News of Note
CRA considers that income on funds earmarked for new projects at sister FAs is FAPI
Email this ContentHead office considered that income from funds generated from projects of one CFA was not deemed by s. 95(2)(a)(i) to be active business income (so that it was foreign accrual property income) notwithstanding that such funds were earmarked to finance future projects in the same business line at sister CFAs. CRA considered that the test in s. 95(2)(a)(i)(A) – that such investment income was directly related to an active business of the sisters – was not satisfied as such income could have been earned irrespective of whether it was so earmarked.
Furthermore, the test in s. 95(2)(a)(i)(B) was not satisfied: CRA considered such income would not have been active business income to the sister affiliates if it had been earned by them directly, on the basis of its jurisprudential interpretation that income on funds set aside for future expansion of a business is not income from that business.
Neal Armstrong. Summary of 2012-0439661I7 E under s. 95(2)(a)(i).
Income Tax Severed Letters 5 February 2014
This morning's release of 14 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Berg - Federal Court of Appeal finds that a cash-positive transaction is not a gift
The taxpayer issued a bogus promissory note for 90% of the purported value of timeshares units which he purchased and donated to a charity. In finding that the taxpayer was not entitled to a charitable credit for even the modest value of the donated units, Near JA found that the bogus documents provided to the taxpayer represented a substantial benefit to him (as support for his inflated tax credit claim), so that the donation did not qualify as a gift.
Furthermore, the taxpayer's intent was to "enrich himself" (as the targeted credits exceeded his cash cost, and fees to the promoters) rather than to deplete his property. This second "cash positive" point will now represent an exception to the general proposition that an intended tax credit claim does not prevent a donation from being a gift.
Neal Armstrong. Summary of Berg v. The Queen, 2014 FCA 25, under s. 118.1 - total charitable gifts.
CRA accepts the streaming of good and bad sources of family trust income to avoid the kiddie tax
The definition of "split income" for kiddie tax purposes includes income of the "kid" that may reasonably be considered to be distributed trust income which is derived from the parents' professional corporation. Where a family trust rents the 1st floor of a building to an arm’s length tenant and the 2nd floor to the parents’ professional corporation, CRA is generally amenable to the kiddie tax being avoided by streaming only the "good" (1st –floor) trust income to the kid provided the trust deed is appropriately worded.
Neal Armstrong. Summary of 11 October 2013 APFF Roundtable Q.6, 2013-0495651C6 F under s. 120.4(1) – split income – (c).
Future income tax assets are not assets
CRA considers that a future income tax asset is not an asset for purposes of the "qualified small business corporation share" and "small business corporation" definitions. This changes once it becomes a tax receivable. For example, a receivable arising from a loss-carryback to an earlier year of an active business qualifies as an active business asset.
Neal Armstrong. Summary of 17 July 2013 T.I. 2012-0473261E5 F under s. 248(1) – small business corporation.
CRA indicates that an (s. 149(1)(o.2)(ii)) exempt real estate corp can make “modest and necessary” investments in non-real estate permitted investments
A real estate pension vehicle described in s. 149(1)(o.2)(ii) must limit its activities to the real estate activities or vehicles described in s. 149(1)(o.2)(ii)(A) – while at the same time s. 149(1)(o.2)(ii)(B) prohibits it from making investments other than real estate investments, and permitted investments under pension benefits legislation ("permitted investments"). To what extent can it make permitted investments while still satisfying the activity test?
CRA cautiously responded that "it is possible, in limited circumstances" for permitted investments to be made – for example, it would be OK to make a "modest and necessary" permitted investment in furtherance of the [real estate] activities" in s. 149(1)(o.2)(ii)(A).
Neal Armstrong. Summary of 14 January 2014 T.I. 2012-0453871E5 F under s. 149(1)(o.2).
CRA is willing to treat recurring expenditures on very long-lived assets as currently deductible
CRA considers that the costs of purchasing cranberry plants in setting up a cranberry farm are part of the cost of the land, partly in light of their life span of up to 100 years, whereas the costs of replacing unproductive plants can be currently deductible. If one accepts the somewhat contrived treatment of cranberry plants as land, this is vaguely reminiscent of Johns-Manville, where recurring land expenditures to expand the perimeter of an open pit mine were found to be on income account. CRA has also indicated that replacing orchard trees and vines are on capital and income account, respectively (983283).
Neal Armstrong. Summaries of 18 December 2013 T.I. 2013-0479421E5 F under s. 18(1)(b) – capital expenditure v. expense – improvements v. repairs or running expenses, s. 30, and Sched II: Class 8, Class 17, Class 6.
Application of s. 247(2) to apply a mark-up to seconded employee services provided by Canco to a CFA can also result in FAPI
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 a mark-up. However, if CRA applies the transfer pricing rule (s. 247(2)) to impute a profit element to Canco on its secondment services, an applicable portion of the profits of FA will become FAPI to Canco.
Neal Armstrong. Summary of 13 January 2014 Memo 2013-0474431E5 under s. 95(2)(b).
CRA considers that “installation should be the main activity” for a project to be an “assembly” or “installation” project PE
CRA considers that the reference in the permanent establishment definition in the Canada-Brazil Treaty to an "assembly project" means essentially the same as the more common reference to "installation project," and interprets this phrase somewhat narrowly, e.g., "installation should be the main activity."
Neal Armstrong. Summary of 10 January 2014 T.I. 2013-0505911I7 under Treaties – Art. 5.
CRA considers that “income” for FTC Treaty purposes includes taxable capital gains
Unlike many other Treaties, the double taxation article of the Canada-Brazil Treaty refers to Canada allowing a foreign tax credit for Brazilian income tax on "income," rather than "income or gains," which may be taxed in Brazil. However, CRA accepts that "income" includes taxable capital gains. Accordingly, a Canadian company which has sold its shares of a Brazilian company is allowed a foreign tax credit, against its Canadian income tax on that gain, for the Brazilian gains tax (notwithstanding that under Canadian domestic principles, that gain may be considered to be from a Canadian source).
Neal Armstrong. Summary of 13 January 2014 T.I. 2013-0512581E5 under Treaties – Art. 24.