Income Tax Severed Letters - 2017-06-14

Conference

26 April 2017 IFA Roundtable Q. 1, 2017-0691071C6 - Interaction between s17 and s247

Unedited CRA Tags
17; 247
Summary Under
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(7)
s. 247(2) generally applies to boost the imputed cross-border interest arising under s. 17
Summary Under
Tax Topics - Income Tax Act - Section 17 - Subsection 17(1.1)
s. 17(1) does not oust application of s. 247(2)

Principal Issues: 1) Does subsection 247(2) apply where a non-interest-bearing loan made by a corporation resident in Canada to its wholly owned foreign affiliate remains outstanding for more than one year and the loan does not qualify for the exception in subsection 17(8)? 2) What if the loan is outstanding for less than one year and would have qualified for the 17(8) exception?

Position: 1) Yes. 2) No.

Reasons: Textual, contextual and purposive interpretation of the Act, based primarily on subsection 247(7).

26 April 2017 IFA Roundtable Q. 2, 2017-0691191C6 - Subsection 247(2) and FAPI

Unedited CRA Tags
Subsection 247(2); paragraph 95(2)(f.11); section 80.4
Summary Under
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2)
s. 247(2) not applied to a CFA earning FAPI if the transaction has been vetted under foreign OECD-based transfer pricing rules
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f)
s. 247(2) applies for FAPI purposes

Principal Issues: Whether subsection 247(2) applies in computing a foreign affiliate's foreign accrual property income in the context of a transaction between the foreign affiliate and another non-resident person.

Position: Yes

Reasons: See response below

26 April 2017 IFA Roundtable Q. 3, 2017-0691131C6 - U.S. LLPs and LLLPs

Unedited CRA Tags
150; 152(4)(a)
Summary Under
Tax Topics - Income Tax Act - Section 96
further extension of grandfathering relief for Florida and Delaware LLPs and LLLPs
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation
general grandfathering of pre-April 26, 2017 LLPs and LLLPs
Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 4
Florida and Delaware LLPs and LLLPs treated like LLCs
Summary Under
Tax Topics - Income Tax Act - Section 93.2 - Subsection 93.2(2)
Florida and Delaware LLPs and LLLPs subject to s. 93.2

Principal Issues: Update on Florida and Delaware LLP/LLLP compliance committee deliberations

Position: The CRA is, on an administrative basis, prepared to allow Florida and Delaware LLPs and LLLPs created before April 26, 2017 to file as partnerships for all years, subject to certain conditions. Otherwise, the CRA expects them to file as corporations for all years.

Reasons: This approach facilitates compliance and administration.

26 April 2017 IFA Roundtable Q. 4, 2017-0691211C6 - App of s. 261(21) to loan with FA

Unedited CRA Tags
261(6.1), 261(20), 261(21)
Summary Under
Tax Topics - Income Tax Act - Section 261 - Subsection 261(20)
application of s. 261(21) to deny a hedge of a U.S. dollar loan
Summary Under
Tax Topics - Income Tax Act - Section 261 - Subsection 261(6.1)
application of s. 261(21) to upstream USD loan to Cdn$ indirect parent

Principal Issues: Would subsection 261(21) apply to deny foreign exchange loss of CAD reporting Canadian-resident corporation realized on settlement of loan from foreign affiliate of related Canadian-resident corporation.

Position: Yes

Reasons: In respect of the “specified transaction" under subsections 261(20) and (21), i.e., the loan, the FA's tax reporting currency is USD. Therefore the condition in paragraph 261(20)(b) that the taxpayers have different tax reporting currencies will be met.

26 April 2017 IFA Roundtable Q. 5, 2017-0691121C6 - Foreign tax credit Brazilian interest on equity

Unedited CRA Tags
91(4.1) and 91(4.7)
Summary Under
Tax Topics - Income Tax Act - Section 91 - Subsection 91(4.7)
s. 91(4.7) applies year-by-year based on actual dividend deductibility

Principal Issues: In what circumstances would the CRA consider the foreign tax credit generator rules to apply in a scenario where a Brazilian foreign affiliate is eligible to make tax deductible dividend payments under Brazil’s interest on equity provisions?

Position: The foreign tax credit generator rules apply in any taxation year of the foreign affiliate in which it pays dividends to a specified owner that are deductible by virtue of an interest on equity election.

Reasons: The test is applied to each taxation year of a foreign affiliate independent of other taxation years.

26 April 2017 IFA Roundtable Q. 6, 2017-0691241C6 - T1134 filing issues

Summary Under
Tax Topics - Income Tax Act - Section 233.4 - Subsection 233.4(4)
no provision of administrative relief from duplicative T1134 filing requirements resulting from amalgamations or CFA transfers

Principal Issues: Would the CRA consider extending its administrative relief in certain situations?

Position: No.

