News of Note
The TPSM is often inconsistent with the Canadian transfer-pricing rules
Email this ContentUnlike 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).
CRA asserts the ability to potentially bifurcate a cross-border management fee into deductible and non-deductible components
The 19 paragraphs in IC 87-2R on transfer pricing for intra-group services have been expanded into 78 paragraphs in TPM-15. Additional points include:
- It explicitly adopts the OECD Guidelines respecting the use of "indirect charges" (i.e., allocation of centralized service costs), so that this method is acceptable where third-party comparables are "occasional or marginal," the proportionate benefit to each affiliate cannot be "precisely quantified," and record-keeping is onerous.
- Although costs for the benefit of the non-resident parent should not be charged through to Canco, "Sarbanes-Oxley costs…should be reviewed and if the taxpayer can demonstrate that there is a benefit to the taxpayer associated with the charge/expense, it could be allowed as a deduction."
- Where a management fee charged to Canco is pursuant to a contract which "is not usually found in dealings between arm’s length parties, auditors may look through the management fee…[to] identify expenses that are not deductible under specific [ITA] sections…or to which Part XIII withholding tax applies."
- "Stand-by charges for service availability would not be expected in circumstances where… there is little likelihood that the service will be needed."
- In the case of an affiliate performing agency services, such as centralized purchasing, "it will often make more sense to relate the compensation of the purchasing entity to its costs incurred as a facilitator or to the size of the discount it obtains rather than to the value of the goods purchased."
Neal Armstrong. Summary of TPM-15 "Intra-group services and section 247 of the Income Tax Act" under s. 247(2).
Sun Life – Tax Court of Canada finds that the holding of vacant office space by a GST-exempt business for potential future taxable rentals qualified for ITC purposes as commercial activity
Many of the Sun Life sales people were independent contractors, who sublet space in Sun Life office premises. In calculating the portion of its rental costs for which it was entitled to input tax credits, Sun Life included vacant offices which were set aside for potential future rentals to such recruits, and allocated a pro rata portion of common areas, such as meeting rooms (which CRA argued were being used by the sales reps qua promoters of Sun Life exempt financial products rather than qua subtenants.)
Owen J confirmed Sun Life's methodology. Its success on the vacant space point is authority for the first-order supply rule (under which the focus is on the direct rather than indirect purpose for a supply) applying not only to an on-supply but also potentially to property held for a potential future direct use.
Neal Armstrong. Summary of Sun Life Assurance Company of Canada v. The Queen, 2015 TCC 37, under ETA, s. 141.01(5).
Income Tax Severed Letters 25 February 2015
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
AG v. Federation of Law Societies – Supreme Court of Canada reasoning indicates that lawyers’ accounts likely are privileged
In the course of striking down the search-and-seizure provision in the federal anti-money laundering legislation, Cromwell J confirmed the absolute statement in Lavallee that "all information protected by the solicitor-client privilege is out of reach for the state," and also indicated that it was contrary to s. 8 of the Charter to place a blanket obligation on lawyers to provide names and addresses of their clients to the federal authority, in order to be able to claim solicitor–client privilege (as "the name of the client may itself be (although is not always) subject to solicitor-client privilege ... [and] the same ... may be said about the ... address for the client.")
This confirms that lawyers’ statements of account, or at least the portions thereof disclosing the services rendered, and the client name and address, probably are privileged.
Neal Armstrong. Summaries of Attorney General of Canada v. Federation of Law Societies of Canada, 2015 SCC 7 under ITA, s. 232(1) – privilege, and Charter – s. 7.