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: (1) Whether an adjustment to the amount described in variable E of the definition of CEC in subsection 14(5) in respect of eligible capital property transferred to a non-arm`s-length non-resident person should be made pursuant to subsection 247(2); (2) Whether such an adjustment results in an increase of the transferor`s outstanding balance of its CDA effective to the day of the transaction under review.
Position: (1) Yes, (2) Yes
Reasons: (1) Subsection 247 (8) provides support for the view that a transfer pricing adjustment should be made pursuant to subsection 247(2); (2) The preamble and paragraph (c.2) of the definition of capital dividend account in subsection 89(1) provide support for the view that an adjustment made to variable E of the definition of cumulative eligible capital found in subsection 14(5), and the income inclusion under paragraph 14(1)(b) resulting from the disposition of an eligible capital property pursuant to subsection 247(2) will be effective to the day of the transaction under review
XXXXXXXXXX
XXXXXXXXXX Tax Services Office François Mathieu
2013-049075
December 19, 2013
Re : Request for a technical interpretation
Impact of transfer pricing adjustments on the balance of a taxpayer's capital dividend account
This is in response to your request for a technical interpretation dated May 28, 2013 in which you are seeking our views regarding the impact of transfer pricing adjustments on the outstanding balance of a taxpayer's capital dividend account ("CDA") further to the taxpayer's disposition of an eligible capital property ("ECP") to a non-resident sister corporation for proceeds of disposition that are lower than the amount that would otherwise have been determined by parties dealing at arm's length.
Facts
1. The taxpayer is a private corporation that is part of large multinational group.
2. The taxpayer owned the ECP in respect of which no deduction was ever claimed pursuant to paragraph 20(1)(b).
3. The taxpayer disposed of the ECP in XXXXXXXXXX to a non-arm's-length non-resident sister company ("SisterCo") in consideration for a promissory note.
4. The taxpayer had an independent evaluation done to support the fair market value ("FMV") of the transferred property.
5. An amount was included in the taxpayer's income pursuant to paragraph 14(1)(b) as a result of the transaction under review. That amount was added to the taxpayer's CDA pursuant to paragraph (c.2) of the CDA definition in subsection 89(1).
6. The taxpayer subsequently paid a dividend to its Canadian parent equal to the outstanding balance of its CDA, and filed an election in prescribed form and manner under subsection 83(2) to treat the dividend so paid as a "capital dividend".
7. The taxpayer and SisterCo included a price adjustment clause ("PAC") in the terms and conditions of the Purchase and Sale Agreement that governs the transfer of the ECP.
8. CRA's XXXXXXXXXX ("Audit") is of the view that the proceeds of disposition of the ECP as reported by the taxpayer are less than the price that would otherwise have been determined by parties dealing at arm's length.
9. Given that the requirements found in subsection 247(2) are satisfied in this situation, Audit is considering relying on that provision to increase the proceeds of disposition of the transaction under review.
Issues
A. Whether the proposed adjustment to the proceeds of disposition of the ECP has to be made pursuant to subsection 69(1) or 247(2)?
B. Whether the proposed adjustment results in an increase to the outstanding balance of the taxpayer's CDA effective to the day of the transaction under review?
Analysis
Whether the proposed adjustment has to be made pursuant to subsection 247(2)
The Law:
Paragraph 69(1)(b) reads as follows:
69(1) Inadequate considerations - Except as expressly otherwise provided in this Act [
]
b) where a taxpayer has disposed of anything
- (i) to a person with whom the taxpayer was not dealing at arm's-length for no proceeds or for proceeds less than the fair market value thereof at the time the taxpayer so disposed of it [
]
the taxpayer shall be deemed to have received proceeds of disposition thereof equal to that fair market value; [Our italics]
Subsection 247(2) reads as follows:
247(2) Transfer pricing adjustment Where a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's-length are participants in a transaction, and
a) the terms and conditions made or imposed in respect of the transaction between any of the participants differ from those that would have been made between persons dealing at arm's-length, or [
]
any amounts that, but for this section and section 245, would be determined for the purposes of the Act in respect of the taxpayer shall be adjusted to the quantum that would have been determined if
c) where only paragraph (a) applies, the terms and conditions made or imposed in respect of the transaction between the participants in the transaction had been those that would have been made between persons dealing at arm's-length [Our italics]
Subsection 247(8) reads as follows:
247(8) Provisions not applicable Where subsection (2) would, if this Act were read without reference to sections 67 and 68 and subsections 69(1) and (1.2), apply to adjust an amount under this Act, sections 67 and 68 and subsections 69(1) and (1.2) shall not apply to determine the amount if subsection (2) is applied to adjust the amount. [Our italics]
Subsection 247(2) applies where a taxpayer participates in a transaction with a non-arm's-length non-resident person if the terms and conditions made or imposed in respect of the transaction differ from those that would have been made between persons dealing at arm's length.
In addition, subsection 247(8) specifically provides that subsection 69(1) shall not apply where subsection 247(2) is applied to adjust the terms and conditions of the transaction under review.
Whether the proposed adjustment results in an increase to the outstanding balance of the taxpayer's CDA effective to the day of the transaction under review
The wording of subsection 247(2) provides support for an adjustment to variable E of the taxpayer's cumulative eligible capital (footnote 1) ("CEC") based on the amount that the taxpayer would have been entitled to receive upon the sale of the intangible property to an arm's-length person, and, ultimately, to the income inclusion arising from the transaction under review pursuant to paragraph 14(1)(b).
According to subsection 89(1), the taxpayer's CDA at any particular time is determined on a cumulative basis for the period beginning at the beginning of the corporation's first taxation year after which it last became a private corporation (footnote 2) and that ended after 1971 and immediately before the time of computation ("Period"). Among other items, the total of all amounts each of which is an amount required to be included in the taxpayer's income pursuant to paragraph 14(1)(b) must be added to the taxpayer's CDA in accordance with the rule found in paragraph (c.2) of the CDA definition.
In our view, any adjustment having to be made to the amount included to the taxpayer's income under paragraph 14(1)(b) pursuant to subsection 247(2) for the taxation year in which the disputed transaction occurred must be considered in determining the balance of the taxpayer's CDA at that time. Incidentally, the CRA has confirmed that it can adjust the amount of a capital gain, which arose in a taxation year that is outside the relevant normal reassessment period (footnote 3), for the purposes of determining the balance of a taxpayer's capital dividend account in respect of a dividend that is paid in a taxation year that is within the normal reassessment period (footnote 4) .
Therefore, the proposed adjustment will result in an increase in the taxpayer's CDA effective to the date of the disputed transaction on the basis of the wording of subsection 247(2) and paragraph (c.2) of the definition of CDA found in subsection 89(1).
We trust that our comments will be of assistance.
Yves Moreno
Manager
Reorganizations Section II
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 The term "cumulative eligible capital" is defined in subsection 14(5)
2 The term "private corporation" is defined in subsection 89(1)
3 The term normal reassessment period is defined in subsection 152(3.1)
4 CRA document 2006-0185291E5
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