News of Note
In light of the current-use test, borrowed money used to acquire shares that were not excluded property could satisfy s. 95(2)(a)(ii)(D)
Email this ContentFA Finco (a foreign affiliate of Canadian Parent) lends to FA Holdco (a Delaware subsidiary of Canadian Parent), which uses the borrowed money to acquire all of the shares of FA Target, which are not excluded property. FA Target is merged into FA Opco (wholly-owned by FA Holdco), so that FA Holdco receives shares of the merged corporation (Mergeco), replacing its shares of FA Target and FA Opco. After the merger, substantially all of the property of Mergeco is excluded property.
Is the interest on the loan recharacterized under s. 95(2)(a)(ii)(D) as active business income? The focus of the query was on s. 95(2)(a)(ii)(D)(I), which requires that such interest be payable “under a legal obligation to pay interest on borrowed money used for the purpose of earning income from property.” CRA indicated that the current use test established under s. 20(1)(c) was relevant in this context – and that, under this test, there was a reasonable argument that the current use of borrowed money was linked to the Mergeco shares and that, to the extent that there was a reasonable expectation that FA Holdco would receive dividends on those shares, the use test would be met after the merger.
An additional requirement under s. 95(2)(a)(ii)(D)(III) is that the property referenced under the current use test in s. 95(2)(a)(ii)(D)(I) is excluded property. Although CRA was not asked about this, it did not challenge the proposition that this test could be satisfied post-merger by the Mergeco shares even though the shares acquired with the borrowed money were not excluded property (presumably FA Target was small relative to FA Opco).
Neal Armstrong. Summaries of 25 November 2021 CTF Roundtable, Q.15 under s. 95(2)(a)(ii)(D)(I) and s. 95(2)(a)(ii)(B).
CRA acknowledges that its T1135 form is misleading as to what is a “foreign affiliate”
The T1135 form and related disclosure states that specified foreign property “does not include … a share of the capital stock or indebtedness of a foreign affiliate,” without disclosing that the definition “foreign affiliate” for these purposes is narrower than the definition in s. 95(1). For example, if a Canadian corporation holds debt of a foreign “grandchild” subsidiaries whose shares are held by its immediate Canadian subsidiary, then (by virtue of s. 233.4(2)(a) as it applies pursuant to para. (k) of the “specified foreign property” definition in s. 233.3(1)), it will not be considered to be holding debt of a “foreign affiliate,” so that such debt will be required to be disclosed on the T1135 form.
CRA indicated that applications for cancellation of interest or penalties for taxpayers that were misled by the T1135 wording would be “entertained” by CRA, and that it also encouraged taxpayers to voluntarily correct past filing errors through submitting adjustments or applying under the voluntary disclosure program.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.14 under s. 233.3(1) - specified foreign property – para. (k).
We have published 10 more translations of CRA interpretations
We have published a further 10 translations of CRA interpretation released in April and March, 2006. Their descriptors and links appear below.
These are additions to our set of 1,838 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 15 ¾ years of releases of such items by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the "open" week for December.
Loblaw – Supreme Court of Canada finds that a Barbados bank sub conducted its business of investing Loblaw cash principally with arm’s length persons
The taxpayer, an indirect wholly-owned subsidiary of the Loblaw public company, wholly-owned a Barbados subsidiary (Glenhuron), that was licensed in Barbados as an international bank and that used funds mostly derived from equity injections by the taxpayer predominantly to generate income from U.S.-dollar short-term debt obligations and swaps. Whether this income was foreign accrual property income (FAPI) turned on whether Glenhuron’s business was “conducted principally with persons with whom [it did] not deal at arm’s length,” being the relevant exclusion from the “financial institution” exception from the investment business definition.
Côté J rejected the Crown’s submission that this exclusion applied because Glenhuron received its capital mostly from the taxpayer and was subject, in the conduct of its business, to the corporate oversight of its direct and indirect parents. She stated:
Raising capital is a necessary part of any business, and capital enables business to be conducted. But one would not generally speak of capitalization itself as the conduct of the business.
Furthermore, although it is “part of a bank’s business to accept deposits,” this point was not relevant to “receiving funds from shareholders.”
This reading was confirmed by the context of the FAPI regime, which classified a foreign affiliate’s income and did “not provide a method for assigning capital to the different businesses within a single corporation.”
Regarding the alleged relevance of the parents’ corporate oversight as part of the conducting of Glenhuron’s business, “[f]undamentally, a corporation is separate from its shareholders” and its conducting its business “in accordance with policies adopted by the board of directors on behalf of the shareholders … does not change the fact that the corporation remains the party conducting business.”
Neal Armstrong. Summaries of Canada v. Loblaw Financial Holdings Inc, 2021 SCC 51 under s. 95(1) – investment business – para. (a), s. 248(1) - Business, s. 91(1), Statutory Interpretation - Certainty, Expressio Unius, General Concepts - Foreign Law.
