News of Note
CRA finds that a cross-border restrictive covenant payment was not eligible for Treaty-reduced withholding
Email this ContentAfter CanCo had sold shares of a partly-owned subsidiary (SubCo), it made a payment to the other share vendor (LuxCo) pursuant to what was assumed to be a "restrictive covenant" in a related agreement, and withheld and remitted 25% of the payment. Luxco was unsuccessful in a refund claim based on Art. 7 (business profits with no PE) or 21 (other income) of the Canada-Luxembourg Treaty: the restrictive covenant payment did not qualify as business profits given that LuxCo was stated as having held the shares of SubCo as a capital investment; and the payment was not subject to reduced withholding under Art. 21 as it was considered to be derived from Canada (Canadian payer; subject shares were Canadian shares; and Canadian governing law).
Neal Armstrong. Summaries of 20 November 2014 Memo 2014-0539631I7 under Treaties - Art. 22, and s. 56.4(1) - restrictive covenant.
CRA comments on the eligibility of a foreign partnership interest as excluded property
Paras. (d) and (e) of the excluded property definition deem the units of a foreign partnership held by a foreign affiliate of a Canadian taxpayer to be foreign shares for purposes of determining whether the partnership is a deemed foreign affiliate of the taxpayer under the excluded property definition. However, CRA does not consider that this permits one to conclude that such partnership interest is excluded property, even where the partnership is engaged exclusively in an active business, if the equity percentage of the Canadian taxpayer in the partnerships (viewed as a deemed foreign corporation) is under 10% (say, 5%) and a further 5% interest in the partnership is held directly by a related Canadian corporation. The reason is that the paras. (d) and (e) deeming rule only applies to partnership interests held by a foreign affiliate rather than by a (related) Canadian person – so that the partnership interest does not qualify as shares of a foreign affiliate (because the required 10% threshold under the foreign affiliate definition has not been achieved). This, in turn, means that the partnership interest cannot qualify as excluded property notwithstanding the active business.
The factually unusual and narrow character of this point may imply that the paras. (d) and (e) deeming rule works quite well in circumstances where an active foreign partnership is held largely within a wholly-owned group. For instance, there was no quibbling that paras. (d) and (e) do not explicitly go on to deem the active business assets of the partnership to be active business assets of the fictional non-resident corporation, so this would appear not be a sticking point.
Neal Armstrong. Summary of 15 January 2015 T.I. 2014-0546581E5 under s. 95(1) – excluded property.
Income Tax Severed Letters 4 March 2015
This morning's release of eight severed letters from the Income Tax Ruling's Directorate is now available for your viewing.
AUSPICE commodity index ETFs are structured for capital gains treatment to unitholders
The proposed AUSPICE Canadian Crude Oil Index ETF and Canadian Natural Gas Index ETF will each track its designated (Canadian crude or Canadian natural gas) "Underlying Index" by entering into forward agreements with NBC, and pledging cash raised from its Unit offerings to secure its obligations thereunder. Although the forwards will have terms of five years, they will be extended annually with the consent of the parties – which presumably will occur in order that no income in excess of expenses (to be funded with partial settlements) will be realized. Accordingly, unitholders likely will anticipate capital gains treatment on their units, so that the introduction of the derivative forward agreement rules (requiring income account treatment on the forwards) has not had a significant impact.
Neal Armstrong. Summary of Preliminary Prospectus for Units of AUSPICE Canadian Crude Oil Index ETF and Canadian Natural Gas Index ETF under Offerings – Forward Sales/TRS Funds.
The TPSM is often inconsistent with the Canadian transfer-pricing rules
Unlike Art. 9 of the OECD Model Treaty and Code s. 482, which permit consideration of the overall commercial or financial relations between related entities, the focus in ss. 247(2)(a) and (c) on individual transactions renders it quite difficult to utilize the transactional profit split method in a Canadian context.