Reasons: Granting the administrative relief requested would not be consistent with the purpose of the T1134 reporting requirement.

26 April 2017 IFA Roundtable Q. 7, 2017-0691221C6 - Clause 95(2)(a)(ii)(D)

Unedited CRA Tags
95(2)(a)(ii)(D)(IV)2.
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(a) - Subparagraph 95(2)(a)(ii) - Clause 95(2)(a)(ii)(D) - Subclause 95(2)(a)(ii)(D)(IV) - Sub-subclause 95(2)(a)(ii)(D)(IV)2
“income” includes “loss,” but s. 95(2)(a)(ii)(D)(IV)2 inapplicable re an LLC interest that is sold before year end
Words and Phrases
income

Principal Issues: (a) In the context of sub-subclause 95(2)(a)(ii)(D)(IV)2., whether a U.S. LLC that has a loss in the year could meet the requirement that all or substantially all of its income is subject to taxation in the hands of its members.
(b) If the second affiliate sells its interest in the third affiliate part way through the year, can the second affiliate be considered a member of the third affiliate at the end of the year for purposes of determining if "all or substantially all" of the third affiliate's income is subject to taxation?

Position: (a) Yes. (b) No.

Reasons: (a) Consistent with our position in 2015-061056.
(b) The provision refers to members. Since the second affiliate is not a member at the end of the year, its income allocation cannot be considered in determining whether the requirement is met.

26 April 2017 IFA Roundtable Q. 8, 2017-0691141C6 - NR4 Reporting for non-taxable amount

Unedited CRA Tags
212
Summary Under
Tax Topics - Income Tax Regulations - Regulation 202 - Regulation 202(1)
NR4s are required even where there is no Part XIII tax

Principal Issues: Is there a reporting obligation with respect to amounts paid or credited by a person resident in Canada to a non-resident person, if the amount is not subject to withholding under Part XIII?

Position: Yes.

Reasons: The reporting requirement under subsection 202(1) of the Regulations is independent from the withholding and remitting requirement under Parts XIII and XIII.2. Where a resident of Canada pays or credits, or is so deemed, to a non-resident person on account or in lieu of payment of, or in satisfaction of, any amount described in paragraphs 202(1)(a) to (h) of the Regulations, there is a requirement to file an information return (i.e. NR4) even though the amount paid was not subject to withholding tax under Part XIII or XIII.2 of the Act.

26 April 2017 IFA Roundtable Q. 9, 2017-0691201C6 - Computation of Earnings for LLCs

Unedited CRA Tags
Definition of “earnings” under subsection 5907(1) of the Regulations, subsection 5907(2.03) of the Regulations
Summary Under
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(1) - Earnings - Paragraph (a) - Subparagraph (a)(iii)
CRA’s new position, that LLCs generally must compute their income under ITA rather than Code rules, need not be applied for surplus calculations for pre-2016 years

Principal Issues: Whether the CRA would reconsider the position announced at the 2016 CTF Conference that earnings of disregarded LLCs must be computed under the rules in subparagraph (a)(iii) of the definition of “earnings” in Regulation 5907(1), rather than the rules under subparagraph (a)(i) of that definition, starting from the taxation years of the LLCs ending after August 19, 2011.

Position: Relief provided.

Reasons: See below

Technical Interpretation - Internal

1 May 2017 Internal T.I. 2015-0624511I7 - 248(1)(e)(ii) of the definition of TCP

Unedited CRA Tags
“taxable Canadian property” definition in 248(1)
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d)
upstream and downstream loans within a wholly-owned corporate group generally are to be treated differently/gross asset and proportionate value approach used
Summary Under
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paaragraph 94(3)(c)
methodology for determining whether shares of NR corps indirectly holding some Cdn real property and resource properties through Opcos with interco loans were taxable Cdn property

Principal Issues: 1. Whether the gross asset value method or net asset value method should be used in determining whether more than 50% of the FMV of the shares of a corporation was derived from relevant Canadian property. 2. Whether the proportionate value method or another method should be used to determine whether more than 50% of the FMV of the share of a corporation owning shares of subsidiary corporations was derived directly or indirectly from one, or any combination of, RCP. 3. Whether intercompany receivables and payables in a wholly-owned corporate group should be excluded from the assets and liabilities in the determination of the relevant values.

Position: 1. The gross asset value method should be used in determining whether more than 50% of the FMV of the shares of a corporation was derived from relevant Canadian property. 2. The proportionate value approach should be used to determine the FMV of the shares of a subsidiary derived from relevant Canadian property for the purpose of applying the gross asset value method at the parent level. 3. Certain intercompany receivable and payable balances receive particular treatment when determining the relevant values.

Reasons: 1. CRA's long-standing position. 2. This method best reflects the value of underlying assets. 3. Certain intercompany indebtedness within the same corporate group, as described, could distort the calculations.