Income Tax Severed Letters - 2024-09-18

Conference

15 May 2024 IFA Roundtable Q. 1, 2024-1007651C6 - Principal purpose test and the UK-Canada Tax Treaty

Unedited CRA Tags
Article 7(1) MLI and Article 10(8) UK-Canada Treaty
Summary Under
Tax Topics - Treaties - Multilateral Instrument - Article 7 - Article 7(1)
a non-resident’s increasing its voting shareholding in Canco to access the Treaty-reduced dividend withholding rate likely does not engage the PPT
Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 10
marginally increasing a shareholding to access the Treaty-reduced rate likely would not engage the PPT

Principal Issues: In the scenario described in 2019-0792651I7, in the CRA’s view, how would the principal purpose test (“PPT”) in paragraph 1 of Article 7 (“Article 7(1)”) of the Multilateral Instrument (“MLI”) apply if the dividend were paid in 2024? What if the UK-Canada Treaty did not contain Article 10(8)?

Position: In the circumstances outlined in the question, the 5% rate of withholding applies provided that granting a benefit in the circumstances would be in accordance with the object and purpose of Article 10. Example E in paragraph 182 of the OECD Commentary to Article 29(9) of the OECD Model Convention explains that in cases such as this, a relevant factor is whether the taxpayer “genuinely increases its participation in the company”. The benefit might not be granted if there is a manipulation of share ownership such as when the acquisition of additional shares is transitory or there are other facts and circumstances indicating that granting that benefit would not be in accordance with the object and purpose of the relevant provisions of the UK-Canada Treaty. An example could be where UK Co owned 8% of the shares of Canco, acquired an additional 2% of the shares of Canco prior to the dividend distribution, and sold the 2% ex-dividend, shortly thereafter.

Reasons: Example E in paragraph 182 of the Commentary to Article 29(9) of the OECD Model Convention provides for this exact situation.

15 May 2024 IFA Roundtable Q. 2, 2024-1007541C6 - Foreign Entity Classification

Unedited CRA Tags
248(1) "corporation"
Summary Under
Tax Topics - Income Tax Act - Section 96
Luxembourg SCS or SCSp may be a partnership
Summary Under
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation
treatment of Luxembourg SCS or SCSp as a partnership

Principal Issues: 1. Has the CRA considered the entity classification of Luxembourg limited partnerships or special limited partnerships? 2. What is the CRA’s view on whether such limited partnerships would be classified as corporations or partnerships for Canadian income tax purposes?

Position: 1. No 2. General comments and update on new entities or arrangements that were considered by the CRA provided.

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

15 May 2024 IFA Roundtable Q. 3, 2024-1007631C6 - Cash Pooling and Notifiable Transactions

Unedited CRA Tags
237.4, 18(4), 18(6), 18(6.1), 212(3.1), 212(3.2), 15(2), 15(2.16), 15(2.17)
Summary Under
Tax Topics - Income Tax Act - Section 237.4 - Subsection 237.4(2)
cash-pooling arrangement is substantially similar to the back-to-back designated transaction if the Canadian taxpayer as debtor does not withhold on the basis of the higher withholding rate for the ultimate lender
Summary Under
Tax Topics - Income Tax Act - Section 237.4 - Subsection 237.4(4)
full disclosure of one transaction (e.g., an interest payment) for the series of transactions is sufficient
Summary Under
Tax Topics - Income Tax Act - Section 237.4 - Subsection 237.4(1) - Advisor
whether a professional firm is an advisor turns inter alia on its degree of responsibility for the tax advice etc.

Principal Issues: Whether the Notifiable Transaction rules apply in the context of the cash-pooling scenarios described.

Position: See responses below.

Reasons: See below.

15 May 2024 IFA Roundtable Q. 4, 2024-1007571C6 - Late-filed PLOI election

Unedited CRA Tags
15(2.11), 15(2.12), 212.3(11), 212.3(12)
Summary Under
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.12)
revised procedure for filing late PLOI election under s. 15(2.12)
Summary Under
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(12)
revised procedures for the filing of late PLOI elections

Principal Issues: Can the CRA clarify which documents it expects taxpayers to provide together with a late-filed PLOI election made under subsection 15(2.12) or 212.3(12)?

Position: A CRIC is not required to file an amended corporate tax return to report the additional interest income resulting from a late-filed PLOI election. However, in order to facilitate a timely and efficient processing of the late-filed PLOI election, CRICs should file form T1521 or form T2311 together with any amended schedules that are affected by the late-filed PLOI election and not already reflected on the forms for each relevant taxation year. In the case of a PLOI owing to a QCP, amended partnership information return(s) should be filed, as well as amended Schedule(s) 1 of their corporate members and any other amended schedules relating to their corporate tax return(s) that are affected by the late-filed PLOI election.

