News of Note
The MLI is estimated to be effective for most calendar-year Canadian taxpayers starting January 1, 2020
Email this ContentAt the time of the signing of the Multilateral Instrument in June 2017, Canada listed 75 treaties as covered tax agreements. Since then, some additional countries that have either joined the ad hoc group or signed the multilateral instrument with a view to a treaty with Canada. There will be significant consideration to including those treaties where there would be a match prior to ratification.
Canada agreed only to the BEPS minimum standards plus mandatory arbitration. This was done largely for timing reasons (plus the irreversibility of a decision to agree to a higher level of standards), and Finance is actively considering whether to adopt additional provisions. Furthermore, the fact that a particular measure was not adopted in June does not indicate that Canada does not agree with the related policy, and Canada may pursue that policy in bilateral negotiations.
There are uncertainties as to when the MLI will come into effect insofar as Canada is concerned. With respect to withholding taxes, entry into force on January 1, 2019 is possible, although January 1, 2020 also is a possibility. With respect to other taxes and in relation to taxpayers with calendar taxable periods, entry into force effective January 1 of their 2020 calendar is quite likely (assuming a “match” with the other relevant country).
20 November 2017 CTF Annual Conference - Department of Finance on BEPS
CRA considers that a self-insured health care spending account (“HCSA”) for a sole employee-shareholder likely will not qualify as a private health services plan
CRA considers that:
In a situation where a corporation provides a self-insured HCSA for its only employee who is also its sole shareholder … it is likely that the sole employee-shareholder would be reimbursed for the full amount allocated to him or her annually.
On this basis, CRA would view the arrangement as not being a plan of insurance and, thus, not a private health services plan, so that there would be a taxable benefit to the employee-shareholder, even where the benefits were comparable to those available to non-shareholder employees performing similar services for similarly-sized businesses.
Neal Armstrong. Summary of 14 September 2017 CPA Alberta Roundtable, Q.9, 2017-0703871C6 under s. 248(1) - private health services plan.
Six further full-text translations of CRA technical interpretations are available
The table below provides descriptors and links for six French technical interpretations released in March of 2014, as fully translated by us.
These (and the other full-text translations covering the last 3 ¾ years of CRA releases) are subject to the usual (3 working weeks per month) paywall.
Finance is not contemplating any amendments to fix the problems with the Pt IV tax refund exception to s. 55(2)
Comments on the s. 55(2) rules include:
- Given that CPL Holdings found that a creditor-proofing transaction, which had the effect of significantly reducing the capital gain that would have been realized on the disposition of shares, did not have that purpose, the position of CRA in 2015-0623551C6, that creditor-proofing transactions offend the new purpose tests, is questionable.
- The mechanics of the amendment to the Part IV tax exception (so that it is not available even if the Part IV tax is refunded as a consequence of the payment of a dividend to an individual) create a host of issues that may not have been anticipated by the Department of Finance (including over-integration or under-integration). “However, the department is now fully aware of these issues and has indicated that it currently has no intention of making any further amendments to the provision, as suggested in the submissions by the joint committee.”
- In 2015-0610681C6, CRA indicated that it would challenge a preliminary transaction segregating pre-existing ACB from shares to be subsequently redeemed (i.e., shunting ACB away from shares that are being redeemed in reliance on the s. 55(3)(a) exception). However, what if a dirty s. 85 reorg had resulted in common shares of Opco, with an FMV of $1,000,000 and an ACB of $100,000, being converted into preferred shares with an ACB and FMV of $100,000 and new common shares with a nil ACB and an FMV of $900,000? Quaere whether it would be acceptable to engage in a preliminary cost base consolidation transaction to ensure that a redemption of the preferred shares would result in the disappearance of only $90,000 of ACB.
- CRA has not made any specific comments regarding the potential application of the new s. 55 to PUC-streaming transactions. In its simplest form, PUC of the class of shares to be redeemed, in reliance on the s. 55(3)(a) exception, can be reduced with a corresponding increase in the PUC of another class.
Neal Armstrong. Summaries of Doron Barkai and Alexander Demner, "Dealing with New Subsection 55(2): Issues and Strategies", 2016 Conference Report (Canadian Tax Foundation), 6:1–56 under s. 55(2.1)(b), s. 55(2.1)(c), s. 55(2.3), s. 55(2), s. 55(3)(a), s. 248(10) and s. 55(1) – safe income determination time.
