Income Tax Severed Letters - 2019-06-12

Principal Issues: Whether the payment of an “additional participating amount” on an obligation would, in and by itself, prevent any further “periodic non-participating interest” payments to be relieved from Part XIII withholding tax based on Article X(6)(b) of the Canada-US Tax Treaty?

Position: No.

Reasons: Wording of the tax treaty.

Principal Issues: Can fluctuations in exchange rate between Canadian dollars and a functional currency reporter's elected functional currency in respect of income taxes payable result in foreign exchange gains or losses to which the rules in section 39 of the Act would apply?

Position: Yes.

Reasons: Canadian currency fluctuations relative to the reporter’s elected functional currency result in capital gains or losses to which the rules in section 39 of the Act would apply in these situations.

Principal Issues: Where an amount of an indirect benefit would be included in computing a non-resident taxpayer’s income under subsection 15(1) of the Act, if the amount of the benefit were a payment made directly to the non-resident taxpayer and if the non-resident taxpayer were resident in Canada, would the CRA interpret paragraph 246(1)(a) of the Act as including such a shareholder’s benefit in that non-resident taxpayer’s taxable income earned in Canada even though the benefit is akin to income from property rather than any of the Canadian income sources described in subsection 2(3) of the Act?

Position: To the extent that only subsection 15(1) of the Act is relevant in the analysis as to whether a benefit is being conferred under paragraph 246(1)(a), such a benefit would generally not be considered to be taxable income earned in Canada, as it would not be included under subsection 2(3) and Division D of Part I of the Act.

Reasons: A non-resident’s tax liability under Part I of the Act, including any liability that may result from the inclusion of a benefit under paragraph 246(1)(a) of the Act, is generally determined by the non-resident taxpayer’s taxable income earned in Canada under subsection 2(3) and Division D of Part I of the Act. Whether the amount of the benefit can be considered to be taxable income earned in Canada will depend, among other things, on the nature of the benefit being conferred.

Principal Issues: (1) What information should a Canco maintain with respect to a deduction claimed under subsection 113(1) of the Act ("113 Deduction") in respect of a dividend paid by a FA in a taxation year? Are detailed surplus account computations essential to support the 113 Deduction? (2) In a particular set of circumstances, would the CRA accept the late filing by Canco of an election under subsections 5901(2.1) and (2.2) of the Regulations in order for the dividend to be completely sheltered by the 113 Deduction?

Position: (1) General comments, including that a taxpayer is required under 230(1) to maintain records and books of account, which may be inspected, audited, or examined, pursuant to s. 231(1)(a) of the Act. (2) General comments.