News of Note
The Joint Committee notes difficulties with the proposed reportable and notifiable transaction rules
Email this ContentObservations or recommendations of the Joint Committee on the reportable transaction rules in s. 237.3 as they would be revised by the February 4, 2022 package of draft amendments, and on the new notifiable transaction rules in draft s. 237.4, include:
- The proposals should take into account that some of the advisors involved in reportable or notifiable transaction may not be aware of the aspects of the planning giving rise to a reporting obligation, or whether the transactions end up being implemented.
- The change of the “avoidance transaction” test to refer to “one of the main purposes” of the transaction or series (rather than using a “primarily” test for a transaction) means that, for example, having a small safe income dividend (representing an acceptable tax benefit) as part of a series would render all transactions in the series avoidance transactions – so that the presence of only one hallmark would engage a reporting requirement.
- The fee hallmark could potentially be engaged by “value” billing, contingency work (which is common in non-“aggressive” areas such as SR&ED filings) and fees based on the number of taxpayers (for example, an accounting firm may bill for the preparation of T2057s on a per-transferor basis), especially given the “to any extent” language in that hallmark description.
- The draft exclusion in s. (c)(i)(B) from the contractual protection hallmark should be revised in various listed respects to clarify that the typical provisions in a share or asset sale agreement - where the vendor provides indemnities related to pre-closing taxes or tax attributes, or covenants for assistance in the event of disputes with third parties (including disputes regarding tax outcomes expected to apply to the purchaser) - will come within the exclusion.
- Under the Quebec notifiable transaction rules, a newly designated transaction need only be reported after the later of 120 days of publishing the transaction in the Quebec Gazette and 60 days after the day the Minister of Revenue of Québec determines that the obligation to disclose begins. A similar “later of” concept should be employed federally and, given that many taxpayers operate in Québec, consideration should be given to coordinating deadlines.
- It is unclear whether transactions need to be reported as notifiable transactions on a recurring basis and whether the sample list of notifiable transactions describes transactions that may provide tax benefits over a period of time – for example, would a transaction whereby CCPC status was lost before 2022 need to be reported because refundable taxes on investment income were avoided for subsequent years?
- Given that a series of transactions can encompass many years (much longer than the 45-day notifiable-transaction reporting window) and some of the examples (e.g., avoidance of deemed dispositions of trust property) deal with series where some steps may occur well into the future or not at all, an advisor may not know that there is a notifiable transaction until all the transactions in the series are completed and well after the reporting deadline.
- In particular, the taxpayer, advisors and promoters might be required to report before a series is completed. i.e., for some series, before they can know that there is a notifiable transaction.
Neal Armstrong. Summaries of Joint Committee, “Reportable Transaction and Notifiable Transaction Proposals,” 5 April 2022 Joint Committee Submission under s. 237.3(5), s. 237.3(1) - advisor, - avoidance transaction, - – reportable transaction - (a), - (b), - (c)(i)(B), s. 237.3(4), s. 237.4(4), s. 237.4(3), s . 237.4(5) and s. 237.3(9).
CRA rulings on interest deductibility appear to relate to a share capital account distribution out of accumulated profits
CRA ruled that interest on money used by a subsidiary (shortly after an amalgamation) to make a share capital account distribution in cash to its parent would be deductible in computing its income provided that its property continued to be used by it for the purpose of gaining or producing income from its business. Although the ruling letter is heavily redacted, the lack of emphasis on the subsidiary’s PUC, the emphasis on the accounting treamtment of the transaction and a supplementary letter ruling on the dollar amount of the subsidiary’s accumulated profits at the time of the amalgamation suggest that the distribution was regarded as coming, at least to some extent, out of the subsidiary’s accumulated profits rather than PUC.
Neal Armstrong. Summary of 2017 Ruling 2017-0696791R3 F and 2017-0696792R3 F under s. 20(1)(c)(i) and of 2017 Ruling 2017-0696791R3 F under s. 51(1).
CRA indicates that government assistance based partly on payroll levels would not be qualifying revenue if normal accounting practice would be to contra payroll expense
Eligible entities received annual governmental financial assistance based, in whole or in part, on their labour expenditures. Were these qualifying revenues for CEWS purposes?
After stating that this was a question of fact, CRA indicated (in light of the “normal accounting practices” rule in s. 125.7(4)) that if the normal accounting practice of the entities was to apply the amounts to reduce their payroll (or other) expenses, they would not be qualifying revenues.
Neal Armstrong. Summary of 7 January 2022 External T.I. 2020-0866751E5 F under s. 125.7(4).
The Joint Committee recommends that the draft bare trust reporting requirement be scrapped
The Joint Committee noted that the required filing under draft s. 150(1.3) of returns for bare trusts will be burdensome including identifying whether a name can be assigned to the arrangement (when none may exist), identifying how to respond to requests for information which may be inapplicable, the need (in the case of a paid preparer) to get a client to sign and return a T183 form and perhaps also obtain a client engagement letter – for perhaps not much benefit (the required reporting will not provide any meaningful information regarding the trust property).
It is recommended that proposed s. 150(1.3) not be enacted and that beneficial ownership information be obtained some other way – for instance, requiring the beneficial owners, when they file tax returns of their own, to provide beneficial ownership information respecting the bare trust arrangements on those returns would be more efficient.
