Income Tax Severed Letters - 2016-07-20


26 May 2016 IFA Roundtable Q. 1, 2016-0642051C6 - Classification of U.S. LLPs & LLLPs

CRA Tags
248(1) "corporation"
Delaware and Florida LLPs and LLLPs as corporations
LLPs and LLLPs treated as corporations

Principal Issues: Whether LLPs and LLLPs governed by the laws of Florida or Delaware would generally be treated as corporations for the purposes of the Act?

Position: Generally yes; certain administrative relief provided for entities formed before July 2016 that, among other conditions, convert before 2018 to forms of entities that are generally recognized as partnerships for Canadian income tax purposes.

Reasons: The provisions of the foreign legislation and the articles creating these entities support the general conclusion that these types of entities should generally be treated as corporations for the purposes of the Act.

26 May 2016 IFA Roundtable Q. 2, 2016-0642061C6 - AOA & Notional Expenses

CRA Tags
Treaties Article VII
no deduction of notional expenses from the profits of PEs of (non-U.S.) non-residents

Principal Issues: Whether notional expenses determined under the AOA and attributable to a taxpayer’s permanent establishment in Canada can be deducted for Canadian tax purposes?

Position: Notional expenses are generally not deductible, except if there is an agreement entered into between the competent authorities of the parties to the particular tax convention in question and such agreement expressly provides for such deduction.

Reasons: See below.

26 May 2016 IFA Roundtable Q. 3, 2016-0642111C6 - PUC of Shares of a FC Reporter

CRA Tags
84(3), 84(4), 261
Canadian corporation with a USD functional currency can be subject to Part XIII withholding obligations on its USD prefs resulting from FX fluctuations
deemed dividend calculation for shareholder not part of Cdn tax results

Principal Issues: Various questions concerning the maintenance of the paid-up capital of a class of shares of a corporation with a US$ “elected functional currency” for various purposes under the Act, including the determination of the amount of a dividend deemed to be paid and received under subsection 84(3).

Position: General comments on how to maintain paid-up capital accounts for non-functional currency tax reporters and for functional currency tax reporters.

Reasons: See below.

26 May 2016 IFA Roundtable Q. 4, 2016-0642151C6 - Upstream loan converted to PLOI

CRA Tags
90(6), 90(8)(a), 15(2), 15(2.11)
the replacement of an “2nd-tier” upstream loan to a non-resident parent by a PLOI will not occur as part of the same series
Words and Phrases

Principal Issues: Can the exception in par. 90(8)(a) apply to an upstream loan which is repaid and then indirectly converted to a new loan which is subject to a PLOI election?

Position: Yes.

Reasons: The repayment would not be considered to be part of a series of loans and repayments in the scenario presented.

26 May 2016 IFA Roundtable Q. 5, 2016-0642091C6 - Upstream loans: 90(7) and 90(9)

CRA Tags
90(7), 90(9), 90(11)

Principal Issues: How the CRA intends to apply the back-to-back loan rule in subsection 90(7) under two scenarios.

Position: The back-to-back loan rule would not generally be applied in the first scenario and would generally be applied in the second.

Reasons: A TCP approach leads to different results depending on the facts.

26 May 2016 IFA Roundtable Q. 6, 2016-0642081C6 - German Organschafts

CRA Tags
profit transfer payments by German sub to its German parent deemed to be dividends under s. 90(2)
profit transfer payments made by a German sub to German parent are s. 90(2) dividends not within s. 95(2)(a)(ii)(B) after 2016
German profit transfer payment to loss subsidiary is contribution of capital
loss compensation payment under Organschaft

Principal Issues: Whether a payment made under a "profit transfer agreement" by a German subsidiary to its German parent could be deemed to be a "dividend" under subsection 90(2)?

Position: Yes, provided the payment meets the pro rata distribution condition in subsection 90(2).

Reasons: The wording of subsection 90(2) supports this position.

26 May 2016 IFA Roundtable Q. 7, 2016-0642121C6 - 93(2.01) & Capital Contribution

CRA Tags
93(2), 93(2.01)
contribution of shares to a subsidiary caused the subsidiary shares to be substituted property
Words and Phrases

Principal Issues: Whether the concept of “substituted shares” used in subsection 93(2.01) may be interpreted in such a way as to refer to shares owned by a taxpayer in respect of which the taxpayer made a capital contribution consisting of shares of another foreign affiliate?

Position: Yes.

Reasons: See below.

26 May 2016 IFA Roundtable Q. 8, 2016-0642041C6 - s. 95(2)(a)(ii)(B) and borrowing to return capital

CRA Tags
95(2)(a)(ii)(B), 20(1)(c)
tracing approach to determining whether interest on money borrowed to return capital is considered for s. 95(2)(a)(ii)(B) to be deductible in computing exempt earnings
interest used to fund return of capital that had been used in an active buisness deductible under Reg. 5907(2)(j)

Principal Issues: (1) Canco holds two classes of shares in an FA (FA1). The proceeds from the issuance of the Class A shares were used to fund an active business while the proceeds from the issuance of the Class B shares were used to purchase shares in another FA (FA2) that are not excluded property. If FA1 borrows funds from another FA (FA3) and uses those funds to return capital to Canco in respect of its Class A shares, would FA3’s interest income on the loan be recharacterized as active business income? (2) Would the answer be different if there was only one class of shares issued by FA1?

Position: (1) Yes. (2) Yes.

