Income Tax Severed Letters - 2022-08-24

Conference

17 May 2022 IFA Roundtable Q. 1, 2022-0933371C6 - Meaning of Habitual Abode

Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 4
habitual abode determined in context based inter alia on relative stays and nature of activities
Summary Under
Tax Topics - Income Tax Act - Section 2 - Subsection 2(1)
CRA residence test of “significant, secondary or other ties”

Principal Issues: What is an habitual abode of an individual as referenced in Canadian tax treaties and what factors does the CRA review to make a determination?

Position: It is the place an individual normally lives during the relevant period of time. Various factors are considered, including frequency of stays and lifestyle in the country.

Reasons: Plain meaning of words, as well as various TCC and FCA positions and OECD Model Convention Commentary.

17 May 2022 IFA Roundtable Q. 2, 2022-0926461C6 - Royalty Apportionment 212(1)(d)(vi)

Unedited CRA Tags
68, 212(1)(d)(vi)
Summary Under
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(vi)
allocation by arm’s length parties of royalty between copyright and trademark must be “reasonable and realistic”
Summary Under
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1)
CRA has authority to re-apportion where a royalty allocation is not “reasonable and realistic”

Principal Issues: Determination of the application of the exception in subsection 212(1)(d)(vi).

Position: General comments provided.

17 May 2022 IFA Roundtable Q. 3, 2022-0926191C6 - Meaning of "goods" under 95(3)(b)

Unedited CRA Tags
95(3)(b), 95(2)(b)
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(3) - Paragraph 95(3)(b)
condo inventory did not qualify as “goods” under s. 95(3)(b)
Words and Phrases
goods
Summary Under
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(b)
s. 95(3)(b) exclusion unavailable where foreign sub’s services were the marketing of condo sales by Canco

Principal Issues: Does real estate inventory, such as residential condominiums, held for sale in the regular course of business qualify as “goods” for purposes of paragraph 95(3)(b)?

Position: No.

Reasons: Goods are generally accepted to mean tangible, moveable, personal property intended for sale. Since real property is not moveable or personal property, it would not be considered a good.

17 May 2022 IFA Roundtable Q. 4, 2022-0931121C6 - PLOI Administrative Policies

Unedited CRA Tags
15(2.11), 15(2.13), 212.3(11), 212.3(13)

Principal Issues: Announcement of new administrative policies relating to PLOI election and late-filed penalties.

Position: New administrative policies adopted by the CRA.

Reasons: See below.

17 May 2022 IFA Roundtable Q. 5, 2022-0928101C6 - Surplus Account Maintenance

Summary Under
Tax Topics - Income Tax Act - Section 113 - Subsection 113(1) - Paragraph 113(1)(d)
s. 113 deductions denied if there is insufficient documentation to support the FA’s surplus computations (even where Pt. I tax computations do not depend thereon)

Principal Issues: Guidance on required documentation and best practices in preparing surplus account calculations.

Position: Fact dependent.

17 May 2022 IFA Roundtable Q. 6, 2022-0929501C6 - Exempt Earnings and Residency Info

Unedited CRA Tags
Paragraph 113(1)(a), definition of "exempt surplus" and "exempt earnings" in subsection 5907(1) of the Regulations, subsection 5907(11.2) of the Regulations, and subsection 230(1).
Summary Under
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(1) - Exempt Earnings - Paragraph (d)
exempt surplus calculations must be supported by records showing that the FA’s CMC was exercised in a Treaty country
Summary Under
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(11.2) - Paragraph 5907(11.2)(a)
residence in country for Treaty purposes does not necessarily establish that its CMC is there

Principal Issues: What information, in addition to exempt surplus calculations, should taxpayers keep to support a deduction under paragraph 113(1)(a)?

Position: In addition to exempt surplus calculations, taxpayers should keep records to enable the determination of the residency of the foreign affiliate in a designated treaty country under common law principles. Taxpayers must keep records and books of account in such form and containing such information sufficient to substantiate that the conditions for claiming a deduction under paragraph 113(1)(a) have been met.

Reasons: In order to accumulate exempt earnings, the foreign affiliate must be resident in a designated treaty country, which requires the foreign affiliate to be resident in such country under common law principles and subsection 5907(11.2) of the Regulations must not apply to deem the foreign affiliate not to be resident in such country. Pursuant to subsection 230(1), and as described in IC77-9R, taxpayers must retain records and books of account sufficient to substantiate deductions claimed under section 113 in respect of dividends received from a foreign affiliate.

17 May 2022 IFA Roundtable Q. 7, 2022-0926451C6 - Cryptocurrency reporting

Unedited CRA Tags
233.3
Summary Under
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(1) - Specified Foreign Property - Paragraph (a)
CRA is still reviewing whether and when cryptocurrencies may not be foreign property

Principal Issues: Whether the CRA will issue guidance on when cryptocurrency is considered situated, deposited or held outside of Canada for foreign reporting requirements pursuant to section 233.3 of the Act.

Position: The question is currently under review by the CRA.

