCB request will be processed after the notice of assessment for the first taxation year is issued. Where the tax payable reported on the return for the first taxation year is not paid on the balance-due day, the notice of assessment will reflect arrears interest. However, where the LCB request is filed on or before the "balance-due day" of the first taxation year and the net capital loss is at least equal to the taxable capital gain in the first taxation year, arrears interest reported on the notice of reassessment should be reversed.

Reasons: 1. The date on which the T3 return is due, and the “balance-due day” for the first taxation year is extended by paragraph 104(13.4)(c) to be 90 days within the end of the calendar year in which the taxation year ends. 2. The application of the LCB as described will result in no tax payable at the balance-due day for the first taxation year. Accordingly, arrears interest should not apply.

3 December 2019 CTF Roundtable Q. 16, 2019-0824471C6 - Eligible Dividend Designation

Unedited CRA Tags
89(14)
where all shareholders of a private corporation are directors, an eligible dividend designation can be done through the dividend declaration

Principal Issues: Can CRA’s administrative relief with respect to how public companies inform their shareholders of the declaration of an eligible dividend be applied to CCPCs?

Position: No.

Reasons: Our position remains unchanged, factors that allow for a public company to declare an eligible dividend are not applicable for CCPCs.

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