Income Tax Severed Letters - 2021-02-03


27 October 2020 CTF Roundtable Q. 1, 2020-0860991C6 - ACB increase due to misalignment of ACB

Unedited CRA Tags
55(2), 88(1), 245(2)
GAAR may apply to spin-offs that effect a disproportionate distribution of high basis assets to the Spinco
duplication of ACB is abusive

Principal Issues: A reorganization where outside and inside ACB are misaligned could result in an inappropriate increase in ACB on a possible wind-up (or short-form amalgamation).

Position: GAAR could apply and favourable ruling cannot be provided in such situation.

Reasons: Inappropriate increase in ACB is against the scheme of the Act and particularly subsection 55(2).

27 October 2020 CTF Roundtable Q. 2, 2020-0861001C6 - Consolidation of safe income in a corporate group

Unedited CRA Tags
there potentially can be a safe income pick-up from a corporation over which there is no significant influence

Principal Issues: CRA's views on consolidation of safe income.

Position: The views adopted in 1984 remain the same. Furthermore, Brelco is followed regarding the consolidation of negative safe income.

Reasons: See below.

27 October 2020 CTF Roundtable Q. 3, 2020-0861031C6 - Safe income on reorganization

CRA Tags
a spinner corporation is expected to ensure that sufficient tax basis in its shares is transferred to the shares of spinco that also is receiving safe-income rich spin assets

Prinicipal Issues: CRA's guidance on impact of reorganization on safe income.

Position: See below.

Reasons: See below.

27 October 2020 CTF Roundtable Q. 4, 2020-0862451C6 - Sale of TCP by a partnership

Unedited CRA Tags
the s. 116 certificate limit and the purchase price can coincide even where the vendor partnership has resident partners

Principal Issues: Whether a purchaser who purchases TCP from a partnership may be liable under subsections 116(5) or (5.3) of the Act in respect of the portion of the consideration paid to the partnership that, after reasonable inquiry, the purchaser believes is attributable to direct or indirect partners (through one or more other partnerships) of the partnership that are resident in Canada?

Position: No.

Reasons: For the purpose of computing the purchaser’s liability, it is our view that the “cost to the purchaser of the property” or the “amount payable” by the purchaser for the property acquired from a non-resident person in paragraph 116(5)(c) or subparagraph 116(5.3)(a)(i) of the Act respectively excludes the portion of the consideration paid by the purchaser to a partnership that is reasonably attributable to the interest held by Canadian resident partners in the property through the partnership or through the partnership and other tiered partnerships.

27 October 2020 CTF Roundtable Q. 5, 2020-0864281C6 - Article IV:6 of the Canada-US Treaty

Unedited CRA Tags
Article IV:6 of the Canada-US Treaty
where Canco is held by fiscally transparent Franceco, which is held by LP with only some US partners, there is a choice as to which Treaty to apply
choice between application of France and US Convention to dividends paid by Canco at bottom of multi-tier structure

Principal Issues: How should the Canadian payor of dividends and interest determine its withholding obligation where Article IV:6 of the Canada-US Treaty may apply in a triangular situation.

Position: In the situation described, where the ultimate owners of the entity, that is fiscally transparent for U.S. tax purposes, resident in a third country include both U.S. and non-U.S. residents, such entity would have a choice. It could claim treaty benefit under the Canada-US Treaty with respect to the portion of the dividends or interest that is deemed to be paid to the U.S. residents by article IV:6 of the Canada-US Treaty. Alternatively, it could claim the benefit under the treaty between Canada and that third country with respect to the full amount of the dividends or interest. The Canadian payor should determine its withholding obligation accordingly.

Reasons: A textual, contextual, and purposive analysis of paragraph 212(1)(b), subsection 212(2) and the relevant treaty provisions, taking into account Canada's general treaty policy with respect to fiscally transparent entities in a triangular situation.

27 October 2020 CTF Roundtable Q. 6, 2020-0862471C6 - MLI and Principal Purpose Test

Unedited CRA Tags
Article 7 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting - Prevention of Treaty Abuse
CRA will be guided by the OECD examples in applying the PPT

Principales Questions: Can the CRA provide examples of (A) any fact patterns on which rulings have been requested or granted under the MLI and (B) any fact patterns on which the CRA has applied the PPT (and whether the CRA also applied GAAR in those situations)?

Position Adoptée: General comments provided.

Reasons: The Income Tax Rulings Directorate has not yet been asked to provide an advance income tax ruling on the application of the PPT as introduced by the MLI, and the CRA has not yet audited taxation years in which the changes to tax treaties introduced by the MLI are in force and effect.

27 October 2020 CTF Roundtable Q. 7, 2020-0861041C6 - CTF Question 7 - Subsection 105(1)

Unedited CRA Tags
54, 104, 105, 248
use by the children of the cottage held in an alter ego or joint spousal trust is not permitted
generally no taxable benefit for beneficiary’s rent-free use of personal-use property of the trust

Principal Issues: Can the CRA confirm that its position in respect of the rent-free use of personal use property held by a trust will also apply to a trust that is an alter ego trust or a joint partner trust?

Position: General comments provided.

Reasons: See below.

27 October 2020 CTF Roundtable Q. 8, 2020-0861061C6 - SDA and Formula-Based Plans

Unedited CRA Tags
248(1) “salary deferral arrangement”
formula-based appreciation plans are not SDAs where the formula closely tracks the FMV of the employer’s shares over the plan’s duration

Principal Issues: Whether the CRA will continue to consider ruling requests on whether employee incentive plans with units the value of which are determined using a formula are SDAs?

Position: No, except for ATR-45 SAR plans and plans covered by one of the enumerated SDA exceptions.

