News of Note
CRA indicates that the non-qualified securities rules are being reviewed by Finance respecting options such as RSUs that can never generate a s. 110(1)(d) deduction
Email this ContentThe new non-qualified securities rules regarding specified persons (generally, large non-CCPCs) make the employee deduction under s. 110(1)(d) subject to a $200,000 annual vesting limit and may permit the issuer to take a s. 110(1)(e) deduction for the portion of the benefit realized by the employee. S. 110(1.9) requires the employer to notify CRA where it has agreed to issue a non-qualified security. S. 110(1)(e)(vi) provides that non-compliance by the employer in this regard results in no employer deduction being claimable - and there also is the risk of a penalty under s. 162(7).
When asked as to why there is a notice requirement where a specified person (as it happened, a non-resident corporation) issues restricted stock units to an employee that can only be settled for shares (so that they are effectively treated as s. 7 stock options with no exercise price and, thus, as options that could never generate a s. 110(1)(e) deduction on exercise), CRA stated:
The objective of the employee stock options rule is to impose limits on the amount of employee stock options that may vest in an employee in a calendar year and qualify for a subsequent 110(1)(d) deduction against taxable stock option benefits. Therefore, this particular question raises the larger issue of whether restricted share units and other rights to securities that are subject to section 7, which would never entitle the recipient employee to a deduction under paragraph 110(1)(d), should count towards the employee’s $200,000 annual vesting limit.
The Department of Finance is aware of this larger issue and is contemplating potential remedial measures. This particular question will be addressed at a later date in the context of this larger exercise.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.11 under s. 110(1.4).
CRA indicates that a corporation’s factual residence can abide elsewhere than the situs of its board meetings
Responding to a query as to whether CRA will continue to have “too much focus on the location of board meetings” in determining corporate residency, CRA adverted to the general principle enunciated in De Beers ([1906] AC 455, at 458) that “a company resides for purposes of income tax where its real business is carried on … and the real business is carried on where the central management and control actually abides,” stated that De Beers indicated that a corporation’s central management and control “must … be determined after a scrutiny of the whole ‘course of business and trading’ of the corporation” - and then reiterated its position that:
[T]he presence of board meetings in the country in which the corporation is asserting residence would not, in and of itself, be sufficient to conclude that the corporation is resident in that country. … The courts have repeatedly considered evidence beyond the location of board meetings in order to look at the whole “course of business and trading” of a corporation.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.10 under s. 2(1).
CRA will not provide special COVID extensions of the 6-month deadline under s. 247(4) to complete contemporaneous documentation
CRA indicated that it will not provide any COVID-related relief regarding the requirement under s. 247(4) to complete contemporaneous documentation meeting statutory requirements within six months of the end of the relevant taxation year – although it noted that it has the authority under s. 220(3.1) to waive penalties or interest, as described further in IC07-1R1.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.9 under s. 247(4).
CRA will not provide a list of the foreign entities that it considers to be of particular entity types
CRA is unwilling to provide the equivalent of the HMRC table listing entities in a wide range of jurisdictions that it considers to be opaque or transparent for UK tax purposes: CRA considers that its two-step approach to entity classification needs to be applied on a “case-by-case basis” in light inter alia of the application of the foreign law to the documentation governing the particular entity or arrangement.
However, CRA will entertain ruling requests based on complete taxpayer submission as to their analysis of the application of the two-step approach to the relevant documentation submitted by them.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.8 under s. 248(1) – corporation.
CRA is still reviewing whether and when cryptocurrencies may not be foreign property
At the 2021 APFF Financial Strategies and Instruments Roundtable, CRA stated:
The question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 is currently under review ... .
After now indicating that this question “is still under review by the CRA,” it stated:
In parallel, work is underway at the …OECD … to develop the Crypto-Asset Reporting Framework …, a standardized package that will include reporting requirements to tax administrations and exchange of information procedures related to taxpayers’ transactions with crypto-asset service providers. … A public consultation meeting will be held at the end of May 2022.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.7, under s. 233.3(1) – specified foreign property – (a).
