Income Tax Severed Letters - 2015-06-24

Principal Issues: Whether the CRA still follows a "two-step" approach for entity classification, and are there any new entities or arrangements being considered?

Position: General comments, no position taken; Florida LLLPs and LLPs are presently being considered and interested parties are invited to provide comments.

Principal Issues: What is the requisite degree of linkage, between a debt owing by the taxpayer to a creditor and a secondary obligation existing between that creditor (or someone not dealing at arm's length with that creditor) and certain non-residents, sufficient to potentially engage subsection 18(6.1) and 212(3.2), respectively?

Position: It is a question of fact, which can only be determined after a review of all of the facts and circumstances applicable to the particular situation. However, the "Clause B causality test" in subsections 18(6) and 212(3.1) should, in our view, be interpreted broadly enough to fulfill the policy intent of the new back-to-back loan rules as described in the 2014 Budget Plan.

Reasons: A textual, contextual and purposive approach should be used to determine the meaning of words in the Income Tax Act. Furthermore, there is similarity between the language in subsections 17(2), 18(6) and 212(3.1)

Principal Issues: Whether a deficit in a foreign affiliate that ceases to exist in an absorptive merger reduces both the surplus accounts of the merged affiliate and a subsidiary affiliate.

Position: Deficit counted only once.

Reasons: Purpose.

Principal Issues: Whether paragraph 95(2)(i) applies to an amount payable incurred for property acquired?

Position: Yes, to the extent all or substantially all of the amount payable was incurred to acquire excluded property.

Reasons: When read in context, the phrase "a debt of the debtor all or substantially all of the proceeds from which…were used to acquire property…" in paragraph 95(2)(i) can be interpreted in a manner so as to include an amount payable for property acquired to the extent that all or substantially all of the amount payable was incurred to acquire excluded property.

Principal Issues: Is interest on an inter-affiliate borrowing used by the borrower affiliate to pay a dividend, not exceeding the borrower affiliate's accumulated earnings, deductible by the borrower affiliate in computing its earnings or loss from an active business?

Position: Yes.

Reasons: If not deductible under foreign law, then deductible under Reg. 5907(2)(j).