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Finance acknowledges a drafting deficiency in the relevant cost base rules where FAPI under $5,000

Transfers under ss. 88(3) and 95(2)(c), (d.1) and (e) can be elected under para. (b) of the “relevant cost base” definition in s. 95(4) to occur at up to fair market value rather than on a tax deferred basis where the transferring foreign affiliate is an eligible controlled foreign affiliate (ECFA). To be an ECFA the taxpayer’s participating percentage must be not less than 90%. The participating percentage of a taxpayer in a controlled foreign affiliate is deemed to be nil if the FAPI for the year is less than $5,000, which means that in such cases the FA does not qualify as an ECFA.

Finance acknowledged that this anomaly arises from a drafting error, and that it is considering whether or not to correct this deficiency.

Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.8 under s. 95(4) - eligible controlled foreign affiliate.

Finance official suggests that the expanded U.S. earnings stripping rule should not adversely affect the operation of s. 95(2)(a)(ii)

Among the requirements for s. 95(2)(a)(ii) to deem interest paid by a foreign affiliate to be active business income is that the interest be deductible in computing the amounts prescribed to be the income of the payer from an active business. U.S. tax reform has placed further limitations on interest deductibility.

Dave Beaulne (who recently had moved over to Finance from CRA) indicated that he expected that the current CRA position respecting Code s. 163(j) would apply here as well, meaning that if interest is denied under s. 163(j) (as expanded under the new rules) but is allowed to be carried forward indefinitely, it should be possible to recharacterize it under s. 95(2)(a)(ii).

If interest is permanently denied, under say the hybrid rule, that should also not create difficulties under s. 95(2)(a)(ii) by virtue of Reg. 5907(2)(j). However, both were really questions for CRA to address in a ruling.

Neal Armstrong. Summary of 16 May 2018 Finance Roundtable, Q.6 under s. 95(2)(a)(ii)(B).

Finance confirms that it will be accepting more MLI optional items

Canada will be accepting more optional MLI items, but is not yet willing yet to commit to them. It will be obligated to declare which items those are at the time of ratification. Finance is working on the MLI-implementing legislation, and it is possible (but uncertain) that it will be tabled before the summer.

Neal Armstrong. 16 May 2018 IFA Finance Roundtable, Q.1.

CRA states that all self-directed RRSPs and TFSAs are resident in Canada

CRA considers that because the trust company trustee of a TFSA, RRSP, RRIF, RESP or RDSP is required under the Act “to maintain and exercise key decision-making powers and responsibilities over the trust” (e.g., ensuring compliance with ITA requirements including monitoring for non-qualified investments and ensuring that all transactions occurred at fair market value), it follows that such trusts will have their central management and control in Canada, so that they “will always be considered resident in Canada.” Thus, the non-resident holder of a self-directed TFSA was unsuccessful in her arguments that the trust was resident outside Canada based on her making the investment decisions.

CRA’s interpretation could be argued to be consistent with Discovery Trust, where the work performed by Royal Trust, as the Alberta trustee, was somewhat routine.

Neal Armstrong. Summary of 22 March 2018 Internal T.I. 2018-0738201I7 under s. 2(1).

Income Tax Severed Letters 23 May 2018

This morning's release of five severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Joint Committee submits that the shortening of the T1134 filing deadline should be reversed

Budget 2018 proposed that the requirement in s. 233.4(4) to file T1134s within 15 months of year end be changed to 6 months respecting taxation years beginning after 2019. Points on this include:

  • Some of the G7 countries have filing deadlines that extend beyond 6 months, e.g., (re calendar years): the U.S. – extendible to October 15; the U.K. – December 31; and Germany - extendible to December 31
  • Much of the information needed for the T1134s is not required for the Canadian corporate returns due on June 30
  • Were there an accelerated filing deadline, 12 months would align with the filing deadline for CbC reporting – but even this would be problematic for jurisdictions such as the U.K. and Germany whose returns might be filed right at the 12-month point.

Neal Armstrong. Summary of 18 May 2018 Joint Committee Submission re accelerated T1134 filings entitled “Reporting Requirements in Respect of Foreign Affiliates” under s. 233.4(4).

CRA may provide filing extensions when the T1134 filing deadline has been accelerated

In the context of the proposed shortening of the T1134 filing deadline from 15 to 6 months, CRA indicated that it will consider a request for relief in the form of extensions and waivers of penalties on a case-by-case basis.