Reasons: It is not possible to be reasonably certain, at the time of a ruling request, that a formula-based appreciation plan would never become a SDA at some point in the future due to changes in the relevant facts and circumstances specific to the employee, the employer or the business environment in which it operates.

27 October 2020 CTF Roundtable Q. 9, 2020-0866671C6 - entity classification of UK LLP

Unedited CRA Tags
248(1) "corporation"
a UK LLP is a corporation in light of its separate legal personality and sole responsibility for debts and conduct of business
UK LLP has the attributes of a corporation rather than a partnership
  • Principal Issues: Does the CRA view a UK LLP as a corporation or a partnership for Canadian tax purposes?

Position: Corporation.

Reasons: The general characteristics of a UK LLP more closely resemble a corporation than other forms of business association under Canadian commercial law.

27 October 2020 CTF Roundtable Q. 10, 2020-0860961C6 - Refreeze and 74.4(2)

Unedited CRA Tags
74.4(2) and (3)
a refreeze does not reduce the outstanding amount
a refreeze does not reduce the quantum of any imputed interest under s. 74.4(2)

Principal Issues: If subsection 74.4(2) applies to an estate freeze do shares received on a subsequent refreeze reduce the "outstanding amount" (as determined under subsection 74.4(3) and will the redemption of refrozen preferred shares reduce the "outstanding amount" only to the extent of the value of those shares?

Position: Shares received on a refreeze will not reduce the outstanding amount in subsection 74.4(3) and the redemption of the refrozen shares will only reduce the outstanding amount to the extent of the value of the refrozen shares.

Reasons: The definition of "outstanding amount" in subsection 74.4(3).

27 October 2020 CTF Roundtable Q. 11, 2020-0860981C6 - Refinancing Prescribed Rate Loans

Unedited CRA Tags
74.1(1), 74.1(3), 74.2(1), 74.5(2)
a 1% prescribed-rate loan can effectively replace a 2% loan if the latter loan is repaid with sales proceeds
fresh prescribed rate loan could be made immediately after repayment of 1st such loan out of sale proceeds

Principal Issues: 1. Whether the attribution rules will apply to the securities that are still owned and were purchased with Loan 1; 2. Whether the attribution rules will apply to the investments purchased with Loan 2?

Position: 1. No; 2. No.

Reasons: Based on technical requirements.

27 October 2020 CTF Roundtable Q. 12, 2020-0862501C6 - COVID-19 and Prior APAs/Current MAPs

CRA will assess the COVID impact on APAs on a case-by-case basis

Principal Issues: A. What are CRA's views on how COVID-19 will impact (i) the Mutual Agreement Procedures (“MAP”) cases that are currently being negotiated and the previously negotiated Advance Pricing Arrangements (“APA”) and (ii) the benchmarking analyses that are used to establish transfer pricing policies and prepare transfer pricing compliance documentation? B. Is the CRA considering amendments to historic transfer pricing policies to reflect impacts of the COVID-19 pandemic on business economics, risk sharing, etc.?

Position: A.(i) To the extent that the MAP cases currently being negotiated cover taxation years that precede the 2020 COVID-19 crisis, the CRA does not envision any impacts on these cases or the need to adopt special considerations on account of the COVID-19 crisis. COVID-19 and the economic uncertainty created by the crisis also present a significant challenge as it pertains to APAs that are currently in the process of being negotiated. At this time, the CRA does not have a formal policy or approach to guide how APAs are to be negotiated to take into account these circumstances, nor does it believe (at this time) that an across the board policy is an appropriate measure, given that not all industries (or taxpayers) will be impacted in the same manner or degree. A.(ii) In transfer pricing, the CRA typically looks at year specific comparable company data in determining arm’s-length profitability. This will not change for the COVID-19 pandemic years. The CRA’s review of benchmarking studies will be unaffected as well. B. The CRA is not considering across the board changes on its historic transfer pricing policies. However, the COVID-19 crisis may impact the future selection and use of transfer pricing methodologies on a case-by-case basis.

27 October 2020 CTF Roundtable Q. 13, 2020-0861021C6 - Reimbursement of Equipment

Unedited CRA Tags
CRA extends the COVID $500 safe harbor re employer reimbursement of home office computers to other home office items

Principal Issues: Various questions concerning the CRA’s administrative position concerning the reimbursement of computer equipment purchased by employees during COVID-19.

Position: See response.

Reasons: See response.

27 October 2020 CTF Roundtable Q. 14, 2020-0860971C6 - Section 86 Reorganization of Capital

Unedited CRA Tags
a s. 86 reorg normally requires the filing of articles of amendment

Principal Issues: Does subsection 86(1) require amendments to articles of incorporation?

Position: Yes.

Reasons: No change warranted.

Technical Interpretation - Internal

7 December 2020 Internal T.I. 2020-0867851I7 - Canada Emergency Student Benefit

Unedited CRA Tags
81(1)(a) of the ITA, 87(1)(b) of the Indian Act, Canada Emergency Student Benefit Act
CRA indicates no Indian Act exemption for CESB benefits

Principal Issues: 1. Will the CESB be exempt from tax under section 87 of the Indian Act?
2. Will the CESB be treated like an old age security (OAS) payment?
3. Does the CESB have to be included on line 7 of Form T90?

Position: 1. No 2. Not necessarily 3. No

Reasons: 1. The CESB is not considered to be situated on a reserve as there are insufficient factors connecting this income to a reserve.
2. There are differences between the eligibility requirements of the CESB and the OAS. The CESB has additional eligibility requirements which may be considered as connecting factors. However, these factors are not significant enough to connect the CESB to a reserve and therefore, the CESB will be taxable.
3. It is not exempt from tax under section 87 of the Indian Act.