News of Note
The expansion of the FAD rules creates tension with existing FAD rules which implicitly contemplate a real non-resident parent
The Budget proposed amendment to the foreign affiliate dumping (FAD) rules would expand them to situations where the non-resident “parent” of the CRIC is a non-resident individual or a group of no-resident persons not dealing with each other at arm’s length (a “NAL group”).
The existing “more closely connected business” (“MCCB”) exception in s. 212.3(16) is simply unworkable where the deemed “controlling” person is a trust beneficiary by virtue of s. 212.3(26). In addition, s. 212.3(26)(c) (re a discretionary beneficiary having a deemed 100% interest) could deem multiple discretionary beneficiaries to each own 100% of the shares owned by the trust, leading to multiple incidence of tax on multiple deemed dividends. Given that the core premise- that absent tax considerations, the investment in the FA would have been made by the discretionary beneficiary is almost certainly false, s. 212.3(26)(c) should be scrapped.
Ss. 212.3(26)(a) and (b) (providing a look-through rule to non-resident trust beneficiaries) also are unnecessary – if the CRIC is controlled by a Canadian-resident trust (albeit, with non-resident beneficiaries), the CRIC will in reality be controlled by Canadian-resident decision makers.
The addition of the concept of a NAL group is fraught since identifying such a group is a difficult question of fact which it very well might be impracticable for the CRIC to determine. In addition, why should a NAL group who have gone to the trouble to negotiate a shareholders agreement for the CRIC be regarded as the real direct investors in the FA? Furthermore, the s. 212.3(16) exception would be very difficult to apply where the deemed “parents” do not exercise control.
Neal Armstrong. Summaries of Joint Committee “Foreign Affiliate Dumping, Derivative Forward Agreement and Transfer Pricing Amendments Announced in the 2019 Federal Budget” 24 May 2019 Submission of the Joint Committee under s. 212.3(1)(b), s. 212.3(16), s. 212.3(26), s. 212.3(18), s. 248(1) – tax-indifferent investor, s. 247(1.1) and s. 152(4)(b)(iii).
Moras – Tax Court of Canada finds that s. 20.1(2)(c) allowed a taxpayer to deduct interest on personally-owed debt following a drop-down
Prior to the transfer of his accountancy practice in 2007 to his corporation, the taxpayer borrowed under a home equity line of credit to fund alleged expenses of that practice. Following the drop-down, the outstanding balance was maintained. Favreau J allowed in full the deduction by the taxpayer of his HELOC interest for two subsequent years, stating:
[P]aragraph 20.1(2)(c) specifically provides that the portion of the borrowed money outstanding when the business ceases operating shall be deemed to be used by the taxpayer at any subsequent time for the purpose of earning income from the business.
An oddity is that CRA initially had disallowed the deduction of all of the HELOC-financed expenses, and then at trial conceded that 2/3 of them were deductible – yet Favreau J allowed all of the related interest to be deducted under s. 20.1(2)(c). Although not discussed, perhaps this could be explained on the basis that the taxpayer had succeeded in “demolishing” the basis for the full interest denial by CRA, so that the onus now shifted to the Crown to demonstrate that some portion of the interest was still non-deductible on more factual grounds, which it failed to do.
The self-represented taxpayer apparently did not argue that the shares of his corporation had replaced his accountancy practice as an income-producing source.
Neal Armstrong. Summary of Moras v. The Queen, 2019 TCC 111 under s. 20.1(2)(c).
3087-1883 Québec – Federal Court finds that a determination of CRA not to reassess a taxpayer is a reviewable decision
Two co-owners paid a portion of the expropriation proceeds received for one of their properties to their affiliated tenant of that property. However, when CRA treated that receipt in the tenant’s hands as a s. 9 receipt, rather than as a s. 12(1)(x) receipt that was eligible for the s. 13(7.4) election, the two co-owners and the tenant requested CRA (within the normal reassessment period) to amend their returns for the year of expropriation to treat the amount that had been paid to the tenant not as income to the tenant but instead as capital gains realized by the co-owners. CRA essentially refused this request. The taxpayers considered it to be unfair that CRA had not issued any reassessment that they could appeal, and applied for an order of mandamus compelling CRA to reassess in some manner.
Walker J found that the refusal of CRA to reassess was a decision that could be subject to judicial review (e.g., if the decision was unreasonable) – although, of course, the substantive question of whether the requested adjustment was correct could not be reviewed by her. However, this decision was not before her because their application had not been brought on a timely basis and the criteria for extending the 30-day period for bringing such an application had not been made out.
In any event, CRA had no legal obligation to issue a reassessment notice following the taxpayer request – that was a decision that was within its discretion (s. 152(4) used the word “may”).
Neal Armstrong. Summary of 3087-1883 Québec Inc. v. Canada (National Revenue), 2019 CF 785 under s. 152(4).
Although we summarized most of the oral responses provided at the 2019 IFA CRA Roundtable a month ago, for you convenience the table below provides descriptors and links to the published version of the CRA answers.
CRA provided some further commentary on 2017-0729431R3, which helps fill in some of the redacted details.