CRA indicated that the information should be available in the case of a controlled foreign affiliate. Where it is not, however, it should still be possible to file the T1134 on time but with some missing information – but bearing in mind that penalties could thereby apply, subject to relief in the reasonable efforts exception of s. 162(5)(a), or the due diligence exception of s. 233.5(c.2). CRA did not mention the jurisprudential due diligence defence.

Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q. 10 under s. 233.4(4).

CRA may review the overlap between T1134 and CbC reporting

CRA uses T1134s in risk-assessment. Generally, the T1134 reporting requirements are more detailed, while CbC reporting provides a higher level of information and uniformity of reporting across jurisdictions. As it gains more experience, it may consider reviewing the overlap to reduce duplication.

Neal Armstrong, Summary of 16 May 2018 IFA Roundtable, Q. 9 under s. 233.4(4).

Six further full-text translations of CRA interpretations are available

The table below provides descriptors and links for a French Technical Interpretation released last week and for five Interpretations released in October and December of 2013, as fully translated by us.

These (and the other full-text translations covering the last 4 2/3 years of CRA releases) are subject to the usual (3 working weeks per month) paywall.

Bundle Date Translated severed letter Summaries under Summary descriptor
2018-05-16 12 April 2018 External T.I. 2016-0640651E5 F - Swiss Pension Income Tax Act - Section 248 - Subsection 248(1) - superannuation or pension fund or plan Swiss vested benefits policy was a “superannuation or pension fund or plan”
Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) a Canadian resident was not subject to Canadian tax on income accruing in a Swiss vested benefits policy
2013-10-02 10 April 2013 Internal T.I. 2013-0475991I7 F - Montant- période de raccordement Income Tax Act - Section 5 - Subsection 5(1) terminated employee treated as continuing to be an employee due to employer’s continued treatment as an employee for EI, CPP and RPP purposes
2013-09-25 5 October 2012 Roundtable, 2012-0453231C6 F - Creditor's Group Life Insurance and CDA Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) - Subparagraph (d)(ii) Innovative case extended to individual policy: credit to borrowing CCPC’s CDA
2013-09-11 13 August 2013 External T.I. 2012-0471401E5 F - FMV - partnership interest General Concepts - Fair Market Value - Other deferred tax liability re deferred (s. 34) partnership income recognition reduces partnership interest FMV
Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(c) FMV of professional partnership interest would normally discount the value of s. 34-elected WIP for income taxes
Income Tax Act - Section 34 FMV of partnership interest reduced re deferred income taxes on WIP subject to s. 34 election
6 August 2013 External T.I. 2012-0469481E5 F - Benefit under trust Income Tax Act - 101-110 - Section 105 - Subsection 105(1) taxable benefit on sale to beneficiary at undervalue was not eliminated under s. 105(1)(a) when beneficiary sold the property
Income Tax Act - Section 52 - Subsection 52(1) benefit on estate sale to beneficiary at under-value added to property's ACB
Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) taxable benefit added to acb
5 July 2013 Internal T.I. 2013-0489821I7 F - Application of subsection 18(3.1) Income Tax Act - Section 18 - Subsection 18(3.1) realty taxes or premiums related to land which is renovation object are capitalized

CRA declines to rule that a French SLP was a partnership

CRA essentially repeated the points made in the 21 July 2017 Email of the CRA Delaware/Florida Working Group respecting grandfathering of existing LLPs/LLLPs, namely:

  • Respecting a requirement that the LLP/LLLP not take positions that are inconsistent with corporate treatment, CRA will accept the filing of a T2 return or of a T1134 or T106 (as well as obtaining a Business Number) based on the announcement at the 2016 IFA Conference that the LLPs/LLLPs were corporations.
  • Respecting a requirement that there is no significant change in its membership or activities, this will not be considered to occur by virtue of a transfer of membership between parties not dealing at arm’s length or the issuance of additional memberships to them.
  • The fact that the Delaware & Florida LLP or LLLP resulted from a previous conversion from an LLC would not by itself prevent accessing the grandfathering relief.
  • The above relief will be applied to LLPs and LLLPs of other jurisdictions having similar (corporate) attributes where they were set up before April 26, 2017.

CRA also declined to rule that a specific French SLP (Société de Libre Partenariat) was a partnership for ITA purposes. Although it had separate legal personality, that was not sufficient to render it a corporation. However, there was no legal authority to support an effective entitlement on the part of the members to share profits and losses earned through the entity: the computation of earnings at the SLP entity level, with a distribution mechanism for its members akin to the declaration and payment of dividends, was found to be very relevant.

Neal Armstrong. Summary of 16 May 2018 IFA Roundtable, Q.8 under s. 96.