News of Note
CRA provides written CTF Roundtable Responses including on LOB and base erosion
Email this ContentCRA has provided its written responses to the technical questions posed at last week’s Annual CTF Conference Roundtable, including its responses to two questions for which there was insufficient or no time:
- Q.7 CRA has yet to turn down a ruling request respecting the rule in XXIX-A3 of the Canada-U.S. Treaty, which permits a U.S. resident who is not a qualifying person to enjoy Treaty benefits on income derived from Canada that is connected or incidental to a U.S. active business, on the basis that the U.S. business was not relatively "substantial." So far, the high water mark has been a U.S. business with 50% of the revenues and average fixed asset base, and 10% of the employees, of the relevant Canadian business. (In a staccato oral comment, Randy Hewlett stated that more than a "lemonade stand" was required.)
- Q. 8 In 2013-0474431E5, CRA indicated that if Canco seconds employees to its non-resident subsidiary (FA) for use in FA’s services business with arm’s length customers there, CRA will not impute foreign accrual property income to Canco under s. 95(2)(b)(ii) if the employees are provided to FA at cost rather than at, say, a 25% mark-up. CRA has now clarified that a mark-up over direct salaries will not result in FAPI if there is no profit element, i.e., the mark-up covers other costs – and that whether more than that level of markup would result in an offsetting deduction in computing the FAPI of FA "depends on the proper determination of the related profit to be attributed to the activities of the relevant personnel."
Neal Armstrong. 2014 CTF Conference Roundtable.
CRA accommodates notional elections on notional s. 90(9) dividends, and application of rule against double taxation to multiple s. 90(6) inclusions
Various elections potentially are available to Canco when it receives a dividend from its foreign affiliate (FA1). But what if it is receiving a notional dividend from FA1 as a result of the receipt of an upstream loan from FA1 (or perhaps from FA1’s subsidiary - FA2)? Can it then pretend that it has made notional elections?
CRA accepts that Canco can treat the disproportionate underlying foreign tax election under Reg. 5907(1), the Reg. 5901(2)(b) election to convert a dividend into a "pre-acq" dividend or the Reg. 5901(1.1) election to access taxable surplus and related UFT, as if they had applied to the notional dividend. However, the 90-day rule cannot be used (see also 2014-0526721C6) – nor can Canco access notional surplus that would have arisen to FA1 as a result of a s. 40(3) (negative ACB) gain which would have arisen to FA1 if the notional dividend in question had instead been paid as an actual dividend by FA2 to FA1 before being on-paid by FA1 to Canco (see also Buttenham).
CRA also accommodates avoidance of double taxation, e.g., where FA2 has been wound up into FA1 following having made a loan to Canco, thereby technically giving rise to a 2nd s. 90(6) inclusion (see also 2013-0499121E5), or there have been a series of upstream loans and repayments, thereby technically giving rise to multiple income inclusions to Canco given the denial of a s. 90(14) deduction to Canco for repayments as part of a series (see also 2013-0506551E5).
Within limits, CRA can be accommodating.
Neal Armstrong. Summary of 30 October 2014 T.I. 2013-0488881E5 under s. 90(9).
Rogers – Tax Court of Canada implies that a capital gain can arise from a property which is not capital property
Mathieu found that stock option surrender proceeds were not a taxable s. 6(1)(a) benefit when received by a non-arm’s length employee prior to the introduction of s. 7(1)(b.1). Rogers also found that such a benefit is not "remuneration" under s. 5(1) – nor was it a shareholder benefit as Mr. Rogers surrendered his options to Rogers Communications Inc. for their fair market value.
Hogan J found obiter that the cash surrender proceeds received by Mr. Rogers were a capital gain. He indicated that under s. 39(1), a capital gain is "the taxpayer’s gain . . . from the disposition of any property" other than property specifically excluded under that provision (such as eligible capital properties and resource properties) except to the extent that the gain was already taxable under s. 3. Therefore, the disposed-of property need not be a capital property to give rise to a capital gain. However, the bit he left out in the above quote is that the gain is to be computed "under this subdivision" (i.e., the taxable capital gains subdivision), so that he did not address a plausible argument that the taxable capital gains subdivision applies only to "capital property" in its usual sense.
Neal Armstrong. Summaries of Rogers v. The Queen, 2014 TCC 348 under s. 7(3)(a), s. 39(1)(a), s. 15(1), s. 5(1) and s. 9 – capital gain v. profit – options.
CRA treats the question, of whether the shrinking of a control group of a private company results in an acquisition of control, as one of fact
A group of related shareholders (A, B and C) collectively held 39% of the shares of Opco, an unrelated shareholder (D) held 25% and a second related group (E, F and G) held the balance of 36%. All seven shareholders acted in concert. In finding that a purchase of all the shares of the second family by the first four shareholders in proportion to their respective shareholdings "quite likely" would result in an acquisition of control of Opco, CRA indicated:
- The first family (A, B and C) thereby would end up with a majority (61%) of the shares, and such majority ownership by a related group "could represent a sufficient common link to indicate that a new group controlled Opco"
- Weight should also be given to the fact that 3 out of 7 holding a substantial (36%) interest ceased to be shareholders
It could be comforting that CRA did not treat this as a trivially easy question.
