News of Note
CRA narrowly construes the s. 95(3)(b) safe harbour for “services performed in connection with the… sale of goods”
Email this ContentIn s. 95(3)(b) there is a safe harbour - from the general rule in s. 95(2)(b)(i) that income of a foreign affiliate from providing services to its Canadian parent (which are deductible in computing the parent’s Canadian business income) is foreign accrual property – for "services performed in connection with the purchase or sale of goods." CRA’s position is "that only services directly related to such sales so qualify," so that services of a foreign affiliate in testing prototypes (manufactured by its Canadian parent) of goods that would subsequently be manufactured and sold by the parent, were found not to qualify.
Neal Armstrong. Summaries of 13 January 2015 Memo 2013-0497361I7 F under s. 95(3)(b) and s. 95(3)(d).
CRA implies that a U.S. LLC with a normally drafted LLC Agreement does not have PUC
CRA considers that "to the extent [the applicable State corporate] laws and constating documents do not provide for stated capital akin to that which is provided for under Canadian domestic corporate law but, rather, provide for an attribute that is akin to a partner's capital account, [a] US LLC would not…have stated capital" – and therefore would have no paid-up capital for s. 90(3) purposes. Given that the various State LLC statutory provisions do not provide for distributable corporate capital (and, conversely, in Canada, stated capital generally is provided for in the governing statute rather than in the articles), the reference here to the effect of the LLC’s "constating documents" (i.e., LLC Agreement) is helpful and may be consistent with an LLC with a properly drafted LLC Agreement having PUC.
Neal Armstrong. Summary of 20 March 2015 T.I. 2014-0535971E5 under s. 90(3).
CRA apparently considers that there is no deduction for repaid employment benefits
CRA considers that only reimbursements of remuneration described in s. 8(1)(n) (such as repayments of income received during a leave when the individual did not return to employment) are deductible, so that if an employee is required in a subsequent year to repay employment benefits received, the employee apparently does not receive a deduction for the repayment.
Neal Armstrong. Summary of 16 March 2015 T.I. 2014-0524371E5 F under s. 8(1)(n).
Income Tax Severed Letters 15 April 2015
This morning's release of 20 severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA considers a share subscription by FA Canadian parent as an “investment” by a “Canadian investor” for purposes of the s. 115.2 safe harbour
Where a foreign subsidiary (Forco) of a widely-held Canadian corporation (Canco) receives a treasury share subscription from Canco, this will taint the s. 115.2 safe harbour respecting management services provided by an affiliated Canadian investment manager. CRA notes that this scenario is equivalent to Canco’s investment needs being serviced offshore "through" Forco, contrary to the policy of s. 115.2(2)(b)(i)(B).
Neal Armstrong. Summary of 18 November 2014 TEI Roundtable, Q. E.6 under s. 115.2(2)(b)(i)(B).
CRA confirms that s. 39(3) generally applies only to anonymous bond or debenture repurchases
Where a public corporation repurchases its bonds at a premium "in the open market, in the manner in which any such obligation would normally be purchased in the open market by any member of the public," s. 39(3) generally deems the premium to be a capital loss rather than potentially giving interest treatment to the corporation and the vendors under s. 18(9.1).
CRA has confirmed where the transaction is such that the corporation and the vendor know each other’s identities, the quoted words are not satisfied – so that s. 39(3) generally would not apply to a tender offer or the exercise of a call right.
Neal Armstrong. Summary of 2014 TEI Roundtable, Q. E.3 under s. 39(3).
CRA may delay paying a refund if there is a pending audit
ITA s. 164(1) and ETA s. 229(1) require the Minister to pay refunds with "all due dispatch" after the corresponding return is filed. CRA considers that "this term allows for some discretion on the part of the Minister," so that it can delay paying a refund if there is a pending audit.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 7 under ITA, s. 164(1).
CRA acknowledges that the deemed trust for unpaid GST/HST (or source deductions) does not follow assets in an arm’s length sale
CRA (contrary to alleged practices of some of its collection agents) recognizes that the deemed trust under ETA s. 222(3) over assets of a tax debtor continues to apply, after an arm’s length sale of those assets, to the sales proceeds rather than to the sold assets, so that the arm’s length purchaser should not have to worry about the deemed trust attaching to the purchased assets.
ITA s. 227(4.1) is quite similar, so that the same position should apply where the vendor has unremitted source deductions.
Neal Armstrong. Summary of CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 3 under ETA, s. 222(3).
Charania - Tax Court of Canada applies unintended and unarticulated price adjustment clause
An individual shareholder of a corporation thought that he was the beneficial owner of his home, but everyone else, including his accountants (and ultimately the Tax Court) considered that it was beneficially owned by the corporation. Immediately before his sale of the home at a gain, it was transferred to him by the corporation, with the excess of its book value over the outstanding mortgage amount being booked as a shareholder advance to him.
In reversing a shareholder benefit assessment of the taxpayer equal to the excess of the property’s fair market value over its book value (and stating an "understanding" that the shareholder loan amount would be increased by this difference), VA Miller J found that the failure to debit the shareholder loan account with the higher FMV-based amount was an obvious error (which the taxpayer did not sanction because he was unaware of it) and that there was no intention to confer a benefit.
This goes beyond CRA’s policies (in S4-F3-C1) on price adjustment clauses given that no agreement to transfer at FMV was documented at the time and, in fact, one of the parties was not even aware that he was purchasing the property from the other.
Neal Armstrong. Summary of Charania v. The Queen, 2015 TCC 80, under s. 15(1).
CRA offers streamlined procedure for validating historical GST/HST s. 156 (nil consideration) elections
Since January 1, 2015, group registrants wishing to make an ETA s. 156 election for qualifying supplies between them to be made at deemed nil consideration have been required to file their elections with CRA rather than merely signing them and keeping them on hand. In the case of elections which were made in the old (unfiled) way before January 1, 2015, there is a requirement to file a new election form (on RC4016) with CRA by January 1, 2016.
In order to permit group members to avoid multiple filings, CRA is offering a streamlined procedure under which group members that have existing elections with differing effective dates now only need to file one Form RC4616 indicating December 31, 2014 as the effective date – with CRA effectively ignoring this date provided that the old election forms showing the actual earlier effective dates are retained on file by them.
CRA also has changed its services standard, from responding to GST/HST ruling or interpretation requests (that are not highly technical or precedent–setting) within 45 days of receipt, to so responding within 45 days of receiving all relevant facts and supporting documentation.
Neal Armstrong. Summary of Excise and GST/HST News - No. 95 under ETA – s. 156(2).