19 October 2012 External T.I. 2012-0440071E5 - Section 67 of the Income Tax Act

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Is the CRA's response to question No. 39, made during the Revenue Canada Round Table, at the 1986 Canadian Tax Foundation's Annual Conference still valid?

Position: Yes.

Reasons: In the absence of special situations, such as abuses, it remains the Agency's policy not to tax the same amount twice. This policy may have application where the issue concerns the matter of reasonableness. Where a taxpayer has been reassessed for a disallowance pursuant to section 67 and the unreasonable amount has been reported by the recipient corporation, the agency will, upon receipt of a written request from the recipient, make the appropriate adjustment(s) granting alleviation provided that the recipient agrees to refund the excess to the taxpayer.

XXXXXXXXXX
John Parker CMA
2012-044007

October 19, 2012

Attention: XXXXXXXXXX
Tax Associate

Dear XXXXXXXXXX:

Re: Section 67 of the Income Tax Act

We are writing in response to your email query of March 16, 2012, wherein you asked our opinion as to whether the CRA’s response to question No. 39, given during the CRA Roundtable, at the 1986 Canadian Tax Foundation’s Annual Conference, was still valid. Question No. 39 and the Department’s response were as follows:

“Q. 39 Disallowance of intercompany charges

In situations where Revenue Canada has, on reassessment, disallowed an intercompany charge such as a management fee (perhaps on the basis of a different interpretation of reasonableness), will it agree to make a compensating adjustment to reduce the related income inclusion of the recipient corporation?

Department’s Position

In the absence of special situations, such as abuses, it is the department’s policy not to tax the same amount twice. This policy may have application where the issue concerns the matter of reasonableness. Where a taxpayer has been reassessed for a disallowance pursuant to section 67 and the reasonable amount has been reported by the recipient corporation, the department will, upon receipt of a written request from the recipient, make the appropriate adjustment(s) granting alleviation provided that the recipient agrees to refund the excess to the taxpayer.

In the circumstances where the recipient is a non-resident residing in a country with which Canada has an income tax convention, competent authority assistance may be requested to negotiate offsetting or corresponding adjustments in order to relieve the double taxation. In the case where the unreasonable or excess amount would also give rise to non-resident tax under Part XIII as a deemed dividend pursuant to paragraph 214(3)(a), the taxpayer is provided the option of repatriating the amount that has been disallowed in order to avoid the non-resident tax.”

You have also referenced Income Tax Rulings document No. E9703045 dated July 25th 1997 which confirmed that the above opinion was still valid, at that time.

Our Comments

We confirm that the CRA policy as outlined in the 1986 Canadian Tax Foundation Annual Conference, Revenue Canada Roundtable, reply to question No. 39 remains valid.

We trust our comments will be of assistance.

Yours truly,

Doug Watson
for Director
Financial Industries Division
Income Tax Rulings Directorate