If the answer to this is “no,” then at least CRA might provide a streamlined T3 form specifically for bare trust arrangements, addressing only the Reg. 204.2 information.
Also linked on our Joint Committee page are the Joint Committee submissions on reportable and notifiable transactions and on the tax debt avoidance rules in the February 4, 2022 draft legislation along with a CBA submission focused on privilege issues raised by the reportable and notifiable transactions, and a CPA Canada submission on the uncertain tax treatment rules contained in the same package.
Neal Armstrong. Summary of Joint Committee, "Reporting Requirements for Trusts", 5 April 2022 Joint Committee Submission under s. 150(1.3).
CRA indicates that s. 52(1) applied to give full basis to a member receiving a distribution-in-kind of RPP property
CRA indicated that where surplus from a registered pension plan trust was distributed as an in-kind distribution to a member, the resulting inclusion of the distributed property’s FMV in the member’s income pursuant to s. 56(1)(a)(i) meant that such amount was deemed to be the cost of the property to the individual pursuant to s. 52(1).
Neal Armstrong. Summaries of 22 December 2021 External T.I. 2021-0914081E5 under s. 52(1) and s. 149(1)(o).
Income Tax Severed Letters 6 April 2022
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA rules on the non-application of s. 55(4)
A family company (DC) controlled by father and that engaged in leveraged investing will spin off a portion of its share portfolio to respective transferee corporations (TCs) largely owned by the respective three adult children of father but with father retaining voting control. Largely because all the corporations will be related through the continuing control of father, CRA ruled that the s. 55(3)(a) exception applied, so that there was no need to strictly comply with the butterfly rules. CRA also ruled that s. 55(4) will not apply (which would have applied if it could reasonably be considered that one of the main purposes for father subscribing for special shares of the TCs was to cause them to continue to be related to DC so as to engage the s. 55(3)(a) exception), presumably in light of a representation that father will continue to have high-level involvement in the TCs’ investing activities.
Another aspect related to a family discretionary trust shareholders of DC whose trustees had the authority to appoint beneficiaries out of a wide range of persons including persons dealing at arms’ length with father. A representation was given that no such authority had been exercised - and that the trust has not acquired property from any such potential beneficiary or a person with whom such person does not deal at arm’s length (there’s no harm in giving a rep where no one could figure out what it means?)
Neal Armstrong. Summary of 2021 Ruling 2020-0874961R3 under s. 55(4).
Westcoast Energy – Federal Court of Appeal confirms that an employer was not entitled to ITCs for the GST/HST on reimbursed employee health care services
Westcoast reimbursed (through Manulife as its agent) employees who had incurred various health care services – including some which were GST/HST-taxable, namely, acupuncture, massage therapy, naturopathy and homeopathy services. On appeal, Westcoast submitted, contrary to the finding below, that the employees should be considered to have consumed or used the services “in relation to activities of [Westcoast]” so as to generate ITCs under s. 175(1)(c).
Stratas JA agreed with the Tax Court below that ExxonMobil, which had held under the similar wording of s. 174 that “property or services which are intended by the employer for the exclusive personal use of the employees and which lend themselves to such a use bear no relationship with the employer’s activities,” also applied here in the context of s. 175, such that if “an employer reimburses for a service or property that is for the exclusive personal use of employees, the employer will not enjoy the deeming effect of subsection 175(1).” Accordingly, no ITCs were generated to Westcoast under s. 175.
Neal Armstrong. Summaries of Westcoast Energy Inc. v. Canada, 2022 FCA 57 under ETA s. 175(1)(b) and s. 170(1)(b)(ii).
Our translations of CRA interpretations go back more than 17 years
We have published a further 8 translations of CRA interpretation released in April and March, 2005. Their descriptors and links appear below.
These are additions to our set of 1,985 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 17 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
CRA provides for expanded PLOI election disclosure and permits PLOI elections to be made on loan-by-loan basis
Where a pertinent loan or indebtedness (PLOI) election is made under s. 15(2.11) or 212.3(11) respecting an amount owing by a corporation resident in Canada (CRIC) to certain non-residents, the loan or indebtedness will be subject to notional interest imputation rules instead of potentially being treated as a deemed dividend paid by the CRIC to the non-resident debtor. Until about now, CRA required that separate elections be filed in respect of each amount owing to the same non-resident regardless of whether such amounts pertained to the same debt instrument.
Effective for elections filed after April 11, 2022, CRA will require only one election to be made in respect of a particular legal instrument where multiple amounts are owed under its terms. An election must be made in respect of each non-resident person that owes an amount under the terms of the legal instrument. In order to be eligible for this administrative policy, taxpayers will need to send to the CRA, along with the PLOI election, a copy of the agreement detailing the terms and conditions of the loan or indebtedness for which one single PLOI election is being filed for multiple amounts owing under that legal instrument.
CRA is also requiring expanded disclosure from the electing CRIC, including the total changes in the amount of the PLOI on a monthly basis showing total increases (including capitalized interest) and total decreases, and the total amount of deemed interest on the PLOI, the total amount of interest charged by the CRIC on the loan or indebtedness and the net adjustment to interest income required (if any).
These and related changes are reflected in the updated CRA Webpage on the “Pertinent loans or indebtedness (PLOI)” .
Neal Armstrong. Summary of Notice to Tax Professionals: Updates to filing process for a pertinent loan or indebtedness election, 25 March 2022 under s. 15(2.11).