Reasons: (1) It is our view that the loan to FA1, which replaced capital that was being used for eligible purposes, would have qualified for interest deductibility under paragraph 20(1)(c) if FA1 had borrowed the money for that purpose, as such, the interest income received by FA3 on the loan should be recharacterized into income from an active business pursuant to clause 95(2)(a)(ii)(B). (2) In the situation where FA1 has issued only one class of shares the pro-rata treatment should be used such that income from the loan to FA1 is recharacterized proportionate to borrowed funds used by FA1 to return capital that was used by it in its active business.

26 May 2016 IFA Roundtable Q. 9, 2016-0642131C6 - Article IV(7) and S-Corporations

CRA Tags
Treaties Article IV(7)(b)
US-Treaty benefits denied on interest paid by a transparent ULC sub to an S-Corp

Principal Issues: Does subparagraph 7(b) of Article IV of the Treaty apply to the interest paid by a Canadian unlimited liability company that is disregarded for U.S. tax purposes to a US S corporation that is the holder of a 100% interest in a qualified subchapter S subsidiary that owns a 100% interest in the aforementioned Canadian unlimited liability company?

Position: Yes

Reasons: To the extent that a Canadian ULC is disregarded for U.S. tax purposes, the interest income paid by the ULC would not receive the “same treatment” as it would have received if the ULC was treated as being a regarded entity for U.S. tax purposes and as such, subparagraph 7(b) of Article IV of the Treaty would apply to deny Treaty benefits to the US S Corporation parent in respect of that interest income.

26 May 2016 IFA Roundtable Q. 10, 2016-0642101C6 - 93.2 & 95(2)(c)

CRA Tags
dropdown of shares made to an LLC as a contribution of capital deemed by s. 93.2(3) to be for "share” consideration
s. 95(2)(c) rollover can apply on a dropdown of shares made to an LLC as a contribution of capital rather than for “share” consideration
drop-down of FA shares to non-share FA deemed to be for share consideration

Principal Issues: Whether paragraph 95(2)(c) applies in a situation where a taxpayer transfers shares of a foreign affiliate to another foreign affiliate that is a “non-resident corporation without share capital”, within the meaning of subsection 93.2(1), without any “shares” being issued as consideration?

Position: Yes, provided the conditions set out in subsection 93.2(3) are met.

Reasons: See below.

26 May 2016 IFA Roundtable Q. 11, 2016-0642031C6 - PLOI late-filed penalties

CRA Tags
15(2), 15(2.11), 15(2.12), 212.3(11)
potential administrative relief on computing late-filed PLOI election penalties on a debit-by-debit basis
aggregating A/R debits for penalty purposes under review

Principal Issues: Where an intercompany account between a CRIC and a related non-resident contains multiple accounts receivable, for the purposes of the penalty calculations under subsections 15(2.13) and 212.3(13) for a late filed PLOI election, whether the CRA would accept that there was one accumulated “amount” for a year (or some other period within the year) or whether the CRA considers that an “amount” arises from each intercompany transaction.

Position: Each transaction would result in a separate amount. However, an administrative position to aggregate the amounts is currently being reviewed by the International, Large Business and Investigations Branch.

Reasons: The wording of the relevant provisions of the Act and our previous interpretations.

3 May 2016 CALU Roundtable Q. 1, 2016-0632601C6 - LIA Policies

concerns re products which technically skirt the LIA policy rules

Principal Issues: At the 2015 CLHIA Tax Officers’ Meeting, a CRA official indicated that there is a review underway relating to new types of leveraged insured annuity arrangements. Can the CRA provide more details relating to the structures of these arrangements and its particular concerns?

Position: Comments provided below

3 May 2016 CALU Roundtable Q. 2, 2016-0632611C6

Principal Issues: Can the CRA comment on any other insurance related planning strategies that are currently under review?

Position: Comments provided below

3 May 2016 CALU Roundtable Q. 3, 2016-0632621C6 - Seg fund policy - charitable gift on death

CRA Tags

Principal Issues: A contract holder designates a registered charity as beneficiary of a segregated fund policy. Does paragraph 38(a.1) apply in respect of the property transferred to the qualified donee upon the death of the annuitant?

Position: No.

Reasons: The property transferred to the qualified donee is in the form of a cheque or other negotiable instrument and not a property listed in subparagraph 38(a.1)(i).

3 May 2016 CALU Roundtable Q. 4, 2016-0632631C6

CRA Tags
70(5), 70(6), 104(4), 248(1)

Principal Issues: Is Paragraph 8 of IT-305R4 (archived) still valid?

Position: Yes - response provides detail as to context and application

Reasons: Main purpose of this paragraph is to clarify that for certain purposes of the ITA (i.e. 104(4)) one must reference terms of the trust existing on the date the trust was created

3 May 2016 CALU Roundtable Q. 5, 2016-0632641C6 - Clearance certificate & GRE rules

CRA will issue a clearance certificate for a partial estate distribution

Principal Issues: Will the CRA clearance certificate process be modified in situations where a clearance certificate is needed before a gift can be completed by a graduated rate estate?

Position: The overall process to receive a clearance certificate is currently under review. A legal representative may request a clearance certificate for a partial distribution.

Reasons: CRA policy and clearance certificate procedures.

3 May 2016 CALU Roundtable Q. 6, 2016-0633741C6 - PHSP-sole employee dealing at arm's length

CRA Tags

Principal Issues: Can a plan be considered a PHSP if an employer only has one employee who deals at arm's length with them?

Position: Question of fact, but yes if all conditions to be a PHSP are met.

Reasons: There is no requirement that a plan have more than one member.