Savage – Tax Court of Canada finds that a “dog kennel” operation was a source of revenue, but not of income
A couple had two dogs, which supposedly were part of an objective of developing a show dog business, but were not registered. The couple had about $2,000 a year in revenues from dog sitting and training. C. Miller J found that they were not able to deduct their claimed losses of $15,000 to $22,000 per year, as there could be no “objective finding of commerciality” for their “dog kennel” operation, and the evidence “smack[ed] more of a hobby than a business,” so that the operation did not represent a source of income. Accordingly, it was unnecessary to resume the hearing to review evidence as to the expenses incurred by them.
The effect of the CRA assessments, which thus were confirmed, was that they received their revenues on a tax-free basis, irrespective of the reasonableness of their claimed expenses.
Neal Armstrong. Summary of Savage v. The Queen, 2017 TCC 247 under s. 3(a) – business source.
Notwithstanding the very different Cdn and U.S. rules, a Canadian resident can establish a U.S. dynasty trust
“Dynasty trusts” are commonly used in the U.S. as a way to shelter transfers from U.S. generation-skipping transfer tax.
A Canadian resident on death can establish a U.S.-resident dynasty trust with exclusively U.S. residents and holding property that is not taxable Canadian property or that is exempted under Art. XIII of the Treaty. The property transferred to the trust generally has been stepped up under s. 70(5) and the trust is not deemed to be resident under the s. 94 rules once the settlor is deceased. This means that the trust will not be subject to Canadian income taxation or the 21-year deemed realization rule.
Neal Armstrong. Summary of Robert E. Ward, "Twenty-One Years Is Not Enough: Avoiding Canada's 21-Year Rule with Trusts for U.S. Beneficiaries," Tax Management International Journal, 2017, p. 710 under s. 94(5).
CRA extends its policy on the executor’s year to a stub executor’s year
IT-286R2, para. 6 states that the income of the trust for that year is considered to be payable to the beneficiaries where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the taxation year of a testamentary trust coincides with the executor’s year, and all of the beneficiaries agree to this treatment. CRA confirmed that where the initial taxation year of the estate is less than one year, the above comments apply to the “stub” portion of the executor’s year that is within the first estate year. In this regard, CRA indicated that the mere fact that the beneficiaries each had a fixed percentage entitlement to the net estate would not by itself result in the trust income being considered to be payable to them during the stub executor’s year.
As to the portion of the executor’s year falling in the second estate year, although CRA did not state it this baldly, effectively the executor’s year concept was irrelevant given that the income for the second estate year could be paid or payable to the beneficiaries under the general s. 104(24) rules by the end of that year.
Neal Armstrong. Summary of 14 September 2017 CPA Alberta Roundtable, Q.25, 2017-0703921C6 under s. 104(24).
CRA indicates that waivers generally cannot be used to extend the 6-year period for claiming a FTC under s. 126(2.21)
Where an individual, who had been resident in Canada for over five years, realized a capital gain from the deemed disposition of non-Canadian real property under s. 128.1(4)(b) on emigrating from Canada, he would be potentially eligible under s. 126(2.21) to claim a Canadian foreign tax credit for foreign taxes that become payable on the gain that accrued in Canada, provided that this credit is assessed within the extended reassessment period of six years following the emigration year. Can this period be extended by filing a waiver with CRA? CRA stated:
[I]f any of the circumstances to support the deduction under subsection 126(2.21) … (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) … it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.
This seems to be saying that a waiver can be useful in giving CRA the time to process the FTC, but is not a mechanism for getting the FTC for foreign tax that is not triggered until, say, 20 years after the emigration year.
Neal Armstrong. Summary of 11 October 2017 External T.I. 2016-0660421E5 under s. 152(4)(b)(i).
CRA provides comfort on when provision of corporate security for a shareholder loan will not trigger the B2B loan rules
When will the back-to-back loan rules in s. 15(2.17) apply where a corporation provides security to a lender to its shareholder? CRA noted that “where a security interest in the assets of the company is tantamount to putting assets in the hands of the intermediary for its general use, the shareholder loan rules will ordinarily apply.” On the other hand:
[W]here a financial institution lends money on commercial terms to an individual that is a shareholder of a corporation, the corporation provides a security interest in its property to the lender, and such property can only be used in the event of default on the loan as a means of repaying amounts owing by the debtor under the lending agreement, then the security interest would not ordinarily be considered a “specified right”.
CRA also noted that this quoted safe harbour is not affected if the security interest is granted by the corporation to secure more than one shareholder debt.
Neal Armstrong. Summary of 14 September 2017 CPA Alberta Roundtable, Q.11, 2017-0703901C6 under s. 15(2.16)(c)(ii).
Income Tax Severed Letters 20 December 2017
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.