Reasons: A valid late-filed PLOI election gives effect to the tax consequences to be assessed.

15 May 2024 IFA Roundtable Q. 5, 2024-1007581C6 - Late-filed PLOI election and reassessment of the affected taxation year(s)

Unedited CRA Tags
15(2.11), 15(2.12), 212.3(11), 212.3(12), 152(1), 152(3.1), 152(4)
Summary Under
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(iii) - Clause 152(4)(b)(iii)
a late-filing of a PLOI election does not cause the related deemed interest to be statute-barred
Summary Under
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(12)
late filing of PLOI election is coupled with an extended reassessment period for the s. 17.1(1) deemed interest

Principal Issues: If a PLOI election is late-filed with the Minister in accordance with subsection 15(2.12) or 212.3(12), does it become valid at the time it is filed or only after the reassessment of the affected taxation year(s) has been processed by the CRA?

Position: To the extent the election is filed in compliance with subsections 15(2.11) and 15(2.12), or 212.3(11) and 212.3(12), the election is valid.

Reasons: Interpretation of subsections 15(2.11), 15(2.12), 212.3(11), 212.3(12), 152(3.1), 152(4).

15 May 2024 IFA Roundtable Q. 6, 2024-1007591C6 - PLOI Election Administrative Relief

Unedited CRA Tags
ITA 15(2.11), 15(2.13), 212.3(11), 212.3(13)
Summary Under
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2.11) - Paragraph 15(2.11)(d)
CRA effectively indicates that to disengage a single PLOI election, the loan agreement must be replaced
Summary Under
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(11) - Paragraph 212.3(11)(c)
irreversibility of choice to make a single election unless a separate loan agreement is entered into

Principal Issues: Clarification of new administrative relief relating to PLOI election.

Position: As of March 25, 2022, the CRA has adopted an administrative policy that requires only one election to be made in respect of each loan or indebtedness governed by the same agreement owing by each non-resident person. If the electors no longer wish to have the PLOI election apply to amounts borrowed in a subsequent taxation year, they should have those amounts governed under a separate agreement.

Reasons: This policy is intended to provide administrative relief in respect of agreements under which all amounts, for the duration of the agreement, are desired by the electors to be treated as a PLOI.

15 May 2024 IFA Roundtable Q. 7, 2024-1007641C6 - Principal Purpose Test in the Multilateral Instrument

Summary Under
Tax Topics - Treaties - Multilateral Instrument - Article 7 - Article 7(1)
PPT application to a treaty-reduced dividends of Canco paid to a pure Holdco with an ultimate Treaty-resident parent
Summary Under
Tax Topics - Treaties - Income Tax Conventions - Article 10
application of PPT where Treaty-resident pure holdco with ultimate Treaty-resident parent received Canco dividends

Principal Issues: Can the CRA provide their views regarding the application of the PPT in the following situations:
Situation (a): Same Rate
Canco is owned by a Foreign Entity (FE) and FE is owned by Foreign MNC. FE’s only activity is holding shares of Canco and it has no employees. FE is resident in a country that has a treaty with Canada (Treaty 1). Treaty 1 provides for a 5% withholding tax on dividends paid by Canco to FE where FE has sufficient ownership of Canco shares. Foreign MNC is also resident in a country that has a treaty with Canada (Treaty 2). Treaty 2 would also provide for a 5% withholding tax on dividends paid by Canco to Foreign MNC if it held shares of Canco directly. Treaty 1 is a Covered Tax Agreement.
In this situation, will CRA confirm whether it is reasonable to conclude that the principal purpose test (PPT) should not apply in respect of a dividend paid by Canco to FE?
Situation (b): Non-Treaty Country in ownership chain
Same facts as above, however, there is a holding company (HC) in the ownership structure between Foreign MNC and FE. HC is resident in a jurisdiction that does not have a treaty with Canada. Foreign MNC chose to add HC into the structure for non-Canadian tax reasons (before or after the Canco shares were acquired). The funding for the acquisition of the shares of Canco came from Foreign MNC and any dividends paid flow back to Foreign MNC.
In this situation, will CRA confirm whether it is reasonable to conclude that the PPT should not apply in respect of a dividend paid by Canco to FE?

Position: For both situation (a) and (b): The CRA’s approach to the PPT, as informed by the OECD’s BEPS Action Report 6 and the MLI, involves a case-by-case analysis to determine whether, upon examination of all the facts and circumstances, obtaining a treaty benefit is one of the principal purposes of the arrangement or transaction. The CRA can make that examination on proposed transactions in the context of an Advance Income Tax Ruling Request.