This related to a situation where CRA had assessed a Canadian subsidiary (Canco) in a Canadian multinational group under s. 247(2) on the basis that the fees earned by a CFA (resident in Country A) of Canco’s Canadian parent from management services were too high from a transfer-pricing perspective and the fees earned by Canco itself from providing management services to group companies were too low. After negotiations between the competent authorities, it was agreed (under the “MAP Settlement”) that the income of CFA (which was from an active business) would be reduced by assessment by the Country A taxing authority, thereby generating income tax refunds for the affected years, and that there would be no adjustment to the actual fees charged by CFA (to which it was entitled under the Country A domestic law) and that there also would be no secondary adjustments.
CRA in its discussion indicated that, as a result:
- The “earnings” of CFA, under Reg. 5907(1)(a)(i), were reduced by the income adjustment under the MAP Settlement as reassessed by Country A.
- Upon receipt of such Country A reassessments reducing CFA’s income to reflect the MAP Settlement adjustments, the “net earnings” of CFA, under Reg. 5907(1), were increased by the amount of income taxes that had been paid to Country A but, in fact, were not payable after giving effect to the MAP Settlement and consequential Country A reassessment.
- The amount of the MAP Settlement adjustment (reassessed by Country A) that was excluded from the computation of income or profit from an active business pursuant to the income tax law of Country A for each of the reassessed taxation years was added to the earnings of CFA pursuant to Reg. 5907(2)(f) given that the amount of such adjustment constituted “revenue, income or profit” of CFA for purposes of Reg. 5907(2)(f).
Neal Armstrong. Summary of 15 May 2019 IFA Roundtable Q. 10, 2019-0798781C6 under Reg. 5907(2)(j).
We have published a further 6 translations of CRA interpretations released in December 2011 (including 3 questions from the October 2011 APFF Roundtable). Their descriptors and links appear below.
These are additions to our set of 885 full-text translations of French-language Rulings, Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers the last 7 1/2 years of releases by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.
CRA is allowing immediate application of the new non-supply rules for human ova or embryos but won’t process rebate claims until passed
A proposed GST/HST amendment would zero-rate the supply of an ovum – which would have the effect of rendering the importation of an ovum as a non‑taxable importation. A further amendment will add the importation of in vitro embryos to the list of non-taxable importations. “As a result, the importation of in vitro embryos would no longer be subject to tax” – so that implicitly CRA is treating supplies of in vitro embryos under current law as supplies of goods rather than humans.
Respecting the application of the ovum amendment, for example, CRA indicates:
[S]uppliers can stop charging GST/HST on supplies of human ova in accordance with the proposed amendment as of March 20, 2019. … [C]onsistent with its standard practice, the CRA is administering this measure on the basis of the proposed amendment [and similarly re embryos]
… However, the CRA cannot pay a rebate for an amount paid in error as or on account of tax until the proposed amendment becomes law.
A supplier who has charged or collected GST/HST on human ova supplied after March 19, 2019, must include that amount in the calculation of their net tax on their GST/HST return … .
CRA goes on to indicate that ova or in vitro embryos provided at a fertility clinic are considered to be part of a single exempt supply of an institutional health care service.
CRA accepts Applewood (re GST/HST exemption for car dealers who promote, sell and process credit insurance provided to their customers)
The car dealer in Applewood entered into a “Dealer Agreement” with a distributor of credit insurance products under which it was agreed that it would “up sell” the insurance products and assist the car customers in explaining the coverage and in applying for the insurance in consideration for a commission of over 50% of the insurance premium. Pizzitelli J applied the single supply doctrine in finding that the predominant element of what was being supplied by the dealer was an exempt supply of arranging for the insurance – and that the exclusion in (r.4) of the definition of an exempt financial services for promotional and various administrative services did not apply.
CRA has stated that it will apply Applewood “in the same fact situation” as well as where the car dealer deals directly with the insurer (rather than with the distributor), if “the car dealer performs the activities referred to in the Applewood decision.” CRA went on to state:
Within the context of the insurance industry, the Applewood decision does not have an impact on the CRA’s position with respect to the services provided by managing general agents and similar entities performing management and administrative services for insurers. Supplies of these management and administrative services are taxable.
Neal Armstrong. Summary of Excise and GST/HST News - No. 106 June 2019 under ETA – s. 123(1) – financial service – para. (l).
CRA indicates that subjecting dividend income paid to a preferred beneficiary to TOSI accords with tax policy – but that it’s easy to avoid the designation
As noted re Q.13, CRA considers that the exclusion from para. (c) of the “split income” definition of amounts included in a preferred beneficiary’s income does not apply where a s. 104(19) designation is made respecting the preferred beneficiary income amount, so that the amount is included under subpara. (a)(i) of the split income definition. There is thus, in CRA’s view, the absence of a legislative exclusion from the tax on split income for such dividend amounts.
This seems anomalous and arguably is contrary to the Savage principle (that a specific exclusion implies the same exclusion from a more general charging provision). However, CRA noted that it has received confirmation in discussions with Finance that its interpretation accords with tax policy.
In order to avoid making the s. 104(19) designation when preparing a T3 slip, the amount should simply be included in Box 26 (“other income”).