Neal Armstrong. Summary of Ilana Ludwin, "Application of the Transactional Profit Split Method in Canada," Tax Management International Journal, 2015, p. 98 under s. 247(2).
CRA finds that a transfer of marketable securities to a charity was a gift by will notwithstanding complicated post-mortem mechanics
As disclosed in a heavily redacted and confusing description, a testator bequeathed half the residue of his estate to a charitable foundation. The executors apparently satisfied this bequest, in part, by having an investment holding company issue notes to them in satisfaction of dividends, and gifted the notes to the foundation, with the notes being paid off with a transfer of marketable securities by the holding company to the foundation.
In finding that the testator was thereby deemed by s. 118.1(5) to have made a gift in his terminal year, CRA first noted that even though the gifted notes were non-qualifying securities, ss. 118.1(13)(c) and (15) deemed there to be a gift at the time of death when the notes were paid off. Furthermore, discretion of the executors as to how to effect the bequest did not detract from their obligation to make it.
Neal Armstrong. Summary of 2 January 2014 Memo 2013-0490141I7 under s. 118.1(5).
Ford Motor Co. – Tax Court of Canada finds that it is sufficient for only CRA to be able to understand the issues raised in a Notice of Objection
The ITA large corporation and ETA specified person rules deny the right to appeal an issue that was not identified (and quantified) in the notice of objection. Boyle J has found that all that is required here is that the Minister (as opposed to a third party such as a Justice lawyer or a Tax Court Justice) "be able to understand the scope and quantum of the issue from its description in the notice of objection" – so that it was sufficient for the notice to say not much more than "I hereby object that you did not allow the unclaimed ITCs and FX adjustments that I previously brought to your attention" (before quantifying the requested adjustments).
Neal Armstrong. Summary of Ford Motor Company of Canada, Ltd. v. The Queen, 2015 TCC 39, under ETA s. 306.1(1).
Funeral home business proceeds allocated to prepaid contracts are treated by CRA similarly to goodwill
Amounts received on the sale of a funeral home business which are allocated to prepaid funeral contracts or other "eligible funeral arrangements" are generally considered by CRA to give rise to eligible capital amounts rather than being exempted by s. 148.1(2)(b)(ii).
Neal Armstrong. Summary of 9 February 2015 T.I. 2013-0480881E5 F under s. 148.1(2)(b).
2012 amendment to s. 92(1)(a) means that statute-barring period for FAPI does not start running until it is distributed
The wording of the ACB addition for foreign accrual property income in s. 92(1)(a) was amended effective 2012 to replace "any amount required to be included…by reason of subsection 91(1)…in computing the taxpayer's income", by "any amount included…under subsection 91(1)." The likely effect is that if CRA is statute-barred from assessing Canco for FAPI earned by FA in a year, it can still indirectly assess that FAPI by denying a s. 91(5) deduction to Canco when FA distributes that FAPI as a dividend (and similarly where "Canco" is an individual).
Neal Armstrong. Summary of Allan Lanthier, "FAPI or Taxable Surplus Dividend," Canadian Tax Highlights, Vol. 23, No. 2, February 2015, p. 4 under s. 92(1)(a).
CRA confirms that it will not adjust cross-border amounts within an arm’s length range
In TPM-16, CRA acknowledges in a transfer-pricing context that "an arm’s length range will usually be established by the CRA…[and] the CRA will not make a transfer pricing adjustment if the price or margin of a transaction is within the arm’s length range." This is similar to the comment made in Henco in a domestic context that:
A range of value makes eminent sense. And, where a taxpayer has designated a value that ultimately is found to fall within the range of reasonable fair market value, I see no reason to disturb that figure.
However, if the figure falls outside the arm’s length range, CRA will apply an average or some other technique to pick a figure well within the range.
Neal Armstrong. Summary of TPM-16 "Role of Multiple Year Data in Transfer Pricing Analyses" under s. 247(2).