News of Note
CRA will deny FTC for income tax imposed by a foreign jurisdiction on a Canadian employee’s investment earnings sourced outside that county
Email this ContentIf a Canadian-resident employee working in "Country A" (a non-Treaty country) is subject to Country A taxes on her worldwide income, Canada will not accord a foreign tax credit for any Country A taxes which thereby are imposed on sources outside Country A. If the Canadian employer reimburses the employee for Country A taxes, then (following Gernhart) such reimbursements will be taxable benefits for Canadian purposes.
Summaries of 11 September 2014 T.I. 2013-0495091E5 under s. 126(1) and s. 6(1)(a).
Bessette – Quebec Court of Appeal uses the “sham” word in denying fees paid to a professional services company
A dental practice paid 70% of its revenues to a professional services company which had no employees and purchased no supplies. In dismissing the taxpayer’s appeal, Gouin JCQ stated that "it is necessary to prove that the management expenses constitute genuine expenses and not a sham in the sense that the concluded agreements represented genuine transactions between the parties."
Neal Armstrong. Summary of Bessette v. ARC (Quebec Revenue Agency), 2014 QCCQ 4329 under s. 18(1)(a) – income producing purpose.
9016-9202 Québec Inc. – Tax Court of Canada finds that CRA used gross negligence penalties as a lever to terminate a tax avoidance structure
In 1995 a Quebec garbage collection company (EBI) had a brilliant idea: its garbage collectors would become incorporated independent contractors. A difficulty was that it is essentially impossible to expect that level of employee to now start behaving like an entrepreneur. Not only were their (highly-supervised) functions essentially unchanged, but EBI completely administered their new companies through its accountants (and used its address as the companies’ address).
While the individual companies’ Notices of Objection for their 2004 to 2006 years were still under review, CRA reassessed their 2007 and 2008 years to not only deny expenses under the personal services business rules but also to impose gross negligence penalties – at which point EBI caved and the individuals became its employees again. Before vacating the penalties (but confirming the application of the PSB rules to all the reassessed years), Favreau J stated: "The sole reason that the penalties were imposed appears to me to have been to force the parties to terminate the structure."
Neal Armstrong. Summaries of 9016-9202 Québec Inc. v. The Queen, 2014 TCC 281 under s. 125(7) – "personal services business" and s. 163(2).
CRA considers SR&ED conducted by a manufacturing company to be manufacturing for enhanced CCA purposes
CRA considers that a building used by a pharmaceutical company for SR&ED likely qualifies as being used in manufacturing or processing of goods for sale, as the SR&ED contributes to its business of selling manufactured pharmaceuticals. Accordingly, the building likely is eligible for the additional 6% CCA provided by Reg. 1100(1)(a.1).
Neal Armstrong. Summary of 9 September 2014 T.I. 2014-0530631E5 F under Reg. 1100(1)(a.1).
CRA indicates that it would not reassess a prior return to apply the cost recovery method to a share sale earnout
A taxpayer sold shares under an earnout. Although he could have used the cost recovery method, he instead reported a gain based on his best estimate of the future proceeds. He now considers this estimate to be faulty and wants to amend his return to use the cost recovery method.
CRA indicated that it would not reassess the return as a change in estimate is not an error.
Neal Armstrong. Summary of 27 August 2014 T.I. 2014-0529221E5 F under s. 12(1)(g).
CRA rules that the s. 40(2)(e.1)/53(1)(f.1) basis preservation rule applies in the face of the loss denial rule in s. 40(2)(g)(ii)
A Canadian-holding company (Holdco2) made a non-interest-bearing demand U.S-dollar loan to the Canadian subsidiary of another Canadian family-owned corporation (Holdco1). The accrued FX loss to Holdco2 would be denied under s. 40(2)(g)(ii) if realized, as the loan was not made for an income-producing purpose.
CRA ruled that the capital loss realized by Holdco2 on its disposition of the loan to Holdco1 (following the loan’s amendment to be interest-bearing) will be deemed to be nil by s. 40(2)(e.1) (so that the denied capital loss will be added to Holdco1's ACB for the US Loan under s. 53(1)(f.1)) notwithstanding that s. 40(2)(g)(ii) also applies.
Neal Armstrong. Summary of 2014 Ruling 2013-0479701R3 under s. 40(2)(e.1).
Income Tax Severed Letters 8 October 2014
This morning's release of 11 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
U.S. Treasury accepts Canadian exclusion of personal investment trusts for FATCA purposes
A U.S. Treasury attorney stated yesterday that the U S. is willing to accept Canada's exclusion of most personal investment companies and trusts from consideration as financial institutions - so that they will not be required to report U.S.-owned accounts to the IRS under FATCA and thus will not face a 30% U.S. withholding tax.
Neal Armstrong. Summary of Alison Bennett, "Treasury OK with Canadian Stance on Listed Financial Institutions Under FATCA," Daily Tax Report (BNA), October 7, 2014 under Canada-U.S. IGA – Art. 5, s. 2.
It is unclear whether Canadian private trusts can opt into FATCA reporting to CRA to avoid potential U.S. withholding
Certain investment vehicles such as private trusts with U.S. beneficiaries are not financial institutions under s. 263 of the Act but are financial institutions under the Intergovernmental Agreement respecting FATCA. Accordingly, they could become subject to FATCA withholding.
It is unclear that they could avoid this result by voluntarily opting into the Canadian domestic FATCA reporting regime. Furthermore, if they did so, it is unclear that they would be protected from liability for breach of privacy as such disclosure of confidential information would not be required by Canadian law.
Henry Chong, "Canada and FATCA", Tax Management International Journal, 2014, p. 527 under Canada-U.S. IGA, Art. 5, s. 2.
CRA is inclined to treat solar leasing revenues of condo corporations as income of their members
Although CRA considers that a not-for-profit organization such as a condominium corporation may earn incidental income from the rental of common areas without jeopardizing its NPO status, it indicated that in provinces such as Ontario where the condo members are co-owners of common areas, it likely would consider revenue from leasing roof space to a solar company to be non-incidental income of the co-owners which they were required to report.
Neal Armstrong. Summary of 18 August 2014 T.I. 2014-0528171E5 under s. 149(1)(l).