Neal Armstrong. Summary of 15 October 2014 T.I. 2014-0547551E5 F under s. 249(4).
No PUC reinstatement occurs under the FAD rules where sales proceeds are reinvested in a closely connected corporation
The paid-up capital reinstatement rule in draft s. 212.3(9)(b)(ii) for reinvested proceeds is not available where the replacement investment is in shares of a closely connected investment described in s. 212.3(16). This is odd: "Where that [closely-connected] test is satisfied, that investment should be viewed as a "good" investment, so arguably the PUC should be reinstated, since it would not have been constrained in the first place had that investment been made initially."
Neal Armstrong. Summary of Angelo Nikolakakis, "Foreign Affiliate Dumping – The New Paid-Up Capital Offset and Reinstatement Rules," International Tax (Wolters Kluwer CCH), October 2014 Number 78, p.1 under s. 212.3(9).
CRA reports on rulings which it refused to give on GAAR grounds
Highlights from yesterday’s Roundtable at the CTF Annual Conference in Vancouver include:
- Q.1 CRA indicated that there is essentially no difference between exchangeable shares and exchangeable units under the derivative forward agreement rules, so that in both cases (where the call right is not contained in a separate agreement) an assessment must be made as to whether the holder has retained the equity-type attributes referred to in the DFA definition.
- Q.2 In order to rule on loss transfers between corporations which are affiliated but not related, CRA at a minimum will require that they be affiliated for s. 69(11) purposes, i.e., only common de jure rather than de facto control is accepted.
- Q.3 CRA has reversed its position at the 2014 STEP Roundtable (2014-0522961C6) that the standard contractual recital of $1 (but not a dollar more) of consideration will cause the safe harbour - from deemed s. 68 allocation to a restrictive covenant – to not be available.
- Q.4 Where a foreign acquirer does pre-acquisition planning respecting the capitalization of a Canadian Buyco to acquire a non-resident target holding a Canadian Opco, with a view to being able to then effectively step up the PUC of the shareholding in the Canadian Opco through a series of transactions, CRA considers that GAAR would apply on the basis that the application of Part XIII tax to the surplus of the Canadian Opco has been avoided.
- Q. 5 CRA is not receptive to arrangements under which different types of income are streamed to different partners.
- Q. 6 Where a resident rolls a building into a new subsidiary partnership for a note and units, a non-resident subscribes cash for units a day later and the cash is used to pay off the note, CRA will apply GAAR as if the resident had instead dropped the building down only for units, and then sold half its units to the non-resident.
- Q. 9 CRA accepts Lehigh, so that s. 95(6)(b) applies principally respecting status manipulation.
Neal Armstrong. Summary of 2014 Annual CTF Roundtable.
Income Tax Severed Letters 3 December 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules that a s. 85(1)(e.2) does not apply to transfers of property at less than FMV to sister corps
Two sister Canadian subsidiaries (Subco 2 and Subco 3) of Canadian parent (Parent) wish to consolidate ownership of their two foreign affiliate subsidiaries (FA 1 and FA 2) in another newly-formed subsidiary of Parent (Can Holdco – which already has acquired ownership of a portion of FA 2 from Parent). Accordingly, they transfer their FA shares to Can Holdco (their sister) on a purported s. 85 rollover basis in consideration for Can Holdco prefs with a fair market value equal to the ACB of the transferred shares (rather than their higher FMV). Can Holdco then redeems the prefs with cash subscriptions received from Parent and the redemption proceeds received by Subco 2 and 3 are distributed as PUC distributions back to Parent.
The effect of doing the FA transfers at ACB rather than FMV is to reduce the basis reduction to Parent’s investments in Subco 2 and 3, which have other important assets. CRA ruled that s. 85(1)(e.2) (and s. 15(1)) would not apply, stating that it would not be reasonable to regard any part of the excess of the FMV of the transferred shares over their ACB "as a benefit that Subco 2 or Subco 3 desired to have conferred on a person related to [them]." This sounds right - as the prefs are vapourized, the cash is completely circled and Parent retains its 100% indirect ownership of the FAs. However, it took CRA three years to so conclude.
Neal Armstrong. Summary of 2014 Ruling 2011-0415811R3 under s. 85(1)(e.2).
CRA will apply GAAR to any future D&D cases
CRA, after noting that it failed to apply GAAR in D & D Livestock (which entailed "the double utilization of the same amount of safe income in order to reduce a capital gain realized on an ultimate disposition of shares"), stated that it "would not hesitate to invoke the GAAR in similar files." More generally, it will challenge planning resulting in "in an unjustified duplication of fiscal attributes."
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 20, 2014-0534671C6 F under s. 245(4).
Swirsky has not affected the CRA policy on interest deductibility
Notwithstanding, Swirsky CRA considers that there generally will be no interest deductibility on loans incurred to acquire common shares only where there is a "permanent" corporate policy of not paying dividends.
Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 1, 2014-0534811C6 F under s. 20(1)(c).