Income Tax Severed Letters - 2017-04-12

Ruling

2016 Ruling 2015-0593341R3 - loss consolidation

Unedited CRA Tags
12(1)(x), 20(1)(c), 55(2), 56(2), 69(1), 112(1), 112(2.2), 112(2.3), 112(2.4), 187.1, 191, 246(1)

Principal Issues: Is the loss consolidation arrangement acceptable?

Position: Yes.

Reasons: Adheres to longstanding administrative policy.

Technical Interpretation - External

24 March 2017 External T.I. 2016-0662381E5 F - Control - unanimous shareholders agreement

Unedited CRA Tags
125(7); 251(5)(b)
Summary Under
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(i)
highly contingent secondary call right of a non-resident on shares of minority residents undercuts for CCPC purposes their USA right to appoint half the board
Summary Under
Tax Topics - Income Tax Act - Section 251 - Subsection 251(5) - Paragraph 251(5)(b) - Subparagraph 251(5)(b)(ii)
no application if non-resident under USA cannot control board decision to redeem residents’ shares – applies if automatic redemption requirement
Summary Under
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation
non-resident would control notwithstanding USA board appointment right of residents due to its secondary call right on their shares or right to require corp to honour automatic redemption clause

Principales Questions: 1. Whether paragraph 251(5)(b) would apply to the situations described considering the different provisions of a shareholders’ agreement? If yes, how would paragraph 251(5)(b) be applied?
2. Where there is a unanimous shareholders’ agreement in which there is a provision stating that the group of Canadian residents will designate two directors and a non-resident will designate two directors, whether the non-resident may have the control if the non-resident is deemed to own more than 50% of the voting shares of the capital stock of a corporation.

Position Adoptée: 1. In some situations, the non-resident would have a right described in paragraph 251(5)(b). In the situations described in which paragraph 251(5)(b) would apply, it appears appropriate to consider the rights with respect to the shares held by all the other shareholders of the corporation.
2. Following the decision in the Bagtech case, we would take into account a provision of designation and nomination of the directors that is included in an unanimous shareholders’ agreement to determine the effective control where a non-resident is deemed to own more than 50% but less than 100% of the voting shares of the capital stock of a corporation except in the situations where it is not appropriate. However, when the non-resident is deemed to own 100% of the shares, we would not take such a provision into account because the non-resident would be deemed to be the only shareholder of the corporation.

Raisons: 1. It depends on the facts and the provisions described in the agreement. 2. The Bagtech case.

9 March 2017 External T.I. 2016-0677351E5 - Withholding on remuneration paid to a non-resident

Unedited CRA Tags
153(1); 248(1) and Regulations 104(2); 200(1)
Summary Under
Tax Topics - Income Tax Regulations - Regulation 104 - Subsection 104(2)
non-resident director attending all Canadian board meetings by phone or internet is not subject to withholding
Summary Under
Tax Topics - Income Tax Regulations - Regulation 200 - Subsection 200(1)
Reg. 104(2) exemption does not apply for T4 reporting purposes, subject to $500 exclusion

Principal Issues: 1. Obligation, if any, of a corporation resident in Canada to withhold income tax from the remuneration paid to a non-resident who does not perform any services in Canada. 2. If there is no obligation to withhold, whether a T4 or other information slip is required to be prepared.

Position: 1. No withholding required. 2. A T4 must be prepared and filed.

Reasons: 1. No withholding where non-resident does not perform services in Canada. Attendance at director's meetings by telephone or internet does not, in and of itself, constitute performing services in Canada. 2. Regulation 200(1) requires preparation of T4 where employment remuneration is paid.

24 February 2017 External T.I. 2016-0669081E5 - T1135 reporting

Unedited CRA Tags
233.3
Summary Under
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(1) - Reporting Entity
attribution rules disregarded
Summary Under
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(3)
attribution rules ignored

Principal Issues: Should the attribution rules be considered for the purpose of the specified foreign property reporting requirements in section 233.3?

Position: The reporting requirements under section 233.3 of the Act are independent of any determination with respect to the attribution rules.

Reasons: The legislation.

3 February 2017 External T.I. 2015-0589821E5 F - Change of Use of duplex

Unedited CRA Tags
45(1)(a), 45(1)(b), 45(1)(c), 13(7)(c)
Summary Under
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)
substantially renovating the personal-use portion of a rental property (without changing floor areas) generally would not engage the change-of-use rules

Principales Questions: 1. Whether a change in use occurs when a taxpayer moves from one unit of a duplex to another unit, which he previously rented, and starts to rent the unit he used to inhabit? 2. Whether a change in use occurs as a result of important renovations made to one unit used for personal purposes without any corresponding renovations being made to the other unit? 3. In a situation described in 2) whether certain expenses incurred in respect to the whole duplex should, after the renovation, be allocated on the basis of the relative FMV or relative cost of each unit rather than based on the square meters of each unit?
4. In a situation described in 2), if the taxpayer were to dispose of the duplex, how should the proceeds of disposition be allocated considering the costs incurred for the renovation of one unit and the increase in value attributable to such renovation?

Position Adoptée: 1. Generally no, if the size of each unit is the same and the proportion of each use (personal and rental) of the duplex remains unchanged.
2. Generally no, unless the renovations are such that the size of the renovated unit is increased.
3. The allocation has to be reasonable considering all the relevant circumstances. 4. None.

Raisons: 1. Wording of paragraphs 45(1)(a) and 45(1)(c), considering that the duplex is one single property. 2. Wording of paragraph 45(1)(c).
3. In accordance with paragraph 18(1)(a), an expense is not deductible except to the extent it was incurred by the taxpayer for the purposes of earning income. The allocation has to be reasonable in the circumstances. 4. The question is based on assumptions which the CRA is unable to verify.

Technical Interpretation - Internal

17 January 2017 Internal T.I. 2016-0647161I7 - Capital gains of a partnership

Unedited CRA Tags
96(1), 96(8), 114
Summary Under
Tax Topics - Income Tax Act - Section 114
a year-end income allocation by a non-resident partnership to an immigrant included offshore capital gains realized pre-immigration
Summary Under
Tax Topics - Income Tax Act - Section 96 - Subsection 96(8) - Paragraph 96(8)(c)
no reciprocal application to pre-immigration capital gains

Principal Issues: Whether an individual, a partner in a foreign partnership who became a Canadian resident during a year, is required to report a capital gain for Canadian income tax purposes that was realized by the partnership while the individual was a non-resident of Canada.

Position: Yes.

Reasons: Capital gain is included in the partner’s income under subsection 96(1) and reported under section 114.

29 July 2016 Internal T.I. 2015-0600941I7 - Share Based Deferred Compensation - Section 7

Unedited CRA Tags
Section 7, 7(3)(b)
Summary Under
Tax Topics - Income Tax Act - Section 7 - Subsection 7(3) - Paragraph 7(3)(b)
CRA treats amounts paid by a Canadian sub, to reimburse its U.S. parent for dilution under SARs that could be settled in cash at the issuer’s option, were deductible

Principal Issues: Are various types of share based compensation plans subject to section 7 of the Act? If so, will paragraph 7(3)(b) apply to deny the employer a deduction?

Position: Question of fact, depends on whether an agreement to issue shares exists for purposes of section 7. If section 7 applies, in general, paragraph 7(3)(b) will apply to deny an employer a deduction in respect of the agreement.

Reasons: If the share based compensation plan creates an agreement where an employer has a legally binding obligation to issue shares of the employer to an employee and the employee has an enforceable right to be issued the shares, the provisions of section 7 will apply. As a result, in general, the provisions of 7(3)(b) will apply.