CRA indicates that s. 261(1) did not deny a loss that was deemed to be from excluded property rather than on FAPI account
S. 261(6.1) deems a foreign affiliate, for purposes of computing foreign accrual property income (FAPI), to have an elected functional currency that is the same as that of the Canadian taxpayer of which it is an FA. Suppose that FA is a U.S. subsidiary of Cansub, that Cansub has elected to have the U.S. dollar as its functional currency, that FA makes a U.S.-dollar loan to Parent (which has the Canadian dollar as its functional currency and is the parent of Cansub), and that Parent hedges this U.S. dollar exposure by entering into a Canadian-U.S. dollar cross-currency swap with a bank.
In 2017-0691211C6, CRA indicated that if Parent realizes an FX loss on the maturity of the loan to it, this loss will be denied under s. 261(21), mainly because the loan is on FAPI account, and therefore within the scope of s. 261(6.1) so that FA would have a tax-reporting currency of the U.S. dollar.
Suppose instead that the “specified transaction” is a loan from Parent to FA (the Parent-FA Loan) and that the gain or loss from the settlement of this loan is deemed, under s. 95(2)(i), to be a gain or loss from the disposition of an excluded property of FA (not giving rise to FAPI).
CRA indicated that since, on this basis, no amount would be included in FA’s FAPI in respect of Cansub on the settlement of the Parent-FA loan, and FA would not have Canadian tax results, it also would not have a tax reporting currency, so that such condition for s. 261(20) to apply would not be met: s. 261(21) would not deny Parent’s loss.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.11 under s. 260(20)(b).
CRA indicates that commencing to work remotely shifted the source deduction rates to those of the province of the payroll department
An individual, who previously had reported to work at the PEI office of a national company, with the pandemic commenced working remotely from his PEI home and (as before) was paid by the payroll department in the company’s Ontario office. CRA indicated that, pursuant to Reg. 100(4)(a) - which deems an employee, who is not required to report for work at any establishment of the employer, to report for work at the establishment from which the employee’s salary is paid – the individual would be treated as if he reported to work in Ontario, so that source deductions on the Ontario scale would apply.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.10 under Reg. 100(4)(a).
CRA notes that an employer does not certify on Form T2200 that employees’ home offices are the principal place of performing their duties
Regarding the claiming by employees of home office expenses in the context of post-COVID hybrid work arrangements, CRA noted that, although Q.10 on the T2200 Form asks that an employer approximate the percentage of the employee’s duties of employment that were performed at a workspace in the home, the employer is not asked to certify whether this workplace was the place where the employee principally performed the individual’s duties of employment (being the test in s. 8(13) that this question is directed at.)
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.9 under s. 8(13).
CRA indicates that there is no exclusion in s. 15(2.1) from the application of s. 15(2) to a loan from an FA to a partnership of FAs
A partnership, whose partners (FA1 and FA2) are foreign subsidiaries of Canco, borrows money from another foreign subsidiary (FA3) of Canco in order to fund the purchase of the shares of a foreign corporation (FA4) that are excluded property. S. 93.1(4) deems the partnership to be a non-resident corporation for the purpose of applying s. 95(2)(a)(ii)(D) (effectively converting the interest paid by the partnership to FA3 into active business income), but does not deem the partnership to be a non-resident corporation for s. 15 purposes.
S. 15(2.2) provides that s. 15(2) does not apply to indebtedness between non-resident persons, and s. 15(2.1) provides an exception to s. 15(2) respecting certain foreign affiliates that are debtors, but these exceptions do not specifically deal with a partnership. Does s. 15(2) apply in this situation, so as to generate FAPI?
CRA noted that ss. 15(2) and (2.1), in various places, specifically extend their application to partnerships, but that there is only a reference to a person, and not a partnership, when dealing with the carve-outs in ss. 15(2.1)(a) and (b) regarding dealings with foreign affiliates.
Accordingly, in this situation, there is a policy concern that has been brought to the attention of the Department of Finance.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.8 under s. 15(2.1).
CRA discusses how many notional corporations arise through use of an umbrella corporation
An umbrella corporation has three classes of tracking-interest shares (A, B and C) which each track to a corresponding Sub-Fund (A, B or C). A Canadian shareholder of the umbrella corporation (“Canco”) owns 90% of the Class A shares of the umbrella corporation (Scenario 1), or those shares together with 10% of the Class B shares (Scenario 2).
CRA indicated that in Scenario 1, s. 95(11) would deem there to be a separate notional non-resident corporation that owned the tracked property (in Sub-Fund A) for FAPI and other purposes and whose shares were held by the Class A shareholders (e.g., 90% by Canco).
In Scenario 2, there would be two separate notional corporations, each holding the properties of the respective sub-funds (Sub-Funds A and B), with the Class A and B shareholders of the umbrella corporation being respective shareholders of those two notional corporations for the FAPI etc. purposes.
Why then does s. 95(11)(e)(ii) refer to “tracking classes” in the plural if there is a separate notional corporation with one class of shares for each sub-fund? CRA indicated this reference takes into account the situation where, for example, the umbrella corporation had both Class C and D shares outstanding that both track Sub-Fund C and with both classes of shareholders holding the shares of the notional corporation (holding the Sub-Fund C property) on a pro rata basis.
Neal Armstrong. Summaries of 25 November 2021 CTF Roundtable, Q.7 under s. 95(11).
Income Tax Severed Letters 1 December 2021
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.