CRA indicates that exempt surplus calculations must be supported by records showing that the FA’s CMC was exercised in a Treaty country
In order for the net earnings of a foreign subsidiary (FA) from an active business to be included under para. (d) of the Reg. 5907(1) definition of exempt earnings in respect of the Canadian parent (Canco), FA must be resident in a “designated treaty country” (an undefined term). CRA reiterated its position that for an FA to be so resident, it not only must be resident in the country for Treaty purposes under Reg. 5907(11.2)(a) (or under variants of that test in Regs. 5907(11.2)(b) to (d)), but its central management and control (CMC) must also be exercised there.
Furthermore, in addition to surplus calculations, Canco must keep records supporting that FA is resident in the Treaty country under the CMC test. Given that CRA considers that the situs of board meetings is not necessarily dispositive of satisfying the CMC test, such information in the records should:
include information relating to the whole “course of business and trading” of the FA and, thus, not be limited to the location of board meetings or where members of the board are resident.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.6, under Reg. 5907(1) – exempt earnings – (d).
CRA states that it will deny s. 113 deductions if there is insufficient documentation to support the FA’s surplus computations
The CRA position noted at 5 May 2019 IFA Roundtable Q.9, 2019-0798761C6 is that “[i]f complete surplus computations are not provided to the CRA, the current CRA general practice is to deny the deduction under subsection 113(1)” (even if the shares of the foreign affiliate had sufficient ACB (a.k.a., pre-acquisition surplus) to cover any deficiencies in its other surplus). At the 2022 IFA Roundtable, CRA went further and stated:
If documentation is not available to accurately support surplus account calculations at the time surplus is utilized, any deduction claimed based on surplus account balances will be denied and other adjustments may also be required. …
CRA went on to list various types of documentation that it “may” require, depending on the circumstances, including non-consolidated financial statements, minute books, and tax returns of the FA and supporting documentation illuminating the nature of its business and income and related to its transactions.
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.5, under s. 113(1)(d).
Income Tax Severed Letters 25 May 2022
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Marin – Tax Court of Canada confirms that FTC domestic and Treaty provisions are applied re the particular year in which the subject income was earned
France started imposing income tax on rental income as it was earned rather than the tax being payable one year in arrears, as previously. However, the taxpayer (a Canadian resident with a French rental property), like others, was granted transitional relief so that in 2019 he received a tax credit from the French government equal to the French tax otherwise payable by him on his 2018 income – so that in 2019 he only had to pay the current tax on his 2019 rental income.
He nonetheless argued in Tax Court that he should be entitled to a foreign tax credit (“FTC”) for French income tax on the rental income for his 2018 taxation year (which clearly was subject to Canadian income tax) on the grounds that he was continuing throughout to pay French income tax on an annual basis.
In rejecting this and another argument, Lafleur J confirmed:
- The reference in s. 126(1) to an FTC for non-business income tax paid “for the year” refers to the taxation year (2018) in which the income was earned giving rise to the Canadian tax for which the FTC is claimed (he paid no net French tax for 2018).
- The statement in Art. 6 of the Treaty that "[i]ncome from immovable property ... may be taxed in the Contracting State in which such property is situated" did not accord an exclusive right on France to tax his French rental income, so that Canada was not precluded from taxing it.
- Art. 23 only dealt with issues of double taxation for income, and there was no double taxation of his rental income for 2018.
Neal Armstrong. Summaries of Marin v. The Queen, 2022 CCI 49 under s. 126(7) – non-business income tax, Treaties – Income Tax Conventions, Art. 6, Art. 24.
CRA indicates that condo inventory did not qualify as “goods” under s. 95(3)(b)
Where a foreign subsidiary (“FA”) provides services to its Canadian parent (“Canco”) for which the fees are deductible in computing Canco’s Canadian business income, the net fee income of FA therefrom generally will be deemed under s. 95(2)(b) to be foreign accrual property income (FAPI) of Canco. However, there is an exclusion from the application of s. 95(2)(b) under s. 95(3)(b) where the services of FA are “performed in connection with the purchase or sale of goods.”
CRA found that the s. 95(3)(b) exclusion was unavailable where FA was providing marketing services to Canco respecting the sale of Canadian residential condominiums by Canco in the course of its Canadian business, given its conclusions that real estate inventory did not qualify as “goods.”
Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.3 under s. 95(3)(b).