Reasons: Awaiting for the OECD to complete work on developing a cryptocurrency reporting framework that provides for the exchange of information on cryptocurrency transactions.

17 May 2022 IFA Roundtable Q. 8, 2022-0926431C6 - Foreign Entity Classification

Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation
materials that should accompany an entity-classification ruling request

Principal Issues: Will the CRA publish and maintain an online list of foreign entities that the CRA has classified for reference purposes?

Position: No.

Reasons: The CRA would consider the classification of a foreign entity in the context of an advance income tax ruling.

17 May 2022 IFA Roundtable Q. 9, 2022-0926341C6 - Contemporaneous Docs and COVID-19

Unedited CRA Tags
220(3.1) and 247(4) ITA.
Summary Under
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(4)
no COVID extension of 6-month deadline under s. 247(4) to complete contemporaneous documentation

Principal Issues: Whether the CRA considers, in the context of the COVID-19 pandemic, to apply an administrative concession to extend the documentation-due date of a taxpayer or partnership for the purposes of the contemporaneous documentation rules in subsection 247(4), or to otherwise administratively relieve taxpayers or partnerships from their duty to meet their obligations under subsection 247(4).

Position: No.

Reasons: The CRA recommends that taxpayers or partnerships determine their transfer pricing on an on-going basis during the year even if the Act allows them to make or obtain the documentation up to the documentation due-date.

17 May 2022 IFA Roundtable Q. 10, 2022-0926331C6 - Corporate Residence Approach

Summary Under
Tax Topics - Income Tax Act - Section 2 - Subsection 2(1)
board meeting situs not determinative of CMC

Principal Issues: Whether CRA is considering changes to its approach to corporate residency, given that we are now in the age of video conferencing and ESG concerns.

Position: Our approach to corporate residency is based on relevant statutory rules and common law principles.

Reasons: The role of the CRA is to administer the Income Tax Act in accordance with its provisions and based on principles established by common law.

17 May 2022 IFA Roundtable Q. 11, 2022-0926411C6

Unedited CRA Tags
110(1)(d); 110(1)(e); 110(1.3); 110(1.31); 110(1.9); 162(7)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1.4)
requirement to issue s. 110(1.9) notice to employees re RSUs could be avoided by designating them as non-qualified securities under s. 110(1.4)
Summary Under
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1.31)
the non-qualified securities rules are being reviewed by Finance respecting options such as RSUs that can never generate a s. 110(1)(d) deduction

Principal Issues: Whether penalties under subsection 162(7) would be imposed for an employer's failure to file an information return and notify employees with respect to non-qualified securities, 50% of the benefits from which cannot be deducted by the employee under paragraph 110(1)(d).

Position: Part of larger issue under consideration by Department of Finance.

Reasons: Given the policy objectives underlying the new employee stock options rules, the question raises the larger issue of whether securities to be sold or issued under an agreement that would never entitle the recipient employee to a deduction under paragraph 110(1)(d) should even reduce, or count towards, the employee’s $200,000 annual vesting limit under these new rules.

17 May 2022 IFA Roundtable Q. 12, 2022-0926361C6 - Principal Purpose Test (PPT)

Summary Under
Tax Topics - Treaties - Multilateral Instrument - Article 7 - Article 7(1)
CRA is monitoring PPT compliance on a priority basis
Summary Under
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)
PPT approach can inform GAAR analysis

Principal Issues: 1) The numbers of matters in which CRA has recommended applying the PPT and whether GAAR is being applied. 2) Has CRA received any PPT ruling requests.

Position: 1) CRA has not to date issued assessment on the basis of the PPT. 2) Other than the one pre-ruling consultation request discussed at the 2021 IFA Conference, CRA has not to date received any other ruling or pre-ruling consultation request relating to the PPT.

17 May 2022 IFA Roundtable Q. 13, 2022-0926381C6 - Statistics on MAPs

Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 26
around half of CRA’s recent MAP cases resulted in full relief

Principal Issues: Whether the CRA can give current statistics on mutual agreement procedures.

Position: Yes.
HAA: No paper record.

17 May 2022 IFA Roundtable Q. 14, 2022-0926441C6 - Partnership and Subsection 90(3)Election

Unedited CRA Tags
90(3), 90(4), 96(3), Reg.5911(6)
Summary Under
Tax Topics - Income Tax Act - Section 90 - Subsection 90(4)
proposition applied (regarding a s. 90(3) PUC distribution election) that a partnership cannot be a related person

Principal Issues: Who should make a subsection 90(3) election when a dividend is paid to a partnership.

Position: A subsection 90(3) election will be valid if made by a member of the partnership who has authority to act for the partnership provided the election is made in accordance with subsection 96(3) and within the timeframe specified in subparagraph 5911(6)(a)(i) of the Regulations.

Reasons: On the facts of this Question 14 and on the assumption that the partnership is the relevant taxpayer in subsection 90(3), there is no connected person or partnership in respect of the taxpayer as defined in subsection 90(4).