News of Note
CRA implies that PUC distributions by a CRIC of ordinary-course dividends from the subject corp can reverse a PUC grind from a prior actual or deemed investment in it
Email this ContentAfter providing preliminary responses at the 2014 IFA Roundtable, CRA did not say, "good enough for private-sector work," but instead refined and expanded its responses. Some additional points, clarifications or responses:
- Q.1(b). On a suggestion that a failure to charge a fee for the provision by Canco of a guarantee of debt of a foreign subsidiary (Forco) will not give rise to an investment by it in the subsidiary under the foreign affiliate dumping rules because "Canco benefits from Forco's access to debt capital," CRA responded that there would be no benefit conferral "if fair market value consideration were… given in exchange for the guarantee and it would be reasonable… to conclude that a party dealing at arm's length would provide the guarantee on the same terms" (which kinda sounds like "no.")
- Q. 1(d). CRA comments imply that grinds to the PUC of cross-border classes of shares of CRIC resulting from investments by it in Forco (or in this case, from imputed investments) can be subsequently reversed through PUC distributions of dividends received in the ordinary course from Forco. See Example 9-D.
- Q. 3(c). CRA has not yet developed any specific positions on the application of the upstream loan rules to cash pooling arrangements.
- Q. 6. Of the 19 cases considered by the s. 95(6) Committee over the 2010-2013 period, it recommended that s. 95(6)(b) be applied in seven cases.
For reasons of completeness (or sloth), we have kept the original questions and notes on responses on our Roundtable page. We have added links to the reformulated questions and responses (and to our summaries).
Neal Armstrong. Summaries of May 2014 IFA Roundtable, Q. 1, 2014-0526691C6 under s. 212.3(9) and 212.3(10)(b), of May 2014 IFA Roundtable, Q. 3(c), 2014-0526741C6 under s. 90(14) and of May 2014 IFA Roundtable, Q.6, 2014-0526761C6 under s. 95(6)(b).
CRA will not apply s. 56(2) so as to result in double taxation
S. 6(1)(a) only requires the inclusion in employment income of a benefit "received or enjoyed." However, where the employee foregoes the benefit and directs that it go to someone else, CRA considers that the employee generally will be taxable on the benefit under s. 56(2) - but if the amount was included in the employee’s income under s. 56(2), it "would not be required to be included" in the income of the recipient of the benefit. (This statement also appears in IT-335R2, para. 13, but with the weasel word "normally" added.)
Neal Armstrong. Summaries of 10 April 2014 T.I. 2013-0514321E5 under s. 56(2) and s. 6(1)(a). See also summary of 13 March 2014 T.I. 2013-0510791E5 under s. 56(2).
CRA rules on the addition of FX-hedged units to a mutual fund
An open-end mutual fund trust will add a "hedged" class of units, whose performance will not be affected by fluctuations in the Canadian dollar relative to the currencies of the underlying foreign securities of the fund due to the allocation of gains or losses on forward currency contracts strictly to the hedged class.
CRA ruled that this addition will not result in a disposition of the existing units, a resettlement of the fund or the application of s. 104(7.1).
Neal Armstrong. Summary of 2014 Ruling 2014-0518521R3 under s. 104(7.1).
CRA considers that s. 12(1)(x) could apply to the compromise under the BIA of interest and penalties on unremitted GST (but not of the GST itself)
CRA has confirmed that, although the forgiveness of trade debts in the same year as they are incurred gives rise to s. 9 income, this will not be the case for trade debts compromised under Part III of the Bankruptcy and Insolvency Act. Where there is such a compromise of a claim of the government for unremitted GST, s. 80 will not apply (on the basis that the unpaid GST is not a debt obligation "issued" by the debtor.) However, rather intriguingly, CRA considers (in cryptic reasoning) that s. 12(1)(x)(iv) "could" apply to the compromise of interest or penalties on the unpaid GST (but not of the GST itself), unless a s. 12(2.2.) election is made.
Neal Armstrong. Summaries of 20 May 2014 T.I. 2013-0516121E5 F under s. 9 – debt forgiveness, s. 12(1)(x) and s. 80(1) – commercial debt obligation.
