News of Note
Loblaw – Supreme Court of Canada finds that a Barbados bank sub conducted its business of investing Loblaw cash principally with arm’s length persons
Email this ContentThe 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.
CRA will entertain ruling requests to consider when a “right to reduce” arises under a Plan of Arrangement
A “right to reduce” is defined in s. 143.4(1) as “a right to reduce or eliminate an amount in respect of an expenditure at any time, including, for greater certainty, a right to reduce that is contingent upon the occurrence of an event, or in any other way contingent, if it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable.”
2016-0628741I7 appeared to indicate that where, under a Plan of Arrangement, interest of a debtor will be forgiven, s. 143.4 will apply in the year the Plan is approved by the creditors to reduce the interest amount rather than in the subsequent year when the Plan is implemented. If CCAA procedures commence in Year 1, the creditors approve the Plan in Year 2, and the Plan is implemented in Year 3, when will a “right to reduce” arise for s. 143.4 purposes?
CRA indicated that when a right to reduce arises under s. 143.4(1) will require a determination of when the legal right, albeit contingent, arises, and whether it is reasonable to conclude that the right will be exercisable. In the case of an interest that is forgiven under a CCAA proceeding, this will include a review of the Plan of Arrangement and the terms of the contingencies contained in the Plan. CRA would be willing to review this issue in a ruling application, where it could review the terms of the Plan.
This seems to indicate that the answer is Year 2 or 3, depending in part on how big the contingencies are.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.6 under s. 143.4(1) - right to reduce.
CRA indicates that the s. 74.4(4)(a) exception does not apply where the indirect transfer is to a subsidiary of the trust-owned corporation
A resident individual transfers $100 to a discretionary trust (whose beneficiaries include minors, i.e., “designated beneficiaries”), which uses the $100 to subscribe for shares of Holdco (wholly-owned by it) which, in turn, uses the $100 to subscribe for shares of its subsidiary (Subco), so that Subco (which is not a small business corporation) can acquire investments. Will s. 74.4(2) apply?
After noting that there was insufficient information to determine whether the purpose test in s. 74.2(2) applied, CRA found that the exception in s. 74.4(4) (which required inter alia that “the only interest that the designated person has in the corporation is a beneficial interest in the shares of the corporation held through a trust”) did not apply given that “the corporation” to which the indirect transfer had occurred was Subco, whereas the minor children had a beneficial interest only in the shares of Holdco, not of Subco. Furthermore, assuming that the Trust was a discretionary trust, each child would be deemed under para. (e) of the specified shareholder definition to wholly-own Holdco, so that each child also would be a specified shareholder, under that definition, of the related corporation (Subco) – thus the test in s. 74.4(2)(a) also would be satisfied. Accordingly, s. 74.4(2) would apply assuming that the purpose test was satisfied.
Neal Armstrong. Summaries of 25 November 2021 CTF Roundtable, Q.5 under s. 74.4(4)(a) and s. 74.4(2)(a).
CRA determined that a Singapore corporation was a resident there for Treaty purposes – even though it was subject to tax on a territorial basis - provided its CMC was there
Generally, a person must be “liable to tax” in a contracting state to be a resident there for treaty purposes. Per CRA, a person must be subject to the most comprehensive form of taxation as exists in that contracting state to be liable to tax therein.
CRA reported that it had been asked to comment on whether a corporation that was incorporated in Singapore would be viewed as a Treaty resident of Singapore, which typically taxes income that is sourced in Singapore, or remitted to Singapore. CRA’s conclusion was that such corporation was a resident of Singapore that could therefore benefit from the Treaty, provided that its central management and control was in Singapore at all relevant times.
Neal Armstrong. Summary of 25 November 2021 CTF Roundtable, Q.4 under Treaties – Income Tax Conventions – Art. 4.