CRA will assess a s. 92(5) gain at the Canadian partner level where there is a "rollover" transfer of a foreign affiliate subsidiary of the partnership which has received pre-acq dividends
Where a partnership (LP) received a dividend from Forco out of pre-acquisition surplus, and LP subsequently rolled its shares of Forco into a Canadian subsidiary (ULC) of LP under s. 85(2), the capital gain resulting under s. 92(5) to Canco from this disposition (based on its "share" of the previous pre-acquisition dividend) did not affect the operation of the s. 85(2) election at the LP level.
In commenting on this and similar situations at the 2014 IFA Conference, CRA indicated that there would be no administrative relief notwithstanding that the transaction triggering the s. 92(5) gain was a transaction intended to occur on a rollover basis. This illustrates one of the pitfalls in utilizing partnerships at an intermediate level within a Canadian multinational structure.
Neal Armstrong. Summaries of 7 May 2014 Memo 2012-0433731I7 and May 2014 IFA Roundtable, Q. 5, 2014-0526751C6 under s. 92(5).
Prescribed interest on a foreign currency PLOI is translated at the spot rate when the loan was made
When a Canadian-resident corporation elects for a qualifying loan made by it to a non-resident affiliate to be a pertinent loan or indebtedness, for example, a non-interest-bearing U.S.-dollar loan made to a non-resident subsidiary, it will compute the prescribed interest rising on the loan under s. 17.1 using the spot rate at the date the loan was made (assuming it has not made a functional currency election).
Neal Armstrong. Summary of 4 June 2014 T.I. 2014-0517151E5 under s. 261(2).
Marzen Artistic Aluminum – Tax Court of Canada shifts 100% of the income of a U.S. marketing operation from Barbados to Canada
The taxpayer, a Canadian window manufacturer which sold its windows in B.C. and the U.S., generated essentially all its profits in its Barbadian subsidiary (SII), which essentially had no assets or employees other than its (very part-time) Barbadian managing director: the taxpayer sold windows for the U.S. market to its U.S. subsidiary ("SWI") at their retail price; SII charged "marketing fees" to the taxpayer which were sufficient to reduce the taxpayer’s income to nil; SII paid fees to SWI for the SWI employees ("seconded" to SII) who did the marketing work at SWI’s payroll cost plus 10%; and SII paid dividends (out of exempt earnings generated from the substantial mark-up of its fees over those of SWI) to the taxpayer which essentially were equal to 100% of the profit of the consolidated group.
Sheridan J applied s. 247(2)(c) to reduce the marketing fees to the sum of: the fees paid by SII to SWI; and those paid to its managing director (which she treated as the comparable uncontrolled price for SII’s services to the taxpayer). One effect of this adjustment was that 100% of the profits of SWI, which it might have earned had it been charged for windows at the wholesale rather than retail price, were shifted from Barbados to Canada, i.e., it was not just profits which normatively should have been earned in Canada which were shifted back to Canada.
This point was not argued directly, but it came up indirectly respecting the approach of the taxpayer’s transfer pricing expert, who considered that the marketing fees paid by the taxpayer were appropriate if they were treated as paid to SII/SWI as an "amalgam." Sheridan J found this to be contrary to the separate entity approach mandated in the 1995 OECD Guidelines (which she referred to rather than the subsequent 2010 Guidelines).
Neal Armstrong. Summaries of Marzen Artistic Aluminum v. The Queen, 2014 DTC 1145 [at 3433], 2014 TCC 194 under s. 247(2) and s. 247(4).
Income Tax Severed Letters 18 June 2014
This morning's release of 22 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers that a single condo unit can be a hotel for GST/HST purposes
A residential complex for GST/HST purposes does not include a hotel or inn. CRA considers that where there is a building with multiple condo units (in this case, a condominium resort), each unit is tested to see if it is a hotel or inn on its own rather than by reference to the character of the building as a whole. In P-099, CRA indicates that a hotel or inn generally provides temporary accommodation to the public, with ancillary services where appropriate.
Neal Armstrong. Summaries of 22 July 2013 Interpretation 145125 under ETA – S. 123(1) – Residential complex and General Concepts – Ownership.
Joint Committee makes submissions on acting–in-concert and partnership control concepts in draft Folio
In response to the release in draft form of Folio S1-F5-C1 entitled "Related persons and dealing at arm’s length," the Joint Committee has made detailed submissions that a statement - that highly interdependent dealings presumptively establish a non-arm’s length relationship - does not accord with the jurisprudence, and also has suggested an acknowledgment that generally it is the GP of a limited partnership who controls